張才奎所託管中國山水投資有限公司股份及另一人 v. 張才奎及另一人

HCA 1661/2014,
HCA 1766/2014 and
HCA 2191/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1661, 1766 AND 2191 OF 2014

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D E C I S I O N

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I. INTRODUCTION

1.  This is my decision on a number of interlocutory applications taken out by the 1^st defendant in three actions.  The three actions contain materially identical claims and complaints by different plaintiffs against the same two defendants. 

2.  Both the plaintiffs and defendants are individuals habitually resident in Mainland China.  The actions principally concern the shares of a Hong Kong company called China Shanshui Investment Company Limited (“CSI”) which in turn holds shares representing approximately 25.09% of the issued share capital of China Shanshui Cement Group Limited (“Shanshui Cement”), a public company incorporated in the Cayman Islands whose shares are listed on the Main Board of the Hong Kong Stock Exchange (stock code 00691). 

3.  In very broad terms, the plaintiffs contend that they are absolute equitable owners of certain shares in CSI, now registered in the 1^st defendant’s name, representing approximately 38.51% of the issued share capital of CSI.  The 1^st defendant’s case is that the plaintiffs are not beneficial owners but merely members of the class of beneficiaries under two discretionary trusts governed by the law of the British Virgin Islands (“BVI”), on which the shares were settled.

4.  In all three actions, Master Hui granted leave to effect substituted service of the writs on the 1^st defendant.  In HCA 1661 of 2014, Master Chow granted leave to issue and serve the writ out of the jurisdiction on the 1^st defendant.  The 1^st defendant has applied to set aside the orders for substituted service and the order for leave to serve out.  He has in addition issued further summonses for stay of all three actions on the ground of forum non conveniens, though these are now conceded to be redundant.

5.  For their part, the plaintiffs have applied by summonses dated 24 November 2014 for an injunctive relief relating to the voting rights attached to the shares and also, by further summonses dated 24 March 2015, for the appointment of receivers in respect of certain shares in CSI.  The receivership application has been adjourned to 18 May 2015 for argument.  Although the injunction application had already been argued before me, I consider it more appropriate to decide it after hearing also the receivership application.  Accordingly this is my decision on the 1^st defendant’s summonses only.

II.  FACTUAL BACKGROUND

Employees stock ownership plan

6.  In 1997, Jinan Shanshui Group Limited (“Jinan Shanshui”) was set up as a state-owned enterprise under the laws of the People’s Republic of China with the approval of the municipal government of Jinan, Shandong Province.  It carried on business in the making of cement and related products.  In 2000, Jinan Shanshui promoted an employees stock ownership scheme by which its employees were given the opportunity to invest in the enterprise in which they were working.  A promotion booklet was produced to inform the employees of the purposes and details of the scheme, which suggested that under the scheme a shareholders’ committee would exercise shareholder’s rights on behalf of the individual shareholders.

7.  Pursuant to this scheme, in around February 2001, each of the employees who chose to participate (to whom I shall refer collectively as the “participating employees”) signed an “entrustment letter”, whereby the employee in question entrusted a member of the shareholders council to exercise the shareholder’s rights on his behalf, acknowledging that the investment returns and risks were the employee’s.  The letter was a short one and read as follows:

“兹委託個人股東理事會 xxx 同志,代理行使股東權力,但投資收益和風險歸委託人所有。”

(In English translation as follows:)

“I hereby appoint Comrade xxx of the shareholders’ committee to exercise the powers of a shareholder on [my] behalf, but investment proceeds and risks shall be received and borne by the person who made the appointment.”

8.  For the purpose of taking over part of the business and assets of Jinan Shanshui, a new company was set up in the Mainland in August 2001 with the name of Jinan Innovation.[1]  Its initial capital was funded in part by the participating employees of Jinan Shanshui pursuant to the stock ownership scheme and in part by Jinan Shanshui. 

9.  As the Company Law in force in Mainland China at the time confined the number of shareholders of a limited liability company to 50, however, the shares for which the employees subscribed were held by several “employee share representatives”.  Up to December 2004, the majority equity interest in Jinan Innovation was held by these employee share representatives with a minority interest being held by Jinan Shanshui. 

Domestic restructuring

10.  In August and October 2004 respectively, the plan to restructure the business of Jinan Shanshui into a private enterprise was approved by the employee representatives unanimously and by the municipal government of Jinan.

11.  For the purpose of the restructuring, two additional companies, called Shanshui Lixin[2] and Shanshui Jianxin[3] respectively were set up to which the participating employees had also contributed capital.  These two companies were used to acquire the state’s interest in Jinan Shanshui.  For simplicity I shall leave out references to these two companies below since nothing turns on them.

12.  By the end of 2004, a total of 3,947 employees[4] had participated in the stock ownership scheme and paid subscription monies.  All together the employees had injected into the various companies a total of approximately Rmb 105.28 million (including dividends re-invested in the business) pursuant to the scheme.

13.  On 15 December 2004, in anticipation of the further corporate restructuring for a public listing in Hong Kong, the employee share representatives and Jinan Shanshui transferred the 94.3% and 5.6% equity interests they by then respectively held in Jinan Innovation to 9 individuals respectively known as the “Management Shareholders”.  They had been senior employees involved in the management of Jinan Shanshui and included Mr Zhang Caikui (the 1^st defendant) and Mr Li Yanmin (the 2^nd defendant) (to whom I shall as “Mr Zhang” and “Mr Li” respectively), as well as 7 other senior employees specified in the table in the next paragraph.  The interests transferred to Mr Zhang and Mr Li were to be held by them respectively on behalf of 3,940 employees including themselves.  The interests transferred to the other 7 Management Shareholders were to be held by them for themselves beneficially.  I shall refer to these individuals as the “minority shareholders” six of whom, as will be seen below, have recently been commenced separate litigation in Hong Kong against Mr Zhang.

14.  As a result, the 9 Management Shareholders held the entire equity interest in Jinan Innovation as follows:

Name		Proportion of equity held	Remarks
1	Mr Zhang	65.55%	52.37% held for other employees
			13.18% held for Mr Zhang himself
2	Mr Li	16.19%	9.4% held for other employees
			6.79% held for Mr Li himself
3	Mr Yu Yuchuan	4.35%
4	Mr Dong Chengtian	4.18%
5	Mr Zhao Liping	3.05%
6	Mr Zhao Yongkui	2.77%
7	Mr Mi Jingtian	1.56%
8	Mr Li Maohuan	1.53%
9	Mr Wang Yongping	0.82%
Total		100%

15.  In other words, 3,938 participating employees (ie 3,947 less Mr Zhang, Mr Li and the 7 minority shareholders) owned approximately 61.77% of the equity interest in Jinan Innovation.

16.  Jinan Innovation changed its name to Shandong Shanshui Cement Group Company Limited (“Shandong Shanshui”).  In around the end of January or early February 2005, each of the participating employees signed a document called “Equity Interest Entrustment Declaration” entrusting either Mr Zhang or Mr Li to manage that employee’s equity or shareholding interest in the three companies.  The document (using the version that concerns Mr Zhang) provided as follows:

“股权委托声明

本人xxx，性别x，身份证号：xxx

在山东山水水泥集团有限公司实际出资xxx元，增值xxx元，增值后，持有股权xxx元；

在济南山水立新投资发展有限公司持有股权； xxx元；

在济南山水建新投资发展有限公司持有股权；xxx元；

以上股权的所有权归本人所有，对以上股权的管理，本人自愿委托张才奎代为办理。”

(In English translation as follows:)

“I, XXX, [gender], I.D. card numbered xxx

Actual contribution of capital was made to [Shandong Shanshui] in the sum of xxx yuan. After the value has been increased by xxx yuan, the equity interest held is in the sum of xxx;

The equity interests held at [Shanshui Lixin] is in the sum of xxx yuan;

The equity interests held at [Shanshui Jianxin] is in the sum of xxx yuan.

The ownership of the aforesaid equity interests belongs to me; I am hereby willing to entrust the management of the aforesaid equity interests to Zhang Caikui who will handle it on my behalf.”

Overseas restructuring

17.  An overseas restructuring of the enterprise began in 2005.  As part of that exercise, CSI, the shares of which are the subject matter of these actions, was incorporated as a private company in Hong Kong on 25 January 2005.  On the same date, two other companies, namely, China Shanshui Cement Group (Hong Kong) Company Limited (“CSHK”) and China Pioneer Cement (Hong Kong) Company Limited (“Pioneer Cement”), were also incorporated in Hong Kong.  Shortly thereafter Pioneer Cement became a wholly-owned subsidiary of CSHK.  It appears that these three companies were all bare corporate shells at that time with no asset, having been established in preparation for the subsequent transactions.  Mr Zhang, his son Mr Zhang Bin (Mr Zhang Jr) and Mr Yu Yuchuan, one of the 7 minority shareholders, became directors of CSI.

18.  On 11 April 2005, the 9 Management Shareholders acquired the entire issued share capital of CSI (being 1 million shares of HK$0.01 each) for HK$1.  It appears that, in accordance with the proportion set out in paragraph 14 above, Mr Zhang and Mr Li each became a holder of 655,519 shares and 161,902 shares in CSI respectively.  It is said that at this time, Mr Zhang and Mr Li as settlors verbally established two trusts of the shares in CSI they held, called the Zhang Trust and the Li Trust, which were intended to be an extension of and mirror the substance of the employees stock ownership scheme upon its subsequent termination.

19.  The injection of assets into the Hong Kong group took place in September 2005.  By then Jinan Shanshui had transferred its cement business, related assets, and employees to Shandong Shanshui.  On 5 September 2005, Pioneer Cement acquired the entire equity interest of Shandong Shanshui from the 9 Management Shareholders at the consideration of Rmb 162.8 million.  On 9 September 2005, CSI acquired the entire issued share capital of CSHK (which held Pioneer Cement) for a nominal consideration of HK$2.

20.  Part of the consideration of Rmb 162.8 million for Pioneer Cement to acquire Shandong Shanshui was then funded with subscription monies paid by Morgan Stanley and other institutional investors (together the “Investors”) for an allotment of shares by CSHK representing a 49% interest in that company, with the remaining 51% being held by CSI. 

21.  As a result of these transactions, Shandong Shanshui became a wholly foreign owned enterprise and the employees stock ownership scheme came to an end.

22.  By two trust deeds both dated 28 November 2005 executed by Mr Zhang and Mr Li respectively, Mr Zhang and Mr Li “confirmed” the trusts on which they held the shares in CSI registered in their name.  In the deed relating to the Zhang Trust, Mr Zhang was stated to be the settlor and trustee of the 655,519 CSI shares.  The beneficiaries are 2,549 participating employees named in the schedule (including Mr Zhang himself as the first named beneficiary).  The deed relating to the Li Trust was materially identical with Mr Li being the settlor and trustee of 161,902 CSI shares and another 1,391 participating employees named in the schedule (including Mr Li himself) as the beneficiaries.  I shall refer to the two trusts together as the “BVI trusts”.

23.  For present purposes, several features of each of the BVI trusts are of note:

(1) The trust is an irrevocable one for the period of 100 years.

(2) It is an absolute discretionary trust, in that the trustee may appoint that he holds the trust property for the benefit of any beneficiaries on such terms as he thinks fit.  The powers of the trustee may be exercised at his absolute discretion.

(3) The trustee may by deed appoint new or additional trustees.

(4) Subject to the trustee’s power to amend, the trust is governed by BVI law and the BVI courts have “exclusive jurisdiction in any proceedings involving rights or obligations under the settlement”.

(5) The trustee may by deed amend the governing law of the trust and the courts which have exclusive jurisdiction in any proceedings involving rights or obligations under the trust. 

24.  Also on 28 November 2005, Mr Zhang and Mr Li each issued a letter of wishes in relation to the Zhang Trust and the Li Trust respectively.  The contents represented the “current wishes” of the settlor, and the letter is expressly “not intended to be binding on the trustees but is intended to guide them in the exercise of their discretions”, and states that settlor’s firm wish is that the beneficiaries listed in the schedule to the letter should receive the proportion of the dividends on the shares corresponding to the amounts listed in the schedule.  It appears that the amounts listed for the beneficiaries other than Mr Zhang and Mr Li are in proportion to the financial contribution made by them as participating employees under the employees stock ownership scheme.

25.  Between December 2005 and September 2007, 11 participating employees ceased to be employees of Shandong Shanshui and apparently “transferred” their “interests” to other participating employees, though it is not entirely clear how such transfer was implemented.

The listing in Hong Kong

26.  For the purpose of a public offer of shares, Shanshui Cement was incorporated in the Cayman Islands in 2006.  On 6 September 2007, CSI and the Investors exchanged their shares in CSHK for the same number of shares in Shanshui Cement on a pro rata basis, with the result that Shanshui Cement was interposed as the immediate holding company of CSHK. 

27.  For the purposes of the proposed listing, in April 2008, each of the participating employees was procured to sign a letter of confirmation stating (using the version relating to Mr Zhang):

“5． 本人明白并同意：上述委托事项因山水集团于2005年变为外商独资企业时终止；张才奎先生及李延民先生因此于海外建立信托计划，使本人可继续享有在山水集团所拥有的全部出资及对应的全部经济利益。

6． 本人明白并同意：由张才奎先生全权管理本人在山水集团的全部出资，本人相信张才奎先生作为托管人会公平、公正及无私地管理和维护本人的经济利益。”

(In English translation as follows:)

“5. I understand and agree that the aforesaid entrustment ceased as Shandong Shanshui changed its status to a wholly foreign-owned enterprises in 2005. Mr Zhang Caikui and Mr Li Yanmin therefore set up a trust plan overseas to enable me to maintain all the capital contributions owned (by me) in Shandong Shanshui and continue enjoying all the corresponding economic benefits.

6. I understand and agree that Mr Zhang Caikui is responsible for managing all the matters relating to all the capital contributions made by me to Shandong Shanshui.  I believe that Mr Zhang Caikui, being the person to whom entrustment is made, will manage and protect my economic interests in a fair, just and impartial manner.”

28.  The prospectus of the public offer of Shanshui Cement’s shares was published in June 2008.  The shares began to be listed on the Main Board of the Hong Kong Stock Exchange on 4 July 2008.  Mr Zhang was and is the chairman of the board of directors and an executive director of Shanshui Cement.  The corporate structure immediately after the listing in 2008 was as follows:

Mr Li’s resignation

29.  In July 2010, Mr Li resigned as director of the companies in the group.  At the same time, and without the knowledge or consent of the participating employees, he also retired, and was replaced by Mr Zhang, as trustee of the Li Trust.  The CSI shares held in Mr Li’s name under the Li Trust were transferred to Mr Zhang in January 2011.

The repurchase plan and commencement of the present proceedings

30.  In November 2013, Mr Zhang presented a proposal to the participating employees effectively to buy them out from the BVI trusts. The plan was that the purchase price would be calculated with reference to the share price of the listed company, but at a discount.  The payment would be completed in 3 terms of 10 years each.  The capital payments would be derived from and funded by the income of the trusts, ie dividends received by the trustee from CSI.  The plaintiffs suspected that the plan would involve Mr Zhang using “their money” to buy them out.  According to the plaintiffs, this was the first time they became aware that the relevant shares in CSI were being held on absolute discretionary trusts.

31.  Many of the participating employees resisted and boycotted the repurchase plan.  They lodged complaints with the Mainland authorities, rejecting the repurchase plan and demanding the termination of the trust arrangements.  The plaintiffs requested that the shares in CSI be returned to them individually.  Eventually their Hong Kong solicitors, K & L Gates, issued a letter of demand on 22 August 2014.  On the same date, Mr Zhang’s Hong Kong solicitors, Norton Rose Fulbright Hong Kong, denied all the allegations on behalf of Mr Zhang. 

32.  On 23 August 2014, the first of these actions ie HCA 1661 of 2014 was brought by certain participating employees against Mr Zhang and Mr Li.  In the ensuing months three further actions were commenced against Mr Zhang and Mr Li by additional groups of participating employees.[5]  The number of and interests held by the plaintiffs in these actions may be summarised in the following table (the 1^st and 2^nd plaintiffs being groups of participating employees for whom Mr Zhang and Mr Li were representatives respectively):

Action	Date of Writ	Plaintiff groups	Number of individual plaintiffs	Percentage interests of plaintiffs in CSI
HCA 1661/2014	23 Aug 2014	1st plaintiffs	569	19.16%
		2nd plaintiffs	192	2.10%
HCA 1766/2014	10 Sep 2014	1st plaintiffs	327	9.40%
		2nd plaintiffs	230	2.10%
HCA 2191/2014	30 Oct 2014	1st plaintiffs	424	4.94%
		2nd plaintiffs	125	0.81%
Sub-total			1,867	38.51%
HCA 623/2015	25 Mar 2015	1st plaintiffs	131	1.88%
		2nd plaintiffs	97	0.67%
Total			2,095	41.06%

33.  It can be seen that the plaintiffs in the first three actions, in which the applications now before me were made, are 1,867 participating employees referable to 38.51% of the shareholding of CSI.  If the fourth action is taken into account the number of participating employees who have sued in Hong Kong is 2,095 claiming to have interests in 41.06% of the issued shareholding of CSI.

Placement with CNBM

34.  On 27 October 2014, Shanshui Cement entered into an agreement with China National Building Material Company Limited (“CNBM”), a company incorporated in Mainland China the H shares of which are listed in the stock exchange of Hong Kong, for CNBM to subscribe for 563,190,040 shares in Shanshui Cement at HK$2.77 per share, representing approximately 20% of the issued share capital, or 16.67% of the enlarged issued share capital, of Shanshui Cement. When the placement was completed on 3 November 2014, CSI’s shareholding in Shanshui Cement correspondingly decreased from 30.11% to 25.09%.

35.  This prompted six of the 7 minority shareholders to commence proceedings, by way of a common law “multiple derivative action” (HCA 2194 of 2014), against Mr Zhang and Mr Zhang Jr, on 30 October 2014, complaining that the placement was against the interests of CSI. 

Requisitioned EGM of CSI

36.  Also on 30 October 2014, two of the 7 minority shareholders requisitioned an extraordinary general meeting (“EGM”) of CSI in order to appoint five of them to the board of CSI.  The five proposed appointees are Mr Dong Chengtian, Mr Zhao Liping, Mr Zhao Yongkui, Mr Mi Jingtian and Mr Li Maohuan.

37.  On 24 November 2014, having obtained an order for substituted service of the writs on Mr Zhang on an urgent basis, the plaintiffs issued a summons seeking an interlocutory injunction requiring Mr Zhang to attend and vote at the requisitioned EGM in accordance with the plaintiffs’ instructions given in their solicitors’ letter dated 17 November 2014 (supporting the appointment of the above five minority shareholders) and further written instructions to be given by the plaintiffs.

Share options

38.  On 27 January 2015, Shanshui Cement announced a board resolution to grant options to various persons to subscribe for 207,300,000 new shares at $3.28 per share.

Proposed grantee	Number of shares covered by options
Mr Zhang	23,600,000
Mr Zhang Jr	20,000,000
Mr Li Cheung Hung	9,000,000
Other grantees	154,700,000
Total	207,300,000

39.  The 6 minority shareholders and the plaintiffs herein both complain that these share options were intended further to dilute CSI’s shareholding in the listed company from 25.09% to 23.64%.

Unfair prejudice petition in HCMP 593/2015

40.  In February 2015, the 6 minority shareholders applied under ss. 732 and 733 of the Companies Ordinance (Cap. 622) for leave to bring a statutory derivate action in the form of a petition under s. 725, on behalf of CSI, against, among others, Mr Zhang, Mr Zhang Jr and CNBM, complaining that the affairs of Shanshui Cement had been or were being conducted in a manner unfairly prejudicial to the interests of CSI.  This petition was intended to replace the common law multiple derivative action in HCA 2194/2014 which was to be discontinued.  The reason given for this change in strategy was that in the light of what had taken place it may be appropriate to seek not just orders remedying specific wrongful acts but orders of a type that are only available under s. 725(1), for example, reconstituting the board.[6]

41.  On 13 March 2015, after a hearing of the application which was contested by counsel on behalf of CSI, Harris J granted leave for the 6 minority shareholders to issue what may be called a “statutory derivative unfair prejudice petition”.  The petition (numbered HCMP 593/2015) was duly presented in the name of CSI against Mr Zhang, Mr Zhang Jr, Shanshui Cement and CNBM on 16 March 2015.

Proposed EGM of Shanshui Cement

42.  Meanwhile it was announced that Shanshui Cement would hold an EGM on 20 March 2015 for the purpose of considering and, if thought fit, approving the grant of the share options to Mr Zhang and Mr Zhang Jr.[7]  It appears that Harris J was minded to grant an interim injunction which became unnecessary as an undertaking was given not to hold the EGM before the determination of the application for injunction by the plaintiffs in these proceedings.

43.  The plaintiffs contend that although CSI as a person connected with Mr Zhang could not vote in favour of the grant of options at the EGM of the listed company, CSI could vote against the motion, and that therefore it was important to grant the injunction sought by them so that CSI’s board could be reconstituted before the EGM of the listed company is held.

44.  On 24 March 2015, the plaintiffs in each of the three actions issued a further summons, seeking the appointment of two accountants from Ernst & Young as receivers in respect of a proportionate number of shares in CSI referable to the plaintiffs’ claims.

III.  PRINCIPLES CONCERNING THE 1^ST DEFENDANT’S APPLICATIONS

45.  In Tillemont Shipping Corp SA v Taitexma Enterprise Corp [1993] 2 HKC 129, the Court of Appeal held that substituted service of a writ on a foreign defendant is permissible only if the requirements in Order 11 for the issue and service of a writ out of the jurisdiction are met.  The 1^st defendant contends that the orders for substituted service should be set aside because these requirements are not satisfied.  It follows that a decision on the applications to set aside substituted service (made in all three 2014 actions) is determinative also of the application to set aside leave to serve the writ out of the jurisdiction (granted in HCA 1661/2014 only).  As confirmed by Mr Jat SC, who appeared on behalf of the 1^st defendant, the summonses (taken out in all three 2014 actions) for stay of proceedings on the ground of forum non conveniens are redundant and do not require determination.

46.  The principles governing the exercise of the power to grant leave to serve a writ out of the jurisdiction are not in dispute.  They have been settled by authorities such as Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460; Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438, 453-457 and applied in Hong Kong in numerous decisions, such as Stone J’s decision in Hargreaves v Taian Insurance Co Ltd [2006] 3 HKLRD 70 at §50.  They have also been recently restated by Lord Collins in the Privy Council in AK Investment CJSC v Kyrgyz Mobil Tel Ltd [2012] 1 WLR 1804 at §§71, 88. 

47.  In the present context, in order to resist the 1st defendant’s applications and establish that leave was properly given for service of the writ on the 1^st defendant out of the jurisdiction, the plaintiffs have to satisfy three requirements.  First, they must show that there is a serious issue to be tried on the merits in the claim against the 1^st defendant.  Secondly, the plaintiffs must satisfy the court that there is a good arguable case that their claim against the 1^st defendant falls within one or more of the “gateways” in Order 11 rule 1(1) pursuant to which leave may be given for service out of the jurisdiction.  Thirdly, the plaintiffs must satisfy the court that in all the circumstances Hong Kong is clearly or distinctly the appropriate forum for the trial of the dispute, and that in all the circumstances the court ought to exercise its discretion to permit service of the proceedings out of the jurisdiction.  This reflects the requirement in Order 11 rule 4(2) that it has to be “made sufficiently to appear to the Court that the case is a proper one for service out of the jurisdiction under this Order”. 

48.  While the principles are well established, there are two aspects to which I should draw attention here.  First, although the legal burden lies on a plaintiff who seeks leave to serve out of the jurisdiction to show that Hong Kong is clearly or distinctly the appropriate forum for the trial of the dispute, it has been said that it is incumbent on the defendant to identify the issues concerned and how they arise or may arise in the proceedings.  Clarke LJ put it in the following terms in Limit (No. 3) Ltd v PDV Insurance [2005] 1 CLC 515 at §72:

“It is to my mind important that, in general, where a defendant wishes to set aside an order for permission to serve out of the jurisdiction on the basis that the action involves or may involve issues which it would be appropriate should be tried in a court or courts outside the jurisdiction, it is incumbent upon him, so far as possible to identify the issues concerned and to state as clearly as possible how they arise or may arise in the proceedings. That is so even though, on such an application, the burden of proving that England is the more appropriate forum for the trial of the action is on the claimant. It is not appropriate for a defendant merely to speculate as to the issues which might arise.”

See also VTB Capital plc v Nutritek International Corporation [2013] 2 AC 337, at §36 per Lord Mance and at §192 per Lord Clarke. 

49.  In VTB Capital plc, Lord Neuberger, recognising that a defendant is in principle “entitled to keep his powder dry”, stated at §91:

“91. However, if the defendant chooses to say nothing, then it would be quite appropriate for the court to proceed on the basis that there is no more (and no less) to the proceedings than will be involved in the claimant making, or trying to make, out its case. … [I]f he is wholly reticent about his case, he can have no complaint if the court does not take into account what points he may make, or evidence he may call, at any trial. …”

50.  What I think is clear from the authorities is that despite the burden is on the plaintiff, a defendant is expected to inform the court in outline what his case on the merits is so that the court can form a view of what the issues may be that arise for trial.  Often not every element of a plaintiff’s case requires trial; only the disputed matters have to be tried.  At the stage when a jurisdictional challenge is raised, which is almost invariably before the defendant has filed a defence, neither the plaintiff nor the court will know from any pleading what will be in dispute.  If the defendant does not reveal any positive case then the court assumes there is none and proceeds on the basis that the trial will involve no more and no less than the plaintiff trying to make out his case.

51.  The second aspect arises out of Mr Jat’s description of the jurisdiction under Order 11 as being “exorbitant”.  He referred to Wo Fung Paper Making Factory Ltd v Sapi Kraft (Pty) Ltd [1988] HKC 10 at 22A where Hunter JA, citing Spiliada at p 481, stated that the court’s basic jurisdiction is territorial and it is therefore a strong thing for the court to go outside its territory and to compel a foreigner to come here to defend himself.  Mr Jat also referred me to Kayden v Securities and Futures Commission (2010) 13 HKCFAR 696 at §36, where Ribeiro PJ referred to “the extraordinary nature of the long-arm jurisdiction asserted under O.11”.  That remark was made in the context of his Lordship emphasising the need for a strict approach to the construction of the “gateways” under Order 11 rule 1(1) and for full and frank disclosure by the plaintiff in the ex parte application.

52.  I have no quarrel with that at all if what Mr Jat meant is simply that the court must approach an application for leave under Order 11 with care and insist on such applications being prepared by plaintiffs with equal care, but I do not think this means the court ought to have any predilection or presumption against granting leave to serve out.  As Lord Goff made clear in Spiliada at 481D-E, the “exorbitant” nature of the jurisdiction is recognised by placing the burden on the plaintiff to show not only that Hong Kong is the appropriate forum for the trial of the action, but that it is clearly so.

53.  Furthermore, the use of the word “exorbitant” in this context is becoming out of date.  It was used by Lord Diplock in Amin Rasheed Shipping Corporation v Kuwait Insurance Co [1984] AC 50, 65G to mean a jurisdiction which, under general English conflict rules, an English court would not recognise as possessed by any foreign court in the absence of some treaty providing for such recognition.  In Spiliada itself at 481E-H, Lord Goff said that the word “exorbitant” was, as used in this context, “an old-fashioned word which perhaps carries unfortunate overtones” and that

“the circumstances specified in Order 11, r. 1(1), as those in which the court may exercise its discretion to grant leave to serve proceedings on the defendant outside the jurisdiction, are of great variety, ranging from cases where, one would have thought, the discretion would normally be exercised in favour of granting leave (e.g., where the relief sought is an injunction ordering the defendant to do or refrain from doing something within the jurisdiction) to cases where the grant of leave is far more problematical. …”

54.  The approach of the English courts has developed further, so much so that in Abela v Baadarani [2013] 1 WLR 2043 at §53, Lord Sumption stated:

“This characterisation of the jurisdiction to allow service out [i.e. as an ‘exorbitant’ jurisdiction] is traditional, and was originally based on the notion that the service of proceedings abroad was an assertion of sovereign power over the Defendant and a corresponding interference with the sovereignty of the state in which process was served. This is no longer a realistic view of the situation. The adoption in English law of the doctrine of forum non conveniens and the accession by the United Kingdom to a number of conventions regulating the international jurisdiction of national courts, means that in the overwhelming majority of cases where service out is authorised there will have been either a contractual submission to the jurisdiction of the English court or else a substantial connection between the dispute and this country. Moreover, there is now a far greater measure of practical reciprocity than there once was. Litigation between residents of different states is a routine incident of modern commercial life. A jurisdiction similar to that exercised by the English court is now exercised by the courts of many other countries. The basic principles on which the jurisdiction is exercisable by the English courts are similar to those underlying a number of international jurisdictional conventions, notably the Brussels Convention (and corresponding regulation) and the Lugano Convention. The characterisation of the service of process abroad as an assertion of sovereignty may have been superficially plausible under the old form of writ (‘We command you …’). But it is, and probably always was, in reality no more than notice of the commencement of proceedings which was necessary to enable the defendant to decide whether and if so how to respond in his own interest. It should no longer be necessary to resort to the kind of muscular presumptions against service out which are implicit in adjectives like ‘exorbitant’. The decision is generally a pragmatic one in the interests of the efficient conduct of litigation in an appropriate forum.”

Lord Clarke, with whom the other Supreme Court Justices concurred, agreed with Lord Sumption’s approach: see §45.

IV.  THE PARTIES’ CASES

The plaintiffs’ case

55.  With the principles in mind I turn to consider the parties’ cases.  The plaintiffs’ primary claim, as I see it, is that an aliquot portion of shares in CSI were and are held by Mr Zhang on trust for them individually.  I shall call this the “ownership claim”.  They contend that they contributed capital to and obtained corresponding equity interests in Jinan Innovation (later renamed Shandong Shanshui).  Those interests were held by Mr Zhang and Mr Li on their behalves under the employees stock ownership scheme. The overseas restructuring was intended effectively to reflect the same arrangement after the stock ownership scheme ceased when Shandong Shanshui became a wholly foreign-owned enterprise.  It was for this purpose, among others, that the 9 Management Shareholders procured a series of transactions as set out above.  In particular, they became registered shareholders of the 1,000,000 shares in CSI in April 2005 and CSI, via Pioneer Cement, acquired all the equity interests in Shandong Shanshui in September 2005.

56.  The plaintiffs contend that therefore Mr Zhang held 523,669 shares in CSI on trust individually for 2,548 participating employees and that Mr Li held 94,002 shares on trust for another 1,390 participating employees (ie a total of 617,671 shares for 3,938 participating employees).  The plaintiffs rely on, among others, the “Equity Interest Entrustment Declaration” dated January 2005 (quoted in paragraph 16 above) and the confirmation signed by participating employees in April 2008 (quoted in paragraph 27 above).  In addition, the plaintiffs refer to the declarations made to the State Administration of Foreign Exchange by Mr Zhang and Mr Li in 2006 and by Mr Zhang again in 2012, in which they stated that the relevant proportions of the shareholding in CSI were held “for the trust employees”.[8]

57.  The plaintiffs contend that as trustees Mr Zhang and Mr Li owed them fiduciary duties and that in breach of such duties and without the plaintiffs’ knowledge and consent they purportedly established the Zhang Trust and the Li Trust in respect of the shares held on behalf of the participating employees.  The plaintiffs plead that they have never agreed to the BVI trusts and that these trusts are not binding on them.

58.  There is no dispute that under a discretionary trust such as the BVI trusts, individual “beneficiaries” have no proprietary interest in the trust assets or capital, and no right to a definable part of the trust income.  They merely have a hope or expectancy that the trustee will exercise his discretion and make a disposition of property in his favour.  It is meaningless to speak of a duty to act impartially between the beneficiaries: PLTO v KLK [2013] 2 HKLRD 1089, §40.[9]  Indeed, the expert opinion on BVI law adduced by Mr Zhang himself states that under a discretionary trust, no beneficiary or beneficiaries have any entitlement to any trust property.  From the point of view of the participating employees, the letters of wishes issued by Mr Zhang and Mr Li, which are expressly stated to be non-binding and can be revoked or changed at any time, are worth little more than the paper they are written on.

59.  In nutshell, the plaintiffs feel aggrieved that their beneficial equity interests in Shandong Shanshui are said to have been transformed, as a result of the corporate restructuring, into nothing more than an expectation to be considered for being given some benefit out of the trusts at the absolute discretion of the 1^st defendant.  Moreover, as a result, their “interests” have become non-transferrable, as stated in the repurchase plan.

60.  On this basis the plaintiffs claim (i) a declaration that the defendants hold specified proportionate numbers of shares in CSI (including all dividends and ancillary rights and interests) on constructive trust for them, (ii) an order that the defendants deliver up the relevant share certificates, and (iii) an order that the defendants execute transfers of the relevant shares to the plaintiffs or to their order.

61.  In addition, the plaintiffs complain that Mr Zhang has used his controlling shareholding in CSI to inflict damage upon various group companies for his own personal benefit, thus causing damage to the interests of the participating employees in CSI.  I shall call this the “corporate misconduct claim”.  These acts include the following:

(1) Mr Zhang, via CSI, procured the listed company to appoint (i) his son Mr Zhang Jr, (ii) a loyal subordinate Mr Li Cheung Hung, (iii) Mr Zhang’s close friend Mr Hou Huailiang, (iv) another close friend Mr Sun Jianguo, and (v) Mr Xiao Yu (who was recommended by Mr Sun Jianguo), as its directors to facilitate Mr Zhang’s pursuit of personal gains.

(2) In respect of a cement project in Lüliang (in Shanxi Province), Mr Zhang and Mr Zhang Jr permitted an engineering company called Shandong Lujian to increase substantially the fees charged to the group beyond that stated in the contract.

(3) In relation to another cement project in Shanxi, Mr Zhang and Mr Zhang Jr insisted on awarding a contract to a small and inexperienced factory called Jinan Huantao and on accepting all the subsequent demands by that company for additional payments.

(4) Mr Zhang and Mr Zhang Jr insisted on awarding a contract relating to a Neimenggu project to an unqualified company called Shandong Tianyi despite that the fees it demanded were much higher than other qualified bidders.

62.  The plaintiffs also claim an account of the profits made by the defendants, damages or compensation, interest and costs.

The 1^st defendant’s case

63.  The principal affirmation made by Mr Zhang in support of his applications to challenge jurisdiction deals mainly with the connections with various jurisdictions.  So far as I can distill from it his substantive defence, it seems that Mr Zhang contends that the relationship between the participating employees and Mr Zhang and Mr Li was an entrustment contract relationship governed by PRC law.  As participants in the stock ownership scheme, the participating employees entrusted all rights of management and control to the shareholders’ representatives, being content to receive only the economic benefits.  Mr Zhang also relies on the “Equity Interest Entrustment Declaration” dated January 2005 (see paragraph 16 above) and the confirmation signed by participating employees in April 2008 (see paragraph 27 above).  He contends that the participating employees therefore know they only have the right to receive economic benefits.

64.  Mr Zhang does not allege that any of the plaintiffs or participating employees had actually seen the trust deeds of the BVI trusts or were actually aware that the BVI trusts were discretionary trusts.  The furthest he goes in his affirmation is to point to a passage in the prospectus for the listing of Shanshui Cement which stated:

“The beneficiaries of the trusts will be provided with copies of the trust deeds and related documents upon request.”

He refers to the fact that the prospectus defined the Zhang Trust and the Li Trust as discretionary trusts set up under BVI laws,[10] and that none of the participating employees stated he or she disagreed with any term of the BVI trusts prior to the listing of Shanshui Cement.

V.  SERIOUS ISSUES TO BE TRIED

65.  The plaintiffs’ ownership claim and corporate misconduct claim are in my view quite separate and different, although they have not been differentiated by the parties in their submissions.  The ownership claim is made against the 1^st defendant as the registered shareholder of the CSI shares and trustee of the BVI trusts, for an in rem declaration of ownership in their favour.  The corporate misconduct claim is in contrast a personal claim against the 1^st defendant for wrongs allegedly done by him against certain companies in the group.  Mr Jat did not advance any submission that the claims are doomed to fail.  While I take that as the 1^st defendant’s acceptance for present purposes that the ownership claim raises serious issues to be tried, the claim for corporate misconduct proves on examination to be more problematic.

66.  Paragraph 31 of the amended statement of claim in each of the actions alleges that the 1^st defendant committed misconduct in relation to various projects of group companies, but fails to identify any of the relevant companies or their relationship with CSI or the listed company.  Assuming that the companies in question are distant subsidiaries of the listed company, it has not been explained on what basis the plaintiffs can make a claim in respect of wrongs allegedly done by the 1^st defendant to companies at several remove from CSI – which is the only company in which the plaintiffs claim to have direct beneficial interest.  Any damage sustained by the plaintiffs as beneficial owners of shares of CSI as a result of those wrongs seems to me plainly to be reflective of the loss suffered by the subsidiaries in question, and is as such incapable of founding an action by the plaintiffs by virtue of the reflective loss principle: Waddington Ltd v Chan Chun Hoo Thomas (2008) 11 HKCFAR 370.

VI.  ORDER 11 RULE 1(1) – THE “GATEWAYS”

67.  Likewise, on the question whether the claims fall within any of the heads in Order 11 rule 1(1), I have to approach the two claims separately.  A plaintiff must in general show a good arguable case that each of his claims falls within one or more chosen heads of Order 11 rule 1(1): Official Solicitor v Stype Investments (Jersey) Ltd [1983] 1 WLR 214, 221G; Johnston, The Conflict of Laws in Hong Kong (2^nd ed), §3.057.  It is stated in Dicey, Morris & Collins, The Conflict of Laws (15^th ed), §11-149 that if proceedings fall within one or more of the clauses it is not permissible to litigate any other cause of action which does not fall within one of the clauses: see also Siskina v Distos Compania Naviera SA [1979] AC 210, 255A; Donohue v Armco Inc [2002] 1 All ER 749 §21.  Where one of the claims in a writ falls within Order 11 but not another, it seems to me the court can grant leave as to part only: Hong Kong Civil Procedure 2015, §11/1/7(d), though in practice requisitions will no doubt have been raised by the court at the ex parte stage requiring the plaintiff to remove from the writ any cause of action not falling within Order 11 before leave is granted.  This seems to me to follow also from the principle that the court has no power to allow an amendment of a writ served with leave out of the jurisdiction to add a cause of action for which leave could not be given under Order 11: Hong Kong Civil Procedure 2015, §11/4/6.  As a corollary, it seems to me that where leave has been given ex parte to serve out of the jurisdiction a writ that contains claims that lie outside Order 11 rule 1(1), the court can to that extent set aside the leave in part.

68.  Mr Jat conceded that the plaintiffs’ claim for ownership of the shares falls within Order 11 rule 1(1)(i), in that “the claim … is made to assert, declare or determine proprietary or possessory rights … in or over movable property … situate within the jurisdiction”.  The movable property in question is the shares in CSI.  Those shares are in my view rightly regarded as being situate within Hong Kong, being the place of incorporation and presumably the place where the register is kept: Dicey, Morris & Collins, §22-044.  Accordingly the concession was rightly made in respect of the ownership claim.

69.  Although the 1^st defendant has not drawn a distinction between the two claims, in my view the concession cannot be said to apply to the corporate misconduct claim.  Since Order 11 concerns jurisdiction in the strict sense (see Choi Chung Bun Vincent v Australia China Holdings Ltd [2013] 3 HKLRD 622 §46), I do not think I should base my decision on a concession, unless there is submission to jurisdiction.  On any view that claim does not fall within rule 1(1)(i).  Nor does it in my opinion fall within rule 1(1)(b) (ie “an injunction is sought ordering the defendant to do or refrain from doing anything within the jurisdiction …”) which is the only other head relied upon before the Master.  The only relief sought in the writ that can be called an injunction is an order that the 1^st defendant execute the requisite documents to transfer CSI shares to the plaintiffs, which is plainly ancillary to the ownership claim only and, in any event, does not require the documents to be executed in Hong Kong. 

70.  On this basis it seems to me that insofar as it concerns the corporate misconduct claim, the leave given ex parte must be set aside.

VII.  WHETHER HONG KONG CLEARLY OR DISTINCTLY THE APPROPRIATE FORUM

71.  It is this third requirement on which the parties have focussed in this application.  To appreciate what the trial will involve it is necessary to try to see what the issues are.  It is not easy to ascertain the precise issues at this stage because the details of how the trust alleged by the plaintiffs arose and the 1^st defendant’s defence are not readily discernible.  Doing the best I can it seems to me that the following (possibly overlapping) issues emerge as issues that are likely to arise for trial in the ownership claim:

(1) what were the basis and terms on which the defendants acquired and held the shares in CSI in 2005?

(2) whether the defendants breached their duties to the plaintiffs by purporting to create the BVI trusts over the CSI shares;

(3) whether the plaintiffs consented or must be taken to have consented for their interests to be put under the BVI trusts; and

(4) whether the plaintiffs are bound by the terms of the BVI trusts.

72.  Having in mind the likely shape of the trial, it falls for me to evaluate the factors that the parties have referred to in assessing the appropriateness of Hong Kong as a forum for the trial of the action.  These factors may be conveniently grouped into the following categories: (i) location of witnesses; (ii) the nature of the action and the governing law; (iii) exclusive jurisdiction clause in the BVI trusts; and (iv) related proceedings in Hong Kong.

Location of witnesses

73.  It seems to me likely that Mr Zhang as the principal defendant will be a witness at the trial.  Mr Zhang is resident in Jinan, Shandong Province.  However, he is the chairman of the board and an executive director of Shanshui Cement, a listed company in Hong Kong with a place of business here.  He has presumably no difficulty in travelling to Hong Kong. 

74.  It is not clear from what Mr Zhang has said so far in these proceedings what other witnesses will be required.  While the plaintiffs are or were factory workers in Shandong Province many of whom have never set foot in Hong Kong, I do not think it is realistic to expect that all 1,867 plaintiffs in the three actions (or 2,095 plaintiffs if the fourth action is included) will have to testify in court.  Their status as participating employees, their financial contribution and their equity interests in Shandong Shanshui are not in issue.  As I understand his position, Mr Zhang relies on the documents to suggest that participating employees consented to the arrangements involved in the overseas restructuring and eventual listing and knew of the BVI trusts.  He has not made any allegation that any plaintiff was informed orally at a briefing meeting or otherwise that his or her interest would or had become a mere expectancy at the trustee’s absolute discretion. Nor have the plaintiffs pleaded that the documents they signed were either void or invalid because of fraud, duress or undue influence.

75.  Furthermore, as Ms Eu SC submitted on behalf of the plaintiffs, in many modern cases the Hong Kong courts have accorded little weight to the location of witnesses in Mainland China, given the convenience of travel in this day and age: see Hong Kong Civil Procedure 2015, p 140, §11/1/10U.  I conclude that this factor in itself can count for very little in this case.  Different considerations may of course arise if there are third party witnesses whose compellability is in issue.  But the 1^st defendant has not identified any such witness.  At one stage in his argument Mr Jat SC submitted that the Mainland courts have wide powers to investigate the individual plaintiffs’ circumstances by interrogating them and are therefore a more appropriate forum.  I cannot accept this submission since the 1^st defendant has not pointed to any concrete factual aspect where such investigation would be fruitful, nor is there any evidence at all that the Mainland courts possess any such relevant special powers.

The nature of the action and the governing law

76.  It is easy to see why governing law is a material factor to consider in the present context.  If the central issues in a case are governed by foreign law, trying the case in Hong Kong will not only involve the expense of investigating and proving such foreign law in the Hong Kong court, but also the risks of the Hong Kong court arriving at the wrong conclusions on foreign law.  Conversely, if the Hong Kong court takes the view that Hong Kong law governs the important issues, a trial before a foreign tribunal will involve the same risks and the additional risk that the foreign tribunal may not apply Hong Kong law at all. 

77.  The parties take different positions with regard to the governing law.  In short, at the risk of oversimplification, Mr Jat submitted that the relationship between the parties was governed by PRC law prior to the cessation of the employees stock ownership scheme in 2005 and thereafter by BVI law insofar as the BVI trusts are concerned.  In contrast, Ms Eu submitted that the central question of whether the plaintiffs have a beneficial interest in the relevant shares in CSI is governed by Hong Kong law as the lex situs.

78.  In ascertaining the governing law in this context, it is necessary to focus on the issue in question.  In Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1996] 1 WLR 387 at 391, Staughton LJ analysed the applicable approach in three stages as follows:

(1) First, it is necessary to characterise the issue that is before the court. 

(2) The second stage is to select the rule of conflict of laws which lays down a connecting factor for the issue in question. 

(3) Thirdly, it is necessary to identify the system of law which is tied by the connecting factor found in stage two to the issue characterised in stage one. 

This three-stage approach was common ground and adopted by the Court of Appeal in First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd [2011] 2 HKLRD 45 (CA) at §49.  I bear in mind that the rules of conflict of laws should be directed at the particular issue of law which is in dispute, rather than the cause of action which is relied upon: MacMillan at399C, 407B and 418A-B.

79.  It is quite clear that, prior to the overseas restructuring, the ownership of the equity interest in Shandong Shanshui held by Mr Zhang and Mr Li, and the duties owed by them to the participating employees in respect of such interest are matters governed by PRC law.  There is no dispute between the parties.

80.  The matter becomes more difficult when Mr Zhang and Mr Li acquired shares in CSI in April 2005 and then caused the entire equity interest in Shandong Shanshui to be injected into Pioneer Cement in September 2005 which at around the same time became a subsidiary of CSI.  Treating this as a single composite transaction, its substance is that Mr Zhang and Mr Li divested themselves of the equity interest in Shandong Shanshui in order to acquire valuable CSI shares whose value is derived from the very equity in Shandong Shanshui held by Pioneer Cement.  The plaintiffs contend that in consequence they held certain proprietary interest in the CSI shares registered in the name of Mr Zhang and Mr Li.  On Mr Zhang’s case, however, when he first acquired the shares in CSI in April 2005, he already declared a trust over them, on terms of the Zhang Trust, albeit not yet reduced into writing at that stage.  Whether or not Mr Zhang in fact did so is a question of fact, which seems to me best resolved in Hong Kong given that the act was done in Hong Kong, it was done presumably pursuant to advice from Hong Kong advisers, the shares were Hong Kong shares, it was a preparatory act for an overseas restructuring in Hong Kong and ultimately a public listing in Hong Kong.  On the footing that he had already declared a trust in April 2005, the issue that arises is whether, despite Mr Zhang’s attempt to put the shares into an express discretionary trust, overriding equitable interests arose in favour of the plaintiffs as a consequence of the steps taken which form part of the overseas restructuring.

81.  Mr Jat submitted on behalf of the 1^st defendant that the applicable law continues to be PRC law being the law governing the relationship between the plaintiffs and the defendants arising from the employees stock ownership scheme.  He submitted that any pre-acquisition agreement between the parties for the defendants to acquire shares in CSI must be governed by PRC law, given that the agreement was intended to continue and reflect the pre-existing relationship, that the intention was for the 1^st defendant to perform his obligations within the PRC, that the parties were all resident and domiciled in the PRC, and that being an intangible asset, the location of the CSI shares as the subject matter of the contract is not a significant factor.

82.  Mr Jat relied on Dicey, Morris & Collins, The Conflict of Laws (15^th ed), rule 172(1), which states:

“The law applicable to a cause of action or issue determines whether a person is required to hold property on constructive or resulting trust.”

This rule in itself however does not take the 1^st defendant very far, for the issue applicable to the issue, ie the lex causae, depends on the characterisation of the issue. Constructive and resulting trusts, in this context, are not the bases of claims but the conclusionary responses of the law to the multifarious situations in which they arise.  In the commentaries at §§29-077 to 29-079, Dicey, Morris & Collins suggest that the issue can, depending on the particular case, be classified as one of property law, unjust enrichment or contract.  Each of these attracts a different choice of law rule.  Indeed it seems to me the difference between the parties here primarily stems from the fact that whereas Ms Eu has focussed on the property law aspect, Mr Jat submitted that the trust contended for by the plaintiffs is in essence contract-based.

83.  Relying on Lightning v Lightning Electrical Contractors Ltd (English CA, 23 April 1998), Mr Jat further argued that the law applicable to the issue is the law governing the contract between the parties, and that is PRC law in this case.  In Lightning, LEC, an English company, purchased a property in Scotland in its name.  After LEC went into liquidation, its shareholder and managing director, Mr Lightning, a resident of England, claimed to have provided the entire purchase price with the intention that LEC should hold the property on a resulting or constructive trust for him, and brought an action in England for a declaration to that effect and for orders for conveyance of the property to his order.  LEC applied to the English court for, inter alia, a stay of the proceedings. Although the issue that arose was jurisdiction, the main argument before the Court of Appeal turned on whether English or Scottish law was the governing law. Peter Gibson LJ after referring to Ewing v Orr Ewing (1883) LR 9 HL 34, Deschamps v Miller [1908] 1 Ch 856 and Webb v Webb [1991] 1 WLR 1410, continued to say that in those cases:

“… the English court not unnaturally regarded English law as applicable to the relationship between the parties before it in the absence of any event governed by the lex situs destructive of the equitable interest being asserted.”

He held there was nothing to connect Scottish law with the relationship between the persons concerned apart from the fact that the property to be purchased was situated in Scotland and that no event governed by Scottish law had occurred whereby any equity arising under English law was destroyed.  The governing law was therefore English law. Millett LJ agreed and said:

“If A provides money to B, both being resident in England, to purchase landed property in his own name but for and on A’s behalf, and B does so, the consequences of that transaction are governed by English law. It would be absurd if they were governed by the law of the place where the property in question happened to be located.

 Such a rule would lead to bizarre results if, for example, A’s instructions were to buy properties in more than one jurisdiction, for the consequences of the same arrangement might then be different in relation to the different properties acquired.  It would also lead to bizarre results if A left it to B’s discretion to choose the property to be acquired, since that would give B the unilateral power to decide on the legal consequences of the transaction which he had entered into with A. …”

84.  It seems to me that Millett LJ’s statement was concerned with the consequences in terms of personal remedies between the immediate parties to a consensual purchase by way of agency.  It stems from the maxim that “equity acts in personam” and may claim pedigree to cases such as Penn v Lord Baltimore (1750) 1 Ves Sen 444, Ewing v Orr Ewing (1883) 9 App Cas 34, Deschamps v Miller [1908] 1 Ch 856 and Webb v Webb [1991] 1 WLR 1410 some of which were cited by Peter Gibson LJ in Lightning.  By those cases, which concern the question of jurisdiction rather than choice of law, the principle is affirmed that the English courts of equity in exercise of their personal jurisdiction may compel the performance by a defendant amenable to the courts’ jurisdiction of contracts and trusts relating to property situate abroad.  Thus in First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd (2012) 15 HKCFAR 569 at §72, Lord Collins NPJ cited Lightning as support for the proposition that “personal remedies may be available in one jurisdiction in relation to land or other property in another jurisdiction in which those remedies might not be available”. 

85.  As a statement of the principle for identifying the governing law, however, Dicey, Morris & Collins, §29-081 states that the position in Lightning is “not free from doubt, there being both Commonwealth authority and academic support for application of the lex situs, on the basis that rights in property are ultimately at stake”.  The difficulty has no doubt arisen at least in part because although it is said equity acts in personam, equitable rights are for many purposes proprietary in the sense that they affect and are often binding on third parties (except bona fide purchasers of the legal estate for value without notice).

86.  The situation in the present case is more complex than that postulated by Millett LJ in his example.  In addition to acquiring the CSI shares, Mr Zhang and Mr Li had, wrongfully according to the plaintiffs, put them into trusts (i) which are subject to the trustees’ absolute discretion, (ii) of which not only Mr Zhang, Mr Li and the plaintiffs but also other participating employees are beneficiaries, and (iii) which is expressed to be governed by BVI law.

87.  In these circumstances, it is not surprising that the plaintiffs have sought a remedy in rem – a declaration of beneficial ownership of the shares.  The correct analysis in my opinion is that Mr Zhang is being sued as registered holder of the shares and trustee of the BVI trusts.  In fact, Mr Zhang does not profess to hold the shares absolutely for himself.  He only holds the shares as trustee of the BVI trusts.  The plaintiffs’ claim for ownership is not purely an in personam claim but a claim for the property itself, lying against whomever happens to be in possession of the property.  This can be seen most clearly in relation to the 2^nd plaintiffs in all three actions and the shares in the Li Trust of which Mr Zhang has since 2010 become trustee: although Mr Zhang owed no pre-existing personal obligation to the 2^nd plaintiffs and was a third party with respect to any trust between Mr Li and the 2^nd plaintiffs, he has succeeded to Mr Li as trustee of the Li Trust and as registered holder of those shares.  The 2^nd plaintiffs have a claim against Mr Zhang not because he owed some pre-existing personal obligation to them which he breached, but because he held the legal estate in the shares which is, on the plaintiffs’ case, subject to their proprietary interests.  The plaintiffs’ claim is to recover their property from the person into whose hands it has come.  They assert and rely on a continuing equitable interest in the property or in its traceable proceeds under an express or resulting trust.  They seek a decision binding on any trustee of the BVI trusts as well as on all other beneficiaries who are not plaintiffs in the actions.  In that sense the contest is whether the claim of title of the plaintiffs to the CSI shares is to be preferred to the only other competing title, ie that under the BVI trusts.

88.  In that contest the plaintiffs had to establish they had a proprietary cause of action for the shares which gave them a better title to the shares than the trustee of the BVI trusts.  Unlike in Lightning, the question is not simply what in personam claim the plaintiffs may make against the persons entrusted to recover the property acquired on their behalves.  The question here is rather one of title and ownership. 

89.  As Ms Eu submitted, there is a solid line of authorities that issues of title, ownership and priority are governed by the lex situs.  In Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1996] 1 WLR 387, shares owned by the plaintiff (a subsidiary of a public company) in a New York corporation were transferred to an English company, ostensibly as nominee, but were then wrongfully and in breach of trust used as security for debts of companies in the private ownership of Mr Robert Maxwell and his family.  When those companies defaulted, the banks enforced the security and eventually caused the shares to be registered in their names.  In the action brought by the plaintiff to recover the shares from the banks, the banks claimed to have acquired title to the shares in good faith and for value, without notice of any interest of the plaintiff.  A preliminary question arose as to which law governed the plaintiff’s claim.  The trial judge (Millett J) held that the applicable law was the law of the place of the transaction (lex loci actus) which in turn he held to be New York law.

90.  The Court of Appeal treated the issue as one of title, ownership and priority.  Staughton LJ said (at 399F):

“The general rule, which is subject to exceptions, appears to me to be that issues as to rights of property are determined by the law of the place where the property is.”

He went on to consider the position with regard to choses in action and shares in company in particular and concluded that:

“… the preponderance of authority is that the ownership of shares is to be determined by the law of the situs …” (at 404H)

and

“I conclude that an issue as to who has title to shares in a company should be decided by the law of the place where the shares are situated (lex situs). …” (at 405B)

Auld LJ said:

“In general, disputes about the ownership of land and of tangible and intangible moveables, including negotiable instruments, are governed by the lex situs.” (410B)

“In my view, there is authority and much to be said for treating issues of priority of ownership of shares in a corporation according to the lex situs of those shares. …” (at 411E)

Aldous LJ said:

“As a matter of principle I believe the appropriate law to decide questions of title to property, such as shares, is the lex situs, which is the same as the law of incorporation. No doubt contractual rights and obligations relating to such property fall to be determined by the proper law of the contract. …

The conclusion that the appropriate law is the law of incorporation is, I believe, also consistent with the general rule relating to movables and land. In both cases the courts look to the law of the place where the moveable or land is situated. Further, the conclusion that it is the law of incorporation which should be used to decide questions of title, including questions as to priority of title does, I believe, lead to certainty as opposed to applying the lex loci actus which can raise doubt as to what is the relevant transaction to be considered and where it takes place … The conclusion is, I also believe, consistent with the trend of authority both in this country and abroad.” (at 424G–425A)

91.  In Re Harvard Securities Ltd (in liquidation) [1997] 2 BCLC 369, a stockbroker company went into liquidation, having purchased Australian and US shares and on-sold them to its clients.  The shares were however not registered in the name of the clients but in the name of nominees.  The liquidator accordingly sought the court’s determination of the question whether the company or its clients had the beneficial interest in those shares.  Applying Macmillan, Neuberger J held (at pp 373-375) that the issue was governed by the lex situs – the law of the place where the shares were situated, that being Australian law in the case of the Australian shares and English law in the case of the US shares (because they were negotiable instruments physically situated in England).  It is not clear whether the case was cited to the Court of Appeal in Lightning, but it would be surprising if Millett LJ intended to cast doubt on it since it was based on another Court of Appeal’s decision.  This suggests that in saying it would be bizarre if the consequences of the same arrangement differ in relation to the properties acquired in different jurisdictions, Millett LJ was focussing on the personal remedies between the immediate parties.

92.  In Tripole Trading Ltd v Prosperfield Ventures Ltd (2006) 9 HKCFAR 1, two directors of one of the plaintiff companies (namely, Prosperfield, a BVI company, and Panco, a Hong Kong company), in breach of their fiduciary duties, procured Panco to enter into an agreement to transfer certain shares it held in a Shenzhen public company to a Hong Kong company (CPL) which was owned as to 51% by the defendant directors.  The shares were not transferred as such.  Instead the Shenzhen company underwent a restructuring initiated by the Shenzhen municipal government, in which CPL obtained the opportunity to participate and received shares in the restructuring by relying on the impugned agreement.  The plaintiffs claimed that in consequence they had an interest in those shares.  Despite that the duties owed to Panco by its directors would normally be governed by the law of the place of incorporation, ie Hong Kong law, Lord Hoffmann NPJ, with whom Bokhary and Chan PJJ agreed, said (at §86) that whether the title which CPL acquired under the restructuring was affected had to be considered under the law of Shenzhen:

“The claim against CPL is, as I have said, a ‘receipt-based claim’, alleging a constructive trust imposed upon the property on account of the circumstances in which it was obtained. But such a trust must arise under the law of the place where the property was received: see Millett J in El Ajou v. Dollar Land Holdings plc [1993] 3 All ER 717, 736 and in Macmillan Inc. v. Bishopsgate Investment Trust plc (No.3) [1995] 1 WLR 978 at pp 988-990 and see also Re Harvard Securities [1998] BCC 567, per Neuberger J at p.571: ‘the issue of the beneficial ownership of [the] shares is to be determined by the law of Australia [where the company was incorporated and the share register kept]’. If the circumstances in which CPL obtained its shares under the reconstruction did not affect its title under the law of Shenzhen, there is no basis for imposing a constructive trust under the law of Hong Kong.”

This supports the proposition that to assess whether a trust imposed by the law has arisen from some receipt-based reason, affecting the title of a third party holding the property in question, the lex situs should be applied, both as the law generally governing title and ownership of property and as the law of the place where the property was received.

93.  In First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd [2011] 2 HKLRD 45 (CA), the defendant had entered into an agreement for the sale of the shares in two PRC companies to the plaintiff. The shares were not transferred because governmental approval in the PRC was not granted.  Subsequently the defendant sold the shares to a third party.  The plaintiff brought an action in Hong Kong against the defendant for breach of contract and breach of trust.  The Court of Appeal considered that there were two characterisation issues: (1) the validity of the agreement; and (2) whether the plaintiff had acquired a beneficial interest in the shares by reason of the transaction (§§53 & 58(1)).  The Court held that the second question is one of property to which the lex situs applied.  Cheung JA stated (at §58(25)):

“Further the plaintiff is not merely seeking damages under contract but is also asserting a proprietary claim to the shares as well. This is reflected in the order made by the Judge where he held 51% of the shares in FCL belonged beneficially to the plaintiff. It has not been seriously disputed that the issue of beneficial interest in shares is determined by the law where the shares are situated (lex situs). This is reaffirmed by the Court of Final Appeal in Tripole Trading Ltd & Others v. Prosperfield Ventures Ltd & Another [2006] 1 HKLRD 200 at paragraph 86. The FCL shares are situated in the Mainland. In the circumstances under this limb the applicable law is also Mainland law.”

94.  For the reasons above I consider that irrespective of the governing law of any agreement between the parties for the defendants to acquire shares in CSI, the law applicable to the issue of the title, ownership and priority in relation to CSI shares is Hong Kong law. 

95.  It is possible, in my view, to go further and challenge the 1^st defendant’s proposition that the governing law of such agreement was PRC law and that such law governs any trust over property arising from the acquisition of the property pursuant to that agreement.  Although the agreement was intended to continue the spirit of the previous relationship under the employees stock ownership scheme, it was intended and known that the domestic scheme would end.  It is not clear at all that the 1^st defendant was to perform all his obligations within the PRC, as Mr Jat submitted.  As far as the acquisition of CSI shares was concerned, it was to be done in Hong Kong (by the defendants’ names being entered in its register), presumably under advice from and handled by Hong Kong professionals such as lawyers and investment bankers, in the context of a larger overseas (ie outside the Mainland) restructuring involving 3 Hong Kong companies (CSI, CSHK and Pioneer Cement), with the effect that Shandong Shanshui would become a wholly foreign owned enterprise, and ultimately for the purpose of a listing in the Hong Kong stock market, not in the Mainland.  The act of breathing life into CSI by injecting into it the shares of CSHK should also be regarded as having taken place in Hong Kong, with both CSI and CSHK being Hong Kong companies.  The acquisition and interposition of CSI as the holding vehicle of the underlying interests seem to me to be part of a wholly “Hong Kong-centric” exercise.  The fact that the acquisition of CSI as a bare shell took place in April 2005 and the employees stock ownership scheme did not end until September 2005 when CSI came to life is in my opinion not significant.  As shown (albeit retroactively) by the letter of confirmation dated April 2008 (see paragraph 27 above), the parties’ intention was to have an “overseas” (ie outside the Mainland) trust relationship.  This suggests that the proprietary consequence arising from the mandate was intended to be governed by an overseas system of law, rather than some association under PRC law.  Contrary to these pointers, the 1^st defendant’s contention seems to me to accord disproportionate weight to the domicile and residence of the parties, and to place insufficient weight on nature and location of the subject matter of such agreement, ie shares in a Hong Kong company which was in turn intended to hold a substantial proportion of the equity of the company listed in Hong Kong: see First Laser (CFA) at §§55-56.  Accordingly, if necessary, I would prefer the view that it was the objective intention under the agreement to acquire CSI shares that the relationship between the parties vis-à-vis the shares was to be governed by Hong Kong law.

96.  The remedy sought here being a trust over shares is commonplace in Hong Kong, although the concept is not known in certain civil law jurisdictions.  But even assuming the lex causae is the law governing the personal obligations in question which in turn is found to be a system of law that does not recognise trusts, equitable remedies such as constructive trusteeship may still be imposed by the Hong Kong court.  As Lord Collins NPJ explained in First Laser (CFA) at §§65-69, the approach in the authorities which concern global tracing claims brought in England to recover English assets has been to look at the nature of the obligation under the foreign law, and then consider whether it is capable of supporting the equitable remedies available to a claimant in a local action.  It seems to me, without any disrespect to courts in the Mainland, that Hong Kong, as a forum well versed in the exercise of equitable jurisdiction, would be comparatively much better placed than, for example, the courts of Jinan, in deciding whether a declaration of constructive trust should be made on that basis.  As the plaintiffs have not put their case in quite this way, however, I need say nothing more on this.

97.  Moreover, the declaration of constructive trust is not the ultimate relief sought by the plaintiffs.  The declaration of trust is merely a precursor for an order compelling the 1^st defendant to transfer a proportion of shares absolutely to the plaintiffs, as well as orders for the execution of the requisite documents.  Under Hong Kong law, if the 1^st defendant fails to execute such documents, orders can be made for their execution by another person: High Court Ordinance (Cap. 4), s. 25A.  As Aldous LJ observed in Macmillan at 424H, “it is to the courts of [the place of incorporation of the company] which a person is likely to have to turn” to enforce his rights of ownership over shares.

98.  Mr Jat’s submission that the governing law is BVI law can be more shortly dealt with.  The basis of that contention is the choice of law clause in the BVI trusts.  Each of the trust deeds provides that BVI law governs the settlement.  The plaintiffs are not however invoking any rights under the settlement or contesting the interpretation of the provisions of the deed.  They are instead asserting a prior title to the assets and making a claim against the BVI trusts.  The choice of law clause is not binding on such a claim: Lewin on Trusts (19^th ed), §11-068.

99.  Mr Jat submitted, relying on the Recognition of Trusts Ordinance (Cap. 76) and the Hague Convention to which the Ordinance gives effect, particularly Arts. 6 and 8, that the “validity” and “effects” of the BVI trusts are governed by the law chosen by the settlors, ie BVI law.  Insofar as there is a question of the validity and effect of the BVI trusts in this case, however, it is not a question based on their terms, but a question as to the constitution of the trust, in particular, whether the trust assets are subject to equitable interests in favour of the plaintiffs (among other participating employees) that rank prior to the BVI trusts.  The relevant provision, if the Convention applies at all[11], seems to me to be Art. 4, which provides that the Convention does not apply to “preliminary issues relating to the validity of … acts by virtue of which assets are transferred to the trustee”.  Based on that article, it is stated in Dicey, Morris & Collins, §29-076 that the preliminary question of whether a resulting or constructive trust of property arises lies outside the scope of the Convention. 

100.  Even if BVI law prima facie applies, it would appear that it refers the relevant issues back to Hong Kong law.  S. 83A(6) & (8) of and the First Schedule to the (BVI) Trustee Act 1961 (as amended by the Trustee (Amendment) Act 2003) provide that in ascertaining whether a trust has been completely constituted, the preliminary issues referred to in Art. 4 of the Hague Convention, as well as the essential validity of a disposition, shall be determined, in the case of shares in a body corporate, in accordance with the law of the place of incorporation.  This rule suggests that ultimately Hong Kong law applies.  An exception to the rule exists where a person declares a trust of his own property (see s. 83A(10), but it begs the question whether the CSI shares were Mr Zhang’s own property in the first place.

101.  It is recognised in Dicey, Morris & Collins, at Rule 172(3) and §29-084, that once such a trust is found to have arisen, its governing law is to be determined in accordance with Arts. 6 and 7 of the Convention.  However, there is in this case no issue as yet as to the governing law of the constructive or resulting trust as such, as opposed to the law applicable to the question whether such trust has arisen.  The Convention does not, therefore, lead to the conclusion that BVI law governs and does not assist the 1^st defendant.

102.  I must now evaluate the effect that my views on the governing law and the nature of the actions have in relation to the appropriateness of Hong Kong as the forum.  To the extent that PRC law has some relevance to the issues, as being the law governing the relationship between the parties in relation to the equity interest in Shandong Shanshui, it is a factor in favour of a trial in the Mainland courts, perhaps in particular the courts in Jinan, but is one to which I do not accord much weight.  The Hong Kong courts nowadays regularly deal with cases involving aspects of PRC law and frequently receive expert evidence of PRC law.  There is no suggestion that the relevant PRC law in this case is particularly obscure, novel or difficult: see Rambas Marketing Co LLC v Chow Kam Fai David [2001] 3 HKC 250 at 266-267.  I do not think that insofar as PRC law is applicable, it would be particularly burdensome or likely to engender significant risks of error and thus injustice, for the Hong Kong court to try the relevant issues with expert evidence being adduced on PRC law.

103.  In contrast, it seems to me the Hong Kong court is far more suitable as a forum to apply Hong Kong law to issues in connection with the creation of, and competition between, equitable interests in shares in a Hong Kong company, and ultimately the beneficial ownership of such shares. This is an intricate area of law in which, as far as I know, there is a paucity of authority.  It would not be conducive to the interests of justice to leave to a foreign tribunal the responsibility for applying Hong Kong law in these circumstances.

Exclusive jurisdiction clause

104.  Mr Jat also relies on the exclusive jurisdiction clause in the trust deeds in favour of the BVI courts.  As regards jurisdiction clauses in trusts generally, the Privy Council has held that a beneficiary who wishes to take advantage of a trust can be expected to accept that she is bound by the terms of the trust, although even then it is not a commitment of the same order as a contracting party being bound by the terms of a commercial contract: Crociani v Crociani [2014] UKPC 40 at §36.  As explained above, however, the plaintiffs here are not taking advantage of the BVI trusts; they are attacking them.  It follows in my view that little significance can be placed on the choice of jurisdiction in the trusts: see also Johnston, §8.145.  This point is fortified by the wording of the clause itself which seeks to confer “exclusive jurisdiction in any proceedings involving rights or obligations under the settlement”.  For their part, the plaintiffs are certainly not seeking to enforce any rights or obligations under those settlements.

105.  In addition, Mr Jat submitted that it is likely that the trustee of the BVI trusts will make a Beddoe application to seek directions from the BVI court in relation to the defence of these actions and that this is a factor in favour of the BVI court as the appropriate forum: Lewin on Trusts (19^th ed), §11-068.  I do not accept this submission. Assuming the trustee will make a Beddoe application, it is not a proceeding to which the plaintiffs (albeit named as beneficiaries in the BVI trusts) are likely to be privy.  The usual practice, in this jurisdiction at any rate, is that such an application is privileged and the plaintiffs will be excluded from it: Re Estate of Mong Man Wai William (CACV 34/2012; 20 December 2012); Re Moritz [1959] 1 Ch 251; Re Eaton [1964] 3 All ER 229.  The same judge does not hear both the trustee’s Beddoe application and the trial of the action.  There is no reason to suppose the practice in the BVI will be different.  The prospect of such an application for guidance does not therefore in my view point strongly to BVI as the appropriate forum for the trial of these actions.

Related proceedings in Hong Kong

106.  On behalf of the plaintiffs Ms Eu relies on the fact that there are related proceedings in Hong Kong in the form of the “statutory derivative unfair prejudice petition” in HCMP 593/2015 driven by the 6 minority shareholders (see paragraph 40 above). 

107.  The petition sets out in detail the background to the setting up of CSI and the listed company.  It is also alleged there that Mr Zhang and Mr Li held shares in CSI on trust absolutely for participating employees, and that without the employees’ knowledge Mr Zhang and Mr Li purported to create two discretionary trusts over the shares in CSI.  The petition refers to the repurchase plan proposed by Mr Zhang in November 2013 and states that it was strongly opposed by the participating employees.  These allegations overlap with similar allegations in the present actions, but it seems to me they are merely background material, leading to the steps taken by the employees in protest against Mr Zhang as narrated in the petition.  It is said that hundreds of the participating employees petitioned in writing and protested in person to the Jinan Municipal Party Committee and other Mainland authorities, complaining of wrongs committed by Mr Zhang and his son. 

108.  The complaint in the petition is that, against that background, with a view to securing his personal safety, Mr Zhang asked Mr Song Zhiping (“Mr Song”), the Chairman and Secretary of Party Committee of CNBM, for assistance and in return agreed with Mr Song that, among other things, Mr Zhang would procure Shanshui Cement to allot shares to CNBM so as to make it the second largest shareholder, and that should CNBM later want to become the largest shareholder, Mr Zhang would provide assistance to procure that result.  Mr Zhang and Mr Zhang Jr, in breach of their fiduciary duties to CSI and the listed company, and for improper purposes, caused Shanshui Cement to enter into the subscription agreement with CNBM.  It is also alleged that Shanshui Cement proposed to grant share options to Mr Zhang, Mr Zhang Jr and other employees for the improper purpose of furthering the agreement with Mr Song.

109.  What are central matters in these actions are thus merely background material in the petition.  In the petition it does not seem to me necessary for the court to find whether the participating employees actually have any beneficial interest as they claim in CSI.  The petition and the present actions are different in nature and the reliefs sought are quite different.  The only common party is Mr Zhang who is a defendant here and a respondent in the petition.  It follows, in my view, that the existence of the proceedings in HCMP 593/2015 is not a significant factor in favour of Hong Kong as the forum for the trial of these actions.

Conclusion on forum non conveniens

110.  In my evaluation of the connecting factors, the location of the parties and witnesses and the existence of related proceedings carry little weight.  The exclusive jurisdiction clause in the BVI trusts is not applicable to these actions having regard to their nature.  In the final analysis, what is of significance is that these are actions for recovery of and concerning the title to shares in a Hong Kong company, asserting a trust over the shares and raising substantial issues likely to be governed by Hong Kong law.  In all the circumstances I am satisfied that Hong Kong is clearly or distinctly the appropriate forum for the trial of the actions, and that it is a proper case for leave to be granted for service of the writs out of the jurisdiction on the 1^st defendant except in relation to the corporate misconduct claim.

VIII.  MATERIAL NON-DISCLOSURE

111.  It was also submitted on behalf of the 1^st defendant that the plaintiffs had been guilty of material non-disclosure in the ex parte applications before the Masters.  The principles set out in cases such as Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350 and Wo Fung Paper Making Factory Ltd v Sappi Kraft (Pty) Ltd [1988] HKC 10 are trite and, without intending in any way to undermine the importance of full and frank disclosure by the applicant in an ex parte application, I do not propose to rehearse them.

112.  The ways in which the plaintiffs are said to have failed in their duty in this respect are, broadly speaking, fourfold:

(1) that they failed to address the court on the Hague Convention and the jurisprudence on exclusive jurisdiction clauses in trust deeds;

(2) that they misrepresented the legal position by asserting that Hong Kong law governs the alleged trust;

(3) that they failed to address the court on the connection between the alleged trust and the pre-existing PRC agreements and on the jurisprudence on the governing law of constructive trust; and

(4) that they failed to draw the court’s attention to the factual allegations about misconduct which raises factual issues on which considerable oral evidence is likely to be required.

113.  As far as the first three matters are concerned, the records show that the Masters were quite aware there are issues and arguments on jurisdiction arising from the governing law and exclusive jurisdiction clauses in the BVI trusts, as well as the pre-existing relationship between the parties in the PRC.  Submissions were made (some of them in the affirmations filed) by the plaintiffs as to why Hong Kong law nevertheless governs the issues in their ownership claim.  There is no doubt that those submissions lack the level of refinement and sophistication of the argument before me.  And I accept that the duty of disclosure extends not only to facts but potentially also to matters of law: East Asia Satellite Television (Holdings) Ltd v New Cotai LLC [2011] 3 HKLRD 734, §82.  I take note, however, that the submissions by the plaintiffs’ counsel (who was neither Ms Eu nor Mr MC Law) were made in an urgent application for substituted service, because there was then a perceived need to obtain an injunction urgently in light of an imminent EGM of CSI.  Mr Jat did not suggest there was any intention on the part of the plaintiffs’ counsel to mislead.  Depending on the circumstances, there can be a real difference between omission of a material fact which must have been well known to the applicant, and the failure to cite, for example, an unreported case arguably relevant to the legal submissions.  It would not be right to gauge whether the ex parte procedure has been abused by measuring that application against the very full argument and citation of authorities before me in the inter partes hearing.  Further, as explained above, the Hague Convention is not ultimately material.  Nor is the case of Crociani v Crociani, concerning the effect to be given to exclusive jurisdiction clauses in settlements, of much relevance.  I have, after full argument, decided that the plaintiffs are essentially correct on the question of the governing law in their submissions to the Masters.  In these circumstances, I do not think that in relation to the first three matters there was any such non-disclosure as to warrant an order setting aside leave.

114.  In any event, in the context of an application for leave for service outside the jurisdiction, there is not the same concern that re-granting the application upon discharge on the ground of non-disclosure would effectively allow the applicant to retain the advantage obtained by the original order, as in the case of a Mareva injunction or Anton Piller order: Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd [2007] 4 HKC 372 at §16.  Even if there was material non-disclosure justifying revocation of the ex parte leave, I would re-grant leave to serve out in relation to the ownership claim.

115.  The fourth matter seems to me, however, to stand on a different footing.  The plaintiffs in my view failed to draw the Masters’ attention to the fact that there were in substance two claims in the action, and that the grounds in Order 11 rule 1(1) relied upon were relevant only to the ownership claim.  Nor did the plaintiffs focus on or draw to the Masters’ attention the evidential requirements of the corporate misconduct claim.  The proper response of the court to these material failures, in my judgment, is to set aside leave insofar as it concerns the corporate misconduct claim in any event.

IX. CONCLUSIONS AND ORDERS

116.  For the above reasons, I allow in part the 1^st defendant’s application to set aside leave insofar as the corporate misconduct claim is concerned, and dismiss the remainder of the application.  There will accordingly be the following orders:

(1) The leave for substituted service granted by Master Hui on 21 November 2014 in all three actions and the leave for service out granted by Master Chow on 20 November 2014 in HCA 1661/2014 be set aside insofar as they relate to paragraph 31 of the amended statement of claim in each of the three actions. 

(2) Subject as aforesaid, the 1^st defendant’s summonses dated 27 November 2014 to set aside substituted service and summonses dated 18 February 2015 to set aside leave for service out be dismissed.

(3) The 1^st defendant’s summonses dated 13 January 2015 for stay of the actions be dismissed.

(4) (By way of an order nisi) the 1^st defendant do pay the Plaintiffs 80% of their costs in relation to these summonses in all three actions forthwith with a certificate for two counsel.

(5) There be liberty to apply.