AP CAPITAL HOLDINGS INC v. ORION PARTNERS (2012) INC AND OTHERS

HCA 1244/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1244 OF 2012

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D E C I S I O N

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INTRODUCTION

1.  This application by the plaintiff is to strike out certain paragraphs in the statements filed and served on behalf of the defendants, the whole of certain supplementary statements filed and served on behalf of the plaintiff which deal with the contents of those paragraphs in the defendants’ statements to which objection is taken, and the supplementary statements of the defendants’ witnesses purportedly in reply to the plaintiff’s supplementary statements.

2.  Ideally this application should be decided by the trial judge but none has been designated yet, perhaps because the final touches to the checklist have not been given, particularly the parties’ respective estimates of the length of trial.  The defendants’ initial argument, advanced by Mr John Scott SC on their behalf, is that the matter should be left to the trial judge leaving this action to continue in its present substance, on the possibly, as it may turn out, erroneous basis that the questioned material was relevant and therefore admissible.

3.  The ratio of the contrary argument of Ms Roxanne Ismail SC, for the plaintiff, is that all irrelevant material should be excluded at this stage.  If it is not it would involve considerable waste of time and expense if the decision is left to a later stage.  Despite my earlier expressed view as to the ideal stage I accept that the consideration of the matter and a decision should be given now.  It is of course always possible that something may happen at trial which would justify the admission or exclusion of certain material.  However for the sake of what I regard as essential case management I should not be inhibited by speculation. The trial judge will not of course be bound by my decision if he feels that the merits of the case, on either side, and the interests of justice, call for him to take a different view.

THE PROGRESS OF THE ACTION

4.  I need to consider the chronology in view of Mr Scott’s alternative contention that the plaintiff’s application comes too late, that its earlier actions indicated that it did not consider there was anything objectionable in the contents of the statements in question and that this is clearly evidenced by the fact that they filed and served supplementary statements to deal with the contents of the defendants’ statements which they now consider to be objectionable.  And that they are now estopped from raising objections to the contents identified.

5.  The Statement of Claim was served on 14 September 2012.  It was amended on 26 August 2014, the Defence being amended on 3 September 2014.  An Amended Reply was served on 3 October 2014.  A Second Case Management Conference had taken place before this on 11 September 2014.

6.  There was simultaneous exchange of the parties’ witness statements in December 2013/January 2014. On 9 April 2014 (one year ago) the plaintiff filed its supplemental statements.  These were followed two and a half months later by the defendants’ supplemental statements.

7.  In November 2014 the parties’ solicitors exchanged correspondence concerning certain contents of the witness statements and their relevance.  No agreement was reached on this hence the plaintiff’s application which was taken out on 9 December 2014.

8.  In October 2014 the parties’ solicitors had exchanged correspondence concerning their proposed directions for trial.  Master Hui made an order on 6 November 2014 that the plaintiff serve a certificate of the time estimate for trial by 14 November 2014.  Rightly the plaintiff’s solicitors decided that they could not comply with this order unless there was agreement as to the extent of the evidence to be called.  Hence the earlier unsuccessful efforts to obtain agreement referred to in the previous paragraph.

9.  Mr Scott’s argument falls down on the practical approach to what transpired.  It is not unusual for a party or parties to seek to “get to grips” with the real issues in a case and pay due regard to the expectations behind the Civil Justice Review somewhat later than the court timetable requires. I cannot see any element of prejudice to the defendants in the way matters have turned out even though it would have been preferable to have resolved it early.  To argue that the plaintiff should be estopped from the course they have now taken is in effect to argue against dealing with an aspect of case management which may facilitate the economic and expeditious resolution of the issues.

THE PLEADED CASE AND THE DEFENCE

10.  It may be useful to identify the parties involved and their roles in the various companies concerned in the agreements to be examined at trial.

11.  The plaintiff company is a Cayman Islands exempted company.  It is wholly owned by other corporations and three individuals described in the pleadings as the PG2 shareholders.

12.  The 1^st defendant (formally called AJIA Partners Holdings Inc), also a Cayman Islands exempted company, is wholly owned by the 2^nd to 11^th defendants. These individuals are also referred to as the PG1 shareholders (the defendants).

13.  Up to 21 September 2010 the PG2 shareholders held 45% of the issued share capital of another Cayman Islands exempted company, AJIA Partners Inc (“API”). The balance 55% was owned by the PG1 shareholders.  Up to the said date API held 59% of the issued share capital of North Asia Strategic Advisors (“NASA”), another Cayman Islands company.

14.  This company, NASA, controlled effectively by the shareholders of API (59%), provided services to North Asia Strategic Holdings Ltd (“NAS”).  I shall refer in future to this company by the abbreviation NASH, which is somewhat less confusing.

15.  Some of the directors of API were common to NASA and NASH.  These included Moses Tsang who was chairman of API until 30 September 2010, and Tai Ruan Chiang who was a managing partner of API until December 2010.

16.  Moses Tsang was also a director of NASA until 30 September 2010, and a non‑executive director of NASH until 4 October 2010.

17.  Savio Sing Nam Chow (the 4^th defendant), Henry Kim Cho (the 2^nd defendant) and Frederick John Lee (the 5^th defendant) all had shareholdings in NASH, Savio Chow being a director of NASH until September 2010.

18.  It is clear that amongst the prime personalities involved in the activities of these companies there was a good deal of common interest and perhaps conflict of interest possibly forming, at some stage, the basis for a deterioration in relationships.

A)      The statement of claim as the plaintiff’s case

19.  There is a written agreement dated 30 December 2005 between North Asia Strategic Holdings — NASH, and North Asia Strategic Advisors — NASA [I prefer to use the abbreviation NASH as stated earlier].  It is described as the “Old Services Agreement”.  It provided for specified services from NASA, as consultant, for the benefit of NASH, to commence on 1 April 2006.

20.  Clause 5 contained the basis of the remuneration of NASA for these services, ie an annual service fee, an annual incentive fee and a placing fee when NASA carried out specified placings of NASA shares.

21.  Clause 10 provided for the term and termination of this agreement.  It was for three years renewable for a further three years, in that event it being a new three year period.

22.  It also provided that if the original three year term was not renewed, “other than because NASA did not agree to such renewal”, then a sum of money was to be paid by NASH to NASA calculated on a specified formula.  That sum when calculated was to be paid within 15 days of the Appraised Value of Investments (part of the formula set out, either in cash, or in shares, or by a combination of both).

23.  In early March 2009, shortly before the expiration of the agreement, NASH and NASA entered into a Supplemental Agreement which provided for a three year renewal of the Old Services Agreement to run from 1 April 2009 with “all the terms and conditions, representations, warranties, covenants and undertakings (in the original agreement)” being unchanged and remaining “valid, binding and subsisting in all respects”.  The terms are unequivocal and appear to be beyond dispute.

24.  The next document in the factual matrix of this case is called a Reorganisation Agreement.  The parties to it are API, AJIA Holdings, AP Capital, the PG1 shareholders (essentially the defendants), the PG2 shareholders (essentially the plaintiffs) and the PG1 Partners (which include the 2^nd, 4^th, 5^th and 6^th defendants).  The purpose of it was to organise certain of the businesses of API into two companies with separate ownership and management.

25.  One aspect was the sale by API to AJIA Holdings of its shareholding in NASA, AJIA Holdings thereby undertook and the PG1 shareholders (ie the 2^nd to 11^th defendants) undertook to procure AJIA Holdings (the 1^st defendant) to pay “Economics and Terminal Value” to AP Capital (the plaintiff) from time to time in relation to NASA’s existing business.  The nature of these payments is defined in Schedule 1.  I do not need to set this out.

26.  The plaintiff bases its claim on implied terms in the Reorganisation Agreement.  These are set out in paragraph 24 of the Statement of Claim and are, in short, that the 1^st defendant (formerly AJIA) and the PG1 shareholders would do all that was necessary to be done to procure and enforce the payment of all “Economics” due to NASA, and, would not obstruct NASA from seeking all that was due to it.

27.  A further written agreement dated 31 March 2012 entitled the “Amended and Restated Services Agreement” — called the “New Services Agreement” — provided for consulting services by NASA to NASH.  It is contended that the terms of this agreement were materially different from those of the “Old Services Agreement”.  The new agreement was to last for one year only and it is agreed that the termination provisions were materially different from those in the old agreement.  The compensation payable to NASA under the new agreement was changed — it was a “flat service fee” of US$4 million payable in four quarterly instalments.  The claim is based upon specific breaches of the alleged express and/or implied terms.

B)      The amended defence

28.  There is some preliminary jousting as to the proper terminology to be adopted.  The defence replaces the term “New Services Agreement” with “The Renewed Agreement”.  That is clearly at least on the face of it a contentious construction of the nature of the agreement.

29.  Perhaps as a consequence of the different approach to terminology, the defendants rely upon a specific clause as giving rise to three options for them upon the expiry of the Services Agreement:

1) to renew the Services Agreement on the existing terms for three years;

2) to demand compensation from NASH if NASA requests it when NASH has refused to renew the Services Agreement in accordance with the existing terms for three years; and

3) to renew the Services Agreement on terms other than the existing terms and for such length of time as it sees fit.

30.  Although there may be a conflict of facts in the background, the clear issues relate to construction of the various clauses identified in the agreements.  Differences of opinion, views and personal relationships amongst the principal (or subordinate) personalities are not relevant.

31.  An estoppel is also pleaded.  Again this is based on undisputed facts or recorded decisions.  All are matters of construction.  The references to “common understanding and/or apprehension” are vague, likely to be contentious, unlikely to aid construction and, in any event, are matters for the trial judge to consider.

THE ISSUES BETWEEN THE PARTIES

32.  There is as yet no joint agreed statements of the issues.  I propose to order that this be provided for the benefit of the trial judge no later than 28 days before trial.

33.  What does exist is a list of issues prepared by the plaintiff’s legal team.  They identify issues of construction of certain clauses of the agreements concerned, consistent with their pleaded case.

34.  The “Defence Issues” on a sheet presented to me are essentially issues of construction.  Item 3 speaks of what was commercially sensible which only becomes an issue if the so‑called three options can be established.  It highlights the need for an agreed statement of issues with the non‑agreed issues being set out separately as a clarification of the contentious areas.

THE WITNESS STATEMENTS CONCERNED

35.  The statement to which objections made are in three groups.  The first are from the following witnesses for the defendants: Goran Malm, Clelland Hutton, Tai Ruan Chiang, Savio Chow and John Saliling.

36.  The second group are the two witnesses for the plaintiff: Moses Tsang and Paul Chang.  They are their supplemental statements filed in answer to the paragraphs in the first group of witness statement to which objection is now taken.

37.  The third group are the supplementary statements of the majority of the witnesses in the first group plus statements from Henry Kim Cho and Frederick John Lee.  These follow the “tit‑for‑tat” process which in some litigation seems inevitable.

THE OBJECTED CONTENTS OF THE FIRST GROUP’S STATEMENTS

Goran Sture Malm

38.  The paragraphs concerned are numbered 53‑63 and 65.  They are concerned with the relationship with Moses Tsang and his own personal view of the activities of Moses Tsang influenced by rumour, hearsay and his personal reactions to certain circumstances.  They are not relevant to the issues in this case and, even if they were, it would be a fraught exercise disentangling the inadmissible from the germane and it is highly unlikely that they would be conclusive in any direction so unsatisfactory are their contents.

Clelland Hutton

39.  The paragraphs concerned are 17‑22, 28‑29, the first sentence of 30, and 31‑41.  Paragraph 16, to which no exception is taken, opens with an agreed statement to the effect that tensions had been building between two groups of partners at AJIA Partners, identifying the groups as “PG1” and “PG2”, as identified earlier in this decision.  This deteriorating relationship forms the background to this dispute.  Both sides accept it. There is no need to go into the “niggling” detail of the uncertain nature of the relations between key individuals.

40.  The paragraphs under consideration are concerned essentially with suspicions about Moses Tsang’s activities, the sources of such views are not identified.  The allegations as such are general and often vague.  The second group of paragraphs does not improve on the earlier ones in quality, nature or reliability.  They are not relevant.

Tai Ruan Chiang

41.  The concerned paragraphs are 33‑46 and 52‑67.

42.  Again, Moses Tsang is the butt of the adverse expressions, relating largely to his involvement with GSR, and the witness’ personal disagreements with him.

43.  The second group of paragraphs continues in the same vein but the latter part was concerned with the witness’ disclosure of a 20‑year ban imposed on him by a United States regulatory organisation, which he alleged Moses Tsang raised with others to discredit him.  He confesses an error of judgment in not disclosing it to his partners but none of this is of relevance to the issues in this case.

Savio Chow

44.  The paragraphs with which I have to deal are 32, the first sentence of 33, and 34‑47.

45.  The same theme emerges from these — lack of trust in Moses Tsang.  A report from a former Goldman Sachs employee (not a party in this litigation) was relied upon as giving support to the fears about Moses Tsang’s reliability, though it was conceded that it was not known whether it was true or false.

46.  Rumours about Moses Tsang and Paul Cheng and some correspondence were then relied upon as the basis for a further attack on their loyalty, reliability and candour.

John Shim Saliling

47.  The questioned paragraphs are 23, 25‑31 and 49‑59.

48.  Moses Tsang’s involvement with GSR, the report from the former Goldman Sach’s employee, rumours involving Paul Cheng’s involvement with a real estate project in China, the original plan to hire a firm of private investigators and the witness’ speculation (or imaginings) as to what the major shareholders of NASH would be thinking, emerge with ill‑defined sources and dubious reliability.  Nothing can safely be regarded as relevant to the issues in the action.

THE SECOND GROUP OF STATEMENTS

49.  They purport to deal with the allegations continued in the paragraphs with which I have dealt above.  In view of my decision concerning the paragraphs of the statements, which gave rise to counter‑allegations, denials or explanations, neither of these statements can be relevant or admissible.

50.  The defence have raised the argument that since the plaintiff’s solicitors thought it appropriate to obtain and serve such statements, they must have thought the contents relevant and admissible.  Therefore, so the argument continues, the original paragraphs of the defendants’ statements to which they now take exception must have been considered relevant and admissible. Accordingly, the plaintiff is not entitled to withdraw them.  I regard this as somewhat perverse logic.

51.  The simple explanation is that someone decided that the defendants’ statements must be answered seriatim without any application of the mind at that stage to the criteria for the content.  Mature thought was later brought to bear, hence this application before me.

THE THIRD GROUP

52.  These supplementary statements from four of the defendants’ witnesses and two additional statements, similarly fall into the same category of unacceptability and are therefore inadmissible.

THE ARGUMENTS RAISED

53.  I have in fact dealt with these in the course of my review of the questioned material and it is not necessary to expand upon them or repeat them.

54.  However I think some broader comment or the nature of the objectionable material may help to put the matter in sharper relief.

55.  The overwhelming impression that I have from these particular paragraphs is of a barely controlled desire to vent an animus of mistrust, resentment, blame‑laying detailing certain rumours which are no more than that, mixed with questionable hearsay and accusations of impropriety which, if admitted in evidence, would involve considerable examination of records and possibly other documents to ascertain where the truth might lie.  It would thus enter into the realm of possibilities, probabilities and uncertainties without clear relevance to the issues defined by the respective parties.  Whilst one is accustomed in such litigation in Hong Kong to see or read witnesses working out their frustrations, preferences and perceived injustices, it is necessary to stand back and ask — where is all this ‘angst’ leading? — what is its relevance?

CONCLUSION

56.  The paragraphs of statements, and the individual statements which are consequent upon them are to be excluded for the reasons already given. Since the application succeeds and the defendants have opposed it fully, the plaintiff is entitled to an order for costs, to be taxed if not agreed.

57.  It is of course open to the defendants to apply to the trial judge for any or all of the material which I have excluded, to be admitted if it appears in the context of the trial, to be admissible and relevant.  However what I have stated should not be interpreted as an encouragement to that end.