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

HCA 806/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 806 OF 2006

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A. INTRODUCTION

1.  This is an action taken out by the Plaintiffs against Shearman & Sterling, various partners of that firm (“D1‑D8”) and Herbert Smith (“D9”), in respect of allegedly negligent advice provided in 1999 to 2000 concerning the restructuring of certain exchange notes (the “Notes”) issued by Greater Beijing First Expressways Limited (“GBFE”) in the United States.

2.  Due to cashflow problems, GBFE did not make interest payments to its noteholders (the “Noteholders”) when they fell due on 15 December 1999.  This ultimately resulted in the acceleration of the maturity of the Notes and the entirety of the sums owed under the Notes becoming payable.

3.  GBFE engaged D1‑D9 to advise them.  GBFE adopted a “consensual approach” and sought to obtain the consent of the majority of the Noteholders on the terms of restructuring.

4.  That approach turned out to be unsuccessful.  In the end, the Noteholders took out an ex parte winding up petition in Hong Kong resulting in GBFE’s liquidation in HCCW 338/2000 on 12 June 2000 (“the Winding-Up Proceedings”).

5.  It is said that D1‑D9 were negligent.  The existing pleadings, essentially, complain that D1‑D9 ought to have advised GBFE to undertake a unilateral “voluntary filing” for Chapter 11 protection in the United States Court; and ought to have advised against the 1^st to 3^rd plaintiffs advancing a total of HK$62 million (via the 4^th plaintiff) to GBFE in 1999.

6.  Before the issuance of the writ herein, GBFE had assigned its rights of action to the 4^th plaintiff.

7.  The writ was taken out by the plaintiffs on 11 April 2006.  The material facts occurred in the years 1999 to 2000, ie some 14 to 15 years ago.

8.  On 23 December 2008, Deputy High Court Judge Poon (as he then was) allowed the appeal against Master R Yu’s order and ordered that the 2^nd to 4^th plaintiffs (instead of the 1^st to 4^th plaintiffs) do give security for the costs of D1‑D8 in the sum of HK$1,000,000.

9.  On 2 July 2009, Master de Souza ordered the 2^nd to 4^th plaintiffs to provide HK$2,000,000 security for the costs of D9.

10.  In order to defeat the orders for security for costs, the 2^nd to 4^th plaintiffs then assigned their causes of action on 3 August 2009 to the 1^st plaintiff (a company incorporated in Hong Kong).

11.  This tactic was unsuccessful.  On 6 December 2011, Deputy High Court Judge Mayo ordered the 1^st plaintiff to provide security for D1‑D8’s costs (HK$1 million) and for D9’s costs (HK$2 million), up to the completion of discovery, with liberty to apply for further security for costs.

12.  Now that the parties have exchanged Lists of Documents, the defendants seek further security for costs.

13.  The 1^st plaintiff had been served with an amended request from D1‑D8 for Further and Better Particulars of the Amended Statement of Claim on 2 July 2008, and a request from D1‑D8 for Further and Better Particulars of the Reply on 6 March 2008.

14.  It was not until 2 April 2013 (ie some five years later) that the 1^st plaintiff eventually, pursuant to an unless order, served its answers to these two requests on D1‑D8.

15.  Worse still, both sets of answers attempt to slip in new pleas which are not even answers to the requests.  As submitted by the defendants, these new pleas seek to add new and fundamentally different complaints.

16.  By a letter dated 16 May 2013, D1‑D8’s solicitors wrote to the 1^st plaintiff’s solicitors and pointed out that the proper course would be for the 1^st plaintiff to take out an application to file a re‑re‑amended Statement of Claim.

17.  No satisfactory response being forthcoming, D1‑D8 applied to strike out the offending particulars on 21 January 2014.

18.  A similar application had been taken out by D9 on 7 January 2014.

19.  It was only on 3 March 2014 that the present application to re‑re-amend the Statement of Claim was taken out by the 1^st plaintiff to include the offending particulars in amendments to the Statement of Claim.

20.  It should be pointed out that the 1^st plaintiff has gone into liquidation in April 2013 and is now acting through its liquidators.  After its liquidation, the 1^st plaintiff had taken out 3 summonses on 15 April 2013, 17 July 2013 and 16 December 2013 respectively for stay of proceedings for 6 months and extension of time for further discovery.  On all of these occasions, the court refused to grant the full length of the extension sought.

21.  In sum, there are now 3 applications before the court:

(1) The 1^st plaintiff’s summons dated 3 March 2014 seeking leave to re‑re‑amend the Statement of Claim (“P1’s Amendment Summons”);

(2) D1-D8’s summons dated 21 January 2014 seeking further security for costs from the 1^st plaintiff (“D1‑D8’s Security for Costs Summons”); and

(3) D9’s summons dated 7 January 2014 seeking further security for costs from the 1^st plaintiff (“D9’s Security for Costs Summons”).

B. P1’s AMENDMENT SUMMONS

B1. The amendments introduce new and fundamentally different complaints

22.  The negligence originally pleaded was that D1‑D8 failed to advise the plaintiffs to guard against GBFE being placed in liquidation by the Noteholders in the Winding‑Up Proceedings.

23.  In respect of the interest payment default on 15 December 1999, it was simply pleaded that it “became clear” that that would happen.

24.  The plaintiff contends in the existing pleadings that D1‑D8 should have advised that GBFE file a voluntary ex parte petition for Chapter 11 relief in the United States.  The essential claim is that had that been done, the plaintiffs would have obtained precious “breathing space” until its cashflow problem was resolved in 2000.  Importantly, in the existing Statement of Claim, there is no complaint that D1‑D8 should have advised GBFE to pay up on its obligations under the Notes.

25.  On the other hand, the proposed Re‑re‑amended Statement of Claim seeks to make a new and fundamentally different complaint.

26.  The new complaint is that D1‑D8 should have advised a “surrender and pay up” approach rather than the “engage to settle” approach.  The new perspective sought to be introduced is that D1‑D8 should have advised GBFE to simply pay up, rather than be cooperative in the negotiation process in pursuit of a consensual restructuring.

27.  Significantly, the proposed Re‑re‑amended Statement of Claim introduces, inter alia, new pleas that D1‑D8 were negligent in (i) advising GBFE not to make interest payments to the Noteholders which resulted in the 15 December 1999 default and (ii) failing to advise GBFE to obtain funding in the sum of US$288 million to pay the Noteholders in full.

28.  The key new allegations involve the entirely new idea that GBFE should have been advised to pay up, and they would have been able to do so.  The flip side of this new idea is that the consensual restructuring was not worth pursuing at all, to the extent that D1‑D8 are said to be negligent in even embarking on it, such that they should be liable for the entirety of the restructuring costs.

29.  Mr Bernard Man, counsel for D1‑D8, submitted that the new allegations obviously involved hypothetical questions as to what GBFE would have done; whether, and if so, when and how they would be able to raise funds to pay up; what would be the costs of alternative financing; whether GBFE would have difficulty satisfying any other financial obligations; whether GBFE would have to seek any indulgence as to time; whether the Noteholders and/or the Trustee and/or their advisers would have found out about GBFE’s cashflow difficulties in any event; and what steps they would take and what consequences would follow.

30.  In short, Mr Man submits that the new allegations in the proposed Re‑re‑amended Statement of Claim involve difficult questions of fact as to whether, and if so when, the Hong Kong winding up would have taken place if D1‑D8 had advised GBFE to pay up on its obligations under the Notes rather than explore the consensual restructuring.

B2. Prejudice caused to the defendants

31.  Mr Man went on to submit that, in defending the new allegations, D1‑D8 would have to gather new evidence on at least the following new aspects:

(1) Whether GBFE would in fact have acted in accordance with the “surrender and pay up” advice had it been given to them by D1‑D8;

(2) whether GBFE indeed had sufficient funds to make interest payments in December 1999 and whether D1‑D8 were aware of the same;

(3) what were GBFE’s other outgoings (eg under the toll highway project) towards which the limited funds had to cover during 1999 to 2000 while the cashflow problem persisted;

(4) whether deploying resources to the payment of interest would have caused GBFE to default under other obligations and expose itself to other threats of winding up;

(5) whether the plaintiffs/GBFE had ever disclosed to D1‑D8 that they would have been able to raise funds to pay off the Notes’ principal of US$288 million by bank financing and/or sale of assets as alleged;

(6) whether the “surrender and pay up” approach had been discussed at any point in time;

(7) whether circumstances in late 1999 to early 2000 in relation to the management of GBFE, the Trustee of the Noteholders, and market and financial conditions suggest that the “surrender and pay up” approach was at all feasible;

(8) whether, if advice to pay up had been given, the plaintiffs would or ought to have proceeded, in parallel, with preparations for consensual restructuring;

(9) whether the 3^rd defendant would indeed have been in a conflict of interest position to defend the plaintiffs in enforcement proceedings; and

(10) whether the advice on disclosure and terms of the confidentiality agreement was sub‑standard in light of providing incentives to Noteholders to settle and the possibility of proceeding with a consensual restructuring in parallel with other options.

32.  Mr Man submitted that such evidence may take the form of documentary records (eg letters, e‑mails, fax, notes of meeting), oral discussions (eg over telephone calls or in meetings), or circumstantial evidence (eg what certain persons had said or not said at different times, shedding light on how they would have reacted if a certain hypothetical counterfactual situation was presented before them).

33.  Mr Man pointed out that the plaintiffs took out the present writ six years after the alleged breaches.  They took another seven years after issuance of the writ to make the new allegations.  The delay is striking and it is highly prejudicial.

34.  Mr Man further submitted that D1‑D8 obviously could only have been expected to focus on the gathering of materials on the allegations actually pleaded.  Their efforts to preserve evidence could only have been expected to cover pleaded allegations. Documentary evidence has therefore not been retained nor collected for the new allegations.  As to oral or circumstantial evidence, it is extremely unlikely that any witness can have proper (or any) recollection as to why a certain piece of advice on restructuring was or was not given some 15 years ago, or certain things which might or might not have been said by certain persons indicating how they would have reacted if a hypothetical counterfactual had been presented to them.  Mr Man submitted that substantial prejudice would be caused if the new allegations are allowed in.  This is of itself sufficient to defeat the new pleas.

35.  Insofar as they are applicable to D9, Mr Alexander Stock for D9 adopts the submissions of D1‑D8 as to the change of character and nature of the new case sought to be pleaded against the defendants.  D9’s position can be summarised as follows:

(1) The proposed amendments are extraordinarily late, it is now more than 14 years since the key relevant events and more than eight years since the issue of the writ;

(2) the proposed amendments introduce a raft of entirely new allegations against the defendants, which change the nature and greatly increase the scope of the pleaded complaints;

(3) the plaintiffs have no valid explanation for the lateness and apparently admitted that the matters in the proposed amendments could have been pleaded from the outset; and

(4) permitting the proposed amendments, involving “stale” complaints, at this late stage would occasion serious prejudice to the defendants, which cannot be compensated in costs and would seriously prejudice a fair trial.

36.  It should be pointed out that originally, both D1‑D8 and D9 relied on the argument that the proposed amendments fell foul of a limitation point arising under Order 20, rule 5(5) of the Rules of the High Court and section 35 of the Limitation Ordinance, Cap 347.  However, in light of the Court of Final Appeal’s Judgment in Moulin Global Eyecare Holdings Ltd (in Liquidation) v Olivia Lee Sin Mei, FACV 23/2013 delivered on 17 July 2014, both D1‑D8 and D9 in their respective Further Written Submissions dated 26 September 2014 stated that they would no longer pursue the argument that the proposed amendments should be disallowed because they introduce a time-barred cause of action.

B3. Discussion on P1’s Amendment Summons

37.  It is trite that an amendment to pleadings will be refused if it causes prejudice to other parties which cannot be compensated by costs [see: eg, Hong Kong Civil Court Practice (2013), paragraph 20.5.1].

38.  In Johnson Controls Hong Kong Ltd v Associated Engineers Ltd, HCCT 47/2011 (Judgment dated 28.02.12), at paragraphs 62 to 64, Au J considered amendments sought to be made after the expiry of the relevant limitation period, which did not introduce new causes of action.  In other words, in these paragraphs Au J was applying the usual Order 20 principles.

39.  At paragraph 64 of his Judgment, Au J took account of the prejudice caused, which could not be compensated by costs.  The learned Judge placed emphasis on the difficulty of gathering evidence on events some 10 years ago; the inevitable fading of memory; and the fact that the innocent party could not possibly be faulted for not having gathered evidence or taken instructions regarding the new pleas.  He also specifically said (in paragraph 64(4)) that the irreparable prejudice is not saved by the innocent party’s ability to find the relevant witnesses.

40.  I agree with Mr Man that, on these principles, it is plain that the new allegations contained in the proposed Re‑re‑amended Statement of Claim will cause prejudice to the defendants which cannot be compensated by costs.  They should therefore be disallowed regardless of whether they introduce new causes of action which are time‑barred.

41.  Furthermore, Mr Stock relied on the Judgment of DHCJ Le Pichon in Beijing Tong Gang Da Sheng Trade Co Ltd v Allen & Overy (a firm), HCA 1491/2011 (Judgment dated 12.05.14) for the propositions that a claim regarding professional reputations “should be made as promptly as possible and prosecuted with diligence and dispatch” and that it is “entirely unsatisfactory for professionals to have the shadow of such proceedings cast over them for a long period of time”.  Mr Stock submits that this, too, is a form of prejudice to which the court should have regard.  I agree.

42.  For the reasons stated above, I am of the view that P1’s Amendment Summons should be dismissed.

C. Ds’ SECURITY FOR COSTS SUMMONSES

C1. The defendants’ position

43.  It has already been held by DHCJ Mayo that the 1^st plaintiff should provide security for the defendants’ costs up to completion of discovery.  DHCJ Mayo also gave liberty to apply for further security for costs.  There was no appeal from DHCJ Mayo’s order.

44.  The only significant change of circumstances is that since then, the 1^st plaintiff has gone into liquidation.  The defendants submit that this simply puts it further beyond dispute that security must be provided.

45.  Proceedings have now reached the stage up to which security was ordered by DHCJ Mayo, and further security is justified in order to protect the defendants in respect of further costs to be incurred.  In the absence of further security, the defendants would be most unlikely to recover any future award of costs made in their favour, which would be an oppressive state of affairs.

C2. The 1^st plaintiff’s argument against further security

46.  Mr Paul Carolan for the 1^st plaintiff argued that where an order for security for costs against a plaintiff company might result in oppression in that the plaintiff company would be forced to abandon a claim which has a reasonable prospect of success, the court is entitled to refuse to make that order, notwithstanding that the plaintiff company, if unsuccessful, will be unable to pay the defendant’s costs.

47.  Mr Carolan referred to the case of Ronia Ltd v Clarke [2003] 2 HKLRD 643, where the Court of Appeal exercised its discretion afresh to refuse security where the plaintiff had an arguable case in negligence against his solicitor which would have been stifled by an order for security due to the plaintiff’s impecuniosity.

C3. Discussion on security for costs

48.  The defendants submit that in considering whether the plaintiff’s claim would in fact be stifled, the court should consider whether the plaintiff could raise funds outside its own resources to conduct the litigation, the onus being upon the plaintiff to satisfy the court that no such resources are available (this includes considering the possibility of the plaintiff raising funds from directors, shareholders or other backers). If these backers are “unwilling” to pay, but not “unable” to pay, the alleged stifling effect may not be made out [see: Hong Kong Civil Procedure  2015, Practice Note 23/3/14 at page 541].

49.  The defendants referred to the case of Easy Watch Products Manufactory Co Ltd v Epson Precision (Hong Kong) Ltd, HCA 3943/2002 (Judgment dated 4 December 2003), where at paragraph 16 Barma J (as he then was) had this to say:

“16. Moreover, it seems to me that Mr Chan is right in saying that in general, unwillingness of the backers of a company to put up funds to enable it to proceed with a claim which it is making should be afforded little, if any, weight when considering whether or not a claim will probably be stifled if security for costs is ordered. This is particularly so where, as here, it would seem that the plaintiff is no longer operating and that the only persons likely to benefit from a successful claim are its shareholders. In such a case, their professed unwillingness to fund the claim should not, in my view, be regarded as an impediment to the making of an order for security, particularly where the court, as here, cannot be satisfied on the evidence presented that they are actually unable to do so.” (emphasis supplied)

50.  The defendants submit that from the affidavit evidence filed by the Joint and Several Liquidators of the 1^st plaintiff (in particular, paragraphs 37 to 40 of the 11^th Affirmation of Hou Chung Man dated 11 April 2014), this is a case where the backers of the 1^st plaintiff are no longer willing to fund the company to pursue these proceedings.  The defendants submit that their “unwillingness” to continue to back up the 1^st plaintiff should be afforded little, if any, weight when considering whether or not the claim will probably be stifled if security for costs is ordered.

51.  I agree.  For this reason, I hold that the alleged stifling effect of an order for security argued by the 1^st plaintiff has not been made out.

C4. Quantum of Security for Costs

52.  The quantum sought by D1‑D8 is HK$18,120,475, up to and including completion of discovery, exchange of witness statements and expert evidence.

53.  The quantum sought by D9 is HK$14,702,700, up to the stage of exchanging factual and expert evidence.

54.  The 1^st plaintiff argues that the quantum sought by both D1‑D8 and D9 is grossly inflated.  That the defendants’ Skeleton Bills of Costs are unhelpful as well as over ambitious.  Mr Carolan went so far as to suggest that the court may be robust and dismiss the applications on this ground alone.  Alternatively, Mr Carolan submits that the court can use its own experience to decide the amount to be ordered, and if the latter approach is taken, the court may be guided by the 1^st plaintiff’s costs draftsman’s view that no more than HK$2 million each could reasonably be attributed to all of the relevant future work.

55.  Whilst the defendants’ Skeleton Bills of Costs may be over ambitious, I do not agree that they are so much off the mark as to constitute a ground for dismissing the applications.  However, there are two specific points made by Mr Carolan on quantum with which I agree.

56.  First, I agree with Mr Carolan that the whole of Part 2 of D1‑D8’s Skeleton Bill of Costs (which deals with past costs) should be taken out.  The fact that D1‑D8’s actual costs up to completion of discovery may have exceeded the sum paid into court already is no reason to re‑visit this stage of the action by making a “top up” application.  No change of circumstances, for example, that unanticipated costly steps have since been involved, is even relied on.  The earlier orders cannot be re-opened with the benefit of hindsight.

57.  Secondly, I agree with Mr Carolan that each group of defendants can engage the same three experts on the topics of US insolvency law, BVI insolvency law and valuation. There is no reason to each have a different expert who is then to work on a joint report with the others.

58.  Bearing in mind the two points stated immediately above, other criticisms made by Mr Carolan on various individual items of the defendants’ Skeleton Bills of Costs, and doing the best I can taking necessarily a broad brush view on quantum, I am of the view that, in the circumstances of this case, a sufficient level of security which would be fair to both the 1^st plaintiff and the defendants is that additional security of HK$3,400,000 should be provided to D1‑D8 and additional security of HK$3,100,000 should be provided to D9.

D. DISPOSITION

59.  P1’s Amendment Summons is dismissed.

60.  On D1‑D8’s Security for Costs Summons, it is ordered that:

(1) The 1^st plaintiff do pay into court within 2 months from the date hereof the sum of HK$3,400,000 as further security for the 1^st to 8^th defendants’ costs in this action up to and including completion of discovery, exchange of witness statements and expert evidence;

(2) pending provision of security as stated in subparagraph (1) above, this action be stayed against the 1^st to 8^th defendants;

(3) in default of payment into court as aforesaid by the 1^st plaintiff, this action against the 1^st to 8^th defendants do stand dismissed with costs to the 1^st to 8^th defendants without further order; and

(4) the 1^st to 8^th defendants be at liberty, insofar as is necessary, to apply for further security for costs herein.

61.  On D9’s Security for Costs Summons, it is ordered that:

(1) The 1^st plaintiff do pay into court within 2 months from the date hereof the sum of HK$3,100,000 as further security for the 9^th defendant’s costs in this action up to the stage of exchanging factual and expert evidence;

(2) pending provision of security as stated in subparagraph (1) above, this action be stayed against the 9^th defendant;

(3) in default of payment into court as aforesaid by the 1^st plaintiff, this action against the 9^th defendant do stand dismissed with costs to the 9^th defendant without further order; and

(4) the 9^th defendant be at liberty, insofar as is necessary, to apply for further security for costs herein.

62.  The costs of and occasioned by P1’s Amendment Summons be paid by the 1^st plaintiff to the defendants in any event, such costs to be taxed if not agreed.

63.  The costs of and occasioned by D1‑D8’s Security for Costs Summons be paid by the 1^st plaintiff to the 1^st to 8^th defendants in any event, such costs to be taxed if not agreed.

64.  The costs of and occasioned by D9’s Security for Costs Summons be paid by the 1^st plaintiff to the 9^th defendant in any event, such costs to be taxed if not agreed.

65.  The above costs orders are nisi and shall become absolute in the absence of application to vary within 14 days. 

66.  Lastly, I thank counsel for their helpful assistance in this matter.