JINHONG ENTERPRISES LTD v. HONG KONG WAHSHEUNG PROPERTIES LTD

HCA 862/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 862 OF 2008

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D E C I S I O N

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Application

1.  This is an application by the Plaintiff to amend its Amended Statement of Claim.

Background

2.  On 16 May 2008, the Plaintiff commenced the present proceedings.  It pleaded that, by a Transfer Agreement in Chinese dated 22 November 2001 (“the Agreement”), the Plaintiff acquired the entire shareholding of Wei Hai Merchants Investment & Development Company Limited (威海通商投資開發有限公司) (“Wei Hai”) in PRC at RMB 9.5m.  Clause 3.2 of the Agreement stated that the Defendant, upon receipt of the Plaintiff’s written request should provide all necessary information and documentation to enable the Plaintiff to complete the transfer of the shareholding.

3.  It further pleaded that, a letter of request for information and documentation was issued on 25 April 2008, but the Defendant failed and/or refused to do so.  Hence, the Plaintiff claimed, inter alia, for an order for provision of the information and documentation, declaration that the Plaintiff was the beneficiary owner of the shareholding as well as damages.

4.  The Defendant contested the proceedings.  By its Defence filed on 11 June 2008, it argued that:

(a)       Clause 3.1 of the Agreement provided that the Plaintiff should be solely responsible for applying to the Government or Authorities for the transfer.

(b)       Clause 3.2 of the Agreement stated that, the Defendant’s only obligation was, upon receipt of the Plaintiff’s reasonable prior written request, to provide necessary particulars to the Plaintiff.

(c)       Since the execution of the Agreement on 22 November 2001, control and management of Wei Hai was handed over to the Plaintiff.  For many years, the Defendant heard nothing from the Plaintiff.

(d)       It was indeed the Defendant who issued a reminder to the Plaintiff on 18 April 2008 asking it to expedite the transfer.

(e)       The Plaintiff did not reply to the reminder but instead, issued the said letter of 25 April 2008, the 1^st written notice after a lapse of more than 6 years from the Agreement.  It was further followed by another letter on 27 April 2008.  However, the Defendant said that such notices were unreasonably short in the circumstances.

5.  On 5 September 2008, leave was given by a Master to the Plaintiff to amend its Statement of Claim to include the claim of specific performance of the Agreement, failing which, refund of the deposit RMB 9.5m and damages to be assessed.

6.  The Defendant also amended its Defence to deny the further claim, including that the sum of RMB 9.5m was not a deposit in nature under the Agreement.

7.  In the meantime, the Plaintiff issued its application for summary judgment.  A director of the Plaintiff, Mr. Xu Dongguo (徐東國) disposed a supporting affirmation.  He denied that the management of Wei Hai was handed over on 22 November 2001.  The directorship of Wei Hai was said to remain unchanged.  It was also said that the only defence put forward by the Defendant was insufficient time.  It is therefore not a bona fide defence.

8.  The Defendant thereafter filed and served an opposing affirmation by one of its director, namely, Tu Xiao Ping (涂曉平).  He gave details in the followings.

(a)       Wei Hai was incorporated in 1992 by 香港國際招商局貿易投資有限公司 (“China Merchant”) to hold a real property project in PRC, called 威海通商花園.  However, the project contained quality problems and the property market was very poor in 1994.  To cut loss, no further funds were injected.  From 1994, Wei Hai had been operating by 3 staff only, including its general manager Xu Bao Qi (徐寶琪).

(b)       In late November 1999, China Merchant sold all its investments interest to the Defendant at RMB 16m.  The transaction was completed without the assistance from China Merchant.

(c)       In 2000, the Defendant decided to sell Wei Hai.

(d)       On 19 January 2001, the Defendant signed the Shares Transfer Agreement (股份轉讓協議) with 威海市金泓化工集團有限公司 at RMB 9.5m.  Payment was made on 4 July 2001.

(e)       To maintain Wei Hai’s status as a wholly foreign owned enterprise and to simply the transfer procedures, it was agreed that a newly incorporated company in Hong Kong would take up the shares.

(f)       It then led to the Agreement.

(g)       Clauses 3.1 and 3.2 were highlighted.

“ 3.1       買方須獨力負責向國內各有關政府部門及/或行政機關就本投資權益轉讓辦理一切審批，登記及/或備案手續，及按照國內法律要求辦理一切所需手續。買方亦將獨自全數承擔辦理上述審批、登記，備案及一切法律手續所引起之所有費用及開支。

  3.2       在不影響第3.1條的規定下，賣方的唯一責任是當收到買方合理事先書面要求提供辦理“威海通商”之權益變更批准及/或登記（“有關變更手續”）所需資料時，向買方提供合理協助，以便買方或“威海通商”辦理有關變更手續。”

(h)       These 2 clauses were included because parties knew from experience that the transferor’s assistance was not necessary.  If it was needed somehow, the Defendant was still willing to assist.  After all, the Defendant sold Wei Hai at a loss and wanted a hazzle-free transfer in return.  As a matter of fact, the Defendant did not raise any request for assistance until 25 April 2008.

(i)        Since the Defendant heard nothing from the Plaintiff for years.  It presumed that the transfer had been completed.  However, it transpired that there were investigations and proceedings in PRC among the Plaintiff, Xu Dongguo and Xu Bao Qi for (alleged) misappropriation of the assets in Wei Hai.  On 12 June 2008, by an order of the Higher People’s Court, the Plaintiff’s claim was dismissed.

(j)        In September 2008, the Defendant was further informed by the parties that the Plaintiff was holding the shareholding of Wei Hai on trust for Xu Bao Qi.

(k)       The Defendant further elaborated in some details as to why it could not agree with the Plaintiff’s requests as they did not facilitate the transfer.  Instead, they went for ulterior purpose of assisting Xu Dongguo in his disputes with Xu Bao Qi.

9.  The Plaintiff did not file and serve its affidavit evidence in reply within time.  About 3 days before the substantive hearing of its application for summary judgment, the Plaintiff issued a summons to adduce a short affirmation in reply, deposed by its solicitor.  Briefly, the solicitor confirmed that a recent company search had been done.  It confirmed that all existing directors of Wei Hai were nominated by the Plaintiff, including Tu Xiao Ping.

10.  Nonetheless, at the hearing on 22 December 2008, it was ordered by consent that both the said time summons as well as the application for summary judgment were withdrawn with costs to the Defendant in any event, with Certificate for Counsel.

11.  Thereafter, parties agreed on various usual directions as to discovery, exchange of witness statements, and so forth regarding preparation for trial of the proceedings.  The Defendant also amended its Defence in line with the matters as deposed above by Tu Xiao Ping.

12.  The Plaintiff filed and served its Reply on 29 June 2009.  In short, it denied the Defendant’s case, including in particular that Xu Bao Qi was the person behind to acquire the interest in Wei Hai.  The existence of forged document was pleaded.  It was also said that the Plaintiff’s claim against Xu Bao Qi was dismissed because of lack of locus only, i.e. it was legally not the shareholder of Wei Hai.

13.  Up till now, parties have filed a number of lists of documents.  Each of them has also prepared a witness statement, Tu Xiao Ping for the Defendant and Xu Dongguo for the Plaintiff.

14.  In February 2010, the Defendant sought particulars as to the alleged loss and damage suffered by the Plaintiff.  When they went before the Listing Master in March 2010 for setting down, the Plaintiff indicated that they would apply for leave to amend its Amended Statement of Claim.  Thereafter, there might be application for security for costs, supplemental witness statements, and so forth.

15.  On 14 April 2010, the Plaintiff did take out its summons to re-amend its Amended Statement of Claim, with a draft attached thereto.  The Defendant opposed to the same.  The matter went before me for 2 days in July and August 2010.  The Plaintiff indeed prepared a further draft of its Re-Amended Statement of Claim for the purpose of the application.  Mr. Andrew Mak acted for the Plaintiff and Mr. Rimsky Yuen, Senior Counsel, represented the Defendant.  Having heard from them, I reserved my decision to be handed down.  I now do so.

Decision

16.  Upon consideration of all the evidence authorities and submission from the parties, I have decided to refuse the Plaintiff’s application.  My reasons appear in below.

17.  Mr. Yuen, SC proposed 3 general propositions to oppose the Plaintiff’s application for amendments.

“ (1)     the matters in dispute took place long time ago and there is no proper evidence to either explain the delay or the basis (if any) of the proposed amendments;

   (2)     the proposed re-amendments are not properly formulated and were glaringly in lack of particulars;

   (3)     the proposed re-amendments are either bad in law or doomed to fail for reason of limitation and others.”

I have not heard any or sufficient reason from Mr. Mak to persuade me not to accept them, as a matter of principle.

18.  Proper evidence to explain the time taken by the Plaintiff to come to the proposed amendment is particular important in the present case as Mr. Mak attempted to argue that his client was the victim, i.e. one who paid for RMB 9.5m but got nothing.  However, one should not forget that the background of the case, including that the payment was made in 2001 and proceedings herein were commenced in 2008 only.  Worse still, there were so many “underlying facts” being revealed to the Court as from time to time. In order to persuade this Court to exercise his discretion, it is necessary, albeit not mandatory, to support the application with explanations on oath.  Although the hearing before me was adjourned part-heard for one month in-between, the Plaintiff did not take up the opportunity to try to do anything.

19.  Lack of explanation is the major reason why the proposed amendment to Paragraph 3 of the Re-Amended Statement of Claim should be refused.  It is not disputed that the Agreement was entered for the sale of the entire shareholding of Wei Hai.  What is the point or basis of adding “including any underlying assets and business”?  In the alternative, the Plaintiff has not demonstrated to me why the amendment would be material or useful in the proceedings herein.

20.  When one pleads an implied term, it is necessary to give particulars of material facts giving rise to the same.  Paragraph 5A of the proposed amendment sought to ask the Court to imply 2 obligations on the Defendant under the Agreement.

“5A.     Further or in the alternative, it was an implied term of the Agreement that the Defendant was under a duty that it would do everything: -

(a)     that is necessary for, and/or alternatively not to obstruct, the Plaintiff from obtaining the approval from the relevant government authorities and/or administrative institutions in the PRC and to complete the requisite procedure in relation to the transfer of the Shares;

(b)     pending completion of the Agreement, not to exercise its voting rights at any general or board meeting or do anything so as to act beyond a legitimate exercise of the Defendant’s right to direct how the votes should be cast, including damaging or dissipation or disposal of assets of Wei Hai.”

However, why the Plaintiff is entitled to plead such case?  What is the basis of implying such term into the Agreement?  The Plaintiff’s case is probably more difficult, if not impossible, in light of an express term under the Agreement, namely, clause 3.2, wherein it was stated that there is only one obligation (…唯一責任…) in the part of the Defendant.

21.  Paragraph 7 of the existing Amended Statement of Claim pleaded that the Defendant failed to provide documents to the Plaintiff and as such, it could not complete the transfer of the shareholding.

22.  By the proposed amendments, on face of it, it sought to introduce particulars only.

“PARTICULARS

(i)      It is known to the Defendant that according to PRC law, Wei Hai has to complete the process of Annual Examination (年檢) annually, documents for which have to be signed by its legal representative and submitted to the Industry and Commerce Bureau;

(ii)      As at 25^th April 2008, the legal representative of Wei Hai as registered with the Industry and Commerce Bureau was still Tu Xiaoping (涂曉平) designated by the Defendant;

(iii)     Knowing that the legal representative and directors of Wei Hai were still personnels of the Defendant, the Defendant had the duty to complete the negligently failed to make sure that it had been done for the years of 2007 and 2008;

(iv)     As a result, Wei Hai’s registration with the Industry and Commerce Bureau was cancelled on 2^nd December 2008;

(v)     The Plaintiff has therefore suffered loss and damages in losing Wei Hai including but not limited to the latter’s business and assets.”

23.  However, as suggested by Mr. Yuen, S.C., they meant more than “particulars” and were objectionable in a number of areas.

(a)       The Annual Examination (年檢) went beyond the original plea.

(b)       The duty to complete the Annual Examination is a new cause of duty.  It was not pleaded whether it was contractual or tortuous.  No basis was provided to explain how it was arisen.

(c)       No particulars were provided to support the plea of knowledge.

24.  Proposed amendments as per paragraph 7A went on for about 4 pages.  It sought to plead that the Defendant was the constructive or bare trustee of the shares of Wei Hai under the Agreement.  It further attempted to give explanations as to how the Agreement was come about and that the Defendant was in breach of its duty in causing and/or allowing a board resolution dated 1 August 2002 to be signed so that substantial asset with the Defendant were transferred.

“ (i)         ……

  ……

  (x)        By an agreement of transfer (in Chinese entitled “轉讓協議書”) between 中國信達資產管理公司濟南辦事處 and Wei Hai dated 20^th December 2001, Wei Hai agreed to acquire all the shares and interests in one 威海火炬高技術產業開發區銀翔房地產開發公司 (“銀翔公司”) for the consideration of RMB 11.08 million.  The said RMB 11.08 million was fully paid or settled by Wei Hai.  Since then, 銀翔公司 has become a wholly owned subsidiary of Wei Hai;

  (xi)       Unbeknown to the Plaintiff or Wei Hai Jinhong, the Defendant caused and/or allowed a board resolution of Wei Hai dated 1^st August 2002 to be signed by Tu Xiaoping (涂曉平), Zhao Weijin (趙維晉), Ye Chunhua (葉存華), Yu Haifeng (于海鋒) as directors of Wei Hai (“Board Resolution”) so as to purportedly transfer and vest all the shares and interests of 銀翔公司 to Xu Baoqi (徐寶琪), Xu Xiangzhao (徐祥釗), Guo Xiaojing (郭小靜), Xu Baojiang (徐保江), Ren Hong (任紅), Xu Baoyi (徐保義), Song Xiubo (宋修博), Liu Tianfeng (劉天峰), allegedly for RMB 5 million.  In truth and in fact, no payment of RMB 5 million was ever truly paid by the aforesaid 8 persons or any of them, as their salary income and/or assets were minimal.  The Plaintiff also disputes the authenticity of the Board Resolution;

  (xii)      The aforesaid purported transfer of the shares and interests of 銀翔公司 was at an undervalue.  The Plaintiff shall rely upon inter alia the fact that the balance sheets had shown 銀翔公司 had assets of over RMB 14 million as at 30^th July 2001;

  (xiii)      In any event, the purported transfer of the shares and interests of 銀翔公司 was unauthorized nor agreed to by Wei Hai Jinhong and/or the Plaintiff, and had constituted an unauthorized dissipation of assets of Wei Hai;

  (xiv)     The Plaintiff disputed such purported Board Resolution and/or agreement for transfer under sub-paragraph (xi) above as genuine or valid, which the Plaintiff only discovered in about 2006;

  (xv)      Further, such purported Board Resolution and/or transfer was a clear breach of the duties of the Defendant as trustee and are null and void, and/or liable to be set aside.”

25.  As paragraph 7, the Defendant had an uphill battle to pray leave for the amendments.

(a)       It is a new claim.

(b)       The interests in 銀翔公司 were then owned by Wei Hai, not the Plaintiff.  There is no plea of derivative action by the Plaintiff.

(c)       No particulars were provided as to how the Board Resolution was done.  In the words of Mr. Yuen, S.C.,

“ (1)     the relationship between the Defendant and the 4 persons who allegedly signed the Alleged Board Resolution;

  (2)     how did the Defendant caused the 4 persons to sign the Alleged Board Resolution;

  (3)     whether the Defendant was aware of the signing of the Alleged Board Resolution; if yes, on what basis?  If no, on what basis can the Plaintiff assert that the Defendant allowed the Alleged Board Resolution to be signed?”

(d)       What exactly is the Plaintiff’s case towards the “Board Resolution”?

26.  Both the proposed amendments in 8B and 8C further attempted to impose new duty to the Defendant.

“ 8B.    Further or in the further alternative, in the event that the Approval and Registration Procedure cannot be processed or completed due to cancellation of the registration with the Industry and Commerce Bureau on 2^nd December 2008 as pleaded in paragraph 7(iv) hereinabove, the Defendant is obliged to apply or assist the Plaintiff at its election to apply to the relevant PRC authorities to reinstate the registration of Wei Hai with the Industry and Commerce Bureau including but not limited to providing documents or taking such steps under any required PRC law as may be appropriate or necessary for such purpose.

   8C.    Further or in the alternative, in the event that the application to reinstate the registration of Wei Hai with the Industry and Commerce Bureau as pleaded in paragraph 8B hereinabove cannot be processed or completed or is unsuccessful, the Defendant is obliged to set up or to authorize or assist the Plaintiff or its representative at their election to set up the relevant liquidation committee (清算小組) for the liquidation of Wei Hai under any required PRC law.”

Regarding the complaint by Mr. Yuen, S.C., of devoid of basis and particulars, I have not been provided with any or sufficient answer from the Plaintiff.  As to 8E, as an alternative, it pleaded that the Defendant was unjustly enriched.  However, the difficulty is that the Plaintiff’s own case cannot be a total failure of consideration at all.

27.  Having refused all the substantial proposed amendments by the Plaintiff, it will be pointless to allow only those of cosmetic in nature, though they were not objected technically by the Defendant.

Costs

28.  It appears to me that there is no reason why costs should not follow the event.  Counsel’s assistance was useful.  Hence, there will be an order nisi that the Plaintiff shall pay costs of the application to the Defendant, including Certificate for Counsel for hearing on 20 July 2010 and 26 August 2010, to be summarily assessed by me (1  hour reserved) if parties cannot agree on the same within 14 days from the date hereof.

Other matter: authority to sue?

29.  Upon  considering the present argument, I realized that, by the paragraphs 1A of the Re-Amended Defence filed herein on 1 June 2009, the Defendant “… does not admit that the Plaintiff has the requisite locus standi or authority to commence this Action …”.  Attention of paragraph    18/19/24 at p. 403 of HKCP 2010 is hereby drawn to the attention of the parties.  Briefly, if question of authority to sue is an issue between the parties, it must be resolved as soon as possible and not left until the trial of the proceedings. Parties should therefore look into the matter the soonest possible.