INFINITY DEVELOPMENT (HOLDINGS) CO. LTD AND ANOTHER v. BANK OF CHINA AND OTHERS

CACV 1069/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 1069 OF 2000

(ON APPEAL FROM HCA NO. 5491 OF 2000)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal from a judgment of Chung J given on 13 November 2000. The application before the judge was an application to strike out the statement of claim under Ord. 18 r. 19 and under the inherent jurisdiction on the basis that it disclosed no reasonable cause of action, that it was scandalous, frivolous or vexatious and that it was an abuse of the process of the court. In the alternative the relief sought was that certain parts of the statement of claim should be struck out as well as some of the defendants.

The plaintiffs' claim

2. The writ in this action was issued on 31 May 2000. The statement of claim was endorsed thereon. The primary claim is a claim by the 1st plaintiff against the 4th, 5th and 6th defendants for breach of a shareholder's agreement dated 22 September 1993 as it was modified by an agreement dated 23 September 1997 and breach of the agreement dated that date "and/or a memorandum dated that date".

3. There are also claims against the 1st to 3rd and 7th to 11th defendants for procuring the 4th, 5th and 6th defendants to breach the said contracts and the claim for conspiracy by both plaintiffs against all the defendants.

4. The judge ordered that the statement of claim be struck out and dismissed the action.

5. Two weeks before the hearing of this appeal the plaintiffs caused a summons to be issued seeking to substitute the original statement of claim with what was headed "Fresh amended statement of claim". At the same time the application sought to introduce fresh evidence. For the most part the evidence sought to be introduced went to support the allegations in the "Fresh amended statement of claim".

6. At the commencement of the hearing it was indicated to the parties that it was considered inappropriate, in any event, for this court to consider the "Fresh amended statement of claim". It introduced a number of new allegations. There were claims in respect of loans and joint ventures of which no mention had been made in the statement of claim endorsed on the writ; the claims were in part founded upon what was termed the "true agreement" which was not the same agreement as that upon which the action was originally founded. Whereas the Court of Appeal clearly has power to permit amendments it is for the purposes of considering the appeal before it. When new causes of action are sought to be introduced it would be most exceptional for the Court of Appeal to consider those amendments. It should also be mentioned that the "Fresh amended statement of claim" was drafted in a style more suitable to a novel than a pleading. Pleadings "must contain, and contain only, a statement in summary form of the material facts" relied upon.

Background

7. The action is founded upon a joint venture agreement which was made on 22 September 1993 between the 1st plaintiff, the 4th to 6th defendants and Applecrest Properties Limited ("Applecrest"). Applecrest was a British Virgin Islands company. It was to be the joint venture vehicle between the plaintiff and the 4th to 6th defendants. The 1st defendant is, of course, a bank which has operations in Hong Kong. The 1st defendant is said to hold substantial interests in the 2nd defendant. The 2nd defendant in turn owns a 30% interest in the 3rd defendant. The 4th and 6th defendants were direct or indirect wholly owned subsidiaries of the 2nd defendant and the 5th defendant was a subsidiary of the 3rd defendant. The 7th and 9th defendants were directors of the 4th and 6th defendants and the 8th defendant was also a director of the 4th defendant. Finally the 10th and 11th defendants were senior officers of the 1st defendant's Hong Kong - Macau office.

8. The joint venture was to develop real estate in Dongguan. The 2nd plaintiff had control of this property through other companies. The property was to be developed into a residential and commercial complex that would be called Dongguan Xin Zhong Yin Garden. The plaintiff and the 4th to 6th defendants were to be the shareholders of Applecrest. The 1st plaintiff was to own 2,000 B shares; the 4th defendant 500 A shares, the 5th defendant 300 A shares and the 6th defendant 200 A shares. It may be noted at this stage that the B shares carried no voting rights. Moreover it is clear from a number of provisions in the agreement that the A shareholders would have control of the board; the chairman would be appointed by the A shareholders and the A shareholders would have control over the operation of the company. The board would not be able to operate without the directors appointed by the A shareholders being present. It is unnecessary to examine the manner in which the project was financed other than to say that by early 1998 there were shareholders loans which amounted to some HK$355 million of which the 1st plaintiff had advanced 66.67% and there were banking facilities which had been extended to the extent of HK$165 million. It is the plaintiffs' case that the bank loans were secured against mortgages of the Dongguan property and also of the 2nd plaintiff's house.

The claim

9. The plaintiffs' claim arises following the total collapse of Applecrest which was wound up for insolvency in December 1999.

10. In paragraph 8, the statement of claim recites the fact that the financial difficulties of Applecrest had become more than apparent by September 1997. In paragraph 9 it is alleged that there was an agreement on 23 September 1997 which was contained in, or evidenced by, a memorandum which was signed on behalf of the 1st plaintiff and the 4th to 6th defendants. It is unnecessary to set out the full details of that memorandum as pleaded in the statement of claim. The material matter was that agreement was reached that each shareholder should dispose of half of its respective shareholdings in Applecrest to an investor. It was acceptable that the consideration should be paid half in cash and half in listed securities. There were other provisions including one which would benefit the 6th defendant because the investor was required to execute a counter guarantee. It is implicit in the pleading, as indeed was the fact, that a suitable investor had to be located and negotiations conducted. The investor had to subscribe to new shares in Applecrest, representing approximately 20% of the enlarged share capital. The proceeds from the subscription were to be used to pay part of the debts owed by Applecrest.

11. Paragraph 10 of the statement of claim recites that as a result of this agreement the 2nd plaintiff commenced negotiations with Kong Tai International Holdings Company Limited ("Kong Tai"). This was a company listed on the Stock Exchange. Paragraph 11 then alleges that the 4th to 6th defendants and in particular Mr Tsang Kam Lan, who was the chairman of the 6th defendant, were kept fully informed by the 2nd plaintiff of those negotiations. The negotiations were said to culminate in the signing of a Memorandum of Agreement dated 3 February 1998 ("the MOA"). Paragraph 11 goes on to say "The MOA, which gave effect to the share sale, was prepared and negotiated and concluded by Kong Tai acting through their solicitors and Applecrest acting through the 6th defendant and Applecrest's solicitors. Under the MOA, it was agreed subject to execution of a final agreement to be approved by the respective boards of directors of the parties thereto ...".

12. The statement of claim then goes on to give a synopsis of what were to be taken as the major parts of the MOA.

13. For present purposes it is sufficient to set out sub-paragraphs (1), (2) and (4) of paragraph 11 of the statement of claim. It reads as follows:

"(1) Winhill agreed to acquire ("the Acquisition") and Applecrest agreed to sell, at a total consideration of approximately HK$70 million ("the Consideration"), 10% interest in the issued share capital of a new shelf company ("ShellCo") (which would be set up and to which Applecrest would transfer ownership of the Development Project), and 10% of certain Shareholder Loans and Third Party Loans;

(2) the Consideration would be settled by issue of 350 million new shares of Kong Tai ("the Consideration Shares"), which represented approximately 9.89% of the then existing issued share capital and approximately 9% of the issued share capital as enlarged by the issue of the Consideration Shares, at an issue price of HK$0.20 per share;

(3) ...

(4) Winhill would be granted an option to buy in cash up to an additional 90% of shares in ShellCo and the said Shareholder Loans and Third Party Loans (or any part thereof) for a period of up to 1 year from the date of signing of the Final Agreement on the basis that the value ascribed to the Development Project would be based on the then existing value of HK$680 million."

14. It should be mentioned that Winhill was a subsidiary of KongTai. Paragraph 12 of the statement of claim then recites that immediately prior to the signing of this MOA, the 2nd Plaintiff had obtained oral approval over the telephone from Mr Tsang to sign the MOA. It is also said that the 6th defendant's directors through auditors and solicitors had examined Kong Tai's financial condition and obtained legal advice on the intended sale of "the shareholdings in Applecrest".

15. Paragraph 13 then reads as follows:

"In pursuance of the MOA, an Announcement was made by Kong Tai on 4th February 1998, announcing, inter alia, the making of the MOA and setting out the main terms and conditions of the MOA."

16. Before proceeding with the remainder of the statement of claim four things may be observed from the pleading itself:-

(a) The agreement in the MOA was quite different from the agreement envisaged by the agreement of 23 September 1997. The only possible relevance of the agreement of September 1997 was that it was the commencement of the 2nd plaintiff's efforts to find some other party to play a part as an investor in Applecrest or its business. As such, the inclusion in the pleading of the details of, and possibly even also the reference to the September agreement was unnecessary and hence strictly speaking embarrassing. As will be seen, however, the terms of the MOA undermine much of the basis of the plaintiffs' claim.

(b) The MOA by its very terms was not binding on either Kong Tai, Winhill or Applecrest. As acknowledged in the pleading it was subject to approval by the respective boards of directors.

(c) On the face of the pleading there was no money to be injected into Applecrest, or indeed its subsidiary which would be taking over the construction in Dongguan. All that would occur would be that there would be an issue of 350 million Kong Tai shares as consideration for a 10% interest in the Dongguan project.

(d) It was alleged that Mr Tsang and the 6th defendant had given oral approval to the MOA. No such approval is alleged against any of the other defendants although it is alleged that representatives of the 4th to 6th defendants were kept informed of the 2nd plaintiff's negotiations.

17. On the face of the pleading, therefore, all that there is is an allegation that there was a proposal which had been formulated by the 2nd plaintiff with a public company that would be put to the respective boards. On the face of the pleading, it is clear that no party was bound to enter into any formal agreement. In this context, and outside the pleadings, it can be observed that at the same time as Kong Tai issued a public statement referring to the MOA it sent Appleccrest a letter. That letter made very clear that not only did Kong Tai not regard itself as bound to enter into any formal arrangement but also that there were "a number of major issues that would need to be agreed to" that had not, by then, been addressed. The announcement referred to in paragraph 13 of the statement of claim undoubtedly leaves a very different impression on the mind of a reader to that which is given by the letter of the same date.

18. The statement of claim then goes on to allege that the terms of the MOA were and would clearly be in the interest of and for the benefit of Applecrest and each of its shareholders. The allegation is then made that on 16 February 1998 the 1st defendant "suddenly and without prior notice to or consultation with the 1st and/or 2nd plaintiffs issued a press release" indicating that the 1st defendant would not approve Kong Tai's acquisition and making clear that, although the 2nd plaintiff had a 66.67% interest in Applecrest, his shares had no voting rights and, as a consequence, he could not secure that the agreement referred to in the MOA would be implemented. The allegation in the following paragraph is that at a directors' meeting on the following day the directors who represented the 4th to 6th defendants resolved that the proposed transaction referred to in the MOA would be disapproved. It was said that there was no discussion on the merits of the proposed sale as set out in the MOA, on where Applecrest's best interest lay in the matter, or on how Applecrest could overcome its cashflow difficulties in the absence of such transaction. It is also said that no reasons were provided to the 2nd plaintiff for the 4th to 6th defendants' refusal to proceed with the transaction.

19. The statement of claim then alleges that because of the financial difficulties which Applecrest then faced it was eventually put into liquidation.

20. The pleading then proceeded to allege that there had been breaches of the obligations under clauses 7.2(b), 9.5 and 16.3 of the shareholder's agreement and of the agreement of 23 September 1997. As to that latter allegation, as has already been pointed out, the pleading itself makes clear that whatever proposals were put forward in February 1998 had little, if anything, to do with the September agreement.

21. Clause 7.2 of the shareholder's agreement reads as follows:

"Each of the Shareholders agrees to exercise its respective rights hereunder and as a shareholder in the Company (insofar as it lawfully can) so as to ensure that:

(a) the Company performs and complies with all obligations on its part under this Agreement and complies with the restrictions imposed upon it under its Articles of Association from time to time; and

(b) the business of the Company shall be carried on in a proper and efficient manner and for its own benefit and in accordance with the highest ethical standards."

22. The allegation is in respect of the words "carried on in a proper and efficient manner and for its own benefit". On the face of the pleading itself it is difficult to see how it can be said that a failure to proceed with the MOA constituted a failure to ensure that the business was carried on in a proper and efficient manner and for the benefit of Applecrest. The pleading was in essence that Applecrest was in financial difficulties. None of the terms of the MOA, if implemented, would, on what is pleaded, have solved the financial problems of Applecrest. There is no pleading as to that and it is not demonstrated how that would occur. In my view, this plea must fail.

23. Clause 9.5 of the shareholder's agreement reads:

"The Shareholders shall cooperate in good faith and promptly execute all documents and do all things reasonably within their respective powers which are necessary or desirable to promote the business of the Company and to give effect to the spirit and intent of this Agreement. Without prejudice to the generality of the foregoing the 'A' Shareholders shall exercise or refrain from exercising and shall procure, to the extent allowed by law, that every person for the time being representing them, shall exercise or refrain from exercising any rights of voting at any general meeting or meeting of the Directors of the Company and any other rights or powers of control so as to ensure the passing of any and every resolution necessary or desirable to ensure that the affairs of the Company are conducted in accordance with this Agreement and with the object of the Company as described in Clause 7 and otherwise to give full effect to the provisions of this Agreement and likewise to ensure that no resolution is passed which does not accord with such provisions or with the object of the Company as described in Clause 7."

24. Again in this respect I see nothing further than what is contained in the allegations in respect of clause 7.2 of the shareholder's agreement.

25. The allegation in respect of clause 16.3 was acknowledged by Sir John Swaine SC, who appeared on behalf of the plaintiffs, to be wrongly identified. The particular clause which is relied upon is 16.1. The relevant part of clause 16.1 provides that:

"The Shareholders shall not and shall procure that their respective subsidiaries, associated companies, directors, officers and employees shall not divulge or communicate to any person (other than those whose province it is to know the same or with proper authority) or use or exploit for any purpose whatever any of the trade secrets or confidential knowledge or information or any financial or trading information relating to the other Shareholders and/or the Company ..."

26. There are a number of matters which made this plea unsustainable. In the first place the allegation is that the disclosure was made by the 1st defendant which was "under the new local leadership of the 10th and 11th defendants". The allegation was that it was those parties who were in control of the 4th to 6th defendants. In those circumstances the parties alleged to have made the disclosure were not any of the 4th to 6th defendants, who were the parties to the shareholder's agreement, but were other persons, who had not been contracting parties. Hence the allegation of breach of contract simply fails on the face of it.

27. Of course an allegation of breach of confidential information can be made against any party who has misused confidential information which has come into its possession with knowledge that the information is confidential. That allegation was not made in this case. It is also to be noted that the announcement of 16 February 1998, of which complaint is made, was an announcement to counteract the effect of the announcement made on 4 February by Kong Tai. The implication of 4 February announcement was that the 2nd plaintiff had a controlling interest in Applecrest. The statement made on 16 February was clearly designed to disabuse the public of that misconception. Of course, it might be argued that whether that would come within the category of a statement which was made to those whose province it is to know the same would be a matter for later decision.

28. It is then said that the defendants other than the 4th to 6th defendants caused or procured the 4th to 6th defendants to act in wrongful breach of contract. But if the breach of contract fails, this allegation against them also fails. In relation to the plea that there had been a breach of fiduciary duties by the 7th to 9th defendants, as directors of Applecrest, in passing the resolution on 17 February, it is suggested that they were not acting bona fide in the best interest of Applecrest. The allegation of lack of bona fides has not been particularised. In argument it appeared that this plea turned upon two arguments. First was the fact that the 4th to 6th defendants were protected by mortgages over the property in Dongguan and over the 2nd plaintiff's home. I fail to see how this can begin to amount to lack of bona fides.

29. The other aspect which was argued was on the basis of quotations from the judgment of Cohen J in the case of Blackwell v Moray [1991] 5 ACSR 255, SC (NSW). The principles of law cited in that decision are the well known principles that directors are fiduciaries and their powers must be exercised honestly in furtherance of the purpose for which they are given. The directors must look after the interests of the shareholders as a body.

30. The application of that principle in the Blackwell case was in respect of a resolution which was passed by a single director absolving the other director of a debt of A$600,000. It was said in that case that it was the duty of the director who knew virtually nothing about the affairs of the company to have made inquiries.

31. Sir John Swaine attempted to draw a parallel in respect of the present case on the basis that it was the duty of the directors of the 4th to 6th defendants to inquire into the proposed agreement referred to in the MOA and that this should have been discussed at a board meeting. It is said that because it was not and because it was at the instance of the 4th to 6th defendants that it was not, there was a breach of the shareholder's agreement.

32. It seems to me that this argument must fail. In the first place the MOA cannot even be given the epithet "pious hope". The letter from Kong Tai of 4 February makes abundantly clear that Kong Tai did not consider that any agreement had been reached. To say that the letter indicated that it would be unlikely that an agreement would be reached would, in my view, be an under statement.

33. In the second place whatever was contained in the MOA would not have resulted in relief of Applecrest's financial difficulties or cashflow. That was a crucial matter in the September agreement. The September agreement had included as part and parcel of the arrangements which would have to be arrived at, a term that there would be the payment of the guarantee notes. The announcement by Kong Tai on 4 February, referred to in paragraph 13 of the statement of claim, stated that it did not anticipate having any further significant capital commitment in the future. Certainly the announcement did not indicate the contemplation on the part of Kong Tai of making any further capital contributions. Hence Applecrest's cashflow problems would not have been eased.

34. The allegation that the directors acted negligently is, in my view, also doomed to failure. There was nothing more than a useless suggestion which Kong Tai had already indicated was unlikely to be followed.

35. Paragraph 19 of the statement of claim attempts to plead conspiracy. In my view, this is an appalling paragraph. The plea is said to be that there was a conspiracy between all the defendants. Yet no overt acts are pleaded against any other than the 10th and 11th defendants. The object of the conspiracy was said to be the injury of the economic interests of the 1st and 2nd plaintiffs. I can see no justification whatever in the statement of claim for such an extravagant plea. Even on the basis that it is alleged that the directors had breached fiduciary duties by being negligent, it is a far cry to say that their acts were motivated by a desire to injure the economic interest of the 1st and 2nd plaintiffs. There is not the slightest basis pleaded for such a claim.

36. In my view the judge rightly struck out the statement of claim. On the basis that statement of claim was struck out, the action fell to be dismissed. During the course of argument, Sir John Swaine suggested a number of possible amendments to the statement of claim which were aimed at curing some of the objections. In view of the fact that the application to strike out was in part upon the basis that the proceedings were an abuse of the process of the court and evidence was admitted, it was indicated that the court was not disposed to consider the amendments put forward because they represented a substantial change in the plaintiffs' case. It was said that the plaintiffs' concern was that a failure to consider such amendments might mean that the plaintiffs would be prevented from raising them in subsequent proceedings. Mr Tang SC who appeared on behalf of the defendants confirmed that even if there were the possibility of any estoppel or res judicata applying, his clients would waive the point in any future proceedings but reserving only the right to strike out on the grounds of abuse of court's process.

37. I would therefore dismiss this appeal with an order nisi that the defendants should have the costs of this application.

Hon Woo JA:

I agree.

Hon Suffiad J:

I agree.