CHAN TAT MAN AND OTHERS v. TSOI YUK MING AND OTHERS

HCA 2028/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2028 OF 2007

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R U L I N G

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Introduction

1.  This action is related and referable to a Hong Kong arbitration which is presently adjourned to await the outcome of the action.  I have before me a summons by two PRC companies, which I will refer to by their initials CPDH and BPP, who are applying to intervene and be joined as Defendants in the action.  In order to make any sense of the issues raised in the summons, it is essential for me to set out the wider background which centres on the activities of a PRC company which I will refer to as MHX.

2.  MHX has two equal shareholders, a Mr Lin and a Mr Zheng who hold their shares as nominees for a Mr Chan and a Mr Tsoi respectively.  There has been a falling out between Mr Chan and Mr Tsoi which presently I will need to explain.

3.  MHX is now in liquidation, its business licence having been revoked because if failed, as it was required, to conduct an annual verification with the relevant PRC authority.  It has had to form a liquidation committee which is representative of Mr Chan’s and Mr Tsoi’s interests.  Mr Lin and Mr Chan Ka represent Mr Chan, and Mr Zheng and a Mr Wang represent Mr Tsoi.

4.  Pausing there for a moment, it now becomes necessary to briefly explain the backdrop to the arbitration and this action which relates to it.  On 9 August 2004, CPDH entered into a Sale and Purchase Agreement whereby it purchased the 20% shareholding and shareholders’ loans in a Hong Kong company called World Lexus from Mr Chan and Mr Tsoi which I will refer to as the 20% Agreement.  Prior to this, in August 2002, Mr Tsoi had sold 80% of his shares in World Lexus to two companies that were wholly owned by CPDH.  World Lexus owns BPP, a property developer, which has built a substantial development at Beijing called “Richmond Park”.  Under the 20% Agreement any dispute arising from it is to be resolved by arbitration at Hong Kong.

5.  The parties to the 20% Agreement were Mr Chan and his wholly-owned company Mandecly Limited, which held his shares in World Lexus, Mr Tsoi and MHX on the one part as vendors and, CPDH and BPP as purchasers.  Under this Agreement and before all payments due under it were effected, a number of disputes had arisen out of which CPDH and BPP, as claimants, have brought the Hong Kong arbitration proceedings against Mandecly, Mr Chan, Mr Tsoi and MHX.  Mr Lin, who holds Mr Chan’s 50% shareholding in MHX as his nominee, is not a party to the 20% Agreement and therefore is also not a party to the Arbitration Agreement contained in it. 

6.  Because the subject matter of these disputes is not essential to the way in which I will decide this summons, I do not propose to rehearse their substance except in bare outline.  The following summary will be sufficient.  After completion of the 20% Agreement, CPDH had received rival demands from Mandecly/Mr Chan and from Mr Tsoi as to how it should make payment and to whom.  Additionally, Mr Tsoi is saying that Mr Chan had wrested control of MHX from him by making use of forged shareholders’ resolutions which were referred to the courts at Beijing which decided that the resolutions were indeed forgeries and therefore null and void.  Now in the Arbitration, CPDH is, amongst other relief, seeking a declaration that it is entitled to withhold payment under the 20% Agreement until it receives a valid written demand for payment.

7.  In the Arbitration, CPDH is also seeking a declaration that it is entitled to deduct the amount of a number of third party claims that have been made against World Lexus after the 20% Agreement had been entered into which it had not been informed of before entering into the Agreement.  CPDH’s right to make such deductions is disputed by both Mr Chan and Mr Tsoi, Mandecly and MHX. 

8.  Additionally, the Arbitration has before it a counterclaim by MHX against BPP concerning a piece of land known as Zone C which was part of the land to be developed.  MHX relies on Clause 3 of the 20% Agreement, which is to the effect that if BPP did not develop Zone C, this development right should be transferred to MHX.  There is a dispute as to whether Zone C is in fact part of the development land and that BPP therefore could not and did not obtain any development rights over it.  The counterclaim, which includes a claim for loss of profit on the development rights, was filed on MHX’s behalf by its solicitors, Anthony Siu & Co.

9.  The authority of Anthony Siu to act on MHX’s behalf has been called into question, which I will consider in a moment and this alleged lack of authority to act in the Arbitration forms part of the relief claimed in this action.  The dispute comes about in this way.  MHX’s business licence having been cancelled in August 2002, it was required to form a liquidation committee.  The committee was formed pursuant to a shareholders’ resolution on 18 March 2007 comprising Messrs Lin, Chan Ka, Zheng and Wang.  By a power of attorney dated 23 March 2007, the Committee authorised Anthony Siu & Co. to represent MHX in the Arbitration subject to a number of conditions appearing in the Power of Attorney.  According to Clause 2, the amended Points of Defence and Counterclaim which Anthony Siu & Co. had purported to file on MHX’s behalf could only be adopted as MHX’s pleading following the liquidation committee’s approval and signature of it.  Additionally, under Clause 3, Anthony Siu could not submit any legal document and evidence on behalf of MHX unless the documents had been signed by Mr Chan Ka and by Mr Wang on behalf of each of the joint shareholders — ultimately Mr Chan and Mr Tsoi.

10.  The committee was unable to agree as to whether to pursue a counterclaim by MHX in respect of the Zone C claim and for that reason the amended Defence and Counterclaim which brought that counterclaim was not signed on behalf of both shareholders, as the Power of Attorney required that it should.  This impasse and the fact that the pleading had been filed without authority has been communicated to the Arbitrators by Mr Tsoi’s representatives on the committee.  Anthony Siu has also communicated with the Arbitrators to confirm that the committee is deadlocked as to whether the Zone C dispute as reflected in the Amended Defence and Counterclaim should be pursued.

The Present Action

11.  It is as a result of this deadlock in the committee that this action has been brought.  It is a dispute between Mr Chan and Mr Tsoi.  Mr Chan and his representative on the liquidation committee, Mr Chan Kar are the 1^st and 3^rd Plaintiff’s respectively and Mr Tsoi is the 1^st Defendant.  It should be pointed out that the interveners, CPDH and BPP, had originally been made 4^th and 5^th Defendants, which is a matter that is strongly relied on by Mr Horace Wong SC on their behalf in arguing that they should now be joined again as Defendants but this is suggested to be a matter of no consequence by Mr Edward Chan SC who submits that they should not be allowed to intervene.  This of course is a matter that I will need to return to presently.

12.  The relief sought in the action appears at page 50 of Bundle 1. Although I propose to set out the terms of the prayer in full below, it would be helpful to first explain its terms.  Mr Lin, the 2^nd Plaintiff, it will be recalled is a 50% shareholder in MHX as Mr Chan’s nominee.  Under paragraph 1 of the prayer he, as 2^nd Plaintiff, seeks a declaration that he should be allowed to pursue the counterclaim of MHX against CPDH and BPP in the Arbitration in respect of MHX’s claim arising under the Zone C development claim in the way that I have already explained.  This, it is said, is a derivative counterclaim in the Arbitration by Mr Lin on behalf of MHX.  The prayers in paragraphs 1A and 1B, added by amendment, are for orders and directions which would have the effect of preventing Mr Tsoi’s faction from stopping Mr Lin pursuing his derivative counterclaim on MHX’s behalf in the Arbitration and so, as a matter of substance, these additional prayers are very much ancillary to the declaration sought in paragraph 1.  The material parts of the prayer are as follows:

“AND THE PLAINTIFFS THEREFORE CLAIM AGAINST ALL DEFENDANTS :-
(1)	A declaration that Lin (the 2nd Plaintiff) has the right to and be allowed to pursue or continue to pursue the counterclaim of MHX against CPDH and BPP (the 4th and 5th Defendants) arising under the 20% Agreement (including the counterclaim of MHX in relation to Zone C) by way of a derivative counterclaim on behalf of and for the benefit of MHX in the Arbitration.
(1A)	An injunction restraining Tsoi, Zheng, Wang, and each of them whether by themselves, their servants or agents or otherwise howsoever, from contending, in the Arbitration, that Lin has no right to and/or ought not be allowed to pursue or continue to pursue the counterclaim of MHX derivatively on behalf of and for the benefit of MHX in the Arbitration.

(1B)

In the alternative to (1) and (1A) above, directions from this Honourable Court allowing Lin to act on behalf of MHX to continue to appoint and/or authorize AS or other firm of Solicitors to continue to pursue the counterclaim of MHX against CPDH and/or BPP in the Arbitration in the name of MHX and in injunction to restrain Tsoi, Zheng and Wang, and each of them whether by themselves, their servants or agents or otherwise howsoever, from contending, in the Arbitration, that Lin has no right to so act on behalf of MHX.”

The Interveners’ Application

13.  There is outstanding and due to be heard by me on 28 and 29 May an application by Mr Tsoi, as 1^st Defendant, to strike out the action relying on three separate grounds.  Firstly, that the courts of Hong Kong have no jurisdiction, secondly that Hong Kong is forum non conveniens and, lastly that the claims disclose no reasonable cause of action and/or are vexatious, frivolous or are otherwise an abuse of the process of the court.

14.  CPDH and BPP wish to be joined as Defendants to make an identical application to have the action stayed and/or struck out.  If they succeed in their application to intervene, I have already directed that their applications can also be heard on the same time as Mr Tsoi’s at the end of May.

15.  Mr Horace Wong has helpfully indicated that the basis of their submissions will be that there simply is no legal basis for the Plaintiffs’ claim that Mr Lin is entitled to pursue MHX’s counterclaim against CPDH and BPP by way of a derivative counterclaim in the Arbitration.  Their case is that neither under Hong Kong nor PRC law is such a derivative counterclaim permissible.  Further, it will be said that Mr Lin, who is not a party to the arbitration agreement with CPDH and BPP, is therefore not entitled to be joined and participate in the Arbitration and that CPDH and BPP cannot therefore be compelled to arbitrate with him.

16.  Put very simply at this stage, CPDH and BPP submit that they have more than a sufficient interest in this action, which if it proceeds to trial and judgment, will decide whether Mr Lin’s derivative counterclaim on behalf of MHX can proceed against them in the Arbitration.  Mr Edward Chan in resisting the application for their joinder submits that CPDH and BPP have no relevant or material interest in this action which represents a dispute between shareholders in MHX as to the giving of instructions for MHX to pursue the counterclaim against CPDH and BPP in the Arbitration.  This action is solely concerned with the internal management of MHX and nothing else.

17.  In order to decide this matter, it is essential to have regard to the two limbs of O.15 r.6(2)(b) under which this summons is brought.  The material parts of the rule are these:

“Subject to the provision of this rule, at any stage of the proceedings in any cause or matter the Court may on such terms as it thinks just and either of its own motion or on application —

(a)  …

(b)   order any of the following persons to be added as a party, namely —

(i)    any person who ought to have been joined as a party or whose presence before the Court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, or

(ii)   any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.”

18.  Mr Horace Wong has very carefully taken me through many of the cases decided under the rule both here and in England.  He relies on what Lord Denning M R said in Gurtner v Circuit [1968] 2 QB 587 at 595D-F on the effect of the rule under its first limb [(b)(i)].  The Master of the Rolls said this:

“It seems to me that when two parties are in dispute in an action at law, and the determination of that dispute will directly affect a third person in his legal rights or in his pocket, in that he will be bound to foot the bill, then the court in its discretion may allow him to be added as a party on such terms as it thinks fit.  By so doing, the court achieves the object of the rule.  It enables all matters in dispute to ‘be effectually and completely determined and adjudicated upon’ between all those directly concerned in the outcome.”

This was echoed in Lord Diplock’s opinion in Pegang Mining Co. Ltd v Choong Sam [1969] 2 MLJ 52 at 56 (who as Diplock LJ had sat in the Court of Appeal in Gurtner v Circuit).  Lord Diplock was of the view that a party may be added under the first limb if:

“… his rights against or liabilities to any party to the action in respect of the subject matter of the action be directly affected by any order which may be made in the action.”

19.  Mr Wong submits that the interveners have a direct interest in the action.  Any outcome which enables Mr Lin to pursue a derivative counterclaim on behalf of MHX in the Arbitration against CPDH and BPP is bound to affect both their legal and financial interests. He goes on to submit that these two companies have a legitimate interest in protecting their contractual interests under the 20% Agreement which include their rights and liabilities under the Arbitration Agreement of which it is part.  The way he puts it, and this I think is the high point of his argument, is that any order coming out of this action that CPDH and BPP are obliged to arbitrate with Mr Lin (by derivative counterclaim on behalf of MHX) directly affects their rights and liabilities under the Arbitration Agreement which he articulates as their contractual right to ensure that the agreed mode of dispute resolution (by Hong Kong Arbitration) is applied in accordance with the provisions of the 20% Agreement which he says contemplates the resolution of dispute by arbitration only with the parties to the Arbitration Agreement.

20.  In order to emphasise this aspect he has referred me to the judgment of Mortimer JA (as he then was) in Chu Yuen Wah v Lee Kwok Kee [1995] 2 HKLR 280 at 287 when he said that:

“… the whole basis of the rule … is to enable a person not a party to protect his rights when necessary so that natural justice can be done to him …”

Further, Mr Wong submits that it matters not that the interveners’ contractual and legal liabilities would only be contingent on the outcome of the Arbitration in circumstances that Mr Lin is allowed to bring a counterclaim by MHX in the Arbitration and MHX were successful in that counterclaim.   O.15 r.6 is wide enough, says Mr Wong, to permit a joinder of a party whose liability is only contingent upon the outcome of the action that it is seeking to join but also upon any other event or proceedings, again relying on what Mortimer JA observed in Chu Yuen Wah supra:

“… jurisdiction under that provision is wide enough to permit the joinder of a party whose liability to pay is contingent not only upon the outcome of the proceedings which it seeks to join but also upon any other event or proceedings …”

21.  In the event that he fails under this limb, Mr Wong relies on the second limb which appears to provide the court with an even wider jurisdiction to order a joinder [see sub-rule (b)(ii) supra].  The issue in this action is whether Mr Lin is entitled to pursue a derivative counterclaim against CPDH and BPP on behalf of MHX in the Arbitration.  One group of MHX’s shareholders’ saying ‘yes’ and the other ‘no’.  CPDH and BPP are on the side of the ‘no’ faction represented by the Defendants in the action.  Mr Wong says, following the wording of the sub-rule, that it is plainly just and convenient that the interveners’ voice in this matter should be heard at the same time as the present parties to the action in the same action.  One of the aspects highlighted by the editors of the current Practice, Vol.1, page 241, para.15/6/7 is that one of the purposes of the rule on joinder is to prevent multiplicity of actions and to avoid the same or substantially the same questions or issues being tried twice with possibly different results.  The cases on this aspect, principally the judgment of Kerr LJ in Sanders Lead Co. Inc v Entores Metal Brokers Ltd [1984] 1 WLR 452 at 460D-H, adopted in Tony Wong v Ada Ltd [1991] 1 HKC 86 at 94C, Mr Wong submits, are to the effect that in the event that the interveners fail to be joined they would not be bound by the judgment in this action and could therefore bring a separate action of their own seeking a declaration that Mr Lin could not bring a derivative counterclaim on behalf of MHX in the Arbitration.

22.  Whilst that may be possible in a number of other circumstances, it seems to me that in these circumstances such a course would not be open to CPDH and BPP if they were to fail in their present application to be joined.  Failure on this application would be based on this court’s assessment that they had no sufficient interest in this action enabling them to be joined.  I suspect that any subsequent action by these two companies would be met by an application to have it struck out as abusive of the courts process in circumstances where a previous court had already held that these two companies did not have a sufficient locus to have a say in what is a shareholders’ dispute in MHX as to whether Mr Lin could bring this derivative counterclaim.  I cannot imagine that a future court would permit CPDH and BPP to bring an action of their own based on the same issues in circumstances where they had argued the same point on their joinder application and had failed because they were unable to show that they had a sufficient interest to enable them to make such an argument.

23.  It strikes me therefore, that for these reasons and in these circumstances, this aspect of Mr Wong’s submission is not open to him.  CPDH and BPP either have a sufficient interest to be joined in this action or they do not.  If they do they will be bound by the judgment of the court in this action.  If they do not, then subject of course to their right to appeal against a refusal to join them, then they are left to fighting the counterclaim in the Arbitration on its merits.  This it seems to me is the correct analysis of the situation on this limb of the sub-rule.

24.  By way of further argument, Mr Wong has relied on the fact that when the Statement of Claim was first drafted it included the interveners as Defendants and that substantial parts of the Statement of Claim are a reproduction of the Points of Counterclaim in the Arbitration against the interveners.  It was only after the interveners’ solicitors had indicated that they had no instructions to accept service of the writ on behalf of the interveners that they were removed as Defendants from the Statement of Claim.  This, submits Mr Wong, is because the Plaintiffs would have had to seek leave to serve notice of the writ on the interveners out of the jurisdiction, which would have required them to show, amongst other matters, that Hong Kong is the appropriate forum for the action.  He says that they would also have been required to make full and frank disclosure on the application for leave to serve out, which would have revealed that their own expert in PRC law had advised that under PRC law, Mr Lin would not have been able to pursue a counterclaim in the Arbitration because he was not a party to the Arbitration Agreement.  Mr Wong submits that these matters should also be given some weight in the decision as to whether the interveners should be joined because they go to underline their interest in the outcome to the action and as such, in fairness, their voice ought to be heard as parties to it.

The Plaintiffs’ Response

25.  Mr Edward Chan submits that this application for joinder is wholly misconceived because it is the result of a complete misapprehension by the interveners of the true nature of the action which, when properly analysed, shows that they simply do not have the sort of interest which the rule contemplates and which the court will protect and give effect to by allowing a joinder.

26.  Mr Chan begins his submissions by referring to the three situations when intervention can generally be insisted upon.  The first, which relates to representative actions, which has no application in this case, where the intervener is one of the class whom the Plaintiff claims to represent.  The third is, and I take it out of turn in order to eliminate it because it too has no application on this occasion, is in an action for specific performance where third parties have an interest in the question of the manner in which the contract is to be performed.  The second, and only relevant one to these circumstances if the interveners can bring themselves within it, is where the proprietary or pecuniary rights of the intervener are directly affected by the proceedings or where the intervener may be rendered liable to satisfy any judgment either directly or indirectly [see the current Practice, Vol.1, para.15/6/7-15/6/12, pp.241-245].

27.  The foundation of Mr Chan’s objection is that this action is essentially a dispute between two factions of shareholders over the right to give solicitors’ instructions for MHX’s counterclaim in the Arbitration.  The only “cause or matter” to which this action relates and the only “relief or remedy claimed in the cause or matter” refer entirely to MHX’s internal management as a company with which the interveners can have no possible say.  This is all about whether the Chan faction should be entitled to represent MHX in pursuing MHX’s counterclaim derivatively for MHX’s benefit against the interveners in the Arbitration.

28.  In order to have locus to intervene under limb 1 of the rule, the intervener needs to show that it is sufficiently interested in the proceedings.  Mr Chan’s analysis is that this means that the determination of the dispute in the proceedings will “directly” affect the intervener in its legal rights or its pocket in that it will be bound to foot the bill and/or that it will be bound by the judgment in the proceedings against another party and will be directly liable to the Plaintiff upon the judgment.  He supports this submission by reference to the case of Man Whi Cuung v Man Ping Nam [2003] 1 HKC 549 at 555C-556H.

29.  As to limb 2, Mr Chan submits that the intervener is required to have “some interest” which is in some way “directly” related to the subject matter of the action and that a mere commercial interest in its outcome, which is unconnected to the subject matter of the action, is not enough.

30.  What Mr Chan’s submission comes to is that at best the interveners may have an indirect interest in the outcome of the action because the action will determine whether the MHX counterclaim against the interveners in the Arbitration will be able to proceed derivatively but, this is not the nexus to the subject matter of the action that the court looks for in deciding whether an intervener ought to be joined.  All the court is going to decide in this action is whether the counterclaim can proceed, which is entirely different to the hearing out of the counterclaim on its merits by the Arbitrators if the court permits it to be brought.

31.  As to the submission that the interveners somehow have an interest in the outcome of the action because they ought to have a say as to who they should have to arbitrate with in circumstances where Mr Lin is not a party to the Arbitration Agreement, Mr Chan submits that this completely fails to recognise the real basis and standing of derivative proceedings such as this counterclaim brought by Mr Lin on behalf of MHX.  Mr Chan submits, and I uphold this submission, that on the cases and other authorities, a derivative claim is nothing more than a procedural device to enable a shareholder to make a claim on behalf of the company.  It is therefore a claim on behalf of the company, a party to the Arbitration Agreement, and not by Mr Lin.

32.  As to discretion, Mr Chan submits that where the interveners motive in being joined as merely to be able to apply to have the action struck out, this is not a proper reason to allow a joinder, particularly where Mr Tsoi will be making an identical application in due course.  For my part, I would have thought that where an intervener can bring himself within the rule and it is therefore appropriate to allow him to join he may take such course as he may be advised in addressing the action in which he has now become a party.  I do not think that one can legitimately hold it against the interveners that this is why they wish to join in the action.

Conclusion

33.  Notwithstanding this latter point, the fact is that I do not believe that the interveners have shown that they are within either limb of the rule.  It seems to me that Mr Wong’s very strongly put submissions cannot survive the analysis to which they have been subjected by Mr Chan.  He is right that this action is all about an internal management/shareholder dispute within MHX in which the interveners have absolutely no part to play, despite the fact that they will have an indirect interest because the outcome of the action will decide whether they will need to face MHX’s derivative counterclaim.  If they do then they will be able to contest it on its merits before the Arbitrators and that is as far as their interest will go.  Whilst the Plaintiffs may have initially sought to join the interveners as Defendants, this is really no more than a “jury point” which whilst sounding superficially persuasive still needs to pass muster under the rule which, in my judgment, it has not.

34.  Accordingly, the summons must stand dismissed with costs and certificate for two counsel.  The costs order will be, in the usual way, an order nisi.