CHEUNG HING v. WAH FUNG FOREST RESOURCES LTD

HCMP 2433/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2433 OF 2012

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J U D G M E N T

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1.  This is the hearing of the re-re-re-amended originating summons of the plaintiff.

2.  I heard the application in the re-re-amended originating summons on 14 January 2015, gave relief in relation to a number of paragraphs of the re-re-amended originating summons and adjourned the remaining parts.

3.  The background has been set out in my decision of 14 January 2015, to which I refer, and which I will not repeat here. The originating summons was re-re-re-amended in April 2015.  The present hearing concerns paragraph 2 and paragraph 6 of re-re-re-amended originating summons, relating respectively to the tenancy of the property and the question of indemnification of costs. 

4.  The factual basis for the application has been set out in the plaintiff Mr Cheung’s 5^th affirmation filed on 10 February 2015.  Essentially, Mr Cheung said there were apparently four tenancy agreements made by the company (ie Wah Fung Forest Resources Ltd) with Jinrong (HK) International Development Holdings Limited, dated 16 February 2009, 31 May 2011, 30 August 2013, and 4 September 2014, respectively, relating to the property. 

5.  However, the person living in the property, one Mr C Y Yeung, has apparently claimed that he had rented it by dealing with Mr Wong Chor Cheung, and had never heard of Jinrong.  Further, Mr Cheung found out that Jinrong had been struck off the Register on 25  March 2011 and remained so at the time when the 2011 tenancy agreement was entered into, although it was later restored to the Register in August 2011, after Mr Cheung’s solicitors pointed out the situation. 

6.  Mr Cheung submitted that there were also internal inconsistencies within the 2013 tenancy agreements, as referred to in his 5^th affirmation at paragraph 20.

7.  Further, it was submitted that the 2014 tenancy agreement was unusual in that it was entered into in 2014, but for a term of two years commencing on 1 September 2015, and its recitals contained the following:

“(B) The Landlord owes the Tenant a sum of HK$20,000,000 (“the Debt”) being the agreed damages for the breach of contract on the part of the Landlord in relation to a paper product project in the People’s Republic of China.

(C) The Landlord is not able to immediately pay to the Tenant the Debt.

(D) The Landlord and the Tenant mutually agree that the Debt is to be set off against the rent payable under the tenancy agreements which have been entered into between the Landlord and the Tenant, this tenancy agreement and tenancy agreements which are to be entered into between the Landlord and the Tenant.”

8.  Clause 1(a) of the 2014 tenancy agreement provides that the tenant shall pay the rent, being HK$80,000 per month, inclusive of management fee, government rates and government rent, in advance, on the first day of each and every calendar month during the term, but this is subject to Clause 1(b), which provides that the rent payable under the tenancy agreement shall be set off against the HK$20 million debt, and shall become payable only after the debt has been fully settled by way of payment or setoff. 

9.  Also, Mr Cheung said that the director and shareholder of Jinrong, Mr Zhang Jiwei appears to be connected with Mr Wong, from whom no explanation at all has been forthcoming, despite his opposition to this application.  How the company became liable to Jinrong for breach of contract, and how damages were “agreed” at HK$20 million, have likewise not been explained at all. 

10.  It is against this background that Mr Cheung seeks leave to bring a derivative action in the name of the company against: (1) Jinrong; (2) Mr Wong; and (3) all occupier(s) of the property including but not limited to Mr C Y Yeung for:

(a) an order setting aside the four tenancy agreements between the company and Jinrong;

(b)(i) a declaration that there was no debt of HK$20 million or any liability whatsoever owed by the company to Jinrong, as alleged in the 2014 tenancy agreement between the company and Jinrong;

(ii) a declaration that there was no purported agreement of set‑off validly made between Jinrong and the company of HK$20 million or any liability whatsoever owed by the company to Jinrong, as alleged in the 2014 tenancy agreement between the company and Jinrong, and that any such purported agreement is void and of no legal effect;

(iii) a declaration that all purported sub-leases, licence agreements, or other agreements or arrangements for the parting of possession or occupation of the property made between Jinrong and other parties, including Mr Yeung, are void, terminated, or of no legal effect vis-à-vis the company;

(c) vacant possession of the property; and

(d) mesne profits or damages against Jinrong, Mr Wong, and all other occupiers of the property.

11.  The company has taken a neutral stance with respect to the originating summons, and has not appeared at this hearing.  Mr Wong, the intervener, has opposed the application but has not filed any evidence to contradict what Mr Cheung has said. 

12.  Ms Jacqueline Law, who has appeared for Mr Wong this morning, has now confirmed that Mr Wong only puts Mr Cheung to proof, so far as concerns the claims for declaratory relief in relation to the agreed HK$20 million damages and set off.  I think that there is plainly sufficient material to justify leave being granted for a derivative action to be brought for such relief, being paragraph 2(b)(i) and (ii) of the re‑re‑re‑amended originating summons.  I am also satisfied that, prima facie, such an action would be in the interest of the company. 

13.  Whether or not the Jinrong tenancy agreement are all shams is, however, a different question.  While there may be grounds for doubting whether the company and Jinrong were independent parties dealing with each other at arm’s length, there seems to me insufficient material at this stage to say that the agreements are all shams as opposed to related parties transactions.  It is to be noted that the tenancy agreements were all stamped and registered in the Land Office.  There is some evidence that rent was paid by Jinrong pursuant to the agreement.  Whether or not the rent had actually gone into the company’s coffers is another question. 

14.  Indeed, it was submitted by Mr Cheung’s counsel to me in January 2015 that Mr Wong had received and misappropriated rentals from Mr Yeung and/or Jinrong from 2008 until 2012.  I gave leave on that occasion for a derivative action to be brought in the company’s name against Mr Wong for recovery of the rental so allegedly misappropriated. 

15.  As far as vacant possession, mesne profits and damages are concerned, it seems to me, having heard Mr Cheung, that what he really wants is disclosure of documents, especially the relevant tenancy agreements, from Mr Yeung, the occupier of the property.  However, while it may be that Mr Cheung has a very good reason for wanting to get such documents, that is not within the scope or the purpose of the present proceedings before me.  There is, as I see it, not enough material to justify a derivative action against Mr Yeung for vacant possession, mesne profits, or damages.

16.  I propose, therefore, to make an order giving leave for a statutory derivative action in the name of the defendant (ie the company) to be brought in respect of paragraphs 2(b)(i) and (ii) of the re‑re‑re‑amended originating summons. 

17.  As regards paragraph 6 of the re-re-re-amended originating summons, Mr Cheung has recognised the difficulty with seeking an indemnification order at this stage as to costs yet to be incurred, without any information as to the financial position of the company or the amount of costs that are likely to be incurred. 

18.  He accepts, if the court thinks fit, that that part of the originating summons should be adjourned sine die, with liberty to restore, and that is the order I propose to make in relation to paragraph 6.

(Submissions re costs)

19.  As to the costs of the application for leave, I am satisfied that the conditions under section 168BI(3) are met.  I consider that costs should be ordered against, not the company, but the intervener, Mr Wong, who has opposed the application from an early stage.  Essentially, the application for leave has been successful, especially in relation to the application for leave to bring proceedings against Mr Wong himself. 

20.  As I said, Mr Wong has opposed the application from an early stage.  He also opposed the application at its substantive hearing last year, to the extent that, although certain concessions were made at the last moment by counsel in his skeleton argument, counsel had to apply to withdraw those concessions at the hearing upon Mr Wong’s instructions.

21.  Mr Wong also opposed leave today, even in relation to the 20 million set-off point, although, to her credit, Ms Law, who has appeared on behalf of Mr Wong, has taken the position that she would simply put Mr Cheung to proof.

22.  In all the circumstances, I think that a costs order ought to be made in favour of the plaintiff against the intervener. Having regard, however, to the fact that the plaintiff has not been entirely successful, for example in relation to the application for leave to bring a derivative action for the removal of directors, which I rejected last year, and also the application for leave in relation to an action to set aside the Jinrong tenancy agreements as shams, I consider that the appropriate order is to require the intervener to pay 80% of the plaintiff’s costs to date. 

23.  I propose to conduct a gross sum assessment of those costs, and for that purpose, I give the plaintiff 28 days in which to submit a statement of costs that he claims from Mr Wong, and 21 days to the intervener to lodge a statement of his objections, if any, and a further 7 days thereafter for the plaintiff to reply to the objections, if any. The gross sum assessment will then be carried out on paper.