LI YULONG v. LIU JING

HCA 896/2019

[2024] HKCFI 3163

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 896 OF 2019

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DECISION

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1.  Introduction

1.1  On 31 October 2023, the Defendant (“D”) took out a summons (“Summons”) to dismiss the present action on the basis that the Plaintiff (“P”) was in breach of an unless order made by Master Lai on 13 October 2023 (“Unless Order”). The Unless Order states in the following terms:

“ Unless by 4 pm on 16 October 2023 the Plaintiff do file and serve on the Defendant in compliance with the Order made by Master Ho on 11 September 2023 his complete and/or sufficient Answer to the Defendant’s Request for Further and Better Particulars §§3, 5, 9.2, 9.3 and 10.4 of the Amended Statement of Claim of the Plaintiff filed on 22 May 2023, the Plaintiff’s action herein be dismissed with costs to the Defendant.”

1.2  The Summons was heard by Master Ebony Ling on 12 March 2024 (“Hearing”). At the Hearing, it was ordered that: (1) the Summons be dismissed, (2) Paragraphs 3 and 5 of the Amended Statement of Claim filed on 13 April 2023 (“ASOC”) be struck out, and (3) Costs of the Summons be paid by P to D (“12/3/24 Order”).

1.3  I have considered the learned Master’s reasons for the 12/3/24 Order. In gist:

(1)  She was of the view that P was in breach of the Unless Order in respect of ASOC §§3 and 5;

(2)  She noted that there was no application for relief from sanction until the Hearing, at which counsel for D made an oral application (“Oral Application”); and

(3)  She was of the view that it would be disproportionate to dismiss the action in its entirety and acceded to the Oral Application. In granting relief from sanction, she ordered that ASOC §§3 and 5 be struck out.

1.4  By his Notice of Appeal dated 25 March 2024 (“NOA”), D now appeals against 12/3/24 Order §1, namely the order dismissing the Summons. The NOA does not appeal against 12/3/24 Order §2, namely the order striking out ASOC §§3 and 5.

1.5  In response to the NOA, by summons dated 24 June 2024, P applies formally for relief from sanction, in the event that P is held to be in breach of the Unless Order (“Formal Relief from Sanction Application”).

1.6  This is my decision on the NOA and the Formal Relief from Sanction Application. At the hearing before me, D was represented by Mr Jeff Yau and P by Mr Ernest Ng (with Mr Raphael Leung). Mr Yau and Mr Ng also appeared at the Hearing before the learned Master.

2.  Background

2.1  The present proceedings were commenced in May 2019. Pursuant to leave to amend granted on 12 April 2023, P filed the ASOC on 13 April 2023, the effect of which was to replace the Statement of Claim dated 10 September 2020 (filed on 17 September 2020).

2.2  In this action, P’s claim, on a very high level of generality, is premised on a written agreement made on or around 1 August 2015 (“Nominee Shareholding Agreement”). Pursuant to the Nominee Shareholding Agreement, it is said, D holds a substantial number of shares in a listed company (“Shares”) for and on behalf of P as P’s nominee or trustee. P says that D is in breach of the Nominee Shareholding Agreement, and seeks as part of its relief an order compelling D to transfer the Shares to P, damages (in lieu of specific performance and/or for breach of the Nominee Shareholding Agreement), an account, equitable compensation, interest and costs.

2.3  The Nominee Shareholding Agreement is denied by D on a number of different bases (Amended Defence §8):

(1)  First, it is said that D had never entered into the Nominee Shareholding Agreement and D never signed on it;

(2)  Secondly, the Nominee Shareholding Agreement was procured by fraud; and

(3)  Thirdly, even if D did enter into the Nominee Shareholding Agreement, it has never taken effect.

2.4  The procedural history leading to the Summons is not in dispute. Briefly:

(1)  Following the filing of the ASOC, on 22 May 2023, D’s solicitors by letter made a request for further and better particulars of ASOC 3, 4.2, 5, 9.1, 9.2, 10.1, 10.2, 10.3 and 10.4 and requested P to provide his answers within 14 days (“Request”). The Request was filed on the same day. No reply was given by P;

(2)  On 9 June 2023, D applied for an unless order compelling D to provide his answers within 7 days, failing which the ASOC be struck out.

(3)  On 16 June 2023, Master Rita So ordered P to provide an answer to the Request within 14 days from the date of the order. This was not an unless order. No answer was provided by P;

(4)  On 5 July 2023, D filed her Amended Defence;

(5)  On 7 July 2023, D applied for an unless order again, compelling D to comply with Master Rita So’s order made on 16 June 2023 within 7 days, failing which the AOSC be struck out;

(6)  On 12 July 2023, P consented to D’s application and Master D To made an unless order to the effect that P had to comply with Master Rita So’s order by 4 pm on 27 July 2023, failing which the ASOC be struck out;

(7)  On 26 July 2023, P filed and served his answers (“26/7/23 Answers”);

(8)  On 7 August 2023, D’s solicitors pointed out that the 26/7/23 Answers were incomplete and insufficient and urged P to provide complete and sufficient answers. No reply was given by P;

(9)  On 22 August 2023, D applied (a) to strike out the ASOC on the ground of P’s failure to comply with the unless order made by Master D To, or (b) alternatively, for an order that P do file and serve complete and/or sufficient answers to D’s request for further and better particulars of §§3, 5, 9.2, 9.3 and 10.4 of the ASOC. In other words, D accepts that by the 26/7/23 Answers, P had provided complete and/or sufficient answers to part of the Request;

(10)  The above application was heard by Master Ho on 11 September 2023. Upon arguments by the legal representatives of the parties, he made an order in terms of the alternative relief sought by D, namely P do file and serve on D within 21 days complete and/or sufficient answers to D’s request for further and better particulars of §§3, 5, 9.2, 9.3 and 10.4 of the ASOC;

(11)  On 5 October 2023, upon P’s initiation, the parties submitted a consent summons, upon which Master Lai made the Unless Order; and

(12)  On 16 October 2023, P filed its amended 26/7/23 Answers (“Amended Answers”), in purported compliance with the Unless Order.

2.5  It is D’s case that the Amended Answers did not comply with the Unless Order for failing to provide complete and/or sufficient answers to Request §§1 and 3(1)-(2). Request §1 is directed at ASOC §3 and Request §§3(1)-(2) are directed at ASOC §5.

2.6  The full text of ASOC §§3 and 5 is as follows:

(1)  ASOC §3: “At all material times, the Plaintiff was and is a businessman conducting investment business, including investing in biotechnology, cultural innovation and catering business, in the People's Republic of China ("PRC")”; and

(2)  ASOC §5: “On or around 1^st August 2015, the Plaintiff as ‘甲方’ (translation: Party A) and the Defendant as ‘乙方’ (translation: Party B) entered into a written agreement in Chinese titled ‘股份代持協議’[1] (translation: Nominee Shareholding Agreement, the ‘Agreement’) pursuant to which the Defendant holds 25,939,500 shares of the Company (the ‘Shares’) for and on behalf of the Plaintiff as the Plaintiff's nominee/trustee”.

2.7  Request §1 (in respect of ASOC §3) is in the following terms:

(1)  Please identify the name(s) of the Plaintiff’s “investment business”; and

(2)  Please state whether the Plaintiff solely owns the said “investment business” and, if not, with whom the Plaintiff owns such “investment business”.

2.8  In the Amended Answers, P answered as follows[2]:

(1)  This request is irrelevant to the subject matters of the case and unnecessary either for disposing fairly of the cause or matter, or for saving costs. In any event, this is request for evidence; and

(2)  This request is irrelevant to the subject matters of the case and unnecessary either for disposing fairly of the cause or matter, or for saving costs. Neither does the request arise from the pleadings in the Statement of Claim. In any event, this is request for evidence.

2.9  Requests §§3(1) and (2) (in respect of ASOC §5) are in the following terms (emphasis added):

(1)  Please state whether it is the Plaintiff’s case that the Plaintiff and the Defendant entered into the Agreement:

(a)  pursuant to any negotiation between the Plaintiff or his agent(s) and the Defendant;

(b)  after having signed the Agreement; and/or

(c)  by reason of parties’ having signed the Agreement.

(2)  If it is the Plaintiff’s case that there had been any negotiations leading to the Agreement, please state the details of the said negotiations, including but not limited to:

(a)  the identities of the persons who took part in the negotiations;

(b)  the date(s) on which such negotiations took place;

(c)  the place at which such negotiations took place; and

(d)  the contents of such negotiations.

2.10  In the Amended Answers, P answered as follows[3]:

(1)  Without prejudice to the Plaintiffs position that requests Requests (a) to (c) are requests for evidence, the Plaintiff avers the followings.

(a)  The Plaintiff’s case as to the Agreement has been set out in paragraph 5 to 8 of the ASOC (the“Relevant Paragraphs”).

(b)  Negotiation between the Plaintiff and the Defendant (whether as alleged or otherwise) is not part of the Relevant Paragraphs.

(2)  Without prejudice to the Plaintiff’s position that requests Requests (a) to (e) (d) are requests for evidence, the Plaintiff repeats paragraph 3(1) hereinabove.

3.  Analysis

3.1  Whilst an appeal from a master to a judge in chambers under RHC Order 58 is by way of a rehearing, the court is entitled, if it thinks fit, to adopt the master’s reasoning in its own judgment: Hong Kong Civil Procedure 2024 (“HKCP 2024”) Note 58/1/2. As I endeavour to set out below, I agree with the learned Master that:

(1)  P was in breach of the Unless Order, at the very least in respect of Request §§1 and 3(1)(b) and (c); and

(2)  Dismissing P’s claim is disproportionate and relief from sanction should be granted.

3.2  However, I would not have acceded to the Oral Application to strike out ASOC §§3 and 5 as the “form” of relief. Pursuant to the 12/3/24 Order, P has filed his Re-Amended Statement of Claim (“RASOC”). It is plain that, without ASOC §5, the RASOC is incomplete as there are no longer any particulars in respect of the written agreement relied on by P. As set out at HKCP 2024 Note 18/12/4, the pleading should state the date of the alleged agreement, the names of all parties to it and whether it was made orally or in writing, in the former case stating by whom it was made and in the latter case identifying the document. All the foregoing particulars are contained in the now struck-out ASOC §5. If ASOC §5 were struck out, what remains is a plainly defective pleading.

(i)  Whether breach of the Unless Order

3.3  P contends that there was no breach, as the Unless Order is only a time order with no qualitative compliance required. The difference between the two is discussed by Recorder Stewart Wong SC in Chan Luen v Chan Kwong Chi & Ors [2019] HKCFI 2829 at §26:

“ … As far as I understand, the difference between the two is, relevantly for present purposes, whether the defendants are entitled, as they have, to take an objection, in the Answers, to the propriety of the Relevant Requests. That is, if it is a mere time order, ie where the mode of compliance is not specified, all the defendants need to do by the time stipulated in the Unless Order is to give a response, in relation to each of the questions, either by answering substantively or to take an objection (ie by giving the Nil Answers). If, however, the Unless Order prescribes the mode of compliance, ie by requiring the defendants to answer the questions substantively and they cannot decline to answer by taking an objection, then by giving the Nil Answers the defendants have failed to comply with the Unless Order in so far as the Relevant Requests are concerned.”

3.4  As submitted by Mr Ng, an unless order should be construed as a time order absent clear wording or the history of proceedings pointing to a contrary interpretation: Silver Universe Investments Ltd v China Times Securities Limited & Ors [2019] HKCFI 834 §§23-24.

3.5  I do not agree with the submissions advanced by Mr Ng.

3.6  The procedural history leading to the Unless Order (set out at §2.4 above) precludes P from submitting that he was not required to provide a substantive answer. I place emphasis on the following matters:

(1)  On 12 July 2023, P had consented to Master D To making an unless order. The effect of that consent order was that P had to comply with Master Rita So’s order (which was an order for P to provide an answer to the Request) by 27 July 2023;

(2)  P filed the 26/7/23 Answers, by which, as set out at §§2.7-2.10 above, P had taken an objection in respect of Request §§1 and 3;

(3)  At the hearing on 11 September 2023, Master Ho determined that P had to provide complete and/or sufficient answers to the Request in respect of, inter alia, §§3 and 5 of the ASOC (namely Request §§1 and 3). There was no appeal against Master Ho’s order; and

(4)  Not only was there no appeal against Master Ho’s order, the Unless Order to comply with Master Ho’s order was made by consent. As pointed out at HKCP 2024 18/12/61, if a party takes the position that some of the particulars are not ones which should legitimately be given, that is a point which must be taken at the hearing of the appropriate summons. Once consent has been given, it will not thereafter be open to the party to argue that specific particulars were not properly asked for as a matter of law or practice. He will be obliged to give all the particulars to which the consent order refers.

3.7  In my view, given the foregoing matters, it seems to me quite plain that the Unless Order is not merely a time order. P is required by the Unless Order to answer the Request substantively (pertinently in a more complete and sufficient manner than the 26/7/23 Answers) and he cannot decline to answer by taking an objection. I do not agree with Mr Ng that the wording of the Unless Order (ie “his complete and/or sufficient Answer”) should be construed as introducing a subjective element such that P is entitled to decline to provide a substantive answer by taking, what is in his view, a legitimate objection.

3.8  As observed by the learned Master:

(1)  In respect of Request §§1(1) and (2), by the Amended Answers, as set out at §§2.7 to 2.8 above, P had simply raised a further objection (namely this is a request for evidence), in addition to the objections already raised by the 26/7/23 Answers (namely they are irrelevant to the subject matters of the case and unnecessary); and

(2)  In respect of Request §3(1)(b) and (c), as set out at §§2.9-2.10, P has simply not provided an answer.

3.9  Like the learned Master, I am of the view that P is in breach of the Unless Order in respect of Request §§1, 3(1)(b) and (c). I should add that in considering the question of whether relief from sanction should be granted, I am entitled to take into account the “importance” or “utility” of those requests and the effect or prejudice caused to D by P’s breach of the Unless Order:

(1)  Request §§1(1) and (2) only seek further and better particulars of P’s investment business. I agree with Mr Ng that they are concerned with merely background facts and are not significant to the resolution of the principal issues between the parties; and

(2)  Whilst no direct answer was given in respect of Request §§3(1)(b) and (c), P had provided elsewhere in the Amended Answers the information sought. These requests seek to clarify whether it is P’s case that P and D entered the Nominee Shareholding Agreement after having signed the agreement and/or by reason of the parties having signed the agreement. At Amended Answers §3(3)(b), P had already stated clearly that “it was the common understanding of P and D that… the [Nominee Shareholding Agreement] should take effect when the Defendant signed…”.

3.10  In respect of Request §§3(1)(a) and (2), I am of the view that P was not in breach of the Unless Order, for the following reasons:

(1)  Request §3(1) is poorly drafted and does not achieve what is intended by D. I have set out Request §3(1) at §2.9(1) above. Whilst I accept that, as a matter of common sense, the parties must have conducted negotiations prior to the Nominee Shareholding Agreement, the bolded words pose a question whether it is P’s case that P and D entered into the Nominee Shareholding Agreement as a result of the 3 culminative or alternative reasons set out at subparagraphs (a)-(c);

(2)  As set out at §2.10 above, the 26/7/23 Answers had objected on the basis that the Request §3(1) is a request for evidence;

(3)  By the Amended Answer, P in effect stated, as it was entitled to do, that he does not rely on pre-contractual negotiations and such negotiations are not part of his pleaded case;

(4)  Request §3(2) (set out at§2.9(2) above) is also poorly drafted. Again, whilst it is clear that there must have been prior negotiations, the bolded words indicate that P’s obligation to provide the particulars sought is dependent upon P’s answer to Request §3(1); and

(5)  By the Amended Answer, P said, in effect, that, as pre-contractual negotiation was not part of the pleaded case, its obligation to provide the particulars sought under Request §3(2) had not been triggered.

3.11  I take on board Mr Yau’s submission that Amended Answers §3(3)(b) refers to some common understanding and it is not entirely clear how, where, when and by whom the alleged common understanding was reached. But insofar as the current appeal is concerned, it is not D’s case that P was in breach of the Unless Order in failing to particularize the alleged common understanding. In any event, there is no necessary correlation between the common understanding alleged with pre-contractual negotiations, as it may be the fact that the alleged common understanding took place after the execution of the Nominee Shareholding Agreement. If it is D’s case that she requires clarity on the alleged common understanding, which only surfaced for the first time in the Amended Answers (but is in compliance with the Unless Order), a proper application could be taken out.

3.12  In summary, I am of the view that P is in breach of the Unless Order in respect of Request §§1, 3(1)(b) and (c) but not §§3(1)(a) and 3(2).

4.  Whether relief from sanction should be granted

4.1  There is no dispute between the parties that the court may grant relief from sanction even in the absence of a formal application of the same: Daimler AG v Leiduck [2012] 3 HKLRD 119 (“Daimler CA”) at §§57-67. In the subsequent application for leave to appeal to the Court of Final Appeal (CACV 172 of 2011, 20 September 2012), Fok JA (as he then was) said:

“ The final question of whether it is open to the Court of Appeal to grant relief to a party for breach of an unless order when the relevant breach was all along denied by that party and no application was made for relief (Question 5) raises the question of whether the Court has no discretion to grant relief from sanction at all in such circumstances. We do not think that proposition is reasonably arguable as it would be inconsistent with the wide powers of case management conferred, for example, by RHC O.1A rr.1, 2 and 4 and O.2, r.5(1)(a). So far as the question is directed to a challenge to the particular exercise of our discretion to grant relief in the present case, this does not, in our view, give rise to a question of great general or public importance.” (emphasis added)

4.2  Similar observations are made at Chan Luen:

“ [49] As made clear by Order 2, rule 4, it is for the party in default to apply for relief from sanction within 14 days. Such an application must be supported by evidence: see Order 2, rule 5(2).

[50] Despite the fact that the plaintiff took out the Judgment Summons on 4 June 2019, no application has been made by the defendants for relief from sanction until this is mentioned as an alternative in the skeleton submissions filed on their behalf on 8 November 2019, ie four days before the hearing. There is, however, no evidence filed in support.

[52] Mr Fan fairly accepts that I still have jurisdiction to consider such an application because I do have the power to extend the time under Order 3, rule 5. As for the failure to file evidence, I also have the jurisdiction to waive this under Order 2, rule 1.

[52] I exercise my discretion to entertain, and allow, the application for relief from sanction…”

4.3  Pertinently, Chan Luen is a case, like here, dealing with partial non-compliance of an unless order. As stated above, D only complains that P is in breach of the Unless Order in respect of ASOC §§3 and 5. Recorder Stewart Wong SC observed:

“ [45] The Unless Order provides for the striking out of the Amended Defence and Counterclaim upon failure to provide answers to the Request. However, in this case, there is no complete, or substantial, failure to provide answers. The defendants do provide 25 of the 41 requests and there is no suggestion that for those 25 requests there has been no compliance or that such compliance is not made in good faith or is illusory.

[46] The question then is, what should happen when there is partial non-compliance? In my judgment, it cannot have been the intention of the Unless Order that the stated consequence of striking out the Amended Defence and Counterclaim will apply unless there is full compliance, no matter how trivial or insignificant the non-compliance is. What if, for the sake of argument, only one of the 41 requests is not answered? It cannot be the intention that the entire pleading is then struck out, no matter how important or otherwise the unanswered request is.

[47] In my judgment, the proper and fairer way to read the Unless Order is that where there is only partial non-compliance because the defendants have failed to provide answers to some of the requests, ie they have failed to provide particulars of the relevant averments, it is those averments that should be struck out. That applies by the operation of the Unless Order itself.”

4.4  I have considered the factors set out at RHC Order 2, rule 5. As pointed out at Daimler CA §57, a weighty factor in the weighing exercise to be undertaken by the court is the question of proportionality of the sanction. In the present case, the sanction is not simply a striking out of the ASOC, but a dismissal of the entire action.

4.5  Further, I do not accept Mr Yau's submission that the fact that the Unless Order was made by consent is necessarily a weighty factor in the exercise of my discretion. As Tomlinson LJ reasoned in Pannone LLP v Aardvark Digital Ltd [2011] EWCA Civ 803 §33 (an authority cited by Mr Yau himself), where the agreement is no more than a procedural accommodation in relation to case management, the weight to be accorded to the fact of the parties' agreement as to the consequences of non-compliance, whilst real and substantial, will ordinarily rarely be decisive. The court is entitled, indeed bound, to consider all the circumstances, and the fact that the order is made by consent is only one of the many factors the court has to take into account.

4.6  It seems to me that it is appropriate, in the exercise of my discretion to grant relief from sanction for the follow reasons, in addition to those canvassed at §3.9 above:

(1)  In purported compliance of the Unless Order, P did file the Amended Answers. It is plain from the position taken by D that there has been substantial compliance, in respect ASOC §§9.2, 9.3 and 10.4;

(2)  The breach of the Unless Order in respect of Request §§1 and 3(b) and (c), in terms of the interests of the administration of justice and the effect which the failure to comply has on D, is not significant; and

(3)  No milestone dates are affected by the grant of the relief.

4.7  Even were I wrong on my conclusion that P was not in breach of the Unless Order in respect of Request §3(1)(a) and (2), I do not believe it would materially change the weighing exercise.

4.8  In my view, the learned Master was entirely correct in dismissing the Summons. I therefore dismiss the NOA which is only an appeal against 12/3/24 Order §1. The question is whether 12/3/24 Order §2 should stand. At the hearing, both Mr Ng and Mr Yau suggested that it should. As I indicated at the hearing, I find their positions difficult to understand or justify.

4.9  From P’s perspective, Mr Ng seems content with a pleading that is plainly not compliant with the rules of pleading (§3.2 above). Were ASOC §5 struck out, the ASOC would simply read “The Agreement contains inter alia the following express terms”, without stipulating who, what, when, where, and how the Agreement was entered into.

4.10  From D’s perspective, Mr Yau seems to be content with a RASOC which is even less clear than the ASOC for which further and better particulars are sought.

4.11  An important purpose of case management procedures is to elucidate the issues and facilitate fair disposal of an action in a speedy and efficient manner. The result, advocated by both counsel, seems to me to achieve just the opposite, in that it creates a state of affairs ripe for further unnecessary interlocutory skirmishes.

4.12  I therefore find it appropriate to set aside 12/3/24 Order §2, to the extent that ASOC §5 should be reinstated. ASOC §3, which is only concerned with the background, can remain struck out. P should also provide a complete and sufficient answer to Request §§3(1)(b) and (c), which might be said to have been provided elsewhere in the Amended Defence, within 7 days.

4.13  It is a matter for D whether further actions are deemed to be appropriate to be taken (if any) in respect of the common understanding referred to by P in the Amended Answers.

4.14  As I am able to resolve the matter without reference to the Formal Relief for Sanction Application (Daimler CA §72), I make no order (including any order as to costs) in relation thereto.

5.  Conclusion

5.1  For the above reasons, I dismiss the NOA and set aside 12/3/24 Order §2 and replace it with an order set out at §4.12 above.

5.2  I also make a costs order nisi that D is to pay to P the costs of the NOA to be summarily assessed. P is to lodge and serve his Statement of Costs within 3 days hereof and D her Statement of Objections within 3 days thereafter. I will then carry out summary assessment on the papers.