VER, ROGER KEITH v. OKEX FINTECH CO LTD (formerly known as KIND CASTLE TRADING LTD) AND ANOTHER

HCA 2439/2016

[2020] HKCFI 788

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2439 OF 2016

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DECISION

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1.  This is the appeal by the 2^nd defendant, Xu Ming Xing (“D2”), from the order of Master Suen dated 19 November 2018 dismissing D2’s summons dated 25 April 2018 (1) to set aside the order dated 9 August 2017 of Master Chow granting Ver, Roger Keith (“the plaintiff”) leave to serve a concurrent writ of summons out of the jurisdiction on D2, and (2) that proceedings against D2 be stayed on the basis of forum non-conveniens.

Background

2.  The plaintiff is the registrant and operator of the domain name, bitcoin.com.

3.  The 1st defendant OKEX Fintech Company Ltd (“D1”), a company incorporated in Hong Kong, was formerly known as Kind Castle Trading Limited (“Kind Castle”). The name-change occurred on 26 April 2016.

4.  The plaintiff’s action relates to an agreement (“the Agreement”) bearing the description “Bitcoin.com Agreement December 15^th 2014” made between the plaintiff and a party identified as “OKCoin”/“OK Coin”.

5.  Zhao Changpeng (“Zhao”) in his capacity as “CTO OKCoin” (with “cz@okcoin.com” as his email address) executed the Agreement for the counterparty.

6.  At the time the Agreement was signed, Zhao was the sole director of D1, a private limited company, then known as Kind Castle.

7.  The plaintiff maintains that D1 was trading under the name “OKCoin”/“OK Coin” and that D1 is the counterparty to the Agreement.

8.  It is also the plaintiff’s case that D2 is “registrant and administrator of Okcoin.com, the founder and Chief Executive Officer of Okcoin.com, and the person controlling and operating the business of Okcoin”[1]. D2 is a director and shareholder of D1. D1 and D2 are collectively referred to as “the defendants”.

9.  The Agreement provided for D1 to manage and operate bitcoin.com for the plaintiff and to set up an advertising platform under a revenue split model.

10.  OK Coin operated bitcoin.com for a period of time from the date of the Agreement until the plaintiff took back control of the website on 15 May 2015. The plaintiff claims that D1 breached the terms of the Agreement that justified the taking back of control.

11.  On 19 May 2015, D2 informed the plaintiff that a different version of the Agreement between the plaintiff and Zhao “in physical and digital form” containing the plaintiff’s signature was found in their filing records (“the Version 8 Agreement”). The contents of the Version 8 Agreement are the same as those in the Agreement but for an additional clause which provided as follows:

“OKCoin may cancel the contract by givin Roger 6 months advanced notice”.

12.  The plaintiff’s claim against D2 is for a declaration and damages on the grounds that D2 produced the Version 8 Agreement (which is said to supersede the Agreement) when D2 knew, or ought to have known, that there was no subsequent agreement to the Agreement, that the signature on the Version 8 Agreement was not signed or authorized by the plaintiff, having been copied and pasted from the Agreement to the Version 8 Agreement by D1 and/or D2 or their agents.

Chronology

13.  On 21 September 2016, the plaintiff issued a writ against D1 and D2.

14.  On 17 November 2016, the plaintiff obtained summary judgment against D1 (“the 2016 Order”).

15.  The plaintiff’s application for leave to serve a concurrent writ out of the jurisdiction on D2 was taken out on 29 November 2016.

16.  On 17 February 2017, whilst the plaintiff’s service out application was pending, D1 applied to set aside the default judgment. The supporting affirmation of Liu Chengqi (“Jack Liu”) dated 16 February 2017 (at §10), inter alia, challenged the authenticity of the Agreement, asserting that it had been superseded by the Version 8 Agreement.

17.  On 9 August 2017, the plaintiff was granted leave to serve a concurrent writ out of the jurisdiction on D2.  

18.  The default judgment against D1 was set aside on 25 October 2017 and D1 was given conditional leave to defend. The condition was satisfied on 30 October 2017.

19.  D2 acknowledged service of the writ on 24 November 2017.

20.  D1 filed its defence[2] on 24 April 2018.

21.  On 25 April 2018, the defendants took out a summons, inter alia, (i) to set aside leave for service out on D2 granted ex parte on 9 August 2017; (ii) to stay the proceedings against D2 on the basis of forum non-conveniens; and (iii) that D2 be granted leave to file his defence and counterclaim (if applicable) within 28 days after the determination of (i) and (ii).

22.  On 19 November 2018, Master Suen dismissed (i) and (ii) of the defendants’ summons and granted D2 leave to file his defence and counterclaim within 28 days.

23.  Whilst the notice of appeal dated 3 December 2018 was taken out ostensibly in D2’s name only, the appeal was brought by Messrs Patrick Mak & Tse, solicitors for “the 1^st and 2^nd Defendants”. The notice of appeal concluded by stating that it was the intention of “ the 1^st and 2^nd Defendants” to attend by Counsel.

24.  When this issue arose towards the end of the hearing, Mr Clark Wang confirmed that he represented both defendants.

Applicable legal principles on setting aside leave granted under Order 11

25.  This is a jurisdictional challenge. The annotation in HKCP 11/4/8O is a useful guide to the legal principles applicable when a party seeks to challenge a decision granting leave for service out which may be summarized as follows:

(i)  The plaintiff retains the onus to establish a good arguable case on jurisdiction and a serious issue to be tried on the merits and to satisfy the court on forum conveniens issues.

(ii)  The question to be determined is as at the date of the original application.

(iii)  The application is decided on the affidavit evidence of the parties as at the time of the challenge hearing. All the affidavit evidence filed up to the date of the hearing is to be considered and not just that of the plaintiff by the time of the ex parte application.

26.  On the good arguable case aspect, the plaintiff relied on 2 gateways, namely those in subparagraphs (c) and (d) (iii) of O 11, r.1(1). In order to resist the present appeal, the onus is on the plaintiff to demonstrate that he has a good arguable case that one or more of those gateways applies.

The defendants’ case

27.  Counsel for the defendants informed the Court at the outset of the hearing that the defendants would not be pursuing a stay on the basis of forum non conveniens. The defendants’ case is that D2 is not a proper party, there being no lis and, further, there was material non-disclosure at the ex parte stage.

28.  The substantive issue in the present case is whether the plaintiff has a good arguable case on jurisdiction which turns on whether either of the gateways relied on by the plaintiff applies. Before addressing that issue, it is as well to dispose of the subsidiary submission of material non-disclosure which can be done swiftly.

(1) Material non-disclosure

29.  It is common ground that an applicant for leave under Order 11 is under a duty to make full disclosure of all the material facts. 

30.  The defendants’ written skeleton identified no fewer than  “five material areas of relevant considerations that have been either passively or positively concealed Court[3]”. However, the only one that was pursued with any degree of enthusiasm at the hearing concerned the role of D2.

31.  It was submitted, inter alia, that it was not made clear to the master that D2 only became a director of D1 on 10 June 2015 and that there is no evidence that D2 ever acted on behalf of D1 before becoming its director. The 19 May 2015 email never mentioned D1’s name and it was not presented as an email sent on D1’s behalf.

32.  The essential question is whether there was evidence that D2 acted as shadow director prior to the date of his official appointment.

33.  On 28 January 2015, a month or so after the date of the Agreement, D2 wrote to the plaintiff “to discuss [the situation] with the plaintiff explaining that

“[w]hen took over Bitcoin.com, because there is a revenue requirement, we believed we could start from a single page and can sell advertisement with organic traffic. But this turned out to be not easy, and now our company is paying you every month.”

34.  D2 then went on to explain their “new plan” which

“would need your commitment to let us execute on this, because we would need to arrange and work with our partners. I do not want to lose trust with them by cutting their effort short. If you still want to discontinue, I am ok.”

35.  Officially, D2 was not at that stage either a shareholder or director of D1 and thus had no business engaging in the email exchange with the plaintiff. In that exchange, he was clearly acknowledging that “our” company (which in the context[4] could only mean the counterparty to the Agreement) is paying the plaintiff every month.

36.  That evidence is consistent with D2 acting for and on behalf of D1. In other words, it is evidence to support an allegation that he was acting as shadow director of D1.

37.  For those reasons, the submission that there had been material non-disclosure regarding the role of D2 has not been made out.

(2) Whether D2 is a “necessary or proper party within O 11 r 1(1)(c)

38.  This gateway applies where “the claim is brought against a person duly served within or out of the jurisdiction and a person out of the jurisdiction is a necessary or proper party thereto”.

39.  It is common ground that D1 was duly served within the jurisdiction and there was a real issue between the plaintiff and the anchor defendant, D1, as to whether there was any breach of the Agreement by D1 as the plaintiff alleges.

40.  D2 contends that at the time of the plaintiff’s application for leave for service out on 29 November 2016, there was no longer any issue between the plaintiff and D1 in that the plaintiff had, on 17 November 2016, obtained default judgment against D1.

41.  D2 cited Dallah Albaraka (Ireland) Ltd v Symphony Gems NV & Others [2005] 3 HKLRD 703, a procedurally complex case, as being on point. In that case, the plaintiff obtained an ex parte order dated 9 July 2003 granting it leave to serve D6 and D7 out of the jurisdiction. The original claim against them was based on personal guarantees but a cause of action in conspiracy was added by amendment.

42.  To facilitate the entry of a default judgment against them, the plaintiff gave an undertaking to abandon the conspiracy claim and the default judgment obtained in February 2004 against D6 and D7 was based solely on the guarantees. The anchor defendants served in Hong Kong were D2-D5, D9 and D10 against whom default judgments were also obtained.

43.  D6 and D7 applied to set out aside the ex parte order as well as the default judgment made against them. On the day preceding the hearing of those applications before Stone J, the plaintiff, confronted with the skeleton arguments of D6 and D7, conceded that the ex parte order granting leave under O. 11 as well as the default judgment against D6 and D7 should be set aside but that it was the plaintiff’s intention to make an ex parte application to the Court for leave to further amend its pleadings and to seek fresh O. 11 relief against D6 and D7 based on the allegation of conspiracy to defraud.

44.  The hearing before Stone J thus became an inter partes hearing. It was no longer an application for the discharge of existing orders but the plaintiff’s application for fresh orders permitting service out of the jurisdiction, and for leave to file and serve a re-re-amended statement of claim in which the particulars of the claim in conspiracy to defraud the plaintiff against, inter alia, D6 and D7 were re-amended.

45.  The fresh application for leave to serve out of the jurisdiction on D6 and D7 was based, inter alia, on O11 r 1(1)(c).

46.  In rejecting the assertion that D6 and D7 fell within the rubric of (c), the judge analysed “the state of play within the proceedings against the other defendants”: default judgment had been obtained against D2 to D4, D9 and D10, and D5 was deceased with no personal representatives.

47.  After alluding to the fact that D9 and D10 were said to be “attempting to set aside such judgments”, the judge went on to hold (at §24) that “the Court must consider the situation as it prevails as at the date of this application for leave to serve out and that is that these default judgments currently are in place” (emphasis added).

48.  In those circumstances, the judge concluded that as matters then stood, there was before him not one “lis” between the plaintiff and any of those conspiracy defendants which was “live”.

49.  Applying that test, the relevant date for determining the question in the present case would be the date leave was granted, i.e. 9 August 2017.

50.  Prima facie, the default judgment against D1 was still extant on that date as conditional leave to defend was not granted until 2½ months later, on 25 October 2017.

51.  Mr Andrew Lynn, counsel for the plaintiff, sought to distinguish the Dallah case on the grounds that the setting aside application was then pending, and, in any event, the judgment was final and interlocutory in as much as damages remained to be assessed.

52.  The relevant question is whether as a result of the default judgment it could be said that on 9 August 2017 there was a real issue between the plaintiff and D1 which it is reasonable for the court to try.

53.  Applying Dallah, what has to be considered is the situation “as it prevails” at the date of the court’s decision on the service out application. On that basis, the then pending hearing of D1’s application to set aside and its outcome would not be matters that could be taken into account although D1’s application to set aside the default judgment could have gone either way.

54.  Unlike Dallah, where it was only rumoured that certain anchor defendants were contemplating setting aside proceedings, in the present case, a setting aside application had been made almost 6 months prior to the ex parte hearing and an actual hearing date scheduled to take place 2 ½ months after the ex parte hearing.   

55.  In such a case, in my view, the sensible course would have been for the plaintiff to have requested the master to adjourn his decision pending the determination of the setting aside application. That did not happen.

56.  As a backstop to his submissions, Mr Lynn, counsel for the plaintiff, submitted that if this court were to hold that at the ex parte stage the master should not have granted leave under Order 11, the plaintiff would renew his application to this court for leave.

57.  The other distinction sought to be drawn by the plaintiff is that under the default judgment which was final and interlocutory, damages under §3 of the prayer was not affected by the default judgment and remain to be assessed.  

58.  In that regard, it is necessary to look at the prayer for relief in the statement of claim after taking into account the abandoned claims as recited in the final and interlocutory judgment dated 17 November 2016. 

59.  For present purposes, the material part of the prayer as amended would read as follows:

“(1)  Against [D1], the sum of US $575,000 under paragraph 10 above;

(2)  [deletion of claim for an inquiry as to damages/account of profits against D1];

(3)  Against [D1] damages for breach of the Agreement and in particular pursuant to the “Revenue Split” under paragraph 8 (ii) above;

(4)  Against [D2] a Declaration that the Version 8 Agreement produced by [the defendants] is a forgery;

(5)  Against [the defendants] jointly and severally, damages under paragraphs 12-14 above.”

60.  Since the plaintiff had expressly abandoned his claim for a declaration as against D1 in order to obtain the default judgment, and given that the amount awarded under §1 was calculated on the basis of a five-year minimum term pursuant to §10 of the amended statement of claim, it is difficult to see how the issue of forgery would be relevant to any assessment of damages recoverable under §3 of the prayer. That assessment would cover the same period as for §1. Nor is it evident what damages would be recoverable from D1 under §5.

61.  For those reasons, I do not consider that the assessment of damages point assists the plaintiff.

62.  In the present case, central to the plaintiff’s submission that D2 is a “proper party” is that in determining the breach of contract claim against D1, the court must first determine whether the Agreement had been superseded by the Version 8 Agreement, that being one of the defences raised by D1 in its setting aside application. In order to make that determination, it has to be preceded by a determination on the forgery issue.

63.  D1 submitted that Version 8 Agreement is no part of D1’s case on the contract claim at all. It was said that it is clear from the pleadings that D1

(a)  never pleaded the existence of the Version 8 Agreement;

(b)  never pleaded that the Version 8 agreement is binding on either the plaintiff D1 or has any legal effect; and

(c)  never relied on any part of the Version 8 Agreement; never relied on the additional clause.

It was submitted that as a result, there is no dispute that the Version 8 Agreement has no legal effect.

64.  It is the defendants’ position[5] that “issues of litigation are defined by the pleadings, not affidavits[6]” that therefore those statements made in the affirmations[7] filed in support of D1’s case should be regarded as having been ‘abandoned’ and no longer an issue.

65.  In his reply, counsel for the defendants made an additional point, namely, that the fact that because D1 failed to incorporate the defence advanced in the affirmations in support of the application to set aside the default judgment into his defence filed on 24 April 2018 and amended on 4 August 2018, D1 must have implicitly abandoned that defence.

66.  I do not accept the correctness of those submissions. Pleadings are subject to amendment, albeit with leave in certain situations. Further, pleadings should be precise, unambiguous and clear: it is not a guessing game and the opponent should not be left to divine whether or not a specific defence set out in affidavits has been impliedly or implicitly abandoned.

67.  By 30 October 2017, conditional leave to defend granted to D1 had become unconditional. This remained the case when the defendants took out the present application 6 months later (on 25 April 2018) to set aside leave to serve D2 under Order 11.

68.  The effect of Version 8 Agreement was very much a live issue between the plaintiff and D1. That is abundantly clear from Liu’s affirmation filed in February 2017 as well as that of Chris Curl Lee dated 16 August 2017: it was very much D1’s case that the Agreement had been replaced by the Version 8 Agreement.  

69.  It remained so at the hearing of the setting aside application before Master Suen in November 2018. It is clear from HKCP 11/4/8O and §24 above that whether a particular O 11 r 1(1) gateway is applicable “is decided on the affidavit evidence of the parties as at the time of the challenge hearing”, i.e the setting aside application.  

70.  For that reason, whether or not the Version 8 Agreement   was a live issue between the plaintiff and D1 as at 9 August 2017, it clearly became one once conditional leave granted to D1 to defend was rendered unconditional on 30 October 2017. That was long before the defendants’ present application and remained the position at the hearing before Master Suen in November 2018 as well as at present hearing.

71.  In response to the plaintiff’s backstop submission[8], counsel for the defendants informed the Court that the defendants are willing to provide an undertaking that the defendants do not allege and will not be advancing any allegations that the Agreement had been superseded by the Version 8 Agreement. In other words, it was intimated that they are now willing to “abandon” that line of defence.

72.  That was an entirely new development arising at the 11th hour. Coming as it did then was somewhat surprising. In response, counsel for the plaintiff submitted that given the late change of position on the part of the defendants, he would reserve his client’s right to reinstate his claim against D1 for a declaration that the Version 8 Agreement is a forgery.

73.  The hearing concluded with the Court’s Decision reserved.

74.  On the following day, 5 May 2020, the parties were directed to submit an agreed form of the proposed undertaking for consideration and incorporation into an order to be made if appropriate.  

75.  In the event, the draft undertaking proposed by the defendants was not acceptable to the plaintiff for reasons set out in his solicitors’ letter dated 8 May 2020. Suffice it to say that, at a minimum, it would leave the pleas in §§12-14 of the RASOC to be determined since they have been traversed by D1 and they directly affect D2’s position and interests. The proposed undertaking therefore does not provide a satisfactory resolution of this appeal.

76.  In those circumstances, having regard to the underlying objectives of RHC O. 1A, r. 1, I would set aside the ex parte order but immediately re-grant leave to the plaintiff to serve D2 out of the jurisdiction.

Order

77.  Accordingly, it is ordered that

(1)  the ex parte order dated 9 August 2017 be set aside;

(2)  leave be granted to the plaintiff to serve the concurrent writ on D2 out of the jurisdiction pursuant to Order 11, rule 1 (1) (c) and (d) (iii);

(3)  the appeal be dismissed;

(4)  the plaintiff be at liberty to apply to reinstate his claim against D1 for a declaration that the Version 8 Agreement is a forgery; and

(5)  there be an order nisi that the costs of this appeal be to the plaintiff to be payable forthwith, to be taxed if not agreed, with certificate for counsel.