TSANG TAT INVESTMENT CO LTD v. HONG KONG TSANG TAT INVESTMENT CO LTD AND ANOTHER

HCA889/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 889 OF 2011

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D E C I S I O N

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1.  There are 4 applications before me:

A.  The 1^st Defendant’s application for stay of proceedings on the ground of forum non conveniens (“the Stay Application”);

B.  The 1^st Defendant’s application for discharge of an interim injunction against it (“the Discharge Application”);

C.  The 1^st Defendant’s application for extension of time to file a defence in the event the 2 previous applications fail (“the Time Extension Application”); and

D.  The Plaintiff’s application to amend the statement of claim in the event the first 2 applications fail.

THE PLAINTIFF’S CASE

2.  The Plaintiff is a Hong Kong company (“the Plaintiff Company”) incorporated in 1977.  It shareholders and directors were the 2^nd Defendant Mr Lau Fat Tsang (“the Father”) and Madam Ng Yuk (“the Mother”). 

3.  In 1993, the Plaintiff Company acquired land use rights over 2 plots of land in Shanwei, Guangdong (“the Land”).  The Land was registered under the name of “Hong Kong Tsang Tat”.  According to the Plaintiff Company, the Mainland contracting party (SWLRB) added the words “Hong Kong” to signify that the Plaintiff Company was a Hong Kong company. Two land use licenses pertaining to the Land were issued in 1998 and 2000. 

4.  On 25.7.2002, the Father transferred all his interest in the Plaintiff Company to Lau Loi Tat (“the Son”), whereupon the latter became the majority shareholder and director.

5.  In 2005, the Father incorporated the 1^st Defendant (“the Defendant Company”).

6.  The Plaintiff Company alleged that the Father perpetrated a scheme to cause loss to it.  He had allegedly held out the Defendant Company to be the Plaintiff Company and procured a further license over the Land in 2006 for the Defendant Company. The Defendant Company then effectively caused the land use rights under the 2000 and 2006 licenses to be transferred to the Father and one Haifeng Ho Sheng Properties Development Co. Ltd. (“HFHS”).  By a Tripartite Agreement made by the Defendant Company, the Father and HFHS, and 2 Subscription Agreements (all dated 10.9.2010), HFHS acquired through a corporate vehicle 80% of the rights in the Land at a consideration of RMB 40,000,000 to the Defendant Company; the Father acquired the remaining 20%.    

7.  Two months later, on 20.11.2010, the Son was said to have signed a Supplemental Agreement on behalf of the Plaintiff Company with HFHS, which provided for transfer of the remaining 20% of the land use rights to HFHS at a consideration of RMB 10,000,000.  As will be seen below, the Son disputed the authenticity of the Supplemental Agreement.    

8.  The Plaintiff Company allegedly discovered the Tripartite Agreement in October 2010 when “a person claiming to be in charge of HFHS” showed it to the Son and asked for performance of the terms.  The Son refused.  After the meeting, the Son was informed by a friend who was familiar with the Chinese officials in the SWLRB and Shanwei Shi Planning Bureau that someone had attempted to deal with the Land.  However, the Plaintiff Company “did not follow up on the matter”.

9.  The Son allegedly was told by the Mother in about Chinese New Year of 2011 that she saw construction activities on the Land.  He confirmed the same by 2 visits, the last one being in March 2011.

10.  The writ and a summons for an injunction against the Defendant Company and the Father were issued on 26.5.2011.  The Plaintiff Company obtained interlocutory injunctions (“the Injunction”) on 3 and 17 June 2011 to restrain the Defendant Company and the Father respectively (1) from holding out to be users of the Land under the 2000 and 2006 licenses; (2) from taking any steps to carry out any terms in the Tripartite Agreement; and (3) from permitting construction works to be done on the Land under the 2000 and 2006 licenses.

11.  On 17 August 2011, HFHS commenced proceedings (“the Sanwei Proceedings”) against the Plaintiff Company, the Father, the Mother, the Son and another before the Intermediate People’s Court in Shanwei City (“the Shanwei Court”). It sought an order for transfer of the Land to it and loss of profits arising from delay in the transfer.  On 19 August, it obtained an interim injunction to freeze landed assets belonging to the Father’s factory.

12.  The objection by the Plaintiff Company and the Son to jurisdiction was dismissed by the Shanwei Court on 14 October 2011.  It ruled, amongst others, that,

“the subject matter, …namely, the land usage right is in Shanwei City, Guangdong Province. The contract of land usage right is to be performed in Shanwei. Therefore, according to Article 24 (should be 34) of Civil Procedure Law of the People's Republic of China, the Court has proper jurisdiction over this case.”

13.  The appeal against the ruling of the Shanwei Court remained pending as of the date of this hearing.

14.  The Defendant Company now seeks stay of proceedings in favour of the Shanwei Court and to have the Injunction dismissed.

STAY FOR FORUM NON CONVENIENS

15.  The principles for granting a stay are well known. The 3 stage test in Spiliada Maritime Corporation v. Cansulex Ltd[1987] AC 460 has been summarized in the Hong Kong case of The Lanka Muditha [1991] 1 HKLR 741:

(I)  Is it shown that Hong Kong is not only the natural and appropriate forum for the trial, but that there is another available forum which is clearly or distinctly more appropriate than Hong Kong?

(II)  If the answer to (I) is yes, will a trial at the other forum deprive the plaintiff of any legitimate personal or juridical advantages?  The evidential burden here is on the plaintiff.

(III)  If the answer to (II) is yes, a court has to balance the advantages of (I) against the disadvantages of (II).  Deprivation of one or more personal or juridical advantages will not necessarily be fatal to the applicant provided that the court is satisfied that notwithstanding such loss substantial justice will be done in the available forum.  Proof of this rests upon the applicant for the stay.

STAGE I – IS THERE ANOTHER AVAILABLE FORUM CLEARLY AND DISTINCTLY MORE APPROPRIATE THAN HONG KONG?

16.  Since the Defendant Company and the Father are a Hong Kong corporation and Hong Kong resident respectively, jurisdiction is founded as of right and should not be lightly disturbed.  The burden is on the defendant to demonstrate that there is another jurisdiction that is clearly or distinctly more appropriate.  The burden is not on the party suing in Hong Kong to demonstrate the appropriateness of continuing the procedure here: The Peng Yan [2009] 1 HKLRD 144at para 21-23.

Issues Disclosed

17.  One has to first identify the issues.  Mr McCoy SC  leading Mr Ng submits that 2 causes of action in tort have been disclosed in the statement of claim – unlawful interference and conspiracy to injure.  The issues are (i) whether the Father incorporated the Defendant Company and disguised it as the Plaintiff Company to usurp the land use rights obtained by the Plaintiff Company; and (ii) whether the Father and the Defendant Company conspired to injure the Plaintiff Company by perpetuating deceit against the Companies Registry and/or third parties in Hong Kong.

18.  The Plaintiff Company, to my mind, faces the immediate difficulty that these 2 causes of action have not been pleaded.  However, for present purposes, I shall assume that there will be a successful application to amend to plead those 2 causes on the existing facts.

19.  Mr McCoy SC submits that the questions of tort are claims in personam capable of being determined by the Hong Kong Court without having to decide on the question of title over the Land.  He relies on the holding of Scott LJ in St. Pierre v. South American Stores (Gath and Chaves) Ltd [1936] 1 KB 382, at page 397:

“… it is the action founded on a disputed claim of title to foreign lands over which an English court has no jurisdiction, and that where no question of title arises, or only arises as a collateral incident of trial of other issues, there is nothing to exclude the jurisdiction.”

20.  This line of submission is contradictory to the Plaintiff Company’s own case: 

(i)    That there was an “economic dispute regarding right of use of land” when it challenged the jurisdiction of the Shanwei Court; and

(ii)  That it was a “slander to title” and damages would not be an adequate remedy when it applied for the Injunction from the Hong Kong Court.

21.  I agree with Mr Li, counsel for the Defendant Company, that the real dispute centres around the Tripartite and Supplemental Agreements.  The Plaintiff Company disputes their validity and authenticity respectively and seeks damages and the Injunction.  On the other hand, HFHS (in the Shanwei Proceedings) and the Defendant Company (in this High Court action) want to uphold those Agreements.  In a nutshell the court has to decide who has what rights over the Land.

22.  Questions of title and injunction against infringement of land use rights are best determined where the land is situated. 

The Connecting Factors

23.  The Plaintiff Company points to the following factors connecting the present action to Hong Kong.  All the parties are residents here or are Hong Kong corporations.  The most significant acts pertaining to the fraudulent scheme set up by the Father and the Defendant Company took place in Hong Kong.  These included incorporation and deployment of the Defendant Company in Hong Kong as a vehicle of impersonation against the Plaintiff Company, and the act of execution of the Subscription Agreements which pertained to the misappropriation of the land use rights.  The terms of the Subscription Agreements provided that they were to be governed by Hong Kong law and that the parties submitted to the non-exclusive jurisdiction of the Hong Kong courts.  The witnesses (not specified) to the fraudulent scheme were likely to be located in Hong Kong.  The trial of the causes of action shall involve construction of Hong Kong legal documents.

24.  On the other hand, factors connecting the matter to the Mainland are: the signing of the Supplemental Agreement and payment of the consideration in the Mainland.  A potential witness who was a lawyer is from the Mainland. There is an ongoing set of proceedings in the Shanwei Court.

25.  The connecting factors identified by the Plaintiff Company such as the place of incorporation of the companies and execution of documents do not have much significance from the point of view of the trial.  Except for Mainland lawyer, no witness has yet been identified.  Given the proximity of Hong Kong and Mainland China, logistical issues count for little: Hong Kong Civil Procedure 2012, para 11/1/10AC.  That an issue is governed by the law of Hong Kong is a factor tending to make the Hong Kong court a more appropriate forum but there is no hard and fast rule.  There is nothing to show that the Shanwei Court is not in a position to apply Hong Kong law with the assistance of Hong Kong legal experts.

26.  The approach in deciding on the appropriateness of a forum is not just an exercise in loading up with factors which point to any particular jurisdiction in abstract.  The Court is required to focus on the appropriateness of a forum from the point of view of the trial of the action.  The court is to identify a forum with which the action has the most real and substantial connection.  See New Link Consultants Ltd v. Air China & others [2005] 2 HKC 260, at para. 67, per Deputy Judge Poon as he then was.

Proceedings in Shanwei

27.  Of great significance is that the Shanwei Proceedings relate to issues similar to those in this High Court action and involve land in Shanwei.  The Plaintiff Company itself accepted this. That was why in its grounds of objection to jurisdiction submitted to the Shanwei Court, both at first instance and on appeal, it relied on the principle that “one action could not be tried twice”; that the High Court Action and the Shanwei Proceedings were identical; and that the evidence submitted by HFHS and others to both Courts was identical.

28.  The Shanwei Court has been seized of this matter.  All the parties relevant to the various Agreements have been joined.  The Plaintiff Company’s objection to jurisdiction had failed and so the Shanwei Proceedings will continue (subject of course to the outcome of the appeal) regardless of any stay in Hong Kong.  It will be undesirable to continue the Hong Kong Action as there will be duplication of costs and litigation efforts, and risk of inconsistent outcome.  See Hong Kong Civil Procedure 2012, para11/1/11; c.f. Pacific Aerosupplies v. Dakota Air Parts, HCA No. 1233/2010, Deputy Judge Coleman SC, at para 104.  The tort claims in personam which the Plaintiff has made in the present case can be raised as a counterclaim in the Shanwei Proceedings.  Though different in nature, there is close nexus between the two to justify the joinder.

29.  Mr McCoy SC submits that the Hong Kong Court was seized of the matter earlier than the Shanwei Court.  This is unimportant in my view, for otherwise no question of stay will ever arise whenever an action is commenced in Hong Kong earlier in time.

30.  Mr McCoy SC also submits that the Shanwei Proceedings were brought with an oppressive purpose of subverting the Hong Kong proceedings. This is untenable, for the claimant in the Shanwei Proceedings was HFHS who is not a party to this High Court Action.

31.  Having shown that there are questions of title over land in Shanwei and ongoing proceedings which will continue there, the Defendant Company passes the test in Stage I in showing that the Shanwei Court has the most real and substantial connection with the dispute.

STAGE II – JURIDICAL DISADVANTAGE SUFFERED BY THE PLAINTIFF IF THE ACTION WERE STAYED

32.  The burden of proof under this Stage is on the Plaintiff Company.  It names the following disadvantages:

(i)  Potential jurisdictional challenge by the Defendants before the Shanwei Court;

(ii)  Difficulty of direct enforcement of judgment in the Mainland;

(iii)  Forensic evidence would not be accepted by the Mainland Court.

33.  With regard to the 1^st disadvantage, Mr McCoy SC submits that the Shanwei Proceedings concerned different parties and different issues.  The Plaintiff does not have any proceedings on foot in the Mainland to claim against the Defendant Company and the Father.  The Plaintiff should not be forced to give up the right to sue in Hong Kong for tort.

34.  I am unable to see any disadvantage.  All the parties in the Shanwei Proceedings are relevant to the Plaintiff Company’s claim.  The Defendant can hardly challenge jurisdiction there since it considered Shanwei as the more appropriate forum and the Shanwei Court was aware of the High Court Action. 

35.  With regard to the 2^nd disadvantage, what the Plaintiff Company is claiming is both damages and an injunction for its claim in tort.  Insofar as damages are concerned, the Shanwei Court has already frozen some assets that apparently belonged to the Father’s weaving factory.  That might assist the Plaintiff Company in enforcement. 

36.  Mr McCoy SC submits that even though the Father was said to have a factory in the Mainland, there was no evidence on its profitability or whether it was subject to a mortgage.  With respect, the burden was on the Plaintiff Company to adduce evidence to the contrary.  It has failed to discharge this burden.

37.  Insofar as an injunction is concerned, the Plaintiff Company has not shown why it is more difficult to enforce it in the Mainland (than in Hong Kong).  Mr McCoy SC recognizes that his client will not be able to get any relief in Hong Kong as regards title to the Land, therefore it will ask the Court for the next best thing, which is an injunction against the individual.  If he is correct, joining in the Shanwei Proceedings will not be a disadvantage because it might help it also to get the best thing.

38.  With regard to the 3^rd difficulty, the Son had asked for the original Supplemental Agreement for forensic examination.  He claimed that the approach of the Mainland Court is different from that of Hong Kong.  The former does not place reliance on forensic evidence and will not allow it to be adduced.  This is refuted by the Defendant Company by relying on Article 72 of the Civil Procedure Law of the People’s Republic of China which provides that “When the People’s Court deems it necessary to make an expert evaluation of a problem of a technical nature, it shall refer the problem to a department authorized by the law for the evaluation.  In the absence of such a department, the People’s Court shall appoint one to make the expert evaluation.”  The Plaintiff Company’s submission in this respect is unsustainable.

39.  The Plaintiff fails in the test in Stage II.

STAGE III – BALANCING EXERCISE

40.  Since the Defendant Company has succeeded in Stage I and the Plaintiff Company has failed in Stage II, the balance is clearly in favour of having the action tried in the Shanwei Court. I therefore grant a stay on the ground of foreign non conveniens.

DISCHARGE OF THE INJUNCTION

41.  The Defendant Company’s case is (i) that the Plaintiff Company has failed to make full and frank disclosure when it applied for the Injunction.  It had not disclosed the Supplemental Agreement which would have cast doubt on its title to the Land and hence the basis for applying for the Injunction.  (ii) The Son had lied to the Court in his affirmation in support of the Injunction.  (iii) The circumstances of service of the High Court proceedings on the Father were suspicious.

Lack of Full and Frank Disclosure

42.  The case of the Defendant Company is that the Father had initially sold the 80% interest in the Land to HFHS in exchange for financial assistance.  In around October 2010, HFHS approached the Son for his cooperation in relation to the Land.  The Son asserted that the Plaintiff Company, instead of the Defendant Company, was the true owner.  He claimed that, absent a further deal, his Father would disclaim the Tripartite Agreement.  However, he proposed (for himself, his family and the Plaintiff Company) to recognize the Agreement if HFHS would acquire the remaining 20% interest in the Land for an additional RMB 10,000,000.  The Son’s proposal was made to one Mr Zeng (“Zeng”), the lawyer of HFHS, in a telephone conversation on 17 October 2010.  It was taped by Zeng and the contents were not in dispute.  Eventually, the Supplemental Agreement was signed.  The Son never referred to the Supplemental Agreement in the Statement of Claim and his affirmation in support of the application for the Injunction.

The Plaintiff Company’s Explanations for the Lack of Full and Frank Disclosure

43.  Mr McCoy SC first took objection to the use of the transcript of the taped telephone conversation (“the Transcript”) on the ground that it was without prejudice.  With respect to Mr McCoy SC, this objection has not been raised in the evidence and the Son had made references to the telephone conversation with Zeng in his affirmation in reply.  In any case, as a matter of law:

(i)  If “without prejudice” meant that communication should not be disclosed before a contract was formed, this cannot stand because the Supplemental Agreement had been formed after the telephone conversation (although the Plaintiff Company disputed its authenticity).

(ii)  If “without prejudice” meant that the communication was for the purpose of settlement or litigation, the short answer is that litigation was not contemplated at that time.

44.  Next, the Son toned down the effect of the telephone conversation. He said that he made clear that neither the Defendant Company nor the Father had any interest in the Land.  There was a discussion on resolving the matter by selling the ownership of the Land/licenses because he wanted to protect the safety of the Father.   A very brief proposal was made by the Son (which he had not elaborated on in his affirmation).  No agreement was reached.  At the end of the telephone conversation, the Son made it clear that when another agreement was to be signed, he would attend with his lawyers to review the terms and conditions.

45.  He claimed that at a meeting with Mr Tse of HFHS and Zeng in October 2010, he was asked to put down his name and telephone number for future contacts.  He did so on a blank A4 sheet of paper which he claimed had been misused to “create” the Supplemental Agreement.

46.  The Son said he was “shocked” on discovering the Tripartite Agreement and alleged his signature on the Supplemental Agreement to be a forgery.  He became aware of these allegations only when he received the court documents in the Shanwei Proceedings on about 27 August 2011.  He had never seen the Subscription Agreements. 

Analyses

47.  The assertion of the Son that he was shocked was simply incredible.  Why would he negotiate another sale of the Land with strangers who claimed to be owners of part of the Land? 

48.  Moreover, the contents of the telephone conversation showed that the Son knew about the Tripartite Agreement and the sale of the 80% interest in the Land by the Father.  He tried to close another deal on the remaining 20% and purported to act also on behalf of his Father when he made the proposal to Zeng.  The terms of the Supplemental Agreement (entered into 3 days after the telephone conversation) tallied with the contents of the telephone conversation:

(i)  The Plaintiff Company affirmed the Tripartite Agreement in the recital and clause 3.

(ii)  It sold the remaining 20% interest in the Land to HFHS for RMB 10,000,000.

(iii)  The total consideration for the purchase of the Land would be RMB 50,000,000. 

(iv)  Upon payment of a deposit totalling RMB 16,500,000 (which included a loan already lent to the Father), the Plaintiff Company and the Defendant Company should proceed to transfer the Land to HFHS or a new subsidiary.

(v)  Upon completion of the transfer, the remaining consideration of RMB 33,500,000 shall be payable in full.

49.  There were signed receipts and bank statements to prove that HFHS had paid the deposit to the Father.  The Son remained completely silent in the face of such proof of payment.

50.  The Son never mentioned in his affirmations any attempt to communicate with the Father. Had he confronted the Father on the various Agreements? Or sought the Father’s views before or after the telephone conversation? Or confronted him on the construction activities on the Land?  Why did he decide to sue the Father?  There was a deafening silence on these matters despite express challenge by the Defendant Company in its affirmation

51.  One cannot avoid coming to the conclusion that the Son deliberately refrained from making full and frank disclosure of his involvement in events leading up to of the Supplemental Agreement. 

The Son’s Lie

52.  In his affirmation in support of the application for the Injunction, the Son mentioned that he “did not follow up” after speaking to people who claimed to be in charge of HFHS.  The transcript and his signing of the Supplemental Agreement on behalf of the Plaintiff Company showed that he did the exact opposite.  The Son did follow up with SWLRB (page C90) and HFHS.  He had lied to the Court. 

Suspicious Circumstances Surrounding Service of Proceedings on the Father

53.  When the writ was served, the Father was still a director in control of the Defendant Company and the Son ought to be aware of this.  The writ was served at the registered office of the Defendant Company, which was at the office of Messrs T.C. Lau & Co.  That firm claimed to have lost contact with the client in the past year and it later sent the court documents to the Father.

54.  In obtaining the Injunction and later applying for default judgment, the Plaintiff Company’s solicitors said that their service on the Father had led to no response.  The Father had never surfaced in the Hong Kong proceedings.  The Defendant Company learnt about the present proceedings through other sources just in time to stop a default judgment from being entered against it.

55.  It is the case of the Defendant Company that the Son and the Father had engineered a situation whereby the Defendant Company and the Father would not respond to the claim so that the Plaintiff Company could obtain the Injunction and (but for the Defendant Company’s serendipitous change of registered office) even default judgment.

56.  Whilst I find the circumstances surrounding the service on the Father to be suspicious, I refrain from basing my decision on this factor alone.

57.  To sum up, the Son had clearly failed to make full and frank disclosure and lied to the Court when applying for the Injunction.  Had the truth been before the Court, the Injunction would hardly have been granted because the Plaintiff Company had no interest in the Land to protect.  In the premises, the Injunction should be discharged immediately.

58.  Since the injunction against the Father was obtained on the same bases as with the Defendant Company, the Injunction against the Father should also be discharged notwithstanding that he is absent from the present proceedings.

Injunction under Section 21M of the High Court Ordinance

59.  Mr McCoy SC requests that the Injunction do continue despite a stay of proceedings in favour of the Shanwei Court.  Section 21M of the High Court Ordinance does empower the High Court to grant an injunction in aid of proceedings which have been or are to be commenced in a place outside Hong Kong.  It provides as follows:

“(1) Without prejudice to section 21L(1), the Court of First Instance may be order appoint a receiver or grant other interim relief in relation to the proceedings which –

(a) Have been or are to be commenced in a place outside Hong Kong; and

(b) Are capable of giving rise to a judgment which may be enforced in Hong Kong under an Ordinance or the common law.

(2) …

(3) Subsection (1) applies notwithstanding that –

(a) the subject matter of those proceedings would not, apart from this section, give rise to a cause of action over which the Court of First Instance would have jurisdiction.

(b)     the appointment of the receiver or the interim relief sough is not ancillary or incidental to any proceedings in Hong Kong.”

60.  In my view, since the Injunction should be discharged on the ground of lack of full and frank disclosure and the Son’s lie, the Plaintiff Company is barred from invoking the assistance of this Court under section 21M.  There cannot be a different standard for seeking or maintaining an interim injunction simply because the proceedings to be assisted are outside Hong Kong. 

61.  However, in deference to counsel, I will just deal with this application under section 21M briefly. The reliefs sought by the Plaintiff Company are damages and injunctions.  A judgment on damages will be enforceable in Hong Kong under common law.  One questions what benefits can be derived from the Injunction which does not restrain the Father and the Defendant Company from disposing of assets.  And what is the use of restraining the individual Defendants in Hong Kong when the land use rights are in the Mainland?  I am of the view that even if the Injunction were to continue, it should last only for a short period, say, not more than 3 months, to enable the Plaintiff Company to apply, if so advised, to the Shanwei Court for the appropriate injunction in replacement.

CONCLUSION

62.  For Application A, a stay of the proceedings in favour of the Shanwei Court is appropriate in view of the existing proceedings there on a similar or related subject matter.  For Application B, given the lack of full and frank disclosure by the Plaintiff Company and the Son’s lie in his affirmation, the Injunction against both Defendants shall be discharged.  Applications C and D for amendment to the statement of claim and filing of defence are unnecessary given the ruling on the first 2 Applications.

63.  I order, nisi, that costs on all 4 Applications (including all costs reserved) should follow the event and be to the Defendant Company to be summarily assessed.  There shall be summary assessment of costs on the papers on 8 December 2011 at 2:30 pm.  No attendance is required. The Defendant Company shall file and serve its statement of costs by 30 November 2011.  The Plaintiff Company shall file and serve its grounds in opposition by 7 December 2011.

64.  I thank counsel for their assistance.