HONG JING CO. LTD. v. ZHUHAI KWOK YUEN INVESTMENT CO. LTD.

HCA 156/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 156 OF 2006

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D E C I S I O N

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Background:

1.  Zhu Kuan (Hong Kong) Co Ltd, a Hong Kong incorporated company, and Zhu Kuan Group Co Ltd, a Macau incorporated company, (the Zhu Kuan companies) were both companies owned, controlled and used by the Zhuhai Government of the People’s Republic of China as investment vehicles.  In that capacity both incurred substantial debts in Hong Kong, particularly with Bank of China Group Investment Ltd, to whom a sum in excess of HK$800 million was owed.  The debts were secured on three properties, one in Macau and two in Zhuhai.

2.  Both companies were wound up by the Court of First Instance in the Hong Kong in the latter half of 2004, and joint and several liquidators, resident in Hong Kong were appointed.

The parties enter into a Memorandum of Understanding:

3.  The defendant, Zhuhai Kwok Yuen is a further company, established by the Zhuhai Government, in the PRC.  It was established, as a “white knight” for the purpose of rescuing the Zhu Kuan companies from that liquidation.

4.  On 11 November 2005, Hong Jing entered into a Memorandum of Understanding, (the MoU), with Zhuhai Kwok Yuen.

5.  The purpose of the MoU was to advance the rescue of the Zhu Kuan companies from the liquidation by the purchase, by Zhuhai Kwok Yuen, from the Bank of China Group, of the debt owing to the Bank of China Group, and the three properties upon which the debt was secured.  The debt and three properties would then be sold on to Hong Jing for an agreed sum of HK$810 million.  The MoU required, and Hong Jing paid, to Hong Kong solicitors for Zhuhai Kwok Yuen, earnest money in the sum of HK$50 million.

6.  The MoU provides, in Clause 11, that:

“Except the provisions in clauses 5, 6 and 7, this Memoranda of Understanding will not be treated as a contract or a legally binding agreement that is for negotiation purposes only. (Sentence omitted) Except the provisions in clauses 5, 6 and 7, any obligations or duties of both parties mentioned in this Memorandum of Understanding will take effect and be legally binding on both parties only after the execution of the formal agreements by both parties.”

Mr Chang SC, for Zhuhai Kwok Yuen, is on strong ground when he contends that, by implication from clause 11, the parties intended that clauses 5, 6 and 7 of the MoU would be legally binding.

7.  Clause 5 of the MoU appears to establish an obligation upon Zhuhai Kwok Yuen to acquire the debts and assets from the Bank of China Group.  Clause 6 of the MoU sets out the provisions in relation to the payment of the earnest money, to be held by the solicitors as a stakeholder, and a final agreement is reached transformed into a deposit, or in the event that no agreement is reached by a specified date to be refunded to the Zhuhai Kwok Yuen.

8.  Clause 7 of the MoU appears to impose an obligation upon Zhuhai Kwok Yuen, (i) not to negotiate matters relating to the sale of the debt or the properties with any third party, (ii) to provide Hong Jing with all reasonable and necessary information and assistance, and (iii) to disclose for approval by Hong June the contents and format of the agreement for the acquisition by Zhuhai Kwok Yuen from the Bank of China Group of the debts and properties.

9.  In respect of both clauses I have used the expression “appears to” s the true meaning of the clauses has not been argued.

The case for Hong Jing:

10.  The case for Hong Jing is that the Zhuhai Kwok Yuen failed in its obligation under clause 5 of the MoU to acquire the debts and assets from the Bank of China Group for on sale to Hong Jing, would duly disclosing the content and format of the agreement with the Bank of China Group.  It is argued that Zhuhai Kwok Yuen instead dealt with the Bank of China Group for its own purposes, and further, that in breach of its obligation under clause 7 of the MoU, Zhuhai Kwok Yuen negotiated with third parties, and in particular a company called Sei Pou Estate Development Ltd, to sell the debts and the properties to that company.

11.  It is alleged that an agreement was entered into by Zhuhai Kwok Yuen to sell the debts and properties to Sei Pou for the sum of HK$871.99 million.  It is alleged that Zhuhai Kwok Yuen agreed to pay the Bank China Group the sum of HK$700 million for the debts and properties.  Consequent upon this it is then alleged that the effect of the agreement with Sei Pou is that from the payment of the purchase price, Zhuhai Kwok Yuen would receive an “introduction fee” in the sum of HK$171.99 million.  That latter sum has apparently been paid to the Zhuhai Kwok Yuen’s solicitors in Hong Kong.

12.  The case for Hong Jing is that Zhuhai Kwok Yuen’s actions, resulting in a profit to Zhuhai Kwok Yuen of HK$171.99 million, constitutes a breach of fiduciary duty arising from the legally binding provisions of the MoU, and that consequently Zhuhai Kwok Yuen is liable to account for the sum of $171.99 million as a constructive trustee.

13.  On 21 January 2006, Hong Jing obtained, ex parte, an interlocutory injunction restraining the Zhuhai Kwok Yuen from disposing or dealing with, or removing from Hong Kong sum of HK$171.99 million then held by their solicitors.  At the same time leave to serve the writ out of the jurisdiction was given.

The procedural background:

14.  Before the writ could be served Zhuhai Kwok Yuen issued a summons, purportedly pursuant O 12 R 8, seeking a declaration that this Court has no jurisdiction over the defendant in respect of the subject matter or alternatively a declaration that Hong Kong is not the proper forum for the adjudication of the claim.  With the writ, endorsed with the claim, but with no statement of claim attached, not served, Mr Chang sought to file the statement of claim at the commencement of the hearing.  Leave was required as the plaintiff was out of time to file a statement of claim.  I made an order in terms permitting the filing of the statement of claim, with no order for costs.

15.  Out of an abundance of caution, Mr Chang filed a further ex parte application pursuant to O 11 R 1, for leave to serve the writ out of the jurisdiction.  In the absence of Mr Chan, for Zhuhai Kwok Yuen, I made that order, with no order for costs.

16.  Mr Chan acknowledged that the order that should have been sought by the O 12 R 8 summons filed by Zhuhai Kwok Yuen was an order pursuant to R 8(1)(c), for the discharge of the order giving leave to serve the writ out of the jurisdiction.  Upon his undertaking to file an amended summons, argument proceeded on the amended summons on the basis that that was the order sought.

17.  When an O 12 R 8(1)(c) order is sought the grant of leave to serve out of the jurisdiction is considered afresh.  It is clear that the burden is then on the plaintiff to show a good arguable case under one or other of the various paragraphs in O 11 R 1: see Hong Kong Civil Procedure § 11/1/1-2.

18.  To discharge that burden Mr Chang relied primarily on O 11 R 1(1)(b), which permits service out of the jurisdiction, if the action begun by the writ seeks an injunction ordering the defendant to do or refrain from doing anything with in the jurisdiction.  Alternatively, and equally primarily, Mr Chang relied on O 11 R 1(1)(p), which permits service out of the jurisdiction, if the claim is brought for an account or other relief against the defendant as a constructive trustee, and the defendant’s alleged liability arises out of acts committed, whether by him or otherwise, within the jurisdiction.

19.  There appears to be no dispute that the solicitors for Zhuhai Kwok Yuen hold the sum of HK$171.99 million, apparently paid by Sei Pou as part of the purchase price for the debts and properties acquired by Zhuhai Kwok Yuen from the Bank of China Group.  As I have said, Mr Chang is on strong ground in contending that clauses 5, 6 and 7 of the MoU establish legally binding obligations on Zhuhai Kwok Yuen.  It appears not to be in dispute that Zhuhai Kwok Yuen has negotiated with third parties, arguably in breach of a legally binding obligation not to do so.  In consequence and argument may strongly be made that the “introduction fee” effectively paid by Sei Pou to Zhuhai Kwok Yuen is a sum held by Zhuhai Kwok Yuen is a constructive trustee for Hong Jing, for which Zhuhai Kwok Yuen must account.  The argument falls squarely within the provisions of R 8(1)(p).  Mr Chan did not contend otherwise.

20.  There appears to be no dispute that the sum of HK$171.99 million is held in Hong Kong, by Hong Kong solicitors.  The writ plainly seeks an injunction restraining Zhuhai Kwok Yuen from further dealing with that sum.  Any dealings with that sum would be dealings taking place within the jurisdiction of Hong Kong.  The relief sought falls squarely within the provisions of R 8(1)(b).  Again, Mr Chan did not contend otherwise.

21.  That being the case, it is clear that Hong Jing has shown a good arguable case will be to serve out the jurisdiction, and that the application to set aside the ex parte order must fail.

22.  Consequently, it is simply not necessary for me to consider further the third basis upon which Mr Chang argued for leave to serve out of the jurisdiction, namely R 8(1(d)(iii), that the claims and brought to enforce the contract or obtain relief in respect of a breach of contract which, by its terms or by implication, is governed by Hong Kong law.  It was on this aspect of the case only that Mr Chan addressed me.  In the circumstances I do not need to consider the argument.

Costs:

23.  There will be an order nisi that the Zhuhai Kwok Yuen must pay Hong Jing’s costs, to be taxed on a party and party basis, on the application to set aside the grant of leave to serve the writ out of the jurisdiction.