WU MING FAT SIMON v. CHEN FANLIN AND OTHERS

HCA 222/2022

[2022] HKCFI 3250

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 222 OF 2022

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DECISION

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THE APPLICATIONS

1.  There are two summonses before this Court:

(1)  The summons taken out by the 2^nd to 9^th defendants on 10 May 2022 (“the Striking Out Summons”) for, inter alia, the plaintiff’s claims against the 2^nd to 9^th defendants as set out in the Statement of Claim filed herein be struck out and the present action insofar as it concerns the 2^nd to 9^th defendants be dismissed;

(2)  The summons taken out by the 2^nd to 9^th defendants on 16 September 2022 (“the Time Summons”) for retrospective leave to file and serve the 2^nd Affirmation of Geng Bofeng on 1 September 2022.

UNDISPUTED BACKGROUND

2.  The following relevant background is adopted from the Affirmation of Geng Bofeng filed by the 2^nd to 9^th defendants on 10 May 2022, in respect of which the plaintiff has not disputed in his Affirmation in opposition filed on 17 June 2022.

3.  The 1^st defendant[1] wholly owned Central Profit Group Limited (“Central Profit”), which in turn wholly owned China Wisdom Asia Limited (“China Wisdom”).

4.  China Wisdom held around 52.28% of the issued share capital of China Creative Global Holdings Limited (“China Creative”).

5.  The 2^nd to 5^th defendants belong to the same group of companies known as the “Zhongtai Group”. The 2^nd to 4^th defendants are all wholly-owned subsidiaries of the 5^th defendant.

6.  The 6^th to 9^th defendants were directors of the 2^nd to 5^th defendants at various points of time in the period between 2012 and 2021.

7.  By a Subscription Agreement dated 21 June 2017 (“the Subscription Agreement”), China Wisdom agreed to issue and the 2^nd defendant agreed to subscribe “9.5 per cent Notes due 2018 in aggregated principal amount of HK$250 million” (“the Notes”). The principal sum of HK$250 million and interest at 9.5% per annum were repayable within one year.

8.  The Notes were secured by the following documents which were all executed on 21 June 2017 in favour of the 2^nd defendant:

(1)  The 1^st defendant as chargor executed a Deed of Share Charge in respect of the entire issued share capital of Central Profit;

(2)  Central Profit as chargor executed a Deed of Share Charge in respect of the entire issued share capital of China Wisdom;

(3)  China Wisdom as chargor executed a Deed of Share Charge in respect of 1,061,271,180 shares of China Creative, constituting about 52.28% of its issued share capital;

(4)  The 1^st defendant executed a Deed of Guarantee.

9.  Pursuant to the Subscription Agreement, the 2^nd defendant paid China Wisdom HK$250 million as consideration of the Notes on 21 June 2017.

10.  In November 2017 and February 2018, China Wisdom pledged additional China Creative shares in favour of the 2^nd defendant, and the total number of China Creative shares pledged to the 2^nd defendant became 1,135,669,180.

11.  By way of two Amendment Deeds dated 21 June 2018 and 21 September 2018 respectively, China Wisdom, the 1^st defendant and the 2^nd defendant agreed, inter alia, to extend the maturity date of the Notes, firstly to 21 September 2018, and then to 21 January 2019, with interest rate adjustments.

12.  On 18 December 2018, the 2^nd defendant assigned its rights and interests in the Subscription Agreement and the Notes to an associated entity within the Zhongtai Group known as Zhongtai International Strategic Investment Funds SPC, which subsequently changed its name to Win Win International Strategic Investment Funds SPC (“Win Win”). Notice of the assignment had been duly given to China Wisdom, Central Profit and the 1^st defendant.

13.  In around April and May 2019, Win Win enforced around 15,508,000 shares and 33,436,000 shares of China Creative and realised a total sum of around HK$16 million, which was applied to partially settle the interest accrued on the principal of the Notes, after which the outstanding principal under the Notes stood at HK$250 million. The number of China Creative shares remaining pledged to Win Win became 1,086,725,180, which is presently in the custody of the 3^rd defendant qua custodian.

14.  In around May 2019, Win Win filed a claim in the Fujian Quanzhou Intermediate People’s Court (“the Quanzhou Court”) against the 1^st defendant pursuant to his Guarantee for the sum of HK$250 million. After trial, Win Win obtained judgment against the 1^st defendant (“the Judgment”) successfully. However, on appeal, Fujian Higher People’s Court set aside the Judgment and ordered a re-trial. At the time when the 2^nd to 9^th defendants filed their Affirmation in support, the result of the retrial was yet to be known.

15.  The plaintiff’s involvement with China Creative began on 15 April 2021, when, according to China Creative’s announcement dated 15 April 2021, he was appointed as executive director thereof. It was also stated in the same announcement that the plaintiff had no interest in the shares of China Creative within the meaning of Part XV of the Securities and Futures Ordinance.

16.  According to China Creative’s announcement dated 13 September 2021, the plaintiff had also advanced a HK$2 million director’s loan to China Creative as at the date of the announcement, repayable on 1 March 2022 or on demand.

THE PLAINTIFF’S CLAIMS

17.  By this action, the plaintiff (who is acting in person) claims against all the defendants for the sum of HK$260 million, interest and rescission. He did not specify in the Prayer what should be rescinded, but from the body of the Statement of Claim, one may appreciate that he is seeking to rescind various Deeds of Share Charge dated 21 June 2017 referred to above.

18.  As far as the 2^nd to 9^th defendants are concerned, the plaintiff’s allegations are that:

(1)  “It is highly probable that the 1^st defendant had conspired with the 2^nd – 9^th defendants (6^th – 9^th defendants are acting in the capacity as director of one of those 2^nd – 5^th defendants) to defraud all the shareholders and creditors of China Creative in order to get a loan of HK$250,000,000 by the value of shares at HK$280,000,000 approx. without requiring the 1^st defendant to provide audited accounts and other security of China Creative in order to support the said loan.”[2] (“the First Claim”)

(2)  “The Equity Doctrine of Promissory Estoppel will operate and estop the 1^st defendant from entering into the Said Charge Deed of 21^st June 2017 and estop the 1^st defendant from denying his promise made to the plaintiff […] Thus equally the Equity Doctrine of Promissory Estoppel will operate and estop the 2^nd – 9^th Defendants or their authorised representatives / proxies to vote against the resumption plans put forward by the plaintiff at the Annual General Meeting of 22^nd February 2022 or subsequent meeting.”[3] (“the Second Claim”)

(3)  “China Creative had not made any announcement and/or disclosure of Charge Deed of 21^st June 2017 immediately afterwards and it also failed to disclose it in subsequent interim report and annual report. The 2^nd – 9^th defendants knew that the 1^st defendant (who was in control of China Creative at the time) failed to make the aforesaid announcement and disclosure but the 2^nd – 9^th defendants had committed conspiracy to defraud all the shareholders and China Creative and also in breach of SFC’s Code of Conduct for Persons licenced by and registered with SFC and Internal Control Guidelines and they had committed wrongdoings both civilly and criminally.”[4] (“the Third Claim”)

(4)  “The 2^nd – 9^th defendants had deliberately use (sic) those Companies (not regulated by SFC) to undertake certain important roles in handling the transactions concerning the Said Shares Pledge by the 1^st defendant. The Said Charges Deed 21^st June 2017 should be declared void and rescinded and the money received by 2^nd – 5^th defendants and 6^th – 9^th defendants should be considered as trust money which should be returned to the plaintiff.”[5] (“the Fourth Claim”)

THE TIME SUMMONS

19.  Having set out the background and the plaintiff’s claims, this is the convenient point to deal with the Time Summons.

20.  Pursuant to the directions made by Master Rita So on 23 May 2022, the 2^nd to 9^th defendants should have filed and served their Affirmation in reply within 28 days after the plaintiff has filed and served his Affirmation in opposition.

21.  The plaintiff’s Affirmation was filed and served on 17 June 2022. Therefore, the 2^nd to 9^th defendants should have filed and served their Affirmation no later than 15 July 2022. However, they did not file the 2^nd Affirmation of Geng BoFeng until 1 September 2022.

22.  Be that as it may, it can be seen that the 2^nd Affirmation of Geng BoFeng is very short, and the whole purpose of this Affirmation was to update this Court on the progress of the retrial conducted in the Quanzhou Court and to exhibit the Judgment of the re-trial handed down by the Quanzhou Court on 26 August 2022 (“the Re-Trial Judgment”), under which the 1^st defendant was ordered to pay Win Win a sum of HK$250 million together with interest.

23.  The plaintiff has very sensibly raised no objection against such leave.

24.  In any event, I am of the view that retrospective leave should be granted to the 2^nd to 9^th defendants for the filing and service of the said Affirmation because:

(1)  The handing down of the Re-Trial Judgment was a new development which occurred after the deadline imposed by the learned Master;

(2)  The 2^nd to 9^th defendants acted promptly upon the receipt of the Re-Trial Judgment, and the said 2^nd Affirmation was filed and served within one week thereafter;

(3)  There cannot be any dispute that the Re-Trial Judgment had been handed down and as to the content thereof;

(4)  There was adequate time for the plaintiff to peruse the Re-Trial Judgment before this hearing;

(5)  It is appropriate for the 2^nd to 9^th defendants to update the Court on a matter which has been mentioned in their supporting affirmation.

THE LEGAL PRINCIPLES

Striking out

25.  Au-Yeung J has helpfully summarised the relevant principles in the determination of a striking out application in Sealegend Holdings Ltd v China Taiping Insurance (HK) Co Ltd (HCAJ 95/2012, unreported, 24 October 2014), which I would adopt as follows:

“24. The court may, either of its own motion or on application, at any stage of the proceedings order to be struck out any claim on the basis, amongst others, that it is scandalous, frivolous or vexatious or is otherwise an abuse of the process of the court: Order 18, rule 19(1)(b) and (d).

25. A proceeding is frivolous when it is incapable of reasoned argument, without foundation or cannot possibly succeed. A proceeding is vexatious when it is oppressive or lacks bona fides. The expression ‘frivolous or vexatious’ includes proceedings which are an abuse of the process: Hong Kong Civil Procedure 2014, §18/19/8.

26. An ‘abuse of the process of the court’ connotes that the process of the court must be used bona fide and properly and must not be abused. The court will prevent the improper use of its machinery, and will, in a proper case (eg where an action is absolutely groundless or time-barred) summarily prevent its machinery from being used as a means of vexation and oppression in the process of litigation: Hong Kong Civil Procedure 2014, §18/19/10.

27. The court has inherent jurisdiction to stay all proceedings before it which are obviously frivolous or vexatious or ‘hopeless’ in the sense of being bound to fail: Hong Kong Civil Procedure 2014, §18/19/12, 16 and 21.

28. There should be no trial on affidavit. Disputed facts are to be taken in favour of the party whose pleading is under attack. See Hong Kong Civil Procedure 2014, at §18/19/4, paragraph (1).

29. The power to strike out should only be exercised in plain and obvious cases where the claim is obviously unsustainable. A claim must be so obviously unsustainable, the pleading unarguably bad, and it must be impossible, not just improbable, for the claim to succeed before the Court would strike it out. That a case may be weak and unlikely to succeed is no ground for striking it out. See Hong Kong Civil Procedure 2014, at §18/19/4, paragraph (1).

30. Strike out is not justified merely because the story told is highly improbable, and one which it is difficult to believe would be proved. A party’s claim or defence would be struck out only if it is a sham so that to rely on it must be an abuse of the process of the court. Even if one side has a ‘formidable case’, it does not mean that the other has no case. See Hutchvision Asia Ltd v Asia Television Ltd, HCA 6757/1992, 8 September 1993, per Godfrey J (as he then was), p6.

‘But any lawyer with any experience of private practice will be able to remember, only too well, those cases which appeared to be certainties but which, to his surprise, nevertheless failed and, by the same token, those cases which seemed bound to fail but which, to his surprise, nevertheless succeeded. It is for just this reason that the court will not embark, at this stage of an action, on a consideration whether the case of one side or the other is true or false. It will consider only whether the nature of the defence is such that it has to be characterised as an abuse of the process of the court, which is something else altogether.’

31. Where a party seeks to strike out another’s case as unsustainable, he will have to show the other party’s case to be ‘wholly imaginary, a myth or not bona fide’: Overseas Trust Bank Ltd v Coopers & Lybrand & Ors, CACV 109/1989, Fuad VP, 15 December 1989, p15.

32. It is not sufficient to adduce evidence that is relevant for consideration. The lack of proper explanation from the party whose pleading is sought to be struck out is not enough. See Viva Steamship Co Ltd v Chow Lim Choy & Ors [2003] 1 HKLRD 663 (CA), at §11.”

26.  In Lam Kit Sing v Chungshan Commercial Association, Hong Kong & Others (HCA 2011/2014, unreported, 29 June 2016), G Lam J (as he then was) also had this to say at [18]:

“Ms Catrina Lam, who has appeared with Mr Martin Ho on behalf of the plaintiff, argued that on a strike-out application, the factual allegations in the pleading in question must all be taken as true. While that may be the proper approach in most applications, Ms Lam’s proposition is in my view too widely stated. There are authorities that show that the court’s power to strike out a pleading can be exercised where it is plain and obvious that the plaintiff’s case has no factual basis: Oh Jae-Hoon, Eugene v Richdale [2004] 4 HKC 315, at paragraph 15, or has no “solid basis capable of proof” and is a “myth” with “no substantial foundation”, per Lord Herschell in Lawrence v Lord Norreys (1890) 15 App Cas 210, 220, or presents “a tissue of improbabilities which ought not to be sent to proof”, per Lord Watson at page 222; see also Overseas Trust Bank v Coopers & Lybrand [1990] 1 HKLR 568 at 583. Thus if a plaintiff pleads as a fact something which can clearly be shown to be incontrovertibly false, then on an application to strike out on that basis the court is not bound to accept the allegation as true and to proceed on a fictional basis.”

27.  When the locus standi of a plaintiff in bringing a claim is challenged, what Deputy High Court Judge To said in Koo Ming Kown v Pacific Online Limited (HCA 2333/2016, unreported, 16 May 2017) should be borne in mind:

“12. In 佛山市宏達發展公司清算組 v East Legend Investment Ltd [2009] 1 HKLRD 169 at [18], the Court of Appeal held that it is not appropriate to raise the challenge as to the plaintiff’s locus standi by way of defence. It must be raised at the outset or when it comes to the attention of the court or of the defence in the course of the proceedings. Once the issue has been raised it must be decided. It would be wrong to allow the action to go on without deciding the issue of standing because the defendant will not have a further chance to challenge it. Once it is clear that the action was improperly constituted, it must be brought to an end either by way of dismissal, striking out or stay. If a plaintiff has no locus standi, it must necessarily follow that his statement of claim, however well pleaded, could disclose no reasonable cause of action on his part and may also be scandalous, frivolous or vexatious. It may prejudice, embarrass or delay the fair trial of the action, which is bound to fail. Such a statement of claim must therefore be struck out and the action dismissed.”

Conspiracy

28.  As a matter of pleading, a case based on conspiracy must contain the following elements[6]:

(1)  The agreement between two or more persons. The means of carrying out the agreement, whether lawful or unlawful, must be set out.

(2)  The intention to injure the Plaintiff, whether predominant (in the case of a lawful means conspiracy) or merely an intention to injure (in the case of an unlawful means conspiracy).

(3)  The acts that were carried out pursuant to the agreement and the stated intention.

(4)  The damage caused to the Plaintiff.

29.  If a conspiracy claim is made against a corporate defendant, it is also necessary for the party who asserts such a claim to plead his case as to whose state of mind and knowledge should be attributed to that corporate defendant.[7]

30.  As far as the overt act or overt acts is concerned, the plaintiff has to plead at least one overt act which is the act of all the alleged conspirators or, failing that, a number of overt acts which include at least one act on the part of each conspirator. If the plaintiff fails to do that, then, depending on whether the failure is in respect of all the defendants or only some or one of them, then either the plea is liable to be struck out altogether or it is liable to be struck out as against some or one of the defendants.[8]

DISCUSSION

The First Claim

31.  Under this claim, the plaintiff alleged that it is “highly probable” that the 1^st defendant had conspired with the 2^nd – 9^th defendants to defraud all the shareholders and creditors of China Creative in order to get a loan of HK$250,000,000 by the value of shares at around HK$280,000,000 without requiring the 1^st defendant to provide any audited accounts or other security.

32.  As mentioned above:

(1)  According to China Creative’s announcement dated 15 April 2021, the plaintiff had no interest in the shares of China Creative within the meaning of Part XV of the Securities and Futures Ordinance;

(2)  According to China Creative’s announcement dated 13 September 2021, the plaintiff had advanced a HK$2 million director’s loan to China Creative as at the date of the announcement.

33.  The plaintiff has never claimed to be a shareholder of China Creative at any time. Neither has he ever asserted that he had been a creditor of China Creative before he advanced the director’s loan in September 2021.

34.  In these circumstances, the plaintiff simply has no locus standi to make the First Claim.

35.  Moreover, since the First Claim is a conspiracy claim, there are a number of matters which the plaintiff has to plead in his Statement of Claim, but he has plainly failed to do so:

(1)  He has not identified any agreement between the 1^st defendant on one hand and the 2^nd to 9^th defendants on the other hand;

(2)  He has not pleaded any intention to injure him;

(3)  He has not made it clear as to whose state of mind or knowledge which should be attributable to the 2^nd to 5^th defendants;

(4)  He has also failed to plead the damage caused to him.

36.  The plaintiff submitted that it is pre-mature for the Court to strike out his claims without first considering the evidence of the 1^st defendant and other witnesses. He hoped that the 1^st defendant can clarify a lot of matters in these proceedings and he would like to find out the real reason why substantial damage had been caused to China Creative.

37.  With greatest respect to the plaintiff, I do not accept his submissions. I do not think there can be any doubt that, as a matter of principle, the plaintiff’s case must be clearly pleaded before the action should be allowed to be proceeded with further. As pointed out by Au-Yeung J in Chan Wai Keung Lawrence v Au Chi Man Albert & Others [2021] HKCFI 2096, it is an abuse of the process of the Court for a plaintiff to proceed with an action with no foundation in the hope that something may come up in the course of the proceedings. This should not be allowed.

38.  For the above reasons, the First Claim should be struck out.

The Second Claim

39.  Under the Second Claim, the plaintiff alleged that the 2^nd to 9^th defendants are estopped to vote against the resumption plans put forward by the plaintiff at the Annual General Meeting held on 22 February 2022 or in subsequent meetings.

40.  With greatest respect, this claim is incomprehensible.

41.  It is trite that for the equitable doctrine of promissory estoppel to operate, there must be a legal relationship giving rise to rights and duties between the parties, and there has to be a promise or a representation by one party that he will not enforce against the other his strict legal rights arising out of that relationship[9].

42.  However, there is absolutely no plea in the Statement of Claim of any promise or representation given/made on the part of the 2^nd to 9^th defendants that they will not “vote against the resumption plans put forward by the plaintiff”.

43.  Furthermore, as counsel for the 2^nd to 9^th defendants pointed out, the doctrine does not create any new causes of action where none existed before, and it is a shield but not a sword[10]. Therefore, the doctrine cannot be relied on by the plaintiff to claim any relief.

44.  The Second Claim should therefore be struck out.

The Third Claim

45.  In the Third Claim, the plaintiff alleged that the 2^nd – 9^th defendants had committed conspiracy to defraud all the shareholders and China Creative, that they were also in breach of SFC’s Code of Conduct for Persons licenced by and registered with SFC and Internal Control Guidelines and they had committed wrongdoings “both civilly and criminally”.

46.  As aforesaid, since the plaintiff had never been a shareholder of China Creative at all material times, he simply does not have the locus standi to make the Third Claim.

47.  The Third Claim is also a conspiracy claim. In this regard, apart from failing to plead the conspiracy agreement, the intention to injure him, the attribution of state of mind and knowledge and damage which he has allegedly suffered by reason of the alleged conspiracy, the plaintiff has not pleaded the basis upon which it is said that the 2^nd to 9^th defendants should be responsible for China Creative’s failure to make any announcement.

48.  As far as the SFC’s Code of Conduct is concerned, it is difficult to understand how it can be alleged that the 2^nd to 9^th defendants may be liable for China Creative’s failure to make certain announcements pursuant to the said Code.

49.  The Third Claim should therefore be struck out.

The Fourth Claim

50.  Under the Fourth Claim, the plaintiff alleged that the 2^nd to 9^th defendants had deliberately made use of companies which are not regulated by the SFC to deal with the Deeds of Share Charge dated 21 June 2017, and as a result, he contended that the said Deeds should be declared void and be rescinded.

51.  I agree with Mr Chan and Mr Cheung for the 2^nd to 9^th defendants that the plaintiff has no locus standi to make the Fourth Claim because he was not a party to the Deeds of Share Charge.

52.  Furthermore, the plaintiff has simply failed to plead any valid ground in law in support of his claim of rescission of the Deeds of Share Charge.

53.  It is also totally groundless for the plaintiff to allege that the money received by the 2^nd to 9^th defendants should be returned to him.

54.  The Fourth Claim should therefore be struck out as well.

ORDER

55.  I do not think the plaintiff’s claims against the 2^nd to 9^th defendants may be salvaged by amending his Statement of Claim.

56.  By reasons of the aforesaid, it is ordered that the plaintiff’s claims against the 2^nd to 9^th defendants as set out in the Statement of Claim filed herein be struck out and the present action insofar as it concerns the 2^nd to 9^th defendants be dismissed.

COSTS

57.  I order that the plaintiff shall bear the 2^nd to 9^th defendants’ costs of the action (including the costs of the Striking Out Summons and the Time Summons).

58.  The 2^nd to 9^th defendants’ costs be summarily assessed in lieu of taxation pursuant to Order 62 rule 9A(1)(a) of the RHC at $300,000. Having heard the parties, I agree to exercise my discretion and allow the plaintiff to have until 30 November 2022 to pay the said costs.