CHINA METAL RECYCLING (HOLDINGS) LTD (IN LIQUIDATION) AND ANOTHER v. UBS AG AND ANOTHER

HCA 1348/2019

[2022] HKCFI 2215

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1348 OF 2019

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BETWEEN

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DECISION

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1.  By a Summons filed on 27 January 2022 (“Summons”), the 1^st Defendant (“USB AG”) seeks to strike out: (a) §1 of the Amended Writ of Summons issued on 25 July 2019 (“Amended Writ”); (b) §§147 and 148 of the Statement of Claim (“SOC”) dated 23 June 2020; and (c) §4 of the prayer of the SOC (collectively, “Subject Paragraphs”).

2.  The Subject Paragraphs relate to the Plaintiffs’ claim under s 275 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”).

3.  The bases of this application are :

(1) The s 275 Claim is in breach of Rule 58(1) of the Companies (Winding Up) Rules, Cap 32H (“WU Rules”), which is a mandatory provision stipulating that claims under the section “shall be made by a summons”;

(2) The defect could not be cured by a summons subsequently issued by the Plaintiffs on 12 May 2021 (“275 Summons”) in the parallel winding-up proceedings in HCCW 210/2013 because the s 275 Claim was time-barred;

(3) There is in any case no reason for the court to exercise any discretion it may have to cure the deliberate breach of Rule 58.

Background

4.  Given the nature of this application, the material facts can be stated briefly. This action arose from the collapse of China Metal Recycling (Holdings) Ltd and its winding up by the court in February 2015.

5.  UBS AG acted as, inter alia, sponsor of China Metal’s IPO listing on the main board of the Hong Kong Stock Exchange in 2009. It is alleged by the Plaintiffs that UBS AG participated in the fraudulent breach of fiduciary duties of China Metal’s former chairman and CEO, Mr Chun, in respect of China Metal’s IPO by dishonestly performing its role as sponsor. Three causes of action had been advanced against UBS AG: dishonest assistance, knowing receipt, and fraudulent trading under s 275.

6.  On 26 July 2013, the Securities and Futures Commission petitioned for the winding up of China Metal. On the same day, Mr Borrelli and Ms Chi were appointed as joint and several provisional liquidators of China Metal.

7.  On 26 February 2015, China Metal was wound up on the ground that a large-scale fraud had been perpetrated by, inter alios, Mr Chun on, amongst others, HKEx and China Metal’s investors. On 14 May 2015, Mr Borrelli and Ms Chi were appointed as China Metal’s joint and several liquidators (“Liquidators”). In that capacity, Mr Borrelli and Ms Chi are suing as the 2^nd Plaintiff in this action.

8.  On 25 July 2019, China Metal and the Liquidators commenced this action. The Writ was amended and re-filed on 6 May 2020. On 23 June 2020, the Plaintiffs’ solicitors (“Karas”) served the Amended Writ with SOC on the solicitors of UBS AG (“HSF”). On 12 May 2021, Karas issued the 275 Summons and served it on 28 May 2021. The relief sought in the 275 Summons is substantially identical to that under the s 275 Claim in this action.

Plaintiffs’ contentions

9.  In resisting this application, the Plaintiffs contend that :

(1) O 2, r 1(3) of the Rules of the High Court, Cap 4A (“RHC”) provides that the court shall not wholly set aside any proceedings or the writ or other originating process by which they were begun on the ground that the proceedings ought to have been begun by an originating process other than the one employed;

(2) A claim under s 275 commenced by writ does not come within any grounds for striking out, as recently held by Ng J in China Medical Technologies, Inc v Bank of China (Hong Kong) Ltd [2021] HKCFI 3042 (“2021 Decision”);

(3) In any event, UBS AG had elected to defend the s 275 Claim on the merits after becoming aware of the procedural error alleged, and is therefore estopped from making this application, and O 2, r 2(1) expressly provides that an application such as this shall not be allowed in the circumstances.

Applicable principles

10.  The strike out principles are trite. The court has power under O 18, r 19 and its inherent jurisdiction to strike out claims which are obviously unsustainable, are frivolous, vexatious and/or are an abuse of process of the court. As summarised in Hong Kong Civil Procedure 2022, vol 1, [18/19/4]-[18/19/9]:

(1) The power to strike out should only be exercised in plain and obvious cases. “Plain” is not the same as simple and “obvious” is not the same as short. The burden is on the applicant is to demonstrate that the case is a plain and obvious one in which the other party’s claim is bound to fail;

(2) The expression “frivolous or vexatious” includes proceedings which are an abuse. A proceeding is frivolous when it is not capable of reasoned argument, without foundation or where it cannot possibly succeed, and it is vexatious when it is oppressive and/or lacks bona fides;

(3) The court will strike out a claim if its machinery is being abused and will strike a claim out where, eg, the action is time-barred.

Rule 58

11.  There is no argument that the s 275 Claim in this action was brought in breach of Rule 58. That Rule was designed to cover actions by or against delinquent directors, officers and promoters. The applicable sub-sections of s 275 came within Rule 58. It is quite clear from the terms of Rule 58 that it is mandatory. Further, reading s 275 in conjunction with Rule 58, it is apparent that an application by summons for relief under s 275 should be brought in the winding up proceedings of the company in question :

(1) S 275 is only triggered if there is a winding up of a company – “If in the course of the winding up of a company …” (s 275(1));

(2) Rule 58 contemplates that the Summons for an application under s 275 would be dealt with by the Companies Court. Hence, Rule 58(2) refers to the court giving directions on taking of evidence by affidavit or orally and whether the hearing will be in chambers or court.

12.  UBS AG relies on China Medical Technologies, Inc v Wu Xiaodong [2020] 1 HKLRD 342 (“2019 Decision”), [9]-[14], per Ng J for the proposition that it is impermissible to commence a s 275 claim by writ. Despite contrary arguments by the Plaintiffs, I agree with USB AG. Although the 2019 Decision was concerned with a s 276 claim (which also fell within Rule 58), it is quite clear that the analysis of Ng J can be applied equally with a case based on s 275. Indeed, the learned Judge referred to s 275 in [14] of the Decision, indicating that no distinction could be drawn between the two sections for purposes of Rule 58.

13.  As regards the reliance by the Plaintiffs on O 2, r 1(3) and O 2, r 2(1), I am unable to agree for the following reasons. To begin with, I am in agreement with Mr Jat SC, who appeared with Ms Cheung for UBS AG, that those Rules, designed to cure irregularities, are irrelevant here for the simple reason that the Plaintiffs had cured the defect in question by taking out the 275 Summons.

14.  Secondly, prima facie, the RHC do not apply to winding up proceedings by virtue of O 1, r 2(2) (see Re Sunni International Ltd [2014] 5 HKLRD 558, [21]-[23], per G Lam J (as he then was)). In my view, it is reasonably clear that the WU Rules were intended to govern proceedings or application under the Ordinance. It is only where there are gaps in the WU Rules that the parties are to rely upon the RCH (see Rule 210 of the WU Rules and Sunni, [23]).

15.  Thirdly, the Plaintiffs’ s 275 Claim should have proceed in the manner prescribed by Rule 58. Had they done so, any irregularities in the application would fall to be considered under Rule 209(1) of the WU Rules, which provides that: “No proceedings under the Ordinance or [WU Rules] shall be invalidated by any formal defect or irregularity, unless the court is of opinion that substantial injustice has been caused by the defect or irregularity, and the injustice cannot be remedied by any order of the court”.

16.  I do not believe that the Plaintiffs can rely upon Rule 209(1) to cure the defect in their s 275 Claim when they relied upon the inapplicable regime under the RHC to make that Claim. Had they relied upon Rule 58 to make their claim, then Rule 209(1) may be invoked in the event of defect. The provisions of the RHC (O 2, r 1(3) and O 2, r 2(1)) and Rule 209(1) are different and, in my view, intended to govern different regimes under the RHC and WU Rules.

17.  I am unable to agree with Mr Manzoni SC, who appeared for the Plaintiffs, that they can rely upon both O 2, r 1(3) and r 2(1) as well as Rule 209(1). I see no reason to introduce confusion in the application of the Rules or to allowed undisciplined use of the same. If there are separate regimes, then the applicable one should be applied. I have explained why Rule 209(1) is of no assistance to the Plaintiffs. Given that Rule 58 is mandatory, its effect cannot be extinguished with the use of a different set of Rules.

18.  I do not believe that the 2019 Decision is an authority for the proposition that a s 275 claim which was made in breach of Rule 58 can be cured by an O 2, r 1 Summons. The point was apparently not argued and the learned Judge took the view that the proper remedy (“simplest and most cost-effective way”) was to take out a misfeasance summons and seek directions for the summons to be heard together with the action (see [14] of the 2019 Decision).

19.  Further, I have been referred by Mr Jat to the authority of Re Osea Road Camp Site Ltd [2005] 1 WLR 760, [11]-[15], per Pumfrey J. In that case, a minority shareholder brought an unfairly prejudicial conduct claim by way of a claim form instead of by petition which was prescribed under the relevant statutory provisions. The Court held ([13]), inter alia, that: “If there is a power to dispense with the requirement of the statute that these proceedings be by way of petition, then it seems to me that the dispensation must be by means of a provision which has statutory force”. Further, the power of dispensation under the CPR could not apply to requirements imposed by statute other than the statues underlying the CPR. I agree with those dicta. Indeed, my analysis above is consistent with the same.

20.  To fortify Osea Road, Mr Jat had referred the court to s 296(2) of the Ordinance which provides that: “All rules … made under this section … shall have effect as if enacted by this Ordinance”.

21.  I have also been referred by Mr Manzoni to an authority which disagreed with Osea Road, namely, Phillips v McGregor-Paterson [2010] 1 BCLC 72, per Henderson J. In that case the liquidators brought a claim for, inter alia, directors’ misfeasance and wrongful trading by way of a claim form (the English equivalent of writ in Hong Kong) as opposed to an application required under the English insolvency rules (which is the English equivalent of a s 275 Rule 58 Summons). Ocea Road was considered by the Court. It was held that use of the wrong originating process was a “formal defect” capable of correction under the English equivalent of Rule 209(1): at 82a-c.

22.  With respect, I am unpersuaded by Phillips for the following reason :

(1) I have set out above my view on the separate regimes, the confusion which would be caused by unconstrained cross-over in the deployment of the Rules and the nullifying effect to Rule 58 by the cross-over;

(2) The Plaintiffs are not without remedy for the defect in question. They had rightly taken out the 275 Summons;

(3) Mr Jat had rightly pointed out that the effect of Phillips would undermine any limitation defence which UBS AG may have over the 275 Summons (the Plaintiffs dispute that the 275 Summons was issued outside the limitation period).

23.  Finally, Mr Jat also relies on Leung Chi Kai v China-tech Engineering Co Ltd, unrep, HCMP 209/2002, 22 April 2002, [6]-[10], per Chung J. In that case, the court struck out an originating summons issued pursuant to s 168A of the Ordinance when the correct procedure was by way of petition (without prejudice to the applicant commencing a similar action using the proper mode). The learned Judge held that O 2, r 1(3) was inapplicable by reason of O 1, r 2(2) and Rule 209 of the WU Rules was irrelevant to that application. Although the reason why Rule 209 was irrelevant was not explicitly stated, it appears to be reasonably plain that the learned Judge took such view because the applicant had relied upon the RCH for the originating summons. This Decision fortifies the above analysis of this court and is not consistent with Phillips.

24.  Para 8 of Leung Chi Kai dealt with the argument that the court should not strike out proceedings due to the use of wrong originating process or formal defect. This is what the court had to say :

“If this argument is taken to the extreme, it will mean that the provisions in the [RHC] and the Companies Ordinance regarding how legal proceedings are to be commenced can be wholly ignored without consequence. I do not consider this to be correct.”

25.  In respect of Mr Manzoni’s estoppel argument, I propose to set out my reasons for disagreement succinctly as follows :

(1) The point made in para 13 above can be applied equally here. Remedial action had been taken by the Plaintiffs. It is superfluous to be arguing about estoppel;

(2) I accept the law which had been helpfully summarised by G Lam J (as he then was) in Chow Ching Yee v Wong Hung Kee [2020] HKCFI 2555, [20]-[29];

(3) I am unable to accept that a case of equitable estoppel (see Chow Ching Yee, [26]) had been made out. The Plaintiffs cannot simply equate the knowledge of Rule 58 by HSF as USB AG’s knowledge. Given the seriousness and size of the s 275 Claim, UBS AG was entitled to be advised on that Claim and the opportunity to properly evaluate it pursuant to such advice. Indeed, the evidence suggested that it did obtain advice on the Claim. It is not entirely clear on the evidence which of UBS AG’s action can be said to be carried out with knowledge of the defect. The burden of proof is on the Plaintiffs;

(4) More importantly, the fact that the Plaintiffs had taken out the 275 Summons showed that they were not relying on any action or inaction on the part of UBS AG;

(5) Finally, the prejudice which the Plaintiffs are relying upon concerned the deployment of resources in dealing with the s 275 Claim in this action. Such “prejudice” must be assessed in the circumstances of the case. As the Plaintiffs pointed out, all their causes of action (including the s 275 Claim) arose out of the same facts. I do not believe that the costs incurred in dealing with the s 275 Claim would be wasted. The work done would no doubt be used for purposes of the 275 Summons.

26.  As regards the Plaintiffs’ reliance on the 2021 Decision, [51], on the proposition that there is no ground to strike out the Subject Paragraphs given that the s 275 Claim constituted a reasonable cause of action, I am unable to see why there should be two parallel proceedings on the s 275 Claim. After the 275 Summons had been taken out, there is no reason to maintain the same Claim in this action. Duplicitous proceedings constitute an abuse of process and the Subject Paragraphs are liable to be struck out. It does not appear from the 2021 Decison that this point was taken or argued at the hearing.

27.  Another ground for a strike out is that the s 275 Claim in this action is a nullity by reason of the breach of Rule 58.

28.  For completeness, I should mention two points. Firstly, I agree with Mr Manzoni that whether the 275 Summons is time-barred is not an issue before this court. Secondly, as Mr Jat had accepted that this application does not turn upon the conduct of the Plaintiffs (see para 3(3) above). However, it is right to say that Mr Borrelli was alive to the requirement under Rule 58 (see 2019 Decision, [12]) and it is not easy to see why there should be any complaint by the Plaintiffs about the consequences for not abiding by that Rule.

Disposition

29.  For the above reasons, the Subject Paragraphs are struck out. There is no issue that costs should follow the event. I make an order that the costs of and occasioned by this application be paid by the Plaintiffs with a certificate for 2 counsel.

30.  Last but not least, I am grateful to the assistance rendered to the court by counsel.