HUI (ANNIE) GUO v. YUEDONG XU AND OTHERS

HCCL 3/2019

[2019] HKCFI 2171

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 3 OF 2019

(Transferred from HCA No. 2404 of 2018)

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D E C I S I O N

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Background

1.  The Plaintiff commenced proceedings against 6 Defendants in October 2018, for payment of AUD17,168,803.75 (amended in February 2019 to AU$22,671,178.47) (“Sum”), being (according to paragraph (1) of the Indorsement of Claim) an amount equal to:

(a) the Plaintiff’s share of 49% of the dividend payments received and held by the 6^th Defendant, allegedly for the 4^th and 5^th Defendants, as shareholders of Tribune Resources Ltd and Rand Mining Ltd (“Target Companies”);

(b) the Plaintiff’s share of 49% of the unrealized profits in respect of the shares held in the Target Companies; and

(c) 51% of expenses incurred by the Plaintiff for the acquisition of shares in the Target Companies.

2.  The Plaintiff also sought, in the alternative, payment of the Sum from the 4^th to 6^th Defendants as constructive trustees for the Plaintiff and the 3^rd Defendant; and in the further alternative, such amount as determined by the Court to be “a fair and reasonable share” of the dividend payments the 1^st, 2^nd and 6^th Defendants had received from the Target Companies.

3.  According to the Statement of Claim, the claims were made by the Plaintiff against the Defendants on the basis of the alleged breach of an agreement made between the Plaintiff and the 1^st to 3^rd Defendants in 2014 (“Agreement”) to invest in and acquire 49% interest in the Target Companies. Such shares were to be acquired by a Mainland listed company, or some other entity or platform to be agreed. Under the Agreement, the parties agreed to share the expenses for the work undertaken pursuant to the Agreement, as well as the profits and capital gains achieved, as well as the proceeds gained as a result of the acquisition of the shares in the Target Companies, in the proportion of 49% between the Plaintiff and the 3^rd Defendant, and 51% between the 1^st and 2^nd Defendants.

4.  The terms of the Agreement were supplemented and varied between November 2014 and January 2015, such that the acquisition of shares in the Target Companies was agreed to be undertaken by the 4^th and 5^th Defendants, instead of by a listed Mainland company.

5.  The Plaintiff claims that the 1^st and 2^nd Defendants were at all material times acting as her fiduciaries.

6.  Pursuant to the Agreement as varied, the 4^th and 5^th Defendants did acquire shares in the Target Companies, and the Plaintiff claims that the 1^st and 2^nd Defendants were in breach of the Agreement, and in breach of their fiduciary duties owed to the Plaintiff, by failing to distribute or pay to the Plaintiff the dividends received by the 4^th and 5^th Defendants in respect of their shareholding in the Target Companies for the years 2017 and 2018, and failing to account to the Plaintiff in respect of the increase in value/capital gains in respect of the shares held in the Target Companies. The Plaintiff further claims that the 4^th and 5^th Defendants (which had acquired the shares) had knowledge of the terms of the Agreement and the Plaintiff’s entitlements thereunder, such that they hold 49% of the dividends and capital gains they received, or alternatively a fair and reasonable share thereof, on constructive trust for the Plaintiff, and are liable to account to the Plaintiff.

7.  On 7 January 2019, the 4^th and 5^th Defendants applied by summons to strike out the Statement of Claim, on the ground that it discloses no reasonable cause of action against them. They claim that on the face of the Statement of Claim, the Plaintiff only has a personal claim against the 1^st and 2^nd Defendants, who were personally liable (if at all) to pay, out of their own pockets, the Sum claimed as the Plaintiff’s share of the dividends and capital gains. The shares in the Target Companies were at all material times intended and agreed to be acquired, and beneficially owned, by the 4^th and 5^th Defendants, which were accordingly entitled beneficially to the dividends and any capital gain. Even if the 1^st and 2^nd Defendants were in breach of their fiduciary duties to the Plaintiff, as they had no proprietary interest in the dividends and capital gains from the 4^th and 5^th Defendants’ shares in the Target Companies, there is no basis for the Plaintiff to claim that the 1^st and 2^nd Defendants hold any dividends and capital gain on trust for her.

8.  The 4^th and 5^th Defendants claim that they were not parties to the Agreement, and have no obligation to hold the Plaintiff’s share of the dividends or capital gains on trust, when the Plaintiff is not entitled to seek any proprietary relief against the 1^st and 2^nd Defendants said to be in breach of the Agreement.

9.  The 4^th and 5^th Defendants further argued that there can be no trust of the unspecified and un-earmarked amount, equal to 49% or “a fair and reasonable share” of the capital gain of the Target Companies, or the alleged expenses.

10.  By its summons issued on 5 June 2019, a few days before the hearing of the striking out application, the Plaintiff applied to amend the Indorsement of Claim to the Writ and the Statement of Claim. In essence, the Plaintiff pleads by her amendments an entitlement to a “Pallant v Morgan equity” (Pallant v Morgan [1953] 1 Ch 43) in what was acquired by the 1^st and 2^nd Defendants under the Agreement, by virtue of an understanding between the Plaintiff and the 1^st and 2^nd Defendants, that they would share the benefit of an opportunity to acquire an interest and to invest in the Target Companies through a cooperation with the substantial shareholder of the Target Companies (“Opportunity”). The Opportunity was known to the Plaintiff through her relationship with the said substantial shareholder, was not hitherto known to the public, and was provided by the Plaintiff to the 1^st and 2^nd Defendants. By the Amended Statement of Claim, the Plaintiff claims that she had conferred advantages on the 1^st and 2^nd Defendants by making the Opportunity available to the 1^st and 2^nd Defendants, and this secured and led to the eventual acquisition of the shares in the Target Companies. The Plaintiff claims that it is inequitable for the 1^st and 2^nd Defendants to retain the entire interest and all future benefits in the shares in the Target Company, which they would not have obtained but for the Opportunity and their understanding with the Plaintiff, that the benefits of the acquisition would be shared.  

11.  On the above basis, the Plaintiff claims in the Amended Statement of Claim that she is entitled to an equity in the benefit acquired by the 1^st and 2^nd Defendants under the Agreement, and that the 1^st and 2^nd Defendants were in breach of their fiduciary duties to her, in acquiring shares in the Target Companies for themselves, by their nominees, and to her exclusion. The Plaintiff further claims that the 4^th and 5^th Defendants, as the nominee vehicles used by the 1^st and 2^nd Defendants to hold the shares in the Target Companies, as well as the dividends and capital gains thereof, had actual or constructive knowledge, that the 1^st and 2^nd Defendants were liable as constructive trustees based on the Pallant v Morgan equity, and alternatively, owed fiduciary duties to the Plaintiff and were in breach of such duties.

12.  On the basis of the alleged equity pleaded in the Amended Statement of Claim, it is not a plain and obvious case for striking out, which was why the striking out was not pursued by the time of the hearing on 11 June 2019.

13.  The issues which remained in dispute at the hearing were whether the Plaintiff should be allowed to amend the Statement of Claim and, in respect of the striking out application, whether the costs of the striking out should include certificate for 2 Counsel for the 4^th and 5^th Defendants.

The amendment

14.  The Plaintiff argued that she is entitled to amend her Statement of Claim without leave. On behalf of the Defendants, it was argued that the Plaintiff should not be permitted, by the amendment sought, to make a new claim of entitlement to a share of the shares in the Target Companies (“New Claim”), as opposed to her original claim to a share of the dividends and capital gains, when such New Claim is not verified by a statement of truth, nor to plead a case which is inconsistent with or diametrically different to her original claim.

15.  The lack of a statement of truth to verify the New Claim has since been rectified, by the Plaintiff making a statement of truth on 10 June 2019, a day before the hearing.

16.  As for the New Claim being allegedly inconsistent with the Plaintiff’s original claim, and which is not pleaded as an alternative, I accept the submissions made by Counsel for the Plaintiff, that the New Claim is in essence a claim for relief made on the basis of the Pallant v Morgan equity.  By the amendment, the Plaintiff seeks to claim that by virtue of her equity, she is entitled to a share of the property or benefit which she and the 1^st and 2^nd Defendants had agreed to share.  If the Court should accept such an equity, the property which the parties had agreed to share would be held on trust for them jointly. In Pallant v Morgan [1953] 1 Ch 43, the court found that even if there was uncertainty as to how the property was to be shared, if the parties should fail to agree on the division, the court can order the property to be sold and the proceeds to be divided equally.

17.  Hence, how the benefit of the investment in the Target Companies is to be shared pursuant to the Agreement is to be decided by the Court, and it is sufficient if the Plaintiff should plead the facts of the Agreement on which she relies, and the facts to support her claim to the benefit to be shared: be it a percentage or share of the dividends and the capital gains from the shares in the Target Companies, or a percentage of the Shares acquired, which may be ordered by way of relief.

18.  I accept the submissions made for the Plaintiff, that there is no inconsistency in the facts relied upon by the Plaintiff, whether as pleaded in the original Statement of Claim, or in the proposed Amended Statement of Claim.  The claim to the shares is but one legal consequence of the Court’s acceptance of the fact of the parties’ understanding under the Agreement, and the constructive trust that this creates.

19.  For the above reasons, I allow the amendments sought to be made by the Plaintiff to the Statement of Claim.  As the Plaintiff seeks the indulgence of the Court, and her statement of truth was only made a day before the hearing, the usual order of costs should be made, that she should bear the costs of and occasioned by the application for leave to amend the Writ and the Statement of Claim.   

Costs of the striking out

20.  Argument on the striking out application was avoided as a result of the application to amend.  The Plaintiff accepted liability for costs, the only issue being whether there should be certificate for 2 counsel.

21.  Considering the guidelines set out in Xin Juan Trading Co Ltd v NPH Petrochemical Ltd HCA 18159/1988 and CACV 276/1998, 25 September 2000, including the issues and arguments raised for the striking out, the substantive amount of the claim, and the fact that the Plaintiff herself had instructed an eminent and senior counsel for the application, I accept that the Plaintiff should pay to the Defendants the costs of the striking out, with Certificate for 2 Counsel. 

22.  In my view, the costs of the hearing on 11 June 2019 can be divided equally between the costs of the application for leave to amend, and the application to strike out. To consider the striking out and the costs incurred, it is necessary to understand the amendments sought to be made.

23.  Being standalone applications, the costs should be payable forthwith.