WINGAMES INVESTMENTS LTD v. MASCOT LAND LTD AND OTHERS

HCA 907/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 907 OF 2011

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D E C I S I O N

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1.  On 21 February 2013, I heard two applications: to transfer these proceedings to the Commercial List; and to extend time for security for costs to be paid into court.  The greater part of the submissions I received related to the application to extend time.  I deal with that first, as the application to transfer to the Commercial List will fall away if I do not grant the extension sought.

THE APPLICATION TO EXTEND TIME

2.  These proceedings have had a chequered history. The many, and complex, procedural steps that have taken place, including many visits to the Court of Appeal, have been very helpfully summarised in Annex A of the written submissions of Ms Catrina Lam who appeared on behalf of the defendants to resist the applications.  This case concerns dealings between the 2^nd plaintiff, an insolvent Hong Kong listed company, and the 2^nd defendant PRC company whereby the 2^nd defendant arranged to sell its shares in another PRC company (“Shanghai FIS”) to the 2^nd plaintiff, in consideration for the sum of some $3.36m which was to be provided by way of convertible notes which could be converted into shares of the 2^nd plaintiff.  However, these notes were to be provided, not directly to the 2^nd defendant, but to a BVI company, wholly-owned by a Thai company, which had been set up by the 2^nd defendant with the approval of the PRC Ministry of Commerce.  There was a dispute about the efficacy of the sale and purchase agreement, and 4 supplemental agreements purportedly entered into between the parties, to give effect to these arrangements.  There was also a deposit exchange agreement whereby the 2^nd plaintiff paid HK$44m to the 2^nd defendant, and the latter paid just under RMB38m to the 2^nd plaintiff.

3.  According to the plaintiffs, the 2^nd defendant failed to proceed with the transaction and the plaintiff issued proceedings for specific performance, obtaining injunctions against the defendants restraining them from dealing with shares in various associated companies and the deposit paid by the 2^nd plaintiff.  The injunctions were subsequently lifted by Reyes J.  Thereafter, the plaintiffs changed the basis of their claim by no longer pursuing a claim for specific performance, demanding, instead, the return of the HK$44m deposit they had paid.  The reason they advanced for this change was that they had received information that no approval from the PRC authorities had been obtained for the Thai company purportedly set up by the 2^nd defendant, the BVI subsidiary of which was to receive the convertible notes.  A detailed exposition of the background to this case can be found in §§8-24 of the Reasons for Decision of Yuen JA, dated 7 December 2011, in HCMP 2039/2011.

4.  On 17 July 2012, Deputy High Court Judge Pow SC had ordered the plaintiffs to provide further security for the defendants’ costs of the action in the sum of HK$2.4m within 28 days, failing which the plaintiffs’ action herein would be stayed.  The plaintiffs did not provide the security within the 28 days.  Instead, on 30 July 2012, they sought leave to appeal against that order and to suspend the time to effect payment of the further security until 28 days after the determination of their application for leave to appeal, or the substantive appeal against that order, whichever was later.  The application for leave to appeal was refused by Deputy High Court Judge Pow SC on 10 September 2012.  This was followed by an application, on 13 September 2012, to the Court of Appeal for leave to appeal.  The application for leave to appeal was refused by the Court of Appeal on 30 October 2012, for the reason that the proposed appeal was “totally without merit”.

5.  Following that dismissal, the plaintiffs applied by summons, on 9 November 2012, for extension of time to comply with the security for costs order made by Deputy High Court Judge Pow SC on 17 July 2012.  Deputy High Court Judge Mayo dismissed that application on 13 December 2012.

6.  On 31 January 2013, the plaintiffs lodged the requisite security into court.  They did so 7 days after the judgment of the Court of Appeal, handed down on 24 January 2013, granting leave to the plaintiffs to renew an O.14 application before a judge of the Court of First Instance for the return/repayment of the deposit of HK$44m plus interest.

7.  On the receipt of the notice of payment into court by the solicitors for the defendants, they wrote, on 31 January 2013, to the plaintiffs’ solicitors that the payment of further security was out of time and that, to remedy this, the plaintiffs had to take out a summons seeking an extension of time within which to comply with the order of 17 July 2012, together with a supporting affidavit giving reasons for non-compliance.

8.  Mr Denis Brock, who appeared for the plaintiffs, submitted to me that leave was not required for a late lodgement of security. I do not agree with this very bold proposition.  It is clear from the terms of the order of Deputy High Court Judge Pow SC that the further security he had ordered to be paid “shall be paid into court within 28 days from the date hereof (i.e. within 28 days from 17 July 2012) failing which the plaintiffs’ action herein shall be stayed”.  Once the 28 days had passed, the order operated to stay the proceedings.  In order to lift that stay, the plaintiffs had to apply to court for an extension of time within which to provide the further security that had been ordered.  A late lodgement of that further security did not operate to lift the stay.  Indeed, the plaintiffs had applied before Deputy High Court Judge Mayo for an extension of time to comply with the order of 17 July 2012, but he refused that application.

9.  Mr Brock went on to submit, in the alternative, that if leave was required, then his clients ought to be granted that leave. Ms Lam, for the defendants, submitted that the stay, which came into effect after the failure to pay security for costs within the time stipulated, was a sanction imposed by the order for non-compliance and, accordingly, O.2, r.4 of the Rules of the High Court (“RHC”) applied and required the party in default to apply to court to obtain relief from the sanction within 14 days of the failure.  She relied on the authority of Schindler Lifts (Hong Kong) Ltd v Nikko Services Ltd (CACV 250/2010, 3 August 2012) to support this proposition.  In that case, Chu JA had to deal with an application for extension of time to provide security for costs of an appeal.  The original order stipulated that the defendant should provide the security on or before 21 May 2012.  The order also went on to provide:

“(3) Pending the provision of the security, all further proceedings in the appeal are stayed.

(4) In the event the defendant fails to provide the security by 21 May 2012, the appeal shall, without further order, stand dismissed with costs to the plaintiff to be taxed if not agreed.”

Chu JA held that, upon the defendant failing to provide security for costs by 21 May 2012 as ordered, the sanction imposed by §4 of the order took effect because the defendant had not applied for, and obtained relief from that sanction, within 14 days from 21 May 2012. She went on to state:

“12. … In this regard, the defendant’s summons was inadequate in that it merely asked for an extension of time to comply with paragraph 1 of the [security for costs] order when it should have applied, in addition, for an order reinstating the appeal, being a relief from the sanction imposed by paragraph 4 of the [security for costs] order. The shortcoming in the defendant’s summons is a matter that is relevant to the issue of costs.”

10.  I am not persuaded that the stay of the plaintiffs’ action, which came into effect 28 days after 17 July 2012, upon the plaintiffs’ failure to provide security for costs within the said 28 days, amounted to a “sanction” within the meaning of O.2, r.4 of the RHC.  Ribeiro PJ had suggested in Sunchase International Group (China) Ltd and Ors v Vincor Group of Companies (Investment) Ltd and Ors, FAMV No.21 of 2004, 22 February 2005, that an order that might have been appropriate in the case before him was an order whereby the court specified the time within which security had to be given, staying all further proceedings in the meanwhile, and providing for the action to be dismissed without further order if security was not given within the time stipulated.  An order containing the sanction of dismissal of an action, or of an appeal, would be a sanction within the meaning of O.2, r.4 of the RHC.  The present order, which merely effects a stay of the action after the expiry of the 28 days, does not contain any similar sanction as would make it come within O.2, r.4 of the RHC.  Accordingly, I conclude that I am required, on this application to extend time, to exercise the general discretion of the court by taking into account all relevant circumstances, and that I am not constrained either by the terms of O.2, r.4 of the RHC, or O.2, r.5 which provides that the court shall consider all the circumstances, including:

“(a) the interests of the administration of justice;

(b) whether the application for relief has been made promptly;

(c) whether the failure to comply was intentional;

(d) whether there is a good explanation for the failure to comply;

(e) the extent to which the party in default has complied with other rules and court orders;

(f) whether the failure to comply was caused by the party in default or his legal representative;

(g) in the case where the party in default is not legally represented, whether he was unaware of the rule or court order, or if he was aware of it, whether he was able to comply with it without legal assistance;

(h) whether the trial date or the likely trial date can still be met if relief is granted;

(i) the effect which the failure to comply had on each party; and

(j) the effect which the granting of relief would have on each party.”

11.  My decision finds support in the observation of Kwan JA in Wing Fai Construction Co Ltd (in liquidation) v Cheng Kit Yin Kelly and Ors, CACV 249/2010, 14 July 2011, that there was no reason to think that the exercise of discretion to extend time to provide security for costs changed as a result of the Civil Justice Reform.  However, even if I had concluded that O.2, rr.4 & 5 applied to the present case, I would have treated the present application as an application made under O.2, r.4, and I would granted an extension of time to bring the application out of time.  I would also have made an appropriate order of costs in favour of the defendants.

12.  Although the exercise of the general discretion of the court requires the court to take into account so much of the considerations in O.2, r.5, listed above, as directly bear on the matter before the court, common to both the exercise of a discretion to lift a stay, and the exercise of a discretion to provide relief from sanction, is the consideration by the court of the question of the proportionality of the stay, or of the sanction, in the circumstances of the case, which is a weighty factor in the weighing exercise to be undertaken by the court (see the observations of Fok JA in Daimler Ag v Leiduck, Herbert Heinz Horst Intercontinental Resources Co Ltd, CACV 172 of 2011, 11 May 2012).  I also remind myself of the observations of Ribeiro PJ in Nantong Angang Garments Co Ltd v Hellmann International Forwarders Ltd and Ors (FAMV 15/2006, 29 September 2006), that how the court’s discretion to extend time should be exercised is “plainly a matter which must be approached flexibly and contextually on the facts of each particular case”.

13.  Ms Lam submitted, with some force, both in oral submissions and in §§2.6-2.11 of her written submissions, that the plaintiffs’ assertion that they were impecunious was tenuous: clearly they had sufficient financial resources available to commence and continue with the present proceedings, including defending and prosecuting the appeals in CACV 63/2012 and HCMP 2691/2011 which were heard on 24 January 2013, more than 6 months after the 17 July order; that there was no evidence to explain why there was a failure to provide the security for costs within time, or at any time before 31 January 2013, when the security was lodged into court, nor any explanation how they were able to make that payment.  The overwhelming inference from the chronology of the steps taken, since the order of 17 July 2012, was that they were pursuing tactical manoeuvres which the Court of Appeal had described as an excess of “interlocutory skirmishing”.  She submitted that I should conclude that the plaintiffs had deliberately flouted the order for security for costs.  For these reasons, she submitted that I ought to dismiss the application for extension for time.

14.  For his part, Mr Brock submitted that the refusal of the extension of time would have a draconian and catastrophic effect in shutting out the plaintiffs from court to pursue valid claims, including a claim for summary judgment for the return of a deposit in the very substantial sum of HK$44m.  It would have the further effect of creating a windfall for the defendants.  He further submitted that the delay in providing the security, a period of some 6 months, was not inordinate, and that the defendants did not suffer any prejudice which could not be remedied by an order for costs.  He also submitted that the present application for extension of time was a fresh application, being made in changed circumstances, and that it was not a rehearing of the application which had been dismissed by Deputy Judge Mayo, the changed circumstances being the actual lodgement of the security for costs into court and which had not been done when the earlier application was heard and determined by Deputy High Court Judge Mayo.

15.  I accept the submissions of Mr Brock and grant the extension of time sought.  No doubt the parties will prepare an appropriate draft order for me to approve in this regard.  Both parties are tarred by the same brush because, as the Court of Appeal rightly observed, there has been considerable interlocutory skirmishing by all the parties to this litigation.  Although I am of the view that I have enough material before me to infer that the plaintiffs engaged in deliberate tactical moves and made deliberate and conscious decisions not to provide the security for costs as ordered, I conclude that to deprive them of the right to prosecute their claims in court would be disproportionate to any wrongdoing on their part.  Unlike the lapse of more than 4 years in Wing Fai Construction Co Ltd (in liquidation) v Cheng Kit Yin Kelly and Ors (No.2), ( HCA833/2004, 19 October 2004, Poon J), the period of delay of some 6 months in the present case, during which proceedings were afoot in the Court of Appeal, is not such a lengthy period of delay as affects my exercise of discretion.  In my judgment, the proper sanction for the plaintiffs’ wrongdoing, in the form of deliberate and conscious decisions not to provide the security for costs as ordered, is to make an order for costs on an indemnity basis in favour of the defendants that was incurred in respect of the plaintiffs’ application to extend time to provide security for costs.

TRANSFER TO COMMERCIAL LIST  

16.  When I learned that Reyes J had dismissed a similar application that had been made in mid May 2011, at an early stage of the proceedings, I was concerned to ascertain what had changed as would support a repeat application for transfer to the Commercial List.  That concern was alleviated when I read the transcript of the hearing before Reyes J in which he was recorded to have observed that:

“Whether it goes to the Commercial List [or not], I will reserve it to myself so that effectively it doesn’t matter whether it’s in the Commercial List or not.

… In the light of what we have just decided, I don’t think it’s really important whether it’s in the Commercial List or not.

… Whether it is a commercial matter or not, … I am not … going to bother to list it in the Commercial List.  I’ll dismiss that.” 

17.  The retirement of Reyes J necessitated this application, which is made on the ground the action is particularly suitable for decision by a judge of the Commercial Court.

18.  The complexity of the transactions involved and the substantial amounts involved, as set out above, appear, at first blush, to be a sufficient basis for the transfer of the proceedings to the Commercial Court.  However, the transfer was resisted on the ground that, even putting them at their highest, the plaintiffs’ claims were based in tort albeit that they arose out of a commercial context.  Specifically, the defendants submitted that the plaintiffs’ claims, as currently formulated, were based on deceit and the plaintiffs sought, as primary reliefs, declarations of rescission of the sale and purchase agreement on the basis that they were induced to enter into such agreement by the defendants’ alleged fraudulent misrepresentations.  These were not “commercial causes”, within the guidance provided by the Court of Appeal in Idmiston Ltd v Asian Master Enterprises Ltd and ors, CACV 123 of 1989, 17 March 1989.  In that case, Cons J had stated at p.6:

“It seems to me that a very brief description of the actions would be that they raise questions of fraud in a commercial context. They are thus actions of a nature that would not necessarily be excluded from transfer to the Commercial List, and I can see some desirability that the judge who tries them should be a judge with some commercial knowledge. There are however in the High Court many judges who have sufficient knowledge of the commercial world to meet that demand.”

On p.5 in the same judgment, he said:

 “The Commercial List was introduced in Hong Kong, I think in the late 1960s, although it did not become active until 1976.  It followed the precedent set in England at the end of the last century when a special list was set up to deal with “causes arising out of the ordinary transactions of merchants and traders; amongst others, those relating to the construction of mercantile documents, export or import of merchandise, affreightment, insurance, banking and mercantile agency and mercantile usages.”  Those words I have taken from the original notice issued by the Queen's Bench Division of the High Court in England in 1895. And they are words which, with only one change, have since been incorporated into the English Rules of the Supreme Court. Although we have nothing of a similar nature in our own rules, it seems to me that they still provide very useful guidance as to what is a commercial cause.”

19.  Given the passage of more than 20 years since that decision, Mr William Stone SC, the predecessor of Reyes J as the judge in charge of the Commercial List, referred to the above passage (in Commercial Litigation in Hong Kong: A Practical Guide, at §1.004) as “Cons JA’s celebrated but now demonstrably outdated dictum”.  I agree.  The world of trade and commerce has evolved substantially since the advent of the digital age.

20.  As the editors of Hong Kong Civil Procedure 2013 note (at marginal note 72/2/9), there is no exhaustive list of matters that are considered to be appropriate to be heard in the Commercial List.  As the gatekeeper of the Commercial List, I can say that the gates are fairly wide open and that I will exercise my discretion liberally to transfer cases into the List containing claims arising out of trade and commercial transactions, including any claim relating to :

(a)  a business document or contract;

(b)  the export or import of goods;

(c)  the carriage of goods by land, sea, air or pipeline;

(d)  the construction of ships;

(e)  contracts relating to aircrafts;

(f)   insurance and reinsurance;

(g)  banking and financial services;

(h)  the purchase and sale of commodities;

(i)    the operation of markets and exchanges;

(j)    business agency; and

(k)  any other matter, question of fact or law, which is particularly suitable for decision by a judge of the Commercial Court.

21.  I have compiled the aforesaid list by referring to the list of actions suitable for the Commercial Court, as set out in the English 1999 Commercial Court Guide and in the more recent Rule 58.1 of CPR Part 58, which deals with specialist proceedings in the English Commercial Court.  I have not included, in the above list, disputes between regulators and operators, or between operators, in the field of telecommunications.  I do not exclude such cases from the Commercial List, but would defer my decision until such time that the issue arises and after I have heard further submissions on point.

22.  As I observed in Broadmark Ltd v Lin Zhen Zhong and Ors [2012] 6 HKC 397 at p.402 A-B, there is good reason why parties would wish to bring proceedings in the Commercial List, which:

“… has been designed to enable the judge in charge of the list to carry out effective case management from inception of proceedings; to enable close involvement in the case by the same judge with a view to achieving better interlocutory and trial management; to enable the early identification of issues so that the proceedings can be managed efficiently and unnecessary interlocutory applications avoided; and thereby avoiding delay and expense and insuring the efficient disposal of cases.”

23.  Notwithstanding that the plaintiffs claim in tort, these claims arise out of complex commercial transactions involving substantial sums of money.  I have little hesitation in granting the plaintiffs’ application to transfer the present proceedings to the Commercial List.  Claims in tort, including claims in tort for negligence, and professional negligence, are often heard in the Commercial Court (see, for example, Box v Midland Bank Ltd [1979] 2 Lloyd’s Rep 391 which arose out of a banking dispute).

COSTS

24.  I apportion the costs incurred on the two applications before me as follows.  I find that 80% of the work done and time spent was in respect of the application for extension of time, and 20% in respect of the application to transfer to the Commercial Court.  I make a summary assessment of the defendants’ costs on an indemnity basis in the sum of HK$44,700 and, on that basis, I would be minded to make an order that the plaintiffs pay HK$35,760 to the defendants forthwith.  I make a summary assessment of the plaintiffs’ costs on a party-to-party basis in the sum of HK$35,000 and, on that basis, I would be minded to make an order that the defendants pay the sum of HK$7,000 to the plaintiffs forthwith.  The effect of these proposed costs orders is that the plaintiffs ought to pay the sum of HK$28,760 to the defendants forthwith and I so order.