CHINA CONSTRUCTION REALTY LTD v. SINO BUSINESS SERVICES PROPRIETARY LTD AND OTHERS

HCA1294/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1294 OF 2005

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DECISION

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Applications

1. The plaintiff served a set of interrogatories on the 5^th defendant, who only answered some of them.  Dissatisfied, the plaintiff applied for an order that unless the 5^th defendant do answer the remainder, its defence be struck out and the plaintiff be at liberty to enter judgment.  Separately, the plaintiff applied for further and better particulars of the 5^th defendant’s amended defence.

2. The plaintiff’s claims against the 5^th defendant arose in this way.

Background

3. At all material times, the plaintiff owned 90% of the shares in the 4^th defendant, which through various companies in the Mainland (“the Mainland Companies”) held the land use rights in a substantial piece of land in Dalian (“the Rights” and “the Land” respectively.)  By an agreement dated 26 June 1997 (“the Agreement”), the plaintiff agreed to sell to the 1^st defendant its shares in the 4^th defendant (“the WIW Shares”) for AUS$46,500,760, payable in four tranches between July 1997 and December 2000.

4. Pursuant to the 1^st defendant’s instruction, the plaintiff transferred the WIW Shares to the 2^nd defendant as its nominee.  In around November 1997, the 2^nd defendant acquired 90% of the shares in the 3^rd defendant whereupon the 2^nd defendant transferred the WIW Shares to the 3^rd defendant.  In around January 1998, the 3^rd defendant acquired the remaining 10% of the shares in the 4^th defendant and became its sole owner.

5. The 1^st defendant paid the plaintiff AUS$500,760, being first tranch of the AUS$46,500,760 under the Agreement but failed to make any further payment.  The 1^st and 2^nd defendants also refused to return the WIW Shares to the plaintiff.  In November 2001, the plaintiff commenced proceedings in the Victoria Supreme Court, Australia, claiming for damages for breach of the Agreement or return of the WIW Shares.

6. It is the plaintiff’s case that during the aforesaid proceedings, the 1^st and 2^nd defendants expressly or impliedly represented to the plaintiff that they still indirectly owned and controlled the Rights and the Land and that they intended to continue to do so.  However, without the plaintiff’s knowledge, the holding company of the 1^st defendant sold its entire shareholding in the 1^st defendant to one Central Business Asia Limited for AUS$500,000 in about February 2003.  The 1^st to 3^rd defendants procured the 4^th defendant to enter into an agreement in about April or May 2003 (“the Lucky Dragon Agreement”) whereby the 4^th defendant sold all its interests in the Mainland Companies (“the Shares”) to the 5^th defendant.  The 5^th defendant thereby obtained the ownership and control of the Rights and the Land.  Under the Lucky Dragon Agreement, the 5^th defendant agreed to pay the 4^th defendant an initial sum of HK$2 million, which it subsequently did, and a performance payment as set out in Schedule 2 to the Lucky Dragon Agreement (“Performance Payment”).  The plaintiff only became aware of the Lucky Dragon Agreement and the purported sale of the Shares in about September 2003.

7. In March 2004, the plaintiff obtained judgment against the 1^st defendant in the Victoria Supreme Court for AUS$46 million.  The 1^st defendant failed to pay and was then wound up.  The judgment remains an empty one to-date.

8. In July 2005, the plaintiff commenced the present proceedings against the defendants.  It obtained default judgment against the 1^st to 4^th defendants, who did not file any acknowledgement of service.  The plaintiff also obtained default judgment against the 5^th defendant but it was later set aside.

The plaintiff’s claims against the 5^th defendant

9. The plaintiff sought to impugn the Lucky Dragon Agreement under section 60 of the Conveyancing and Property Ordinance, Cap.219 (“the Ordinance”) on the basis that the Lucky Dragon Agreement was entered into with intent to defraud the plaintiff as a creditor of the 1^st defendant.  The plaintiff pleaded thus :

“Lucky Dragon Agreement to be impugned

44.  The Plaintiff is and was, at all material times, a creditor of the 1^st Defendant by virtue of the outstanding sums due from it to the Plaintiff pursuant to the CCR/SBS Share Sale Agreement and, since 26 March 2004, by virtue of the Judgment which remains unsatisfied.  

45.  In addition, the Plaintiff is and was, at all material times, a creditor of the 3^rd Defendant by reason of a construction loan in the sum of US$7,300,000.00 that the Plaintiff provided to the 3rd Defendant between June 1997 and September 1998 at the direction and nomination of the 1^st Defendant pursuant to Clause 2.3 of the CCR/SBS Share Sale Agreement.  

46.  The 4^th Defendant is and was a result of the matters pleaded in paragraphs 9 to 15 above a subsidiary of the 1^st, 2^nd and 3^rd Defendant and under their control and direction.  Further, at the time of the Lucky Dragon Agreement, the 1^st, 2^nd and 4^th Defendants had at least one common director, namely, Chan Ka Wai who signed the Lucky Dragon Agreement for and on behalf of the 4^th Defendant. 

47.  The Lucky Dragon Agreement and the transfer of the Shares by the 4^th Defendant to the 5^th Defendant purportedly pursuant thereto were procured by the 1^st to 3^rd Defendants and entered into and effected by the 4^th Defendant with intent to defraud the Plaintiff as a creditor of the 1^st Defendant. 

PARTICULARS

….

48.  By reason of the matters aforesaid, the Lucky Dragon Agreement was procured by the 1^st to 3^rd Defendants and entered into by the 4th Defendant with the intention of putting the 1^st and 3^rd Defendants’ assets or the value of their assets out of the reach of the Plaintiff. 

49.  As a result of the matters pleaded above, the Plaintiff has been unable to obtain payment or satisfaction of the Judgment Sum or any part thereof from the 1^st Defendant. 

50.  Further, the 5^th Defendant had at all material times actual or constructive notice that the Lucky Dragon Agreement was procured by the 1^st to 3^rd Defendants and entered into by the 4^th Defendant with the intention of defrauding or evading the 1^st and 3^rd Defendants’ liabilities to the Plaintiff. 

PARTICULARS

(1)   The Plaintiff contends that such notice is to be inferred from the fact that the purported sale of the Shares pursuant to the Lucky Dragon Agreement to the 5^th Defendant was at an undervalue and that there was no commercial justification for the terms of the Lucky Dragon Agreement.  The market value of the Dalian Land (in a cleared site state) as of May 2003 was RMB 251 million whereas the consideration under the Lucky Dragon Agreement was, at most, HK$52 million.  

(2)   The 5^th Defendant had actual notice of the Victorian Proceedings which were referred to in the Lucky Dragon Agreement. 

(3)   Despite being advised to obtain independent legal advice, both the 4^th and 5^th Defendants insisted on executing the Lucky Dragon Agreement without obtaining any prior independent legal advice. 

50A. Further to paragraph 50, the Plaintiff will ask the Court to find and/or infer that :-

(i)           The 5^th Defendant is and at all material times was not a company of any substance;

(ii)   the ostensible owner/controller of the 5^th Defendant is and was at all material times not a person of any substance either;

(iii)  the purported Mainland joint venture partner of the 5^th Defendant in developing the Dalian Land was not an entity of any substance either and had not injected any capital into the development;

(iv)  the ostensible owner/controller of the 5^th Defendant agreed with the 1^st to 4^th Defendants to procure the incorporation of the 5^th Defendant and procure the 5^th Defendant to enter into the Lucky Dragon Agreement with a view to frustrating the Plaintiff’s efforts to recover its claim in the Victorian Proceedings and with a view that after transfer of the Shares to the 5^th Defendant, the 5^th Defendant would abide by the orders, wishes or instructions of the 1^st to 4^th Defendants in relation to the Shares; and

(v)   the signing and purported making the Lucky Dragon Agreement was not preceded by any negotiations between the 4^th and the 5^th Defendants.

Prior to the discovery and/or interrogatories, the best particulars that the Plaintiff can give are as follows :-

PARTICULARS

(1)    The 5^th Defendant is and was at all material times not a company of any substance.

         (a)     The 5^th Defendant was only acquired from an offshore agent known as TrustNet Group in around April 2003 as a shelf company incorporated in Western Samoa.  It had no pre-existing business or track record.

         (b)     The 5^th Defendant was subsequently dissolved and struck off the Register of International and Foreign Companies (the ‘Register’) during the period between 18 February 2005 and 28 July 2005 by reason of non-payment of Government fees.

         (c)     It was only upon the application by the Plaintiff pursuant to section 197(6) of the International Companies Act 1987 that the dissolution of the 5^th Defendant was declared void and the 5^th Defendant was restored on the Register by Order of the Supreme Court of Samoa dated 29 July 2005.

(2)    Ms. Shirley Yeung (‘Yeung’), being a shareholder and director of the 5^th Defendant and the ostensible owner/controller of the 5^th Defendant, is and was not a person of any substance either and not in a position to finance a multi-million venture such as the development of the Dalian Land.  The best particulars that the Plaintiff can presently give prior to discovery and/or interrogatories are as follows :-

         (a)     Yeung had previously been a director and/or shareholder of the following 8 companies incorporated in Hong Kong, all of which have either been dissolved or would up by the Court of (the ‘Companies’).

                  (i)      Weichang International Incorporation Limited (wound up by order of the Court dated 22 September 2004 on the ground of insolvency).

                  (ii)     Fuwah Hotel Management (H.K.) Company Limited (dissolved).

                  (iii)     Galaxy Trade Limited (dissolved).

                  (iv)    Jetlux Investment Limited (dissolved).

                  (v)     Katrade Development Limited (dissolved).

                  (vi)    New Stone Limited (dissolved).

                  (vii)    Senibo Investment Limited (dissolved).

(viii)      Top Collection International Limited (dissolved).

(b)     She has not been a shareholder or director of any Hong Kong company since 2001.  She has not been a partner or sole proprietor of any firm or business in Hong Kong since 1987.

(c)     Her last known residence in Hong Kong was Flat F, 17^th Floor, Island Place III, Tanner Road, Hong Kong, a rented property of around 600 to 700 sq ft. and with a current rateable value of HK$120,360.

(d)     She has not owned any landed property in Hong Kong since 1990.

(3)    The purported joint venture partner of the 5^th Defendant in the development of the Dalian Project (as disclosed by the 5^th Defendant in these proceedings), namely, Qingdao Yuzhe Property Development Company Limited (‘Qingdao Company’) does not have and never had the financial capability to make capital injections/contributions to the Dalian Project, and in fact never made any such injections/contributions.  The best particulars that the Plaintiff can presently give prior to discovery and/or interrogatories are as follows :-

(a)     Qingdao Company was incorporated in the People’s Republic of China in October 1996 with a registered capital of RMB 6 million.

(b)     According to the accounts of Qingdao Company for 2003, the company had net assets of approximately RMB 6 million, but with no record of any long term investments.

(c)     There are no records in the accounts of Qingdao Company for the years 2003, 2004 and 2005 of any capital injections/contributions to the Dalian Project.

(d)          Qingdao Company was deregistered by the Qingdao Industry and Commerce Department on 16 October 2005 for failure to submit the 2004 annual assessment required by the relevant company laws of the People’s Republic of China.

(4)    The Plaintiff repeats all the matters pleaded in paragraphs 1 to 49 above against the 5^th Defendant.  The Plaintiff will contend that, having resorted to such conduct of deception and deliberate concealment as pleaded therein :-

(a)     it is inherently improbable that the 1^st to 4^th Defendants would procure that the Shares be transferred merely to an innocent third party; and

(b)     it is inherently more probable that they would procure the transfer of the Shares to a party who had agreed to abide by their orders, wishes or instructions in relation to the Shares so that, although the 4^th Defendant had ostensibly been divested of the Shares (and the Judgment would become an empty one) the 1^st to 4^th Defendants would continue to enjoy the benefit of the Shares.

51.    In the premises, the Lucky Dragon Agreement is voidable by virtue of section 60 of [the Ordinance] and ought to be set aside on the basis that the purported sale and transfer of the Shares pursuant thereto constituted a disposition of property by the 1^st to 4^th Defendants with intent to defraud creditors.”

10. The plaintiff also pleaded that the 5^th defendant had not paid the Performance Payment.

11. The plaintiff further relied on conspiracy which, for present purpose, has no particular relevance.

The 5^th defendant’s amended defence

12. In the amended defence, the 5^th defendant did not admit that it had not paid the Performance Payment : paragraph 9.  It then pleaded that it did not have any notice of the proceedings in Victoria : paragraph 12(i).  It went on to plead in paragraph 12(ii) that the Lucky Dragon Agreement was not “conducted” at an undervalue and there was a justification from the 5^th defendant’s point of view for entering into it.  The following particulars were supplied :

(1)     The Lucky Dragon Agreement was “conducted” in or around April or May 2003 during the SARS crises : sub-paragraph (a).

(2)     The project in question was dormant at the time the 5^th defendant had entered into the Lucky Dragon Agreement and construction works had been suspended for several years prior to 2003 : sub-paragraph (b).

(3)     The 5^th defendant had to invest around RMB50 million as consultants and architects fees to complete a comprehensive overall plan of the project : sub-paragraph (c).

(4)     Recital D of the Lucky Dragon Agreement provided that “Both parties fully understand the risk of the assets, being [the Land], owned by subsidiaries of the Vendor prior to this Agreement could be forfeited by the Chinese Government due to the delay in development and due to breaching the Regulations and Law in China” : sub-paragraph (e).

(5)     Clause 5.1 of the Lucky Dragon Agreement stipulated that the 5^th defendant was to undertake to make payments on behalf of the Vendor of all liabilities which included, inter alia, Judgment entered by the City of Dalian Intermediate People’s Court as against a subsidiary of the 4^th defendant for RMB21,360,478.55 : sub-paragraph (f).

13. In paragraph 13 of the amended defence, the 5^th defendant did not admit the matters pleaded in paragraph 50A of the amended statement of claim.  It further pleaded that the 8 companies particularized in paragraph 50A(2)(a) of the amended statement of claim were either single purpose corporate vehicles that had served their purposes (and were consequently dissolved) and/or were wound upon sound commercial decisions.

Section 60(3) of the Ordinance

14. Before proceeding further, it is important to bear in mind that it is the 5^th defendant’s case, though not expressly pleaded, that section 60(3) of the Ordinance applied. 

15. Section 60(3) provides :

“(3)      This section does not extend to any estate or interest in property disposed of for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent to defraud creditors.”

By relying on section 60(3), the 5^th defendant needs to establish :

(1)     the Lucky Dragon Agreement was for valuable consideration; and

(2)     the 5^th defendant was acting in good faith without notice of the alleged intent to defraud the plaintiff when it entered into the Lucky Dragon Agreement.

16. With this in mind, I first deal with the application for further and better particulars.

Further and better particulars

17. The plaintiff sought further and better particulars of the paragraphs of the amended defence as identified above.  A total of 8 requests were raised.

18. Request 1 relates to the non-admission in paragraph 9 that the 5^th defendant had not paid the Performance Payment.  Plainly, the non-admission is pregnant with an affirmative averment that it had paid the Performance Payment.  It must provide the particulars sought.

19. Request 2 deals with the plea in paragraph 12(ii) that the Agreement was not “conducted” at an undervalue.  The plaintiff wants to know what the 5^th defendant will contend to be the market value of the Land at the time of the Lucky Dragon Agreement.  As the 5^th defendant has to establish that the Lucky Dragon Agreement was for valuable consideration, this request is proper and must be answered.

20. Request 3 seeks a clarification of the word “conducted” used in paragraph 12(ii)(a) of the amended defence and particulars rested on the basis that the word is a mistake for “concluded”.  This again is a proper request and must be answered.

21. Request 4 concerns the plea in paragraph 12(ii)(b).  The plaintiff first seeks the precise time when the 5^th defendant had entered into the Lucky Dragon Agreement.  As paragraph 12(ii)(a) and (b) now stand, it is not clear if the time when the Lucky Dragon Agreement was “conducted” is also the time when the 5^th defendant entered into the same.  This must be clarified.  The plaintiff then asks the 5^th defendant to state the number of years prior to 2003 that the construction works had been suspended.  I think the duration of suspension may have an impact on the value of the project in question, which bears on the question if the Lucky Dragon Agreement was at an undervalue or for valuable consideration.  This must be answered.

22. Request 5 asks if the 5^th defendant had in fact invested around RMB50 million as pleaded in paragraph 12(ii)(c).  Mr Coleman, SC, for the 5^th defendant, agreed (and rightly so in my view) that the particulars sought would be provided.  (According to Mr Coleman, the 5^th defendant had in fact invested the sum into the project.)

23. Request 6 deals with the reference to Recital D of the Lucky Dragon Agreement in paragraph 12(ii)(e).  The plaintiff wants to know if it is the 5^th defendant’s case that (a) there was in fact delay in the development of the project and if so, the consequential particulars; and (b) there had in fact been breach of the “Regulations and Law in China” and if so, the particulars of the same.  In my view, whether there was in fact delay and breach of the statutory provisions are relevant to the value of the project, which in turn impacts on the value of the Lucky Dragon Agreement.  The particulars sought must be provided.

24. Request 7 first asks the 5^th defendant to state its case on the words “inter alia” used in paragraph 12(ii)(f).  Mr Coleman agreed to provide the particulars sought.  It then seeks particulars of the “Judgment” referred to in the same paragraph.  Mr Coleman said that a copy of the judgment concerned had already been attached to the Lucky Dragon Agreement.  The request is therefore unnecessary.  With respect, I disagree.  I think the plaintiff is quite entitled to know on the 5^th defendant’s pleaded case what exactly the “Judgment” is.  The particulars must be provided.

25. Finally, request 8 first deals with the non-admission in paragraph 13 of the amended defence.  The non-admission is again pregnant with affirmatives.  The 5^th defendant must provide the particulars sought.  Request 8 then seeks particulars of the 8 companies as to (a) which was single purpose vehicle that had served their purpose, the purpose in question and how that single purpose had been served; and (b) which was wound up for sound commercial decisions and particulars of the decisions.  All these requests relate to the question if Shirley Yeung, the ostensible owner/controller of the 5^th defendant, was a person of means who was capable of financing the project, which is relevant to the question if the Lucky Dragon Agreement was entered into with good faith.  The requests are proper and must be answered.

26. For the above reasons, I will allow the application for further and better particulars on all the 8 requests save and except request 8(15)(ii), which the plaintiff no longer pursued.  The 5^th defendant should provide the particulars within 35 days from the date of handing down of this decision.

27. I now turn to the application relating to the interrogatories.

Interrogatories

28. Under Order 26, rule 1 of the Rules of the High Court, Cap.4, a party may serve on the other party interrogatories relating to any matter in question in the cause or matter which are necessary either (a) for disposing fairly of the cause or matter; or (b) for saving costs.

29. Counsel had cited a number of English and Hong Kong authorities on the application of Order 26.  I will not discuss the cases in detail here because the principles are well settled and need no repetition.  I will go straight to the outstanding interrogatories, which can be grouped together for present purpose as follows.

30. Interrogatories 11(1) and (2) ask if the 5^th defendant had or still has any bank accounts anywhere in the world from 2003 to date, and if so the particulars of those accounts.  Interrogatories 11(3) to (5) ask in substance if it was the 5^th defendant who actually paid for consideration including the initial payment of HK$2 million under the Lucky Dragon Agreement and the source of funds.   

31. These interrogatories are relevant to the issue if the 5^th defendant had in fact paid for the Shares or otherwise funded the project on the Land, and if it had the financial resources or capability to do so.  This in turn is relevant to the question if the Lucky Dragon Agreement is genuine.  They should be answered so that the plaintiff can be provided with the information to properly prepare for the trial.

32. Interrogatories 12, 13(1) to (3) and 14(1) to (4) ask the 5^th defendant to state if it had paid the Performance Payment and depending on the answer, to give the consequential information.  These interrogatories are relevant to the question if the Lucky Dragon Agreement is genuine.  They are proper and must be answered.

33. Interrogatories 15(1) to (7) seek further information of Qingdao Company referred to in paragraph 19 of Shirley Yeung’s witness statement as a joint venture partner of the 5^th defendant in the development of the project on the Land.  In particular, they ask for information concerning that company’s funding obligations and contributions towards the project.  These are all relevant to the genuineness of the Lucky Dragon Agreement.  They are proper and must be answered.

34. Interrogatories 16(1) to (8) ask for further information on paragraph 20 of Shirley Yeung’s witness statement.  It is not necessary to go into detail.  The interrogatories are relevant to the issue if the Lucky Dragon Agreement is genuine.  They must be answered.

35. Interrogatories 17(4) to (6) deal with Shirley Yeung’s evidence in paragraph 12 of her witness statement on the alleged investment of RMB50 million by the 5^th defendant.  Again, it is not necessary to go into detail.  The interrogatories are relevant to the genuineness of the Lucky Dragon Agreement and must be answered.

36. Interrogatory 20 asks for further information of paragraph 17 of Shirley Yeung’s witness statement where she alleged that in about May/June 2003 the Vendor told her certain matters.  The plaintiff wants to know the exact date when she was so told.  But I do not think the exact date matters.  The plaintiff also wants to know who from the Vendor told her so.  But the identity has already been revealed in the Yeung’s witness statement.  Interrogatory 20 is not permissible.

37. Interrogatory 21 asks for names of the individuals from the 5^th defendant and the Qingdao company who are currently responsible for the management of the project and the Land.  Mr Coleman submitted that it is an attempt to get potential witnesses’ names.  But I agree with Ms Tong’s submission that the information is necessary to ascertain if there is a collusion or association with the 1^st to 4^th defendants on the one hand and the 5^th defendant on the other, which may shed light on the genuineness of the Lucky Dragon Agreement.

38. Interrogatories 22, 23, 24(1) to (2), 25 and 26 concern in substance whether the 5^th defendant had transferred, sold, disposed or other otherwise dealt with the Shares, the Rights or the Land since the Lucky Dragon Agreement and if so the details.  Mr Coleman submitted that the interrogatories are tantamount to a tracing exercise, which is not permissible.   But again I agree with Ms Tong that the interrogatories are relevant to the genuineness of the Lucky Dragon Agreement and if provided, will enable the plaintiff to properly prepare for the trial and save costs. 

39. For the above reasons, I rule that all the remainder of the interrogatories, save and except interrogatory 20, are proper and must be answered.  The failure on the part of the 5^th defendant to answer them is not justified.  It is in the circumstances proper to impose an order that unless the 5^th defendant do within 35 days answer the remainder of the interrogatories (except interrogatory 20), its defence be struck out and the plaintiff be at liberty to enter judgment against the 5^th defendant for the relief as set out in the amended statement of claim.

Costs

40. Costs should follow the event.  I will make an order nisi that the plaintiff do have the costs against the 5^th defendant for both applications, including all related costs reserved, to be taxed if not agreed.