ACHIEVE GOAL HOLDINGS LTD v. ZHONG XIN ORE-MATERIAL HOLDING CO LTD

HCA 1987/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1987 OF 2005

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REASONS  FOR  DECISION

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1.  There are two summonses taken out on the part of the 1^st plaintiff by counterclaim (“Zhong Xin”), 2^nd plaintiff by counterclaim (“Bai Jun”) and the intervener Clarigain Enterprises Ltd (“Clarigain”). 

2.  The 1^st summonses dated 13 September 2007 sought the following reliefs:

(1) joinder of Clarigain suing on behalf of itself and all other shareholders of the Zhong Xin (and renaming Zhong Xin from the 1^st plaintiff by counterclaim as 5^th defendant by counterclaim);

(2) leave to re-amend the Amended Defence and Counterclaim;

(3) consequential directions that:

(a)	the summons dated 21 March 2007 taken out by the 2nd defendant by counterclaim (“Angola”) and the 3rd defendant by counterclaim (“Zhao”) to strike out Zhong Xin as the 1st plaintiff by counterclaim on the ground of want of authority to sue (“Authority to sue Summons”) be adjourned to the trial;
(b)	the summons dated 21 March 2007 taken out by Angola and Zhao to strike out part of the Amended Defence and Counterclaim (“Striking out Summons”) be restored for hearing.

3.  The 2^nd summons dated 25 February 2008 sought to add further amendments to the draft Re-Amended Defence and Counterclaim under the 1^st summons.

4.  At the hearing, I granted the summonses in terms, and I now give my reasons.

Background

5.  CLB is a joint venture mining company in Yulin on the Mainland.  The joint venture shareholders are Yulin Company investing RMB 21.3 million (30%) and Zhong Xin investing RMB 49.7 million (70%).

6.  Originally, Zhong Xin was wholly owned by Bai Jun.  Bai Jun entered into a joint venture agreement with Angola whereby Angola was to invest RMB 50 million in Zhong Xin which would in turn be invested in CLB, and Angola was to pay Bai Jun RMB 7 million.  In return, Bai Jun would transfer 50% of the shares in Zhong Xin to Angola.  The 50% share transfer was completed, and Bai Jun also transferred the remaining 50% shares to Clarigain holding as its nominee. 

7.  At present, the shareholders in Zhong Xin are Angola and Clarigain holding 50% each.

8.  Angola was supposed to invest the RMB 50 million in 3 instalments of RMB 20 million, RMB 20 million and RMB 10 million within 2 years, and Angola was to pay Bai Jun RMB 7 million in 3 instalments of RMB 2 million, RMB 2 million and RMB 1 million.

9.  Angola did not pay Zhong Xin the 1^st instalment of RMB 20 million.  Instead, it procured Achieve Gold to make a loan of RMB 20 million to Zhong Xin.  Angola did not pay the 2^nd and 3^rd instalments of RMB 30 million.

10.  Angola paid Bai Jun the 1^st instalment of RMB 2 million, but did not pay the 2^nd and 3^rd instalments of RMB 5 million. 

11.  In July 2005, Bai Jun commenced HCA 1284/2005 against Angola for breach of the joint venture agreement in failing to make the 1^st instalment.  The defence was that the RMB 20 million loan by Achieve Gold was supposed to be the 1^st instalment.

12.  In October 2005, Achieve Gold commenced the present action against Zhong Xin for repayment of the RMB 20 million loan.  Zhong Xin and Bai Jun counterclaimed against Achieve Goal, Angola, Zhao (director of Zhong Xin whose wife is the only director of Angola), and Ng (4^th defendant by counterclaim, director of Zhong Xin, Angola and Achieve Gold).  Bai Jun alleged that the loan agreement was induced by the misrepresentation that Angola had financial problem and Achieve Gold was an independent third party, but it turned out that Achieve Gold was related to Angola.  Zhong Xin and Bai Jun sought a declaration that the loan agreement had been rescinded, the RMB 20 million paid by Achieve Gold was in fact the 1^st instalment, damages for fraudulent misrepresentation, and/or specific performance of the joint venture agreement by Angola.

13.  Soon after Zhong Xin and Bai Jun had taken out a summons for speedy trial, Angola and Zhao took out the Authority to sue Summons to strike out Zhong Xin and Bai Jun on the basis that Zhong Xin was at all material times a deadlock company and without authority to sue.  The Striking out Summons sought to strike out all references to Zhong Xin as the 1^st plaintiff by counterclaim. 

14.  The hearing of the Authority to sue Summons was estimated to last 2 days with directions for cross-examination of the deponents and expert evidence on BVI law on Zhong Xin’s Memorandum and Articles of Association.  A Consent Order dated 23 March 2007 directed that the Striking out Summons be heard after the Authority to sue Summons.

15.  To date, Bai Jun had paid up the remaining investments in CLB.  The re-amendment pleads this fact and subject to specific performance, seeks rectification of the share register of Zhong Xin such that Angola’s 50% shareholding be rateably reduced under terms of the joint venture agreement to reflect the RMB 20 million only paid by Achieve Gold.

Clarigain’s Grounds

16.  Mr. Leong SC, for Zhong Xin, Bai Jun and Clarigain submitted that:

(1)   Clarigain is joined to bring a common law derivative action under Wallersteiner v Moir [1974] 1 WLR 991; [1974] 3 All ER 217 in order to avoid the time, costs and delay over the Authority to sue Summons;

(2)   the re-amendments are to bring up to date the current development in Angola’s failure to pay the 2^nd and 3^rd instalments and the payment by Bai Jun to CLB;

(3)   the Authority to sue Summons is academic save as to costs and should be dealt with at the trial in order to avoid a separate mini-trial;

(4)   the Striking out summons should be restored for hearing before the Authority to sue Summons in order that it does not stand in the way of speedy trial of the matter.

Angola’s Grounds

17.  Mr. Chan, for Angola and Zhao, submitted the following main points:

(1)   the derivative action on the basis that Zhong Xin was deadlock is inconsistent with the alleged authority to sue on the part of Zhong Xin, and Clarigain should make the election;

(2)   the Authority to sue Summons should be heard first because lack of authority to sue means the action was void ab intio and is liable to be struck out;

(3)   lack of authority to sue is not cured by adding or substituting a party;

(4)   Clarigain should commence fresh proceedings for the derivative action;

18.  Mr. Si, for Achieve Gold and Mr. Ng, adopted the submissions of Mr. Chan.

Discussion

19.  Mr. Leong conceded that there are serious disputes over whether the Counterclaim was brought with proper authority of Zhong Xin, without conceding the Authority to sue Summons. 

20.  He submitted that when there is doubt on the authority to use the company’s name, an action in the form of a derivative action is preferable to an action brought in the name of the company, because by taking the course of a derivative action, the unnecessary time and costs wasted in fighting over the right to use the name of the company can be avoided (see Palmer’s Company Law Vol. 2 p. 8179 para. 8.805 citing Alexander v Automatic Telephone Co [1900] 2 Ch 56, 69 per Lindley MR).

21.  He submitted that upon Clarigain being joined to pursue the derivative counterclaim on behalf of Zhong Xin, the determination of the merits of the of the Authority to sue Summons can offer no assistance to the Court in resolving the substantive issues in dispute, and will have no practical consequences except on costs.  The adjournment of it to trial will save witnesses from coming to Hong Kong to give evidence twice.

22.  Mr. Chan submitted that the bringing of the derivative action by Clarigain as an attempt to remedy the defect of the lack of authority to sue by Zhong Xin is misconceived.  If the amendment were necessary, it would imply that Zhong Xin did not have authority to counterclaim and there is no reason why the Authority to sue Summons should not be conceded; on the other hand, if Zhong Xin had authority to sue in the first place, the amendment would be unnecessary.

23.  He submitted that an amendment takes effect from the date of the original documents it amends and not from the date when the amendment is made (see Hong Kong Civil Procedure 2008 Vol. 1, p. 377, para. 20/8/2).  Hence, it is improper to use amendment of the pleading as a backdoor exercise to bring in a derivative action.  The Counterclaim in the name of Zhong Xin should be discontinued and derivative action be brought afresh.

24.  Mr. Chan also submitted that if Zhong Xin did not have the authority to sue in the first place, the Counterclaim is liable to be struck out (see Daimler Co v Continental Tyre Co [1916] 2 AC 337).  Numerous authorities have decided that the question of authority to issue the writ of summons should be resolved first before the case be allowed to proceed further and not be left for determination at the trial (see Kammy Town Ltd v Super Glory Corporation Ltd HCA 3524/2003; [2005] HKCU 93 per A Cheung J). 

25.  Mr. Chan submitted that notwithstanding the need to cross-examine the deponents, there is not really anything in common between the authority to sue and the substantive issues.  The witnesses might have saved a trip, but would have to stay longer during the trial. 

26.  Mr. Leong pointed out that the derivative action is not to be taken as any remedy of the lack of authority to sue, which is denied.  However, there is no need to resolve that point now as the proceedings continue in the form of a derivative action.

27.  As I see it, amendment to add or substitute a plaintiff under O. 15, r. 6, RHC is allowed where it is necessary to enable the question at issue to be determined and the defendant can be safeguarded as to costs (see Hong Kong Civil Procedure 2008 Vol. 1, p. 237, para. 15/6/2).

28.  Here, the substantive issues are the same be it an action by Zhong Xin or an derivative action by Clarigain.  The carrying on of the derivative action means that the trial of the same issues will proceed in any event without first resolving the locus standi of Zhong Xin.  The Authority to sue Summons will have no practical consequences except as to costs.  In this sense, the authorities on authority to sue are distinguishable.  Further, Achieve Gold and Angola will not be denied any safeguard on costs should the Authority to sue Summons be determined in their favour.  I also see no inconsistency in the alternatives as they are based on different factual bases yet to be determined.

29.  Looking at it differently, even if the derivative action were brought as fresh proceedings, the issue of authority to sue will still have to be determined as it is contested.  Similar application for adjournment and consolidation or sequential disposal may still be made on the ground of cross-examination of witnesses on one occasion at the trial.

30.  I fail to see that Bai Jun and Clarigain are playing any delaying tactics as it is obviously not in their interests to do so.  In fact, they have asked for a direction for a speedy trial before the Authority to sue Summons was taken out.

31.  In the circumstances, I considered the most convenient and costs saving way was to adjourn Authority to sue Summons to be dealt with at the trial in order to avoid the same witnesses coming to Hong Kong for a separate mini-trial.

32.  As to the Striking out Summons, it was previously ordered to follow the Authority to sue Summons.  Mr. Leong asked for it to be restored and hopefully be dealt with by the other side in a sensible manner so that the way could be cleared for a speedy trial.  I simply ordered it to be restored, and counsel that discretion is the better part of valour given my direction on the Authority to sue Summons.

Costs

33.  I ordered that costs of and occasioned by the amendments be to the plaintiff/defendants by counterclaim.

34.  As to the costs of the hearing, as argument against the amendments were intertwined with the authority to sue, I ordered them to be reserved.

35.  Lastly, I thank counsel for their helpful submissions.