GREAT STRATEGY PROPERTIES LTD AND ANOTHER v. SHUNG TAN AND OTHERS

HCA245 / 2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 245 OF 2008

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REASONS FOR DECISION  & DECISION ON COSTS

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I.   Introduction

1.  On 20 November 2008, I allowed Summit Mass Ltd’s application (made through its Receivers) and ordered, inter alia, that Summit Mass (the original 1^stDefendant herein) ceased to be the 1^st Defendant and be joined as the 2^nd Plaintiff in this action.   I will explain the reasons for my decision below.

2.  On 22 January 2009, under Great Strategy (the 1^st Plaintiff)’s Summons dated 22^nd February 2008 (“the Continuation Summons”), I continued certain injunctive orders obtained ex pate against Mr Chen Shunqiang (the 3^rdDefendant).  Mr Chen largely agreed to these orders through counsel. But Mr Chen successfully objected to certain paragraphs of the injunctive orders originally sought by the 1^stPlaintiff.  These objections were raised in his Summons dated 20 May 2008 (“the Variation Summons”).   After hearing submissions, I reserved my decision on costs under the Continuation Summons and the Variation Summons.   I will now also give my decision on costs below.

3.  But first, for better understanding of these decisions, I would set out briefly below the background leading to the dispute and these applications.

II.  Background

4.  Great Strategy is wholly-owned by Wah Nam Group Ltd (“Wah Nam”).  Wah Nam has since July 2000 been in liquidation under the supervision and control of its joint and several liquidators (“the Liquidators”).

5.  Summit Mass has since January 2000 been owned by Great Strategy (99.99%) and Crystal Services Ltd (0.01%), another company wholly owned by Wah Nam.  Thus, since July 2000, practically Summit Mass has also been under the control of the Liquidators.

6.  From January 2001, Summit Mass has been dormant and conducted no business after the resignations of its then directors. 

7.  Summit Mass’s only valuable asset is a piece of land (“the Xinhui Land”) situated in Xinhui District, Guangdong Province in the Mainland.

8.  In November 2007, the Liquidators discovered that various documents had been filed in the Companies Registry concerning Summit Mass, which purported to show that:

(1) On 3 June 2006, Ms Shung Tan (the 2^ndDefendant) was appointed as the sole director of Summit Mass.

(2) On 7 December 2006:

(a)  Great Strategy transferred 10,000 shares in in Summit Mass (being its entire issued shareholding) to Ms Shung.

(b) Ms Shung transferred all the said 10,000 shares in Summit Mass to Mr Chen, and resigned as the sole director. 

(c)  Mr Chen was appointed as the sole director.

(d) Crystal Service resigned as Summit Mass’s company secretary, and instead Wise Express (the 4^th Defendant) was appointed as the company secretary.

(3) On 5 July 2007, the registered office of Summit Mass was changed from the Liquidators’ office to that of Wise Express. 

9.  These purported companies documents were filed at the Companies Registry by Wise Express, and signed by Ms Shung or Mr Chen.

10.  The Liquidators had also discovered that Mr Chen had purportedly filed the original title documents of the Xinhui Land and the business registration certificate of Summit Mass (which were initially in the Liquidators’ possession but had gone missing) with the relevant Land Bureau in the Mainland, with the purpose of transferring the Xinhui Land from Summit Mass to himself.

11.  Great Strategy and the Liquidators deny having any knowledge, consent or approved all these documents to be filed with the Companies Registry and any of the above changes in the shareholding, directorship and corporate details of Summit Mass.  They have also not consented to or caused the Xinhui Land to be transferred or sold to anyone, including Mr Chen.  They also do not know how Summit Mass’s corporate kits including its company chop, and the title documents of the Xinhui Land have gone missing.  They say these are all part of a fraudulent scheme engineered by these Defendants to remove the control of Summit Mass from Great Strategy and to transfer away the Xinhui Land.

12.  In light of the above, on 15 February 2008, Great Strategy issued the present action against the Defendants (with Summit Mass then as the 1^st Defendant) and has since obtained the following ex parte order and interim injunction:

(1) On 15 February 2008, the appointment of Receivers and Managers (“the Receivers”) over Summit Mass.  

(2) On 21 February 2008, an injunction against Mr Chen (a) to hold himself out or act as Summit Mass’s shareholder and director, or in any way to deal with the Xinhui Land, and (b) to deliver up the title documents relating to the Xinhui Land, and Summit Mass’s company documents and chops, including any of its share certificates.

13.  The exact terms of the ex parte injunction (“the Ex Parte Injunction”) against Mr Chen are as follows:

“1.    The 3^rd Defendant must not, by himself or by any agent on his behalf:-

(a) hold himself out, or act, as a shareholder of Summit Mass.

(b) hold himself out, or act, as a director, officer or representative of Summit Mass.

(c) give instructions to Wise Express or any other party in connection with Summit Mass.

(d) use or deal with any property of Summit Mass or the Plaintiff, including without limitation the land in Xiao Liu Bu, Tian Shui Qu, Ya Xi Zhen (changed name to Ya Men Zhen in 2002), Xinhui District, Jiangmen City in Guangdong Province, PRC (中國廣東省江門市新會區崖門鎮（舊稱崖西鎮）甜水區小留步）(the "Xinhui Land"), the Land Use Certificate of the Xinhui Land, the Hong Kong Business Registration Certificate for Summit Mass, any seal or chop for Summit Mass, and any share certificate for shares in Summit Mass.

(e) transfer, or purport to transfer, any shares in Summit Mass to any person or entity.

2. The 3^rd Defendant must deliver up to the Plaintiff such of the folowing documents and items as are in his possession or control within 2 days of service of this Order:-

(a) the original Land Use Certificate of the Xinhui Land.

(b)    the original Hong Kong Business Registration Certificate for Summit Mass.

(c) any seal or chop of Summit Mass.

(d)    any share certificate for shares in Summit Mass.

(e) any other documents, original or copy, in the 3^rd Defendant's power or control and which belong to Summit Mass or the Plaintiff.”

14.  On 22 February 2008, Great Strategy took out the Continuation Summons seeking to continue the Ex Parte Injunction against Mr Chen.

15.  Since the appointment of the Receivers and the grant of the Ex Parte Injunction (which was continued by subsequent orders of the Court pending the determination of the Continuation Summons), the parties have respectively filed their pleadings, and a few rounds of affirmations in relation to various applications concerning the injunction. 

16.  According to the pleading and the affirmations filed, one of Mr Chen’s main defences regarding the Xinhui Land is that by way of an agreement entered into in or around June 2006, Summit Mass sold the Xinhui Land at the consideration of RMB$3.23 million to a company known as Jiangmen Ausccoto Chemical of Building Material Company Ltd (“Ausccoto”).  Mr Chen is the legal representative of Ausccoto, and he was registered as the new owner of the Xinhui Land only as a trustee for Ausccoto.   It is Mr Chen’s case that the title documents of the Xinhui Land were delivered to the custody of Ausccoto since the singing of the said sale agreement.

17.  On 20 May 2008, Mr Chen took out the Variation Summons seeking to vary the Ex Parte Injunction by deleting its paragraphs 1(d) and 2.   In other words, he asks for the injunction against him which relates to the dealing of the Xinhui Land and its title documents to be discontinued. 

18.  On 14 August 2008, Summit Mass (through the Receivers) took out the following Summonses:

(1) The Joinder Summons for an order that (a) Summit Mass cease to be the 1^st Defendant and be joined as the 2^nd Plaintiff in this action, and (b) Ausccoto be joined as the 5^th Defendant.

(2) The Summons to amend the Writ and for leave to serve outside jurisdiction of the Amended Writ on Ms Shung and Ausccoto.

(3) The Summons seeking various injunctions against the 2^nd to 5^th Defendants.  Insofar as the injunction sought by Summit Mass against Mr Chen, they are in the same terms as that of the Ex Parte Injunction obtained by Great Strategy.

19.  These applications, together the Continuation Summons and the Variation Summons were before me at the hearing on 20 November 2008.  

20.  As I said above, at the hearing on 20 November 2008, I granted the joinder applications. I also granted the injunction sought by Summit Mass against Wise Express (effectively by consent).  As I will explain later below, in light of a late objection raised by Mr Chen based on the argument of res judicata, I adjourned Summit Mass’s application for injunction against Mr Chen, the Continuation Summons (taken out by Great Strategy) to continue the Ex Parte Injunction against Mr Chen, and the Variation Summons to 22 January 2009.

III.    The Joinder Summons – reasons for decision

21.  As I said above, at the hearing on 20 November 2008, despite Mr Chen’s objection, I allowed Summit Mass’s application to cease to be the 1^st Defendant and become the 2^nd Plaintiff in this action.  My reasons for this decision are as follows. 

22.  In opposition to this application, Mr Kam Kwok (for Mr Chen) submitted that, as the Receivers were appointed over Summit Mass on the basis that it was a defendant in this action, if it were to become a plaintiff, the appointment would be invalidated.  As such, (Mr Kwok further submitted) the Receivers therefore did not have the authority or power to cause Summit Mass to make this application.

23.  I do not accept the submissions.

24.  The appointment of the Receivers were made on the basis that it was necessary in the circumstances presented before the Court to, inter alia, preserve the status quo of Summit Mass, and to recover its assets.    As a matter of principle, the appointment of the Receivers has nothing to do with whether or not Summit Mass is a defendant in this action. I do not see any basis (legal or otherwise) to support the submissions that the Receivers were and could only be so appointed on the basis that Summit Mass was a defendant in the action.

25.  However, given that Summit Mass is now under the control of the Receivers, but not the wrongdoers, the proper plaintiff to claim for the recovery of the Xinhui Land, and for damages arising form the fraud is Summit Mass.  It is thus right to allow the joinder application to have Summit Mass joined as one of the plaintiffs.

26.  It is noteworthy that the terms of the appointment of the Receivers provide that they are to take all steps necessary to assume, take control of, preserve or retain Summit Mass’ right, title and legal and beneficial ownership in the Xinhui Land, and “to commence or manage any litigation arbitration or other legal proceedings in any jurisdiction on behalf of [Summit Mass], and to continue to engage and instruct solicitors, barristers and/or other legal advisers in this respect in the PRC, in Hong Kong or elsewhere”. 

27.  I regard these terms are wide enough to empower the Receivers to make the joinder application.

28.  Mr Kwok also submitted that there was no rule providing that a defendant (as the 2^nd Defendant in the present case) could cease to be come a defendant.

29.  I reject this submission as well. 

30.  Under O15 r 6(2) of the Rules of the High Court, the Court on an application or on its own motion may, if it thinks fit, order a party (who has ceased to be a proper or necessary party) to cease to be a party. 

31.  For the same reasons set out above, I am satisfied that Summit Mass has ceased to be a necessary defendant in this action, and it is just in the circumstances to order Summit Mass to cease to be a defendant in this action.

32.  I therefore allowed the joinder application with costs in the cause.

IV. Costs under the Injunction Summons and the Variation Summons

33.  At the end of the hearing on 22 January 2009, under the Continuation Summons, and upon Mr Chen raising no objections, I continued paragraphs 1(a), (b), (c), (e) of the Ex Parte Injunction against Mr Chen. 

34.  I however allowed the Variation Summons and refused to continue the injunction under paragraphs 1(d) and 2 of the Ex Parte Injunction[1].

35.  Mr Chen succeeded in opposing paragraphs 1(d) and 2 of the injunctive orders sought by Great Strategy on the basis that, after the appointment of the Receivers of Summit Mass, Great Strategy could no longer maintain its derivative action against Mr Chen in relation to the loss of the Xinhui Land.  This is so because the requirement that the company is in control of the wrongdoers to prevent it from suing for the recovery of the Xinhui Land no longer exists. There is therefore no longer any basis for Great Strategy to ask for these interim injunctive reliefs against Mr Chen concerning the recovery of the Xinhui Land.  Cf: Prudential v Newman Industries (No 2)[1982] Ch 204 (CA), 210D-211C; Birch v Sullivan [1958] 1 All ER 56, 58H-59A .

36.  Mr Chen therefore asked for his costs.  He also said he should have costs under the Continuation Summons since he had previously communicated to Great Strategy that he would only object to the continuation of paragraphs 1(d) and 2 of the Ex Parte Injunction.  This must also be obvious from the reliefs sought under the Variations Summons.

37.  Mr Bartlett for Great Strategy however submitted that the successful ground of objection raised against the continuation of paragraphs 1(d) and 2 of the injunctive orders was different from the ones Mr Chen advanced at the pre-hearing stage and during the first hearing on 20 November 2008.  In the premises, Mr Chen should not have those costs.

38.   Looking at the skeleton submissions Mr Kam (for Mr Chen) provided for the hearings on 20 November and 22 January 2009, although they might not have been clearly expressed, I accept that the objection based on Great Strategy’s lack of a proper derivative cause of action against Mr Chen upon the appointment of the Receivers of Summit Mass has been set out, amongst other grounds, therein.  

39.  I therefore do not accept Mr Bartlett’s submissions.

40.  But that is not the end for the consideration for costs.  The following should also be taken into account.

41.  At the end of the hearing on 20 November 2008, Mr Kwok produced to this court a copy of a decision and order made by the Jiangmen Intermediate People's Court dated 7 April 2008.  The Jiangmen Court’s Order was to dismiss Summit Mass’s claim against Mr Chen for, inter alia, the delivery up of the title documents of the Xinhiu Land.   Upon the Court’s question, Mr Kwok indicated that he would pursue an argument on res judicata as to whether this order constituted a binding ruling (and thus res judicata) thatMr Chen was not the proper person to be sued in relation to the recovery of the title documents to the Xinhui Land, and the land itself.  

42.  Mr Bartlett then rightly asked for time to consider and prepare for this newly raised ground of objection.   I therefore adjourned the determination of the Variation Summons, the Continuation Summons and Summit Mass’s application for injunction against Mr Chen to 22 January 2009 for further submissions.  This was made on the basis that the adjourned hearing was to deal with the arguments on res judicata. 

43.  During the adjournment, Summit Mass filed further substantive evidence (including expert evidence on PRC law) in relation to the res judicata arguments.  Mr Bartlett (for Summit Mass) also filed his skeleton on res judicata before the hearing on 22 January 2009.

44.  However, at the hearing on 22 January 2009, Mr Kwok (for Mr Chen) indicated that, after considering the evidence and arguments raised by Summit Mass, he would no longer pursue the objection based on res judicata.  On the other hand, he asked for leave to address again on the other grounds opposing the continuation of paragraphs 1(d) and 2 of the Ex Parte Injunction.  I granted leave for him to do so.

45.  In light of the above developments, although Mr Chen eventually succeeded in the Variation Summons, I do not think it is fair and just that he should have the costs in relation to the hearing on 22 January 2009.   There would not have been a hearing on 22 January 2009 had Mr Chen (through counsel) not raised the objection based on res judicata.  A ground which he then abandoned at the adjourned hearing.

46.  At the same time, I also believe it should only be right that Great Strategy should be entitled to the costs incurred, if any, in relation to the preparation for the arguments on res judicata.

47.  Having considered the above circumstances in the round, and the general principles that costs should follow the events, I regard it to be fair and just to make the following costs orders:

(1) Costs of the Variation Summons, including the hearing of 20 November 2008, be to Mr Chen to be taxed if not agreed.

(2) Costs of the Continuation Summons, including the hearing of 20 November 2008, be to Mr Chen, to be taxed if not agreed.

(3) As between Great Strategy and Mr Chen, there will be no order as to costs of the hearing on 22 January 2009, save that Great Strategy's costs incurred, if any, in the preparation for the arguments of res judicata be paid by Mr Chen, to be taxed if not agreed. 

 

 

[1] It must be however noted that I allowed Summit Mass's application for injunction in the same terms against Mr Chen with Summit Mass's costs in the cause, which was not opposed by Mr Chen.