佛山市宏達發展公司清算組 v. EAST LEGEND INVESTMENT LTD

CACV 272/2007 and CACV 273/2007
(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 272 OF 2007 and 273 OF 2007

(ON APPEAL FROM HCA 581 OF 2002)

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REASONS FOR JUDGMENT

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Hon Cheung JA :

Background

1. On 7 June 2007 after a six-day trial Deputy High Court Judge To gave judgment for the plaintiff against the defendant for, among other things,

1)   A declaration that the defendant is the constructive trustee of the company known as 佛山市宏達發展公司(‘the Company’) and the plaintiff is the beneficial owner of five Hong Kong properties (‘the properties’).

2)   The defendant shall assign the properties to the plaintiff and discharge the mortgage on these properties and account to the plaintiff the rent and deposit received by the defendant on the properties.

3)   Judgment be entered for the plaintiff in the sum of RMB ￥85,120,000.00 or their Hong Kong dollars equivalent.

4)   After the disposal of the properties, the net proceeds of sale shall be applied by the plaintiff to settle the judgment sum and the defendant shall repay the deficiency to the plaintiff.

2. From this judgment the defendant appealed (CACV 273/2007).

3. The Judge had also at the commencement of the trial decided a preliminary issue as to the standing or authority of the plaintiff to sue the defendant in this action.  He found that the plaintiff had the necessary standing.  The defendant also appealed against this decision (CACV 272 of 2007).

4. The two appeals were to be heard together by this Court.  The defendant then decided not to pursue the appeal on the merits of the plaintiff’s claim in CACV 273 of 2007.  The appeal was by consent dismissed with costs to the plaintiff.  The defendant proceeded with the appeal on the plaintiff’s standing to sue.

5. The plaintiff in CACV 272 of 2007 issued a respondent’s notice seeking to affirm the decision on the plaintiff’s standing to sue on the ground that the Judge should not have allowed the defendant to raise this issue because of the earlier proceedings between the parties.

6. We asked the parties to address us on this issue first.  After hearing the parties, we held that the defendant was not entitled to reopen the issue of the plaintiff’s standing and dismissed its appeal.  I now give my reasons.

Standing to sue

7. The issue concerning the plaintiff’s standing arises in this way.  The Company was and still is a state-owned enterprise in Foshan, Guangdong.  Its sole shareholder is the Foshan Treasury and Finance Committee (‘FTC’).

8. As a result of a failure of the Company to complete the annual audit for the year 2000 in compliance with the Regulations of the People’s Republic of China on Administration of Registration of Companies 《中華人民共和國公司登記管理條例》，the Foshan Administration For Industry and Commerce (‘Foshan Administration’) on 28 November 2001 revoked the business licence of the Company and ordered FTC to form a Liquidation Committee to conduct the liquidation of the Company.  On 3 December 2001, FTC appointed the Industrial and Commercial Bank of China, Foshan Branch (‘the Bank’) to form the Liquidation Committee.  The Foshan Administration confirmed the appointment.  On 28 February 2002 the Bank informed FTC the formation of the Liquidation Committee.

9. The writ in this action was issued by the Company on 19 February 2002.  The case against the defendant was that the Company had transferred money in the sum of RMB ￥210,520,000.00 to the defendant.  Despite the defendant’s agreement to transfer the money back to the Company and its agreement to transfer the properties to the Company it had failed to do so.

10. The defendant had on 14 March 2002 issued a summons to strike out the action on the ground that the Company had no standing to sue.  The plaintiff had also issued a summons on 25 March 2002 to substitute the Liquidation Committee of the Company i.e. present plaintiff to be the plaintiff.

The evidence

11. The defendant’s application to strike out and the plaintiff’s application to substitute the Liquidation Committee of the Company as the plaintiff were supported by the evidence of legal experts from the Mainland on the legal status of the Company and the Liquidation Committee.

The plaintiff’s case

12. The plaintiff’s case is summarized in the following extract from the affirmation of its former solicitor :

‘ ……, the legally organized Liquidation Committee, has the power to act in its own name to represent the Company to exercise its power and to perform its duties. The Liquidation Committee has right to take legal proceedings in the capacity as plaintiff against the debtors of the Company for repayment and clearance of debts due to the Company. The Liquidation Committee has power to act in its own name to clear up claims and debts of the Company and to participate in relevant civil law suits.’

The defendant’s case

13. The defendant’s case is also summarized in the following paragraph of the affirmation of its former solicitor :

‘ In the present case, the Plaintiff initiated the proceedings against the Defendant after it has been struck off.  At that point in time, the Plaintiff has already lost its status as a legal entity.  No person can institute proceedings against any third party in respect of its assets and liabilities except the legal entity as prescribed by the law (the legally formed liquidation committee). There is no question of substitution or succession of the Plaintiff because the proceedings were initiated by a nugatory party, in spite of the fact that a liquidation committee is formed subsequently.  The courts in the Mainland China will not allow the continuance of any proceedings initiated by a party that lacks the status as a legal entity ab initio.’

14. The defendant also challenged the power of FTC to form the Liquidation Committee and contended that the composition of the Liquidation Committee was irregular.

15. On the defendant’s part, three affirmations dated 14 March 2002, 22 April 2002 and 14 November 2002 were relied upon.  On the plaintiff’s part the affirmations of 25 March 2002, 25 September 2002 and 16 October 2002 were relied upon.

16. The hearing of the two summonses was to be held on 30 January 2003.  However, a consent summons relating to these two applications was filed on 21 January 2003 which was then made an order of the Court on 23 January 2003.  By the consent summons the defendant withdrew its application to strike out and the present plaintiff was given leave to substitute itself in place of the Company.

17. At the hearing before the Judge, the parties relied on the same affirmation evidence it had adduced in 2002 to challenge the standing of the plaintiff.

The principles

18. The principles concerning the challenge on the lack of standing by a plaintiff to commence an action is well established and they are :

1)  The challenge cannot be raised by way of defence.

2)  It must be raised at the outset or when it comes to the attention of the court or of the defence in the course of the proceedings.

3)  Once the issue has been raised it must be decided.

4)  It would be wrong to allow the action to go on without deciding the issue of standing : this is because the defendant will not have a further chance to challenge the issue.

5)  Once it is clear that the action was improperly constituted it must be brought to an end either by way of dismissal, striking out or stay.

See the House of Lords decision of Russian Commercial and Industrial Bank v. Le Comptoir d’Escompte de Mulhouse [1925] AC 112 and applied in Airways Ltd v. Bowen and Another [1985] BCLC 355.  The principles were also applied by Andrew Cheung J in Kammy Town Limited v. Super Glory Corporation Limited (HCA No. 3524 of 2003).

My view

19. In the present case the defendant obviously had notice of the issue of the Company’s standing at the outset of the case, namely in the same month when it received the writ.  It then issued the striking out application.  That, however, was not the only issue that it had noticed because the plaintiff in response to the striking out, applied to substitute the Liquidation Committee as the new plaintiff.  The standing of the Liquidation Committee was then extensively canvassed by the Mainland legal experts who put forward opposite views on the matter.  Faced with such evidence the defendant then chose to abandon the striking out and allowed the Liquidation Committee to be substituted as the plaintiff.  In such circumstances, in the absence of other evidence, the only reasonable conclusion one may draw is that the defendant had accepted the standing of the plaintiff to sue.  There was no other evidence to contradict this conclusion.  This being the case it clearly was an abuse by the defendant to raise this issue again at the beginning of the trial in the guise of a preliminary issue when as a matter of law it could not have raised this issue by way of defence. 

20. It is well established that a judgment by consent is as effective as an order made upon adjudication, see In re South American and Mexican Company, ex parte Bank of England [1895] 1 Ch. 37 and Kinch v. Walcott [1929] AC 482.  This is unlike the situation in, for example, Siebe Gorman & Co. Ltd v. Pneupac Ltd [1982] 1 WLR 185 where a party applied for extension of time and the other party did not object to it and they recorded the terms by a consent order.  In such a case there may be room for argument that there is no agreement between the parties.  This is not such a case.  In my view the Judge was plainly wrong to allow the matter to be raised again.  He had overlooked the fact that when the defendant agreed to the amendment it was fully appraised of the contentions of the parties on the issue of standing and had taken a considered position on this issue.  If it was wrong not to decide the issue after it had been raised, it would be even worse to allow this issue to be reopened after the parties had agreed to the substitution of the plaintiff.

21. The crux of the principles on the challenge of the plaintiff’s standing to sue is the requirement of an early determination of the issue.  This makes perfect sense because otherwise the plaintiff would be incurring substantial costs in the preparation of the case for trial which may be totally wasted if the issue was decided against him.  If, as in this case, the contest is to be decided only at the beginning of the trial the rationale behind these principles would be defeated.  In my view, the importance of the rationale had not been properly recognized in the present case when the Judge decided to deal with the issue at the trial.

22. I am not convinced that it was necessary for the plaintiff to show further prejudice in objecting to the issue being raised again.  However, I do see prejudice in one regard although this was not fully argued before us.  The effect of an amendment is that it relates back to the date of the writ.  The Liquidation Committee was not in existence at the time of writ.  The situation here was akin to adding a new cause of action which was not in existence at the time of the writ.  Despite this, the defendant had agreed to allow the Liquidation Committee to be substituted as the plaintiff.  If the issue was to be reopened and if the defendant was successful, the plaintiff might be precluded by limitation to start a new action in order to meet the objection on standing.  This may be a material prejudice.

23. The lack of standing to sue by the plaintiff was also pleaded by way of objection to the plaintiff’s claim in the defence.  I do not regard this as an indication that the defendant did not agree to the substitution of the plaintiff and wished to preserve the issue for further argument.  The law is against the defendant : this issue must be raised and determined as soon as possible.

24. There was some confusion as to whether the Judge at the Pre-trial Review which took place about one month before the trial had already ordered that the issue of the plaintiff’s standing was to be determined as a preliminary issue at the trial.  From the available evidence including the transcript of the hearing, I do not find the Judge had made such an order.  The issue was only dealt with on the second day of the trial when the parties argued whether the issue of standing could be raised at all.

Conclusion

25. For these reasons I dismissed the appeal.

Hon Yuen JA :

26. I agree.

Hon Lam J :

27. I agree.