YIFUNG PROPERTIES LTD AND ANOTHER v. JAMES NICHOLAS BARRIE SMITH AND ANOTHER

CACV 136/2017

[2018] HKCA 866

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 136 OF 2017

(ON APPEAL FROM HCA 2539/2015)

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J U D G M E N T

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Hon Lam VP (giving the Judgment of the Court):

1.  This is the third time the disputes arising from a loan facility granted by Manchester Securities Corp [“MSC”] to Yifung Development Limited [“YDL”] have come before the Court of Appeal. Although neither MSC nor YDL are parties to the present action, the Plaintiffs [“YPL” and “WEG”] (they were the shareholders of YDL and mortgagors under the facility agreement, both of them solely owned and controlled by the main protagonist in these actions Mr Ricky Liu [“Liu”] through Able Mind Investments Limited) and the 2^nd Defendant [“Elliott”] together with MSC had been parties to a previous action HCA 1359/2014. In that action, YPL and WEG challenged the appointment of receivers upon a declaration of event of default by MSC by contesting the validity of the latter.

2.  The 1^st Defendant, Mr Smith, was at the material times the managing director of the 2^nd Defendant. Though not a party to the previous action, he was very much involved as a central figure in the previous action.  A major argument advanced on behalf of YPL and WEG to contest the declaration of event of default was the Estoppel Point (as identified in paragraph 17(2) of Au-Yeung J’s Decision given on 17 November 2014) based on alleged representations from Mr Smith.  Mr Smith was the deponent of several affirmations filed on behalf of Elliott and MSC in that action.

3.  There was also a related action, HCA 1341/2014 commenced by YDL after new directors were appointed to its board after the appointment of receivers.  The new board sought to prevent the former directors and Liu from continuing to hold themselves out as directors of YDL and sought possession and control of the corporate documents and business premises.

4.  The two 2014 actions were heard together by Au-Yeung J on two occasions.  The first occasion was a three-day hearing in September 2014.  On 17 November 2014, the learned judge gave her decision in which she concluded that there was no serious issue to be tried (including the Estoppel Point) in HCA 1359/2014 and dismissed the application for injunction by YPL and WEG (and other parties in Liu’s camp) to restrain MSC and Elliott from enforcing a Share Mortgage and a Property Mortgage.  She also held in favour of an application by YDL (made under the authority of the new board) for delivery up of corporate documents and business premises.

5.  The judge refused to grant leave to YPL and WEG (and the other plaintiffs in HCA 1359/2014) to appeal in respect of those decisions on 12 February 2015.

6.  YPL and WEG (and the other plaintiffs in HCA 1359/2014) renewed their application for leave to appeal in HCMP 461/2015 to 463/2015.  That was the first time the dispute arising from YDL’s loans was considered by the Court of Appeal.  On 28 May 2015, after hearing submissions, the Court (Lam VP and Kwan JA) refused to grant leave.  Reasons for refusing leave were handed down on 3 June 2015.

7.  Au-Yeung J heard the two actions again on 25 August 2015 in the application for striking out the amended writ and the statement of claim in HCA 1359/2014 and certain parts of the defences in HCA 1341/2014. 

8.  On 19 October 2015, the judge gave her decision.  She struck out the claims in HCA 1359/2014 and dismissed the action.  She also struck out parts of the defence in HCA 1341/2014. 

9.  An appeal against that decision was heard by the Court of Appeal (Cheung and Kwan JJA and G Lam J) in CACV 258/2015 and 259/2015 on 1 September 2016.  That was the second time the Court of Appeal had to consider issues arising from the YDL loan arrangement.  The appeal was dismissed on the same day and Reasons for Judgment were handed down on 9 September 2016.

10.  The present action HCA 2539/2015 was commenced by YPL and WEG on 2 November 2015, shortly after the striking out of HCA 1359/2014 by Au-Yeung J.  The statement of truth in the statement of claim was signed by Liu as director of both YPL and WEG.

11.  On 2 December 2015, a summons was taken out on behalf of the Defendants seeking to strike out the statement of claim.  The summons was heard by Deputy High Court Judge Yee on 29 April 2016 with further written submissions lodged in January 2017.  On 22 May 2017, the Deputy Judge handed down the decision holding that the Plaintiffs’ claim is plainly unsustainable and groundless and had no prospect of success.  He also held that the claim is made out of nothing and not a bona fide one.  Instead, it is frivolous, vexatious and an abuse of the process.  Further, he held that the Plaintiffs could and should have raised the misrepresentation claim in HCA 1359/2014 and they are therefore barred by Henderson v Henderson issue estoppel from advancing this claim against Elliott now.

12.  On 18 September 2017, we heard the appeal from this decision and judgment was reserved.  We now give our judgment in the appeal.

13.  The underlying factual background concerning the loan arrangement between MSC and YDL, the roles of the various parties, including Elliott, and the default of YDL in making repayment and consequential enforcement actions by MSC by way of appointment of receivers and the change of the board of YDL  and the dispute raised by YPL and WEG and Liu had been set out in the judgments of Au-Yeung J in HCA 1359/2014 and the Court of Appeal in HCMP 461/2015 to 463/2015 and CACV 258/2015 and 259/2015[1].  

14.  We note the contention by Mr Barlow SC (appearing with Mr D Chen for YPL and WEG in this appeal) that it is not permissible for the court to refer to such judgments in this action.  With respect, insofar as counsel contends that the court cannot have regard to such judgments under any circumstances, we disagree with that submission.  It depends on the purpose(s) for which such reference was made. Whilst we accept findings of fact made in earlier proceedings cannot be taken as evidence in the present action (Hollington v F Hewthorn & Co Ltd [1943] KB 587), the court must refer to the earlier judgments in conducting the broad merits-based assessment in the context of Henderson v Henderson issue estoppel.

15.  In the present appeal, we consider the application of Henderson v Henderson issue estoppel to be of central importance.  In such context, we are entitled to (as indeed we must) allude to the background of the dispute between the parties in the earlier proceedings and the earlier judgments.

16.  As Ma CJ observed in Ko Hon Yue v Chiu Pik Yuk (2012) 15 HKCFAR 72 at [83], the doctrine of Henderson v Henderson issue estoppel is founded on an abuse of process.  If a claim is to be struck out on the basis of this doctrine, it is essential that the court can pinpoint an abuse that exists by virtue of the attempt to raise in subsequent proceedings claims or issues which could and should have been raised in earlier proceedings. 

17.  The abuse usually takes the form of a party or his privy being vexed twice.  But it can also take other forms including bringing the administration of justice into disrepute or manifest unfairness to the other party in the subsequent proceedings (see Trade and Industry Secretary v Bairstow [2004] Ch 1 at [38]; Chiang Lily v Secretary for Justice [2009] 6 HKC 234; Caylon v Michailaidis [2009] UKPC 34 at [35] and [36]; China North Industries Investment Ltd v Chum [2010] 5 HKLRD 1; King’s City Holdings Ltd v De Monsa Investments Ltd [2013] 4 HKC 450; Ho Kin Man v Commissioner of Police [2014] 3 HKLRD 478).

18.  The onus is on the party alleging abuse to establish the subsequent litigation is an abuse: see Caylon v Michailaidis, supra, [36]; China North Industries Investment Ltd v Chum, supra, [54]; King’s City Holdings Ltd v De Monsa Investments Ltd, supra [43] and [44].

19.  In the present action, as mentioned above, YPL, WEG and Elliott were parties to the previous action in HCA 1359/2014.  Though Smith was not a party to that action, he was the managing director of Elliott and central to the running of the defence case of Elliott.  For all intents and purposes, Smith was (as much as Elliott) vexed twice by this action and there was a sufficient degree of identification between the two of them in the subject matter of the dispute.  Given that all relevant circumstances are to be taken into account in the broad merits-based assessment, on the facts of this case, we can treat Smith as a privy of Elliott in the application of the doctrine of Henderson v Henderson issue estoppel, see Johnson v Gorewood [2002] 2 AC 1 at p.32C to G, citing Gleeson v J Wippell & Co [1977] 1 WLR 510 at p.515.

20.  In that respect, we acknowledge that we are going further than the Deputy Judge (who only considered the application of Henderson v Henderson issue estoppel regarding Elliott).  However, the Deputy Judge did not have the benefit of citation of some relevant authorities highlighted above.  Having regard to those authorities, we do not see any justification for differentiating the position of Smith from that of Elliott.

21.  Though the decisions of the court in HCA 1359/2014 were made on applications for interlocutory injunctions and striking out instead of trial, the parties had filed voluminous evidence on the merits[2] and they were carefully considered by Au-Yeung J and two different divisions of the Court of Appeal. 

22.  Though the cause of action advanced in the present action by YPL and WEG is different from the one relied upon by them in HCA 1359/2014, they are based on the same factual matrix.  In both actions, YPL and WEG relied on what transpired between Liu and Smith after YDL had difficulties in meeting its repayment obligations under the facility arrangement. 

23.  In HCA 1359/2014, under the Estoppel Point, YPL and WEG asserted that there was an assurance given by Smith on behalf of MSC that the latter would not insist on repayment on due dates so long as YDL actively sought additional finance to settle the whole loan and there was no need to write to MSC to seek extension of time for repayment.  The assurance was alleged to have been given orally by Smith to Liu in or about November or December 2013. 

24.  After examining the contemporaneous correspondence between the parties[3], Au-Yeung J concluded in the judgment of 17 November 2014 that YPL and WEG’s case on assurance was so contradicted by such correspondence and so inherently improbable that it was demurrable on its face.  That conclusion was upheld by the Court of Appeal when leave to appeal was refused.  Despite the filing of pleadings and further evidence, the judge reached the same conclusion in the striking out judgment of 19 October 2015.  That conclusion was again upheld on appeal in CACV 258/2015[4]. 

25.  In the present action, YPL and WEG alleged Smith misrepresented to them that he had authority from MSC to amend, vary and/or waive the terms of the facility documents, see paragraph 21 of the Statement of Claim.  Such representation was alleged to have been made by conduct during the communications particularized under paragraph 20 of the Statement of Claim, viz from March to December 2013. 

26.  Thus, it is plain and obvious that YPL and WEG referred to the same series of alleged communications between Liu and Smith to advance the Estoppel Point in HCA 1359/2014 and the present action.  Although the emphasis was different[5] and the cause of action was formulated in a different way (with different relief being sought), the scope of the matters to be investigated largely overlapped with each other. 

27.  The authority of Smith had actually been raised as an issue in HCA 1359/2014.  For the purposes of the applications before Her Ladyship, Au-Yeung J proceeded on the assumed basis that Smith at least had apparent authority to bind MSC in addressing the Estoppel Point, see [68] of the judgment of 17 November 2014.

28.  Notwithstanding the lapse of time between the injunction judgments and the striking out application, YPL and WEG did not amend the statement of claim in HCA 1359/2014 to include a claim based on misrepresentation by Smith as to authority.

29.  As it were, neither Au-Yeung J nor the Court of Appeal found it necessary in the context of HCA 1359 and the appeals arising from it to address the question of authority of Smith, for the simple reason that it was a question of no moment, if there was no assurance as alleged by YPL and WEG. 

30.  This line of reasoning could not have escaped YPL and WEG and those advising them.  Au-Yeung J had made the point abundantly clear in the judgment of 17 November 2014.  Thus, if there was any good reason why the authority of Smith should be left for trial, YPL and WEG should have advanced the same to resist the striking out of the action in HCA 1359. 

31.  Actually, the logic of Au-Yeung J in side-stepping the question of authority can be applied in respect of the cause of action as presently formulated in this action.  As noted earlier, the representation as formulated in the statement of claim is specifically about authority from MSC to amend, vary and/or waive the terms of the facility documents. 

32.  As pointed out by Mr Mok SC (appearing with Mr R Li for the Defendants), it is not alleged by YPL and WEG that Smith had no authority from MSC to conduct negotiations with them or Li.  The evidence of Smith and Mr Greenberg clearly demonstrated that Smith had the authority to enter into the negotiations though the ultimate decision on a proposed settlement had to be made by the board of MSC.  It resembles the situation of a solicitor or other agents conducting negotiations for their clients.

33.  Against that background, unless the negotiations had reached a stage where consensus was achieved, it is quite futile to consider the issue of the authority of Smith from MSC to amend, vary and/or waive the terms of the facility documents. 

34.  The rejection of YPL and WEG’s case on assurance in HCA 1359 eliminated the prospect of any claim by them that the negotiations between Liu and Smith had reached a stage where consensus had been achieved. In fact, YPL and WEG made no assertion to that effect in the present action.

35.  The observations of the Deputy Judge at [65] to [72] of the judgment as to the lack of bona fide and the frivolous and vexatious nature of the present claim in light of the conclusions of Au-Yeung J should be understood in this light. 

36.  Further, in the affirmation of Liu of 15 January 2016 at para 21(2), he made it clear that YPL and WEG are not alleging that Smith made any express statement that he had the authority from MSC to amend, vary and/or waive the terms of the facility documents.  Their case, as put by Liu, was that the conduct of Smith would lead a reasonable person to believe that he had such authority and he never said he did not have such authority.

37.  The relevant conducts, as particularized as the Communications at paragraph 20 of the Statement of Claim, were as follows:

“ 20.  Over the period from August 2012 to March 2014, Mr. Smith continued to act purportedly on behalf of MSC in discussions, negotiations and communications (both oral and written) with Mr. Liu acting on behalf of the Mortgagors concerning the payment of the Settlement Sum (the “Communications”).

Particulars

(1) In or about March 2013, Mr. Smith acting purportedly on behalf of MSC invited the Mortgagors again to consider obtaining finance to pay the Settlement Sum, informing Mr. Liu that MSC wanted an “early exit”.

(2) In or about August 2013, Mr. Smith acting purportedly on behalf of MSC informed the Mortgagors that MSC required US$25 million for its potential entitlements under the IRD.

(3) In or about November 2013, Mr. Smith acting purportedly on behalf of MSC informed the Mortgagors that MSC required US$47 million for its potential entitlements under the IRD (instead ofUS$25 million as previously stated) because the value of the Project had significantly increased.

(4) In or about November or December 2013, Mr. Smith acting purportedly on behalf of MSC requested YDL and the Mortgagors to continue to focus on obtaining finance to pay the Settlement Sum.”

38.  These Communications had to be considered against the background to the loan transaction including the role of Elliott. There was a distinction between authority to conduct negotiations and authority from MSC to amend, vary and/or waive the terms of the facility documents.  In respect of the latter, the Facility Agreement expressly provided at Clause 26:

“ 26. AMENDMENTS AND WAIVERS

Any term of the Finance Documents (other than any Security Agreement) may be amended or waived only with the prior written consent of the Lender, the Borrower and the Sponsor and any parties thereto and any such amendment or waiver will be binding on all parties to such Finance Documents.”

39.  To the same effect is Clause 8.7 of the Investor Rights Deed [“IRD”]:

“ 8.7  No purported variation of this Deed shall be effective unless made in writing and signed by or on behalf of all of the Parties.”

40.  Even assuming (as pleaded in paragraph 21 of the Statement of Claim) that the accelerated repayment of the full sum together with compensation for the potential entitlements under the IRD would constitute a variation of the terms under the Facility Agreement and the IRD, it is a quantum leap to equate the mere putting forward by Smith of the option of early exit and proposing figures for accelerated repayment on the one hand, with a representation by him that he had the authority to amend, vary and/or waive the terms of the facility documents on the other.

41.  The fact that the figures had been changing (as pleaded in paragraph 20 of the Statement of Claim) clearly indicated that the figures allegedly proposed by Smith were merely figures for discussion as opposed to binding offers coming from MSC.  In his affirmation of 2 December 2015, Smith deposed at paragraph 23(3) and (4) that the parties came nowhere close to an agreement on refinancing as Liu failed to provide any sensible bid regarding the future value of the profit-sharing entitlement under the IRD. 

42.  Not only was Liu (and YPL and WEG) aware that his discussions from August 2012 to December 2013 with Smith were far from any binding agreement (as he did not suggest otherwise in his affirmation in response of 15 January 2016), he was equally reticent as to the prospect of YPL and WEG obtaining the necessary finance from third parties to make the payment.  He simply brushed these aside as being irrelevant on the basis that but for the misrepresentation by Smith as to his authority, he would not have been engaging in the negotiations with Smith at all.

43.  In so saying, Liu failed to have regard to the evidence that Smith did have the authority of MSC to conduct the negotiations though the ultimate decision had to be made by the board of MSC.  Thus, it could not be said that the efforts and expenses incurred by Liu (and YPL and WEG) in the negotiations were wasted.  As YDL was in default of its repayment obligations, Liu was not in a position to dictate that he would only entertain negotiations with someone who had the authority to amend, vary and/or waive the terms of the facility documents.

44.  His assertion at paragraph 22 of his affirmation of 15 January 2016 that the internal arrangement between MSC and Elliott was irrelevant to him actually exposed the fallacy in his present claim.  Had the negotiations reached the stage of concrete agreement without any reservation by Smith as to his authority to bind MSC, the agreement could be binding on MSC on account of apparent authority. 

45.  The problem for Liu and YPL and WEG is that the negotiations had not reached such a stage.  This is precisely the reason why the Estoppel Point failed. 

46.  In other words, the expenses and efforts incurred on the negotiations failed to yield anything for YPL and WEG because of the failure of the parties to reach any consensus, not because of the lack of authority of Smith to amend, vary and/or waive the terms of the facility documents.

47.  Viewed thus, though the present claim is differently formulated, in substance it is equally unsustainable as the Estoppel Point due to the lack of any agreement reached between Liu and Smith in the discussions in 2013.  Hence, the present action is abusive as it is an attempt to vex Elliott and Smith a second time based on events in 2013 concerning the loan arrangement for YDL. 

48.  Though Liu tried to explain that it was only upon the filing of the Defence in HCA 1359/2014 that MSC had unequivocally confirmed that Smith did not have the authority to amend, vary and/or waive the terms of the facility documents, that cannot be an excuse for not raising the claim before the striking out of the action.  First, the issue of authority had already been raised in correspondence before the commencement of HCA 1359/2014. Second, there was ample time between the filing of that Defence and the striking out of the action for YPL and WEG to add the present claim to that action by way of amendment.  Before us, Mr Barlow correctly accepted that the claim could have been advanced in HCA 1359/2014.

49.  Balancing all the relevant interests in the circumstances of this case, we are of the view that the present claim should have been advanced in HCA 1359/2014 and it is an abuse to vex Elliott and Smith for a second time based on the discussions in 2013 notwithstanding the different formulation of the cause of action.

50.  Hence, having conducted a broad merits-based assessment, we conclude that the present action should be struck out on the basis of Henderson v Henderson issue estoppel.

51.  We therefore uphold the decision of the Deputy Judge and dismiss the appeal with costs accordingly.  We have heard argument on costs.  We order that the Plaintiffs shall pay the costs of the Defendants in this appeal, with a certificate for two counsel, such costs are to be taxed if not agreed.