SINCERE VIEW INTERNATIONAL LTD v. KENCO INVESTMENTS LTD AND OTHERS

HCA 301/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 301 OF 2005

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AND

HCA 569/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 569 OF 2005

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(Heard Together)

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D E C I S I O N

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1.  These are two appeals from the decision of Master Kwan on 5 January 2006 in HCA No. 301 of 2005 and HCA No. 569 of 2005.  The parties in the two actions are identical.

2.  The three defendants in each action issued a summons on 28 October 2005 to consolidate the actions, so that they may proceed as one with consolidated pleadings.  The application was dismissed by the Master, and the defendants have appealed.

3.  I am not concerned with the merits of the two actions in these appeals, so I shall refrain from saying anything that may touch on the merits, particularly as the application for summary judgment in HCA No. 569 is to be heard before a judge in a month’s time.

4.  In deciding whether to order consolidation of actions, the court has an unfettered discretion.  The power is to be exercised in a flexible way with regard to the particular circumstances of the situation.  The objective of such an order is to save time and costs.  There is no hard and fast rule that just because the parties are identical and some common question of fact or law is involved in both actions, it would be expedient and proper to order consolidation.

5.  In the particular circumstances of the present situation, I am not persuaded that it is proper or expedient to exercise my discretion to order consolidation.

6.  I shall give an account of the relevant matters to explain why I agree with the Master.

7.  HCA No. 301 was brought by the plaintiff against the three defendants on 18 February 2005.  The claim arose out of a sale and purchase agreement made on 18 March 2004 (“the Agreement”) of shares in China Everbright Technology Limited (“the Company”).  The plaintiff agreed to purchase from the 1^st and 2^nd defendants a large quantity of such shares at a consideration of $218 million odd.  The 3^rd defendant is the guarantor of the liability of the 1^st and 2^nd defendants under the Agreement.  The sale and purchase was completed on 25 March 2004.  The claim in this action is for breach of warranties under section 3 of Schedule 4 in the Agreement in that some of the amounts warranted by the defendants in the Agreement on various assets values of the Company and its subsidiaries were lower than the amounts certified by Ernst & Young, the appointed accountants, in the certificate issued in November 2004.  The plaintiff claims $54 million odd and the difference between the consideration and the proper and fair market value of the shares.  The plaintiff has not sought summary judgment in this action.

8.  In the defence filed on 16 September 2005, the defences raised are as follows:

(1)     one of general non-admission and denial of the plaintiff’s actual loss; and

(2)     in any event based on the allegation that the plaintiff has failed to serve written notice of the claim within 60 days of various events pursuant to clause 8.4(a) of the Agreement.

9.  A summons for direction was issued on 7 October 2005 and an order was made by Master Kwan on 5 January 2006 after she dismissed the summons for consolidation.

10.  HCA No. 569 was brought by the plaintiff against the same defendants on 31 March 2005.  The claim also arose out of the Agreement.  The plaintiff’s claim is for breach of warranties under section 1 item 8 of Schedule 4 in the Agreement for non-disclosure.  Prior to execution of the Agreement and as part of disclosures required, the plaintiff received the disclosed documents in which it was stated there were receivables from a Shenzhen entity called Tak Yuk of RMB 39 million odd.  The defendants had failed to disclose to the plaintiff what was contained in a letter dated 26 April 2004 from the Company to Ernst & Young (“the Letter”), in which it was stated that Tak Yuk had encountered financial difficulty during the six months ended 31 December 2003, as a result no further settlement had been received nor any sales orders placed by it in the second half of 2003 and that Tak Yuk has been undergoing liquidation.  The Letter ended by saying that the Company considered full provision should be made against the outstanding receivables from Tak Yuk.  The plaintiff claims that the failure to disclose the above matters in the Letter constituted a breach of warranties and it claims to have suffered damages of not less than RMB 39 million odd but pursuant to clause 8.6 of the Agreement limits its claim to $20 million.

11.  The plaintiff applied for summary judgment in HCA No. 569 on 27 April 2005.  This was adjourned by a Master to a Judge.

12.  The defendants filed evidence in opposition on 30 May 2005.  The application for summary judgment came before Sakhrani J. on 3 August 2005.  The defendants sought an adjournment to file further evidence.  Leave was granted with costs against the defendants.  The matter is to be heard by Deputy Judge Carlson on 9 March 2006.

13.  In the evidence filed in opposition to the Order 14 application, the defendants raised these defences:

(1)     They have no knowledge of the Letter and its contents are in any event not admitted.

(2)     Looking at the unaudited accounts and the circumstances as a whole, there was already disclosed to the plaintiff a provision for the bad debts in the sum of $45 million which should include the receivables from Tak Yuk.

(3)     In any event, when one refers to the alleged normal accounting practice in Hong Kong and when one looks at the interim report of the Company, there is in fact no loss suffered by the plaintiff even if there was a breach of warranty.

14.  After the application for summary judgment was adjourned and on 20 August 2005, the defendants’ solicitors raised the question of consolidation of the two actions for the first time, contending that common questions of law and fact are involved in both proceedings, and that to save time and costs, it would be appropriate for the actions to be consolidated.

15.  The initial response of the plaintiff’s solicitors was that they had no strong view on consolidation, on the premise that the consolidation would not and should not affect the application for summary judgment.  The plaintiff’s solicitors mentioned that the better course is to wait until after the disposal of the application for summary judgment, before taking any steps in consolidation because if the plaintiff is successful in HCA No. 569, there would be no need for consolidation.  Further, if consolidation is effected before the hearing of the application for summary judgment, it would be necessary to file fresh affirmations to refer to the consolidated statement of claim and would cause further delay.

16.  The defendants’ solicitors responded on 15 September 2005, stating that consolidation should be effected before the hearing of the Order 14 application, as the court should look at the full picture of the subject transaction entered into between the parties and all the issues raised when deciding on the application for summary judgment.  I find it difficult to accept this.  All relevant evidence in opposition to the Order 14 application should have been filed by the defendants pursuant to the directions given by the Master and by Sakhrani J. on the two occasions when this application came before them.  As pointed out by the plaintiff’s solicitors in their letter of 23 September 2005, it is wrong in principle for these actions to be consolidated for the purpose of putting forward further issues at the Order 14 hearing.

17.  On 2 September 2005, the plaintiff amended the statement of claim in both actions to claim damages to be assessed as further or alterative relief.  An order was made by consent on 27 September 2005 for the plaintiff to amend the Order 14 summons to claim the reliefs in the amended statement of claim and for the defendants to file further affirmation to deal with the plaintiff’s additional claim for damages no later than 60 days before the hearing of the Order 14 summons.

18.  The defendants filed such evidence on 25 January 2006 pursuant to the leave given, in which they exhibited a report of an accountant from PricewaterhouseCoopers which took up 2 box files.  The accountant purported to address certain issues in HCA No. 569 as expert.  Whether the matters covered in this report is within the ambit of the leave given is a matter for the Judge seized with the Order 14 application.  For my part, I wish to say that insofar as this expert has dealt with the relationship between the 2 actions and purported to make submissions why consolidation should be ordered, this is totally outside the scope of the leave granted for evidence to be filed in the order made on 27 September 2005.  There is no leave to use such evidence in the present application, and the matter sought to be addressed by him is not within his province of expertise.  I shall disregard his views altogether.

19.  Miss Linda Chan for the defendants submitted that there are common issues of fact and law in the 2 actions.  These are addressed in paragraphs 23 to 25 of the 2^nd affirmation of the defendants’ solicitors and in paragraphs 22 to 24 of her written submissions.

20.  In essence the defendants contended that it is not open to the plaintiff to point to a particular breach of warranty and claims its loss in respect of each breach as though they were separate and distinct claims.  The overall value of the Company as at the material time should be taken into account.  It is not open to the plaintiff to just focus on certain warranties for which there were shortfalls and ignore other warranties for which there were surpluses.  Unless and until the plaintiff can prove that the consolidated net tangible asset value per share of the Company as at the material time was lower than the value warranted by the defendants, there is no valid basis for the plaintiff to claim that it has suffered any actual loss and damage.

21.  The above defence does not appear to have been specifically pleaded in HCA No. 301, nor was it raised specifically in the evidence filed in opposition to the Order 14 application in HCA No. 569.

22.  I do accept that the new line of defence, if raised, would be common to both actions.  But that is not a reason for ordering consolidation now.  Without consolidation, the defendants can still raise this new line of defence. If they can do so on the existing evidence filed, that would be well and good for them.  If not, they would need to seek leave to adduce further evidence.

23.  Ordering consolidation now would not ensure that the whole of the matters would be disposed of at the same time.  It may turn out to be a pointless exercise if the plaintiff should succeed in the Order 14 application in HCA No. 569.  I agree with the plaintiff that the defendants’ applications for consolidation are premature.

24.  The appeals are without merits.  I dismiss them with costs to the plaintiff.

25.  I order the costs of these appeals to be paid by the defendants to the plaintiff forthwith.