XCHRX TAIT MARKETING AND DISTRIBUTION CO. LTD. v. TAIT INTERNATIONAL LTD. AND ANOTHER

HCA 10308/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10308 OF 2000

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RULING

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1. The 1st Defendant applies by a summons under Order 12 Rule 8 for an order that my order of 4th December 2000 granting leave to the Plaintiff to issue and serve a concurrent writ of summons upon the 1st Defendant in the Cayman Islands be discharged. It claims in the alternative that proceedings in Hong Kong be stayed on the ground that HK is not the "forum conveniens", alternatively that the Mareva injunction granted by me against the 1st Defendant on the same day be discharged.

2. The background to this application is a claim by the Plaintiff against the 1st and 2nd Defendants for the recovery of a sum of NT$169.5 million. The Plaintiff's case is that the 1st Defendant was indebted to the 2nd Defendant in the sum of some NT$240 million, and the 2nd Defendant was in turn indebted to the Plaintiff in the sum of NT$169.5 million. By an assignment dated 3rd August 2000 (the "Transfer Agreement") which was expressly stated be governed by Taiwanese law, the 2nd Defendant assigned to the Plaintiff NT$169.5 million of the debt then due and owing by the 1st Defendant to the 2nd Defendant. Notice of the assignment was duly given by the Plaintiff to the 1st Defendant in writing sent to the registered office of the 1st Defendant in the Cayman Islands. The Plaintiff further alleges that under the terms of the assignment of 3rd August 2000, the 2nd Defendant guaranteed the obligation of the 1st Defendant to repay the assigned debt. The Plaintiff has brought this action against the 1st Defendant as assignee of the debt and against the 2nd Defendant as guarantor of the debt.

3. It is important to note that while there has been a lot of evidence before the Court on the state of account between the Plaintiff and the 2nd Defendant, the debt now sued upon by the Plaintiff is not the amount said to have been lent by the Plaintiff to the 2nd Defendant, but rather the amount which was originally owed by the 1st Defendant to the 2nd Defendant.

4. The parties herein are connected companies although there have been changes in their exact relationship over the last few years.

The Plaintiff

5. The Plaintiff is a company incorporated in Taiwan. There were a number of changes in the ownership of its shares prior to 1998 when it became a company listed on the Stock Exchange in Taiwan. Prior to its listing, Great China Distribution Ltd. (GCD), a British Virgin Island Company, had a 49% shareholding in the Plaintiff and ADI Corporation Ltd. (ADI), a Taiwan Company, held a 51% shareholding. Currently GCD still holds 18.4% the shares of the Plaintiff and ADI still holds 15% of the Plaintiff. The Plaintiff has 9 directors. Amongst these nine are Messrs James Liao, Desmond Chen, Simon Kao and Kenneth Hansen.

The 1st Defendant

6. The 1st Defendant is a company incorporated in the Cayman Islands. It was formed as a holding company holding shares in other companies. It has no business as such. At all material times before April 1994, the 1st Defendant was held as to 49% by GCD and as to 51% by ADI. Hence at that time, the Plaintiff and the 1st Defendant had identical shareholders holding in identical proportion. In April 1994, the 1st Defendant's share capital was increased. The Plaintiff had taken up some 39.12% of the shares of the 1st Defendant, so that the position of the shareholding in the 1st Defendant as in April 1994 was: Plaintiff - 39.12%, ADI - 31.05% & GCD - 29.83%. In April 1998, GCD sold its interest in the 1st Defendant. According to the Plaintiff, GCD sold its interest to China Vest Limited and its affiliates. However it has been pointed out in the affirmation of Mr Greenspan, the General Corporate Counsel to China Vest II, L.P., China Vest II-A, L.P. and China Vest II-B, L.P. that in fact China Vest Limited (which is a Hong Kong company) does not hold any share of the 1st Defendant. The 29.83% shares alleged as being held by China Vest Limited and its affiliates are in fact held by a group of minority shareholders and China Vest Limited is not amongst them. Indeed a list of them appeared in a letter sent out by the Plaintiff to the board of the 1st Defendant dated 12 October 2000. I find that although China Vest Limited is not one of the shareholders of the 1st Defendant, it appears from the list that many of these minority shareholders are closely connected with the group of companies of which China Vest Limited is a member. There is no information as to the registered address, or the place of residence of these minority shareholders.

7. The 1st Defendant has 5 directors. They are Messrs H H Haight, Dennis M Smith, James Liao, Desmond Chen and Kenneth Hansen. It is common ground that H H Haight and Dennis M Smith are directors appointed to represent the interest of the shareholders related to the China Vest group of companies, James Liao and Desmond Chen are appointed to represent the interest of ADI, and Kenneth Hansen is there to represent the interest of those in control of the Plaintiff.

The 2nd Defendant

8. The 2nd Defendant has always been a 100% subsidiary company of the 1st Defendant. It is a company incorporated in Hong Kong having its registered office at the office of an accountants firm at 22nd floor, Prince's Building, Hong Kong. Although it is a company incorporated in Hong Kong, there is nothing before me to show that the 2nd Defendant has any business in Hong Kong. It has however a Taiwan branch and it would appear that this is really the branch where all the business activities of the 2nd Defendant are being conducted. It appears that the main business of the 2nd Defendant was the distribution of Philip Morris' tobacco products in Taiwan until the termination of the distributorship sometime in 1999. Currently the directors of the 2nd Defendant are Kenneth Hansen and Simon Kao.

9. Apart from holding the 2nd Defendant, the other asset of the 1st Defendant is its shareholding in Tait Asia Limited (TAL). Before April 1994, the 1st Defendant directly held a number of companies other than the 2nd Defendant. These companies included Tait China Ltd., Tait Hong Kong Ltd., GO Corp. Ltd., Tait Shanghai Investment Consultancy Co. Ltd. and Tait Vietnam Ltd. With the exception of Tait Hong Kong Ltd., these companies were all 100% owned by the 1st Defendant. In the case of Tait Hong Kong Ltd., the 1st Defendant held 75% only. After April 1994, TAL was brought into hold all these companies in the same manner as the 1st Defendant had before. The 1st Defendant however only held 49% of the shares in TAL. There is no information before me as to who held the balance 51% and whether there was any change in the control of the balance of 51% from 1994 to date.

10. TAL is a company incorporated in the Cayman Islands. However it would appear that it also has some activities in Hong Kong. Indeed through the operation of its various subsidiaries, it could be inferred that it must also have business activities in a lot of other places notably in China.

11. On an application for leave to serve outside the jurisdiction under Order 11, a Plaintiff must initially satisfy two requirements by showing:

(1) A "good arguable case" that the matter falls within one of the sub rules of Order 11 Rule 1(1)

(2) that there is "a serious question be tried" on the merits.

12. Even if the Plaintiff establishes both these requirements, the Plaintiff must satisfy the court that it is proper to exercise its discretion to grant leave. While the court has a general discretion to refuse or grant leave, it has in particular an inherent discretion to decline jurisdiction on the ground that Hong Kong is not the "forum conveniens".

13. In so far as the initial two requirements are concerned, it is the first (whether there is a "good arguable case" that the matter falls within one of the sub rules of Order 11 Rule 1(1)) that is the matter substantially at issue between the parties. In so far as the second requirement is concerned, while Mr Kat for the 1st Defendant disputes liability on the part of the 1st Defendant and both attacks the validity of the Transfer Agreement and points to shortcomings in the vouchers produced by the Plaintiff in support of the alleged liability, he does not as I understand him strenuously dispute that there is a serious issue to be tried.

14. The Plaintiff relied upon two subrules of Order 11 in seeking leave to serve the writ upon the 1st Defendant out of the jurisdiction:

(i) under Order 11 Rule 1(1)(a) on the basis that the 1st Defendant was "ordinarily resident within the jurisdiction" and/or

(ii) under Order 11 Rule 1(d)(iii) on the basis that the contract upon which it was suing was "by its terms, or by implication, governed by Hong Kong law"

15. I have borne in mind when considering the question of whether there is a "good arguable case" that the case falls within the 2 subrules of Order 11 Rule 1 that it is not my function where there are disputes of fact to try those issues on affidavit. Where there are disputes of fact I should look primarily at the Plaintiff's evidence.

16. In deciding whether there was a "good arguable case", I also have borne in mind the following factors:

That the concept of "good arguable" case requires a degree of flexibility but does not require proof as high as the civil standard of the balance of probabilities but higher than whether there is a serious question to be tried (see Canada Trust Co & others v. Stolzenberg No. 2 [1998] 1 WLR 547)

That a good arguable case is one with a good prospect of success (R Leslie Deak v. Deak Perera Far East Ltd. [1991] 1 HKLR 551)

That the court must proceed with caution in allowing a writ to be served out of the jurisdiction. As Pearson J said in Société Générale de Paris v. Dreyfus Brothers (1885) 29 Ch.D. 239, 242 - 243:

"it becomes a very serious question.... whether this court ought to put a foreigner, who owes no allegiance here, to the inconvenience and annoyance of being brought to contest his rights in this country, and I for one say, most distinctly, that I think this court ought to be exceedingly careful before it allows a writ to be served out of the jurisdiction."

Order 11 Rule 1(a): Is the 1st Defendant ordinarily resident within the jurisdiction?

17. There are a number of matters which collectively suggest that the 1st Defendant is not ordinarily resident in Hong Kong and suggesting that it is ordinarily resident in Taiwan:

18. It is not incorporated in Hong Kong but in the Cayman Islands. The fact that the place of incorporation in the Cayman Islands does not appear to be of particular significance as it is not being suggested the Company is ordinarily resident there, although when the Plaintiff demanded payment of its alleged debt under the Transfer Agreement on 7th August 2000, it did not send it to Hong Kong as one might have expected if the company was ordinarily resident here but to its registered office in the Cayman Islands. But the fact that it is not incorporated in Hong Kong is a factor to be borne in mind with others in determining its ordinary residence.

19. The 1st Defendant has not as an overseas company applied for registration in Hong Kong under S333 of The Companies Ordinance Cap. 32.

20. The 1st Defendant has not applied for registration of its business in Hong Kong under the Business Registration Ordinance Cap. 310.

21. There is no evidence of any business activity in Hong Kong at the material time.

22. Its only bank account is with a bank in Taiwan.

23. Its bookkeeping is performed by the Plaintiff's accounting department in Taiwan. Its accounts are audited by accountants (Arthur Anderson, Taiwan) in Taiwan. Taiwan currency is used to show the state of the accounts. The accounts are compiled in accordance with Taiwan accounting principles.

24. It appears from these accounts that Taiwanese tax is paid although it is not clear if that tax is paid directly by the 1st Defendant. There is no suggestion that the 1st Defendant pays Hong Kong tax or submits tax returns to the Hong Kong authorities.

25. Although board meetings have until recently been very infrequent, when they have occurred they have taken place in Taiwan.

26. The 1st Defendant's name does not appear on the list of companies in the lift lobby or on the door of the premises that the 1st Defendant claims it occupies at Room 602 - 603 Eastern Centre, 1065 King's Road, Quarry Bay.

27. Three out of the five directors are residents in Taiwan. Only one is resident in Hong Kong and he appears to attend board meetings in Taiwan by proxy. The other director is a resident of the United States.

28. Two of the three directors resident in Taiwan are Mr Kenneth Hansen and Mr Simmon Kao.

29. Moreover the majority of the shareholders are Taiwanese companies. The Plaintiff, a company incorporated in Taiwan, owns 39.12 % of its shares, ADI, a company incorporated in Taiwan, owns 31.05% of the shares. The balance of the 1st Defendant's shareholders comprises a consortium of minor shareholders. As I have remarked there is no evidence as to the registered address or place of residence of these minority shareholders, although it does appear that they are at least mainly part of the group control by China Vest Ltd., a Hong Kong company which is not itself a shareholder.

30. Mr Chua, for 1st Defendant, has advanced a number of reasons for contending that there is a good arguable case that Hong Kong is at least one of the ordinary residences of the 1st Defendant. Amongst them are the fact that the 1st Defendant is merely a holding company and does not carry on any trading and that there is no evidence that the 1st Defendant has any staff. He suggests that because of this, there is little need for actual management and control on a day-to-day basis. He suggests that because of that, the assets of the company are significant in determining its ordinary residence. They essentially comprise its 100% shareholding in the 2nd Defendant, which is incorporated in Hong Kong, and its 49% shareholding in TAL, which although a Cayman Islands company has an office and a significant number of staff in Hong Kong. He says that the only address ever held out by the 1st Defendant was in Hong Kong. He points to the strong Hong Kong connection of China Vest Ltd. He points to a fax message dated 20th February 1995 between the Plaintiff and China Vest Ltd. agreeing that China Vest Ltd. was in a more favourable position to direct the 1st Defendant's business from Hong Kong. He says there is nothing to show that the Defendant's company is registered in Taiwan.

31. Both parties have been in agreement that the relevant principles to be applied by the court are set out in Rule 185 Dicey & Morris "The Conflict of Laws" 13th edition namely that "a corporation is resident in a country where its central management and control is exercised. If the exercise of the central management and control is divided between two or more countries, then the corporation is resident in each of those countries."

32. In my view the evidence is overwhelming that the central management and control of the 1st Defendant is in Taiwan.

33. Mr Kao, the deponent of the Plaintiff, in his 1st affirmation conceded that the 1st Defendant is a holding company and therefore does not carry on any business of its own in any jurisdiction. He admitted that it was debatable whether any management or control of the 1st Defendant took place in any jurisdiction since hardly any active decision making actually took place. He conceded however that board meetings had taken place in Taiwan and its bookkeeping and accounting was performed by the Plaintiff's accounting department in Taiwan.

34. It is apparent from the minutes and transcripts of the board meetings before the court that significant decision making in relation to the 1st Defendant did occur at those board meetings in Taiwan.

35. While China Vest may have had a significant voice in the affairs of the 1st Defendant, it was not, as I have mentioned, a shareholder and at best it was only in a position to control a minority of the shareholders of the 1st Defendant. The majority shareholders were Taiwanese corporations. Even if China Vest Ltd. itself was based in Hong Kong, it is apparent that any influence it might have had in relation to decision making in the 1st Defendant was exercised in or through Taiwan. The fax message of 20th February 1995 to which I have referred is clearly not relevant to the present management and control of the 1st Defendant. There have been substantial changes in the organisation of the Tait Group including the 1st Defendant in the last six years. It is abundantly apparent from Mr Kao's own affirmation as well as the other evidence that China Vest Ltd. is not directing the business of the 1st Defendant from Hong Kong. Mindful that the court should not try the matter upon affirmation, the bald assertion by Mr Kao in his 4th affirmation affirmed just before this hearing that this was so, an assertion is in conflict with the other evidence in the case including his earlier affirmation, does not change the position.

36. It is clear that the management and control of the 1st Defendant has been in the hands of Mr Kenneth Hansen and Mr Simon Kao, both Taiwan resident directors of the 1st Defendant.

37. It is significant that when two representatives of Arthur Anderson, the 1st Defendant's auditors (one of whom was a partner in that form) were asked at a meeting on 22nd November about the identity of the "management" of the 1st Defendant in the sense of who made the decisions they replied that it was Simon Kao and Kenneth Hansen.

38. While the location and assets of a company may be a factor to be taken into account in determining a company's ordinary residence, it is not determinative. In this case the 1st Defendant's shareholding in the 2nd Defendant and TAL do not alter my view that central management and control was exercised in Taiwan. Although the 2nd Defendant may be incorporated in Hong Kong, the only evidence of any business activity on its part relates to its Taiwan branch where it formerly held the Philip Morris tobacco distributorship. In so far as TAL is concerned, the 1st Defendant only had a 49% shareholding. There is no evidence as to the residence of the remaining 51% shareholders. TAL is not incorporated in Hong Kong but in the Cayman Islands. While it may have an office and employ staff in Hong Kong, it can be inferred that it has business activities in a number of other places. Mr Kao himself conceded that its most valuable business is as distribution agent for Heineken brand beer in the PRC.

39. Mr Chua's suggestion that the only address ever held out by the 1st Defendant has been in Hong Kong is incorrect. The 1st Defendant has an address in Taiwan to which inter alia its bank sends its bank statements, and its auditors sent their invoices. While certain correspondence has been exhibited showing the 1st Dependant had a letterhead with a Hong Kong address, that correspondence predated the restructuring of the Companies within the Tait Group including the 1st Defendant in 1997 and 1998. The court is concerned with the position now. I have not been showing any correspondence since then from the 1st Defendant bearing a Hong Kong address. It is true that its solicitors billed it at the King's Road address in respect of the registration of the trademark in January 2000. This does provide some evidence of the 1st Defendant using that address correspondence in recent years. What it does not show is that any central management and control of the 1st Defendant was being exercised from Hong Kong. The same applies to the answer that the 1st Defendant's solicitor, Mr Clement Tang, received when he telephoned the King's Road address on 29th November 2000 and asked the lady who answered the telephone whether it was the telephone number of Tait International Ltd. While there may be no evidence that the 1st Dependant is registered in Taiwan , there is no evidence that it is not. From the accounts it appears that it is likely to be known to the Taiwanese tax authorities.

40. No doubt aware of the strength of the evidence pointing to central management and control of the 1st Defendant being in Taiwan, Mr Chua has relied heavily on the proposition that a corporation may have more than one residence. For the reasons I already referred to I do not find the 1st Defendant has a good arguable case in the sense that the argument has a good prospect of success that part of its central management and control is in Hong Kong. The evidence before the court points inevitably to the central management and control of the 1st Defendant being in Taiwan.

41. The Plaintiff has therefore failed to show that it has a good arguable case that the 1st Defendant is ordinarily resident in the jurisdiction. It has failed to bring itself within Order 11 Rule 1(1)(a).

42. Mr Chua fairly concedes that the Plaintiff's case that the contract upon which the Plaintiff sues is "by its terms or by implication governed by Hong Kong Law" under Order 11 Rule 1(d)(iii) is dependent on the 1st Defendant as the alleged debtor being resident in Hong Kong. There is nothing else to suggest that the alleged debt in Taiwan dollars is governed by Hong Kong law. The Plaintiff has therefore failed to bring itself within Order 11 Rule 1(d)(iii).

43. I therefore make an order that my order of 4th December 2000 granting leave to the Plaintiff to issue and serve a concurrent writ of summons upon the 1st Defendant in the Cayman Islands be discharged. It follows that the Mareva injunction granted by me on the same day be also discharged.

44. It is strictly unnecessary for me to rule upon the other matters upon which I heard extensive arguments from counsel.

45. I would however indicate that even if I had found that the central management and control of the 1st Defendant had been divided between Taiwan and Hong Kong, I would nonetheless have discharged my order granting leave to issue and serve a concurrent writ of summons on the 1st Defendant in the Cayman Islands. I would have been satisfied that the 1st Defendant had shown that Hong Kong was not the natural and appropriate forum for the trial and that Taiwan was clearly and distinctly more appropriate than Hong Kong. Any trial would involve the validity of the transfer agreement which is expressly stated to be subject to Taiwanese law. It would also involve the examination of the alleged debts between the first and the second Defendants. That would involve examination of documents which it is apparent from the evidence are in Taiwan. It would also involve the calling of witnesses to those debts, the great majority of whom are also in Taiwan. The Plaintiff has not demonstrated that a trial in Taiwan would deprive it of any juridical advantage. The legal opinion from the Taiwan lawyers, Wisdom Attorneys at-law, upon which the Plaintiff bases its claim that it would be unable to secure an interlocutory injunction against the 1st Defendant is based upon the proposition that the 1st Defendant does not have a business establishment in Taiwan. The evidence in my view demonstrates that it has.

46. I would also indicate that there was in my view such serious and material non-disclosure by the 1st Defendant in its application would warrant discharge of the Mareva injunction and refusal to renew it. I shall mention the most significant aspects.

47. The basis upon which the Mareva injunction was sought from the court was that NT$169.5 million of the 1st Defendant's indebtedness to the 2nd Defendant had been validly assigned to the Plaintiff by the Transfer Agreement of 3rd August 2000 and that there had been no objection or dispute by the 1st Defendant as to its liability. It was said that the response to notice of this Transfer Agreement was the resolution by which it was proposed that the 1st Defendant would repurchase up to $15.4 million of its shares in exchange for $3.5 million of its shares in TAL, the 1st Defendant's shares in TAL being its only asset of significant value (the "share exchange"). Mr Kao, the Plaintiff's deponent, stated in paragraph 30 of his first affirmation that "clearly the share exchange was conceived by China Vest and ADI to avoid the consequences of the 1st Defendant's liability for the indebtedness of the Plaintiff". He deposed that the 1st Defendant was in effect being "asset stripped" by its majority shareholders and their appointed directors.

48. What the Plaintiff failed to reveal was that since the restructuring of the Tait Group, the distribution of the assets of the 1st Defendant had been under discussion for some considerable time prior to the Transfer Agreement. Indeed the Plaintiff's initial response to the share exchange resolution was neutral. Mr Hansen's reply to Mr Keen who proposed the resolution was that the Plaintiff had "no ground to decline or incline (the) proposal of repurchase" but needed more time to clarify the Plaintiff's financial and legal position and finalise supporting documents. While it was stated that the Plaintiff was not one of the parties who would receive TAL shares under the share exchange proposal, it was not made clear that after the proposed share exchange, the 1st Defendant would continue to own a quantity of TAL shares which corresponded to the Plaintiff's holding in the 1st Defendant and that the Plaintiff would then be the 100% shareholder in the 1st Defendant. The manner which the matter was put on 4th December 2000 left me with the impression that no significant asset would be left with the 1st Defendant, in other words, the 1st Defendant was being stripped of its assets in order to avoid liability to the Plaintiff.

49. The court was misled into believing that the alleged debt of the 1st Defendant was not disputed. It is apparent from the minutes and transcripts of the three relevant board meetings (only two of which were referred to) when these matters were discussed and from the correspondence between the parties (which was not referred to) that the indebtedness between the relevant companies was very much in question. It was the satisfactory resolution of those matters that was being discussed at the directors meetings and in the correspondence before the share proposal was voted upon. The Plaintiff failed to draw the court's attention to these matters, or to the fact that both Justin Chen, an accountant of ADI, and Arthur Anderson, the 1st Defendant's auditors, had been engaged in attempting to resolve these matters.

50. The appearance from the minutes and transcripts was that the directors were working in apparent good faith to resolve the matters so that no party would be prejudiced rather than attempting to rush through a vote on a resolution that would prejudice the Plaintiff's interests. In a board meeting on 10th November 2000, Mr Hansen, the Plaintiff's deponent, had even acknowledged the existence of good relations between the parties. These matters were fundamental to the court's consideration of whether a Mareva injunction should be granted. They should have been brought to the court's attention. They were not.

51. It must have been apparent to those deposing on behalf of the Plaintiff that the court was not being given a full picture of all the circumstances. In the light of the gravity of that non-disclosure, I make the following order as to costs to take effect unless either party applies to be heard on the question of costs within 14 days; namely the 1st Defendant's costs of incidental to its summons be taxed on an indemnity basis and paid by the Plaintiff.