北京旭阳伟业煤焦化工有限公司 v. HIMADRI CHEMICALS & INDUSTRIES LTD AND ANOTHER

HCMP 3305/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3305 OF 2013

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DECISION
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Background of the application

1.  By Summons dated 21 July 2014, the 1^st and 2^nd defendants apply to have these proceedings begun by Originating Summons continue as if the cause or matter had been begun by writ, and for consequential directions to be made.

2.  These proceedings were commenced by the plaintiff, a company incorporated in the PRC (“Risun”), in aid of the proceedings under HCCT 35/2010 to enforce a CIETAC arbitration award against the 1^st defendant, an Indian company (“Himadri”).  The arbitration award was made in favour of Risun against Himadri on 2 April 2008.  An enforcement order was granted ex parte on 20 September 2010.  Leave to serve the enforcement order outside Hong Kong upon Himadri was only obtained on 5 June 2013, with service on Himadri effected on 24 June 2013.

3.  No dispute arises on the validity of the arbitration award.  There has been no application made to set it aside.

4.  Risun proceeded with the enforcement procedures by obtaining a Charging Order and serving it on Himadri.  The subject matter of the Charging Order was Himadri’s only identifiable asset in Hong Kong, namely the beneficial interest in the entire share capital of a Hong Kong company known as AAT Global Limited (“AGL”), which in turn holds a 94% interest in a joint venture that owns a coal tar pitch in Shandong (“the Shandong Plant”).  Within one week of service of the Charging Order, Himadri applied to discharge it in reliance of a sale of shares agreement bearing a date of execution of 8 June 2013, under which the entire share capital of AGL had purportedly been transferred to the 2^nd defendant (“Equal”) prior to the date of the Charging Order.

5.  The present action was then commenced by Originating Summons dated 8 December 2013 in which Risun seeks declarations and relief with the aim of setting aside the share sale transaction between the defendants and to revert the ownership of the shares to Himadri to enable enforcement of the award to proceed.

6.  On 21 July 2014, seven months after the issue of the Originating Summons, the defendants took out the present summons.  On the other hand, Risun moved ex parte to restrain the disposal of the shares.  In April 2015, HCCT 35/2010 was ordered to be stayed pending the determination of these proceedings.

Position of the parties

7.  The broad grounds relied on by Risun in support of these proceedings are that the transaction was a sham transaction concocted by Himadri in collusion with Equal to frustrate enforcement of the arbitration award.  On the other hand, Himadri claims that the transaction was a genuine transaction concluded at arm’s length, and that it had no knowledge of the steps taken by Risun to enforce the arbitration award until the enforcement order was served upon it weeks after the date of the sale transaction.

8.  The present application by Himadri was based on the contention that since Risun alleged the transaction was fraudulent whereas Himadri and Equal contended that it was genuine, there was bound to be substantial disputes of facts which make the matter unsuitable for determination by the originating summons procedure.  Order 5, rule 4(2) was relied on to contend that the originating summons proceeding should never have been commenced, and that the order Himadri asked for under its summons pursuant to Order 28, rule 8 would enable the proceeding to be determined more expeditiously than if no such order was granted.

9.  On the other hand counsel for Risun, Mr Lau, disagreed that the present action was one that was “bound to” give rise to substantial factual disputes and therefore should not have been begun by originating summons.  Mr Lau contended that there was no substantial dispute on facts, only on what conclusion or inferences were to be drawn from documents and common factual foundation, and indeed the parties knew well what issues were to be determined by the court, relying on those listed in the skeleton argument of counsel for Himadri at §34 to §35.

10.  While Mr Lau agreed that oral evidence would be appropriate, and the deponents should be cross‑examined on their affidavit evidence, he invited the court to exercise its wide powers under Order 28, rule 4 to make such orders and directions as may be appropriate without ordering the action to continue as a writ action.

Legal principles

11.  Whereas the repealed Order 5, rule 2(b) stipulated all claims prior to the CJR based on an allegation of fraud had to be begun by writ, what remains in Order 5 that is relevant to the issue is rule 4(2)(b), which provides as follows:

“Proceedings

(a) …

(b) in which there is unlikely to be any substantial dispute of fact are appropriate to be begun by originating summons unless the plaintiff intends in those proceedings to apply for judgment under Order 14 or Order 86 or for any other reason considers the proceedings more appropriate to be begun by writ.”

12.  Order 28, rule 8(1) provides as follows:

“Where in the case of a cause or matter begun by originating summons, it appears to the court at any stage of the proceedings that the proceedings should for any reason be continued as if the cause or matter had been begun by writ, it may order the cause or matter to be continued as if the cause or matter had been so begun and may, in particular, order that any affidavits shall stand as pleadings, with or without liberty to any of the parties to add thereto or to apply for particulars thereof.”

13.  The party applying for an order under Order 28, rule 8 carries the burden of proving why it is just and convenient that such an order be granted.

14.  Factual disputes may be dealt with under the originating summons procedure or following an order made under rule 8(1) through appropriate directions to be given as early as practicable, including directions as to receiving oral evidence, as per the following provisions under Order 28, rule 4:

“(2) In any case where the court does not dispose of any originating summons altogether at a hearing or makes an order under Rule 8, the Court shall give such directions as to the further conduct of the proceedings as it thinks best adapted to secure the just, expeditious and economical disposal thereof.

(3) Without prejudice to the generality of paragraph (2), the court shall, at as early a stage of the proceedings on the summons as appears to it to be practicable, consider whether there is or may be a dispute as to fact and whether the just, expeditious and economical disposal of the proceedings can accordingly best be secured by hearing of the summons on oral evidence and, if it thinks fit, may order that no further evidence shall be filed and the summons shall be heard on oral evidence or partly on oral evidence and partly on affidavit evidence, with or without cross-examination of any of the deponents, as it may direct.”

15.  The above principles were applied in Li Fung Kai v Fung Sau Lin, HCMP 919/2013 (§52), where the court recognized that the decision ultimately turned on whether there were truly substantial factual disputes that just, expeditious and economical disposal of the proceedings cannot be secured by hearing the originating summons on oral evidence, and that it would be just and proper to continue the proceedings as if the cause or matter had been begun by writ.

16.  In Shum Wah Ming v the Estate of Chan King Ngo, Deceased, CACV 21/1996 (unreported, 9 July 1996), the Court of Appeal set aside the order of the court made under an originating summons after arriving at a conclusion on the disputed facts on the affidavit evidence without cross-examination of the deponents.  The Court of Appeal decided where there were substantial issues of fact requiring adjudication, it was imperative that the issues between the parties were properly framed by pleadings and that an orderly trial procedure be adhered to so that all relevant matters can be satisfactorily canvassed.  Nazareth V‑P found himself compelled to allow the appeal for the above reasons despite his view that there were strong indications and considerations pointing to the strength of the plaintiff’s case on the basis of the affidavit evidence.

17.  If significant delay to the resolution of the dispute and/or additional costs may be caused by the proceedings being ordered to continue as if it was a writ action, an order under Order 28, rule 8 might be regarded as undesirable (Ye Hong-ying v Chan Lup-ying [1996] 1 HKLR 255 at 258; Empire Trend Enterprises Ltd v Double Mind Co Ltd, HCMP 2425/1998 (23 March 1999, unreported, §8). This is so even where the matter is one which involves factual disputes, as in the case of Ye Hong Ying.

Discussion

18.  In the present case, the parties filed a number of affidavits setting out and answering to one another’s allegations.  There are two affidavits from each of Risun and Himadri containing the principal allegations and evidence relied on, and the answers to the allegations.  Four other deponents made affirmations in support of the evidence filed on behalf of Himadri.  Exhibits to the affirmations fill three box files.

19.  After considering the parties arguments, it is apparent to me that the main contention is whether pleadings are necessary in the circumstances in order to facilitate the just resolution of the dispute.  The defendants contend that the judge should not be required to navigate the affirmations and exhibits to discover the factual disputes.

20.  Counsel for Himadri, Mr McLeish, relied on the voluminous evidence filed by the parties and the “wide‑ranging nature” of the factual disputes, which he enumerated in his skeleton argument, as militating against the just, expeditious and economical decision by the court in the absence of proper pleadings.  He contended that the judge should not be required to navigate the affirmations and exhibits to discover the factual disputes.

21.  Mr McLeish further relied on the well‑established rule that allegations of fraud must be pleaded distinctly with utmost particularity (Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & Co Ltd & Ors [1994] 2 HKC 264), and that an allegation of fraud should not be left to be inferred from facts (Marquis Trading & Ors v Associated Bankers Insurance Co Ltd & Ors [1982] HKLR 434 at 439).

22.  After considering the submission of Mr Lau in answer to the points set out in the preceding paragraphs, I do not find counsel’s respective contentions to be in conflict with each other.  There is nothing unusual or untoward for intent to defraud or a sham to be inferred from undisputed or established facts (Tradepower (Holding) Ltd (In Liquidation) v Tradepower (Hong Kong) Ltd & Others [2010] HKLRD 674; National Westminster bank v Jones [2001] 1 BCLC 98).  What is not permitted is for allegations of fraud not to be properly spelled out, but only left to be inferred from pleaded facts or allegations.  In the present case, the allegations of fraud, namely, of how it is that the facts as construed by the plaintiff point to the disposition of shares being a sham have been set out in affidavit evidence.  I am to consider whether the issues arising in the evidence filed are clear and concise enough to facilitate the just, expeditious and economical determination of the issues by the court.

23.  While I agree with Mr Lau that some of the factual issues arising from the affidavit evidence relate to interpretation of documents and the inferences to be drawn from undisputed facts, a number of issues to be determined are dependent on the court’s view on the credibility of the deponents to the affirmations filed on behalf of the defendants.  Without setting out all the subsidiary evidentiary points of dispute, these include the following major disputes of facts arising from the evidence filed to date:

(1) Whether there was indeed a bona fide view taken by Himadri that the joint venture was likely to be loss making for the foreseeable future, prompting it to sell the shares in AGL that represented its interest in the joint venture.

(2) Whether there were genuine negotiations between the defendants on the proposed sale, any objective valuation of the shares, and other factors to give support to the transaction as a genuine arm’s‑length commercial transaction.

(3) Whether Himadri remained in management control of the Shandong plant/AGL after it disposed of its interest in AGL.

(4) Whether the purchase of the AGL shares by Equal was financed by Himadri.

(5) Whether Himadri and Equal had common management and control such that control of AGL remained with Himadri despite the transfer of the AGL shares.

24.  The court’s view on the above issues can only properly be reached upon hearing oral evidence including cross-examination of the witnesses.  As the evidence must be assessed as a whole, the court’s view on the oral evidence, in particular the oral evidence of the defendants, would inevitably have an impact on the inferences to be drawn from other undisputed facts, on the proper construction of the various documents, and on the weight to be attached to the various items of evidence.

25.  Counsel for Risun skilfully identified three key propositions with firm support in objective documentary evidence as demonstrating the explanations rendered by the defendants on the above issues as inherently unbelievable.  These relate to:

(1) the timing and consideration of Himadri’s disposal of the shares in AGL to Equal, and the acquisition by Himadri of the share capital of Equal at nominal consideration within nine months of the disposition;

(2) the source of fund of Equal’s acquisition of the AGL shares from Himadri being provided by Himadri; and

(3) the uninterrupted commonality of management and control between Himadri, Equal and AGL.

26.  On the second point above, the defendants disclosed an extraordinary arrangement between them only in a further round of evidence (3^rd Affirmation of Choudhari), in an attempt to explain statements of ownership of the share capital between them published in company annual reports.  It was disclosed that pursuant to an interim order made in an arbitration between the two defendants, Himadri was required to acquire the entire share capital of Equal at a consideration which was nominal.  Even more inexplicably, the interim order relied on was one that was “agreed” between the parties.  Counsel for Risun made a number of points to highlight the lack of commercial sense in the purported transaction between the defendants, as in the agreed interim order.  It was argued that the nonsensical arrangement, even if it existed, only went further to show that the relationship between the defendants had never been at arm’s length.

27.  On the third point, there are dispute of facts as to whether a member of the senior management of AGL, a Mr Kamlesh Agarwal, was in fact the same person also by that name who became the Senior Vice President and then the Chief Financial Officer of Himadri, contrary to the evidence filed on behalf of Himadri that they were two different persons with the same name.  A finding in favour of Risun, namely, that the two Mr Agarwal were in fact the same person would involve my rejecting the explanation of the defendants as inherently unbelievable, taking into account the timing and circumstantial factors.  On other points, the defence has attempted a number of explanations which are disputed, the acceptance of which would likewise depend on whether their evidence will be believed.

28.  I am in strong sympathy with the plaintiff’s submissions on the views to be taken of the defendants’ evidence contained in the affirmation as they are presented and analyzed before me.  However, it is an inescapable fact that no conclusion could be arrived at to dispose of each of the contentious issues without the court drawing inferences from documents and disputed allegations, and accepting the submissions of one party on what views are to be taken on them, and rejecting the other party’s evidence on affidavit by weighing them and deciding on how much weight if any was to be attached to each item.

29.  In the circumstances, I am unable to agree that the disputes on facts are confined to disagreement of interpretation or inferences to be drawn from common factual foundations.

30.  Mr Lau relies on Ip Kam Wah v Anor v Fair City Group Ltd [2005] 4 HKLRD 168 (at 174 per A To J) for the proposition that in the originating summons procedure, where assertions on affidavit give rise to factual disputes, the court should first undertake an assessment of whether the assertions, taken as a whole, are believable.  It is said that only when the court is satisfied that the assertions are believable and the factual disputes could not be resolved on affidavit that oral evidence or trial should be considered.  It is Mr Lau’s contention that the explanations proffered by the defence on the three keys points identified above were all unbelievable.

31.  The above propositions are relevant only where the court is asked to decide the Originating Summons without hearing oral evidence.  As Mr Lau could hardly deny that it is a case requiring the testing of witnesses in cross‑examination, the authority has little impact on what I have to decide.  I do not understand Mr Lau to be suggesting that I should, at the hearing of the defendants’ present summons, come to the view that the defendant’s evidence is so unbelievable that I would be in a position to make an order without hearing oral evidence under the originating summons.  Mr Lau however suggests that credibility should be taken into account in order to decide whether the originating summons procedure is suitable.  In any event I agree with Mr McLeish that it is not for me to decide on whether the defendants’ evidence is believable at this stage.  However, if I find myself able to come to a view on the strength and weakness of the parties’ case, there is no reason why I should not take that into account in deciding on what directions are appropriate for the further conduct of the proceedings.

32.  While I do not necessarily take the view that the proceedings should not have been commenced by originating summons bearing in mind the procedural history, I find myself persuaded that the court should not be left to comb through the evidence to identify the issues for their determination.  I take the view that a judge adjudicating the matter would benefit from pleadings that would give structure to the issues in dispute.  While the skeleton arguments filed by counsel for the purpose of the hearing before me would in some ways have served the purpose of an outline of the issues in dispute, those documents would not be appropriate to serve as pleadings.

Conclusion

33.  Given the view I have taken as to the necessity, at this stage of the proceedings, of pleadings that are trimmed down from the diverse affidavit evidence and the skeleton arguments filed, I regard an order under Order 28, rule 8(1) to be appropriate.

34.  Under Order 28, rule 4, I have the power to give such directions as to the further conduct of the proceedings as I think best adapted to secure the just, expeditious and economical disposal of the matter.  Given the procedural history of the proceedings and the view I am entitled to take of the merits of the defendants’ case on affidavit and the fact that the arbitration award remains unsatisfied, I shall give directions that would enable the matter to be pressed on with reasonable expedition.

Order

35.  I make the following orders:

(1) The proceedings herein be continued as begun by Writ pursuant to Order 28, rule 8(1).

(2) The plaintiff shall file and serve a Statement of Claim within 21 days from the date of this decision.

(3) The defendants shall file and serve a Defence with/or without Counterclaim within 21 days thereafter.

(4) The plaintiff shall file and serve a Reply with/or without Defence to Counterclaim as may be advised within 14 days thereafter.

(5) The parties herein shall file and serve a list of documents within 21 days after the filing and service of the Reply and/or Defence to Counterclaim, and inspection of the documents be carried out within 14 days thereafter.

(6) Unless otherwise directed by the trial judge, the affidavits or affirmations filed on behalf of the parties hereto do stand as evidence at the trial.

(7) Leave be given to the parties to file and exchange further witness statement (if necessary) within 21 days after the inspection of documents.

(8) There be leave for the parties to fix the matter for trial before a judge with five days reserved in consultation with counsel’s diary, but not earlier than 105 days from the date of this decision.

(9) The parties do have liberty to apply.

(10) The requirement for parties to file Timetabling Questionnaire and to attend Case Management Summons be dispensed with.

(11) A Case Management Conference with 30 minutes reserved be held on a date to be fixed by the court no less than 45 days before trial, early date be given if at all possible.

Costs

36.  As the affidavit evidence filed in support and in answer to the summons will stand as evidence at the trial, and the hearing of the summons has served the function of a case management conference, I propose to apply different treatment to the costs of the summons and the costs of the hearing of the summons.

37.  I make a costs orders nisi as follows:

(1) Costs of the 1^st defendant’s Summons dated 21 July 2014 (“the Summons”) excluding the costs of the hearing of the Summons be costs in the cause.

(2) Half of the costs of the hearing of the Summons incurred by the 1^st defendant be paid by the plaintiff to the 1^st defendant, to be taxed if not agreed.

(3) There be no order as to the costs of the hearing of the Summons incurred by the 2^nd defendant.

38.  Any party disputing the above costs orders may file submissions thereon in writing and serve a copy thereof on all parties concerned within 14 days of the handing down of this decision, such submissions to be limited to two pages for each party.  Any submissions in reply to any other party’s submissions may be filed and served on the other parties within seven days upon receipt of the submissions to be replied to, such reply submissions to be limited to one page for each party.  In the absence of submissions filed under the foregoing directions, the costs order will become absolute upon the expiry of 14 days from the date of this decision.

39.  It remains for me to thank both counsel for their able assistance.