BEIJING HANTONG YUZHI CONVENTION CENTRE LTD v. LAO YUAN YI

HCA 1208/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1208 OF 2010

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D E C I S I O N

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1.  There are 3 applications before the court:

A．  The defendant’s application to strike out the claim, alternatively for an order that the question of whether the plaintiff has locus standi be tried as a preliminary issue.

B．  The plaintiff’s application for leave to re-amend the reply.

C．  The plaintiff’s application to file and serve a further affirmation in opposition to the defendant’s application.

2.  As the case has not yet been set down for trial, there is really nothing in principle that should prevent the plaintiff from re-amending the reply.  Mr Man, counsel for the defendant, very sensibly did not resist leave to amend.

3.  That leaves only applications A and C.  Mr Man submits that even the latest version of the reply and the affirmation of the plaintiff will not salvage its case.  Therefore the affirmation should not be admitted and the statement of claim should be struck out and the claim dismissed.

The facts

4.  The defendant, as he admits, was holding as representative on behalf of 上海中創國際投資有限公司 (“VTI Shanghai”) 50% shares in a Hong Kong company Praiseup Limited (“Praiseup”) and the board of Praiseup so confirmed in January 1996 (“1^st Confirmation”).

5.  Praiseup held certain properties in Shanghai which were reserved for foreign investors only.

6.  VTI Shanghai is a wholly owned subsidiary of 中國新技術創業投資公司(“VTI China”).  Both of these companies are PRC companies.

7.  VTI China was subject to winding up and a winding up committee was appointed (“the VTI China Winding Up Committee”).

8.  The VTI China Winding Up Committee sold the assets and properties of VTI China to 中國華融資產管理公司(“Huarong”).

9.  Upon completion of the winding-up process, Huarong sold, among others, all interests of VTI Shanghai in Praiseup to the plaintiff pursuant to an agreement dated 23 October 2007 (“the 2007 agreement”).   The plaintiff avers that the defendant holds the 50% shares in Praiseup on trust for the plaintiff since then.

10.  The plaintiff avers that the defendant acted in breach of his duty as trustee of the plaintiff and/or as an officer in charge of VTI Shanghai in failing to transfer the shares in Praiseup to the plaintiff.

11.  The defendant denies the alleged trust.  He claims VTI China was to lend money to VTI Shanghai for the acquisition of 50% shares in Praiseup but VTI China only contributed loans equivalent to 18.53% of the total acquisition cost.  The defendant avers that VTI Shanghai’s ownership of Praiseup had come to 18.53%.  Loans that VTI China made to VTI Shanghai remained outstanding even when the former went into liquidation.

12.  On 6 September 2001, VTI Shanghai agreed to set off the loans due to VTI China by transferring 18.53% shareholding of Praiseup to VTI China.  The defendant (as director of Praiseup) agreed in writing that VTI China had acquired 18.53% shareholding of Praiseup, which was being held by the defendant (“the 2^nd Confirmation”).

13.  The defendant challenges the plaintiff’s locus standi to claim against him (para 13 of the amended defence) in that:

(i)  The 2007 agreement did not, on a true construction, have the effect of transferring to the plaintiff the interests of VTI Shanghai in the shareholding of Praiseup.

(ii)  VTI Shanghai is a separate legal entity notwithstanding that it  is wholly owned by VTI China.  Neither VTI China nor the VTI China Winding Up Committee had the power to sell and validly transfer to Huarong assets held by VTI Shanghai and hence Huarong could not have acquired valid title or validly sold or transferred the same to the plaintiff.

(iii)  Since the defendant (being the sole legal representative of VTI Shanghai) has never consented to the purported sale, the interest of VTI Shanghai in the shareholding of Praiseup could not have been validly sold or transferred to Huarong and in turn to the plaintiff.

14.  The plaintiff asserts that according to Mainland law, the State Council had right and power through the VTI China Winding Up Committee to deal with assets of VTI China and all its subsidiaries including VTI Shanghai.  On about 26 October 1999, an officer called Huang Wei De was sent by the VTI China Winding Up Committee to take over all the management of VTI Shanghai and since then, despite the fact that the defendant was still the registered legal representative of VTI Shanghai, he had ceased to be authorized to manage it.  The defendant should comply with all instructions of the VTI China Winding Up Committee and could no longer deal with assets of VTI Shanghai without approval.

15.  In its draft re-amended reply, the plaintiff pleads that the relevant law should be the Hong Kong law of trust.  In substance it is submitted that the defendant was holding the one share of Praiseup as bare trustee and equity will intervene to compel him to deliver up the trust property.

The legal principles

16.  Striking out is only for plain and obvious cases.  There should be no trial upon affidavit.  Disputed facts are to be taken in favour of the party whose pleading is sought to be struck out.  Nor should the court decide difficult points of law in striking out proceedings.  The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out.  Where the legal viability of a cause of action is sensitive to the facts, an order to strike out should not be made.  See Hong Kong Civil Procedure 2013, Vol 1, para 18/19/4.

17.  For trial of preliminary issues, the general rule is that all the issues in the case are to be tried at the same time.  There is power to order that different issues in the case be tried at different times, but the departure from the general rule is ordered only if it is just and convenient. It is for the party who seeks such a departure to demonstrate that it is indeed just and convenient.  Hong Kong Civil Procedure 2013, Vol 1, para 33/4/9:

“The Court of Appeal in Lee Yiu Kwan v. Ting Yin Wah & Another [2004] H.K.E.C. 1222 set out a convenient summary of some of the principles relevant to the exercise of the court’s discretion to deal with preliminary issues of law with or without application of the parties … :

(i) The question of law or construction to be determined by the court under the order should be stated or formulated in clear, careful and precise terms, so that there should be no difficulty or obscurity, still less any ambiguity, about what is the question that has to be determined.

(ii) Where the issues of fact are interwoven with the legal issues raised, it will be undesirable for the court to split the legal and factual determination, for to do so would in effect be to give legal rulings in vacuo or on a hypothetical ruling, which the court will not do.

(iii) An order for the separate trial of separate issues is a departure from the general rule that all disputes should be tried together, and therefore generally speaking, such an order should only be made in exceptional circumstances or on special grounds.

(iv) Where costs can be saved by obtaining a ruling on a point of law which requires serious argument and consideration being disposed or before trial, the point should be raised in the pleading and application should be made under O.33 rr.3 and 4(2) for the trial of this point as a preliminary issue.

(v) The order, as a rule, will only be made if the objection raises a serious question of law, which, if decided in favour of the party objecting, would dispense with any further trial, or at any rate with the trial of some substantial issue in the action. The order should not be made in respect of matters to which by reason of the obscurity either of the facts or the law ought to be decided at the trial.

(vi) The order for the trial of a preliminary point of law should not be made where there are facts in dispute, and if made may be set aside at the hearing.

(vii) A point of law may in special circumstances be ordered to be set down and argued before the trial, although it is not raised on the pleadings.

(viii) The order should make clear what is the precise point of law to be decided.

(ix) Only such questions of law can properly be raised as preliminary issues as must necessarily arise in the action and the court will not decide fictitious questions or questions in which those who are interested, or are likely to be, are not present or are not in esse.

(x) The House of Lords has strongly protested against the practice of the Court of First Instance allowing preliminary points of law to be tried before and instead of first finding the facts, since this course frequently adds to the difficulties of the Courts of Appeal and tends to increase the time and cost of legal proceedings.

(xi) Where for the purposes of deciding questions of law it is necessary or desirable to ascertain the facts beyond those that appear in the pleadings, the court should not order the trial of those questions as a preliminary point of law, especially where the law is itself unsettled or obscure.

(xii) An “issue” which involves dealing with the whole subject matter of the action without any evidence is not a preliminary point and should not be ordered to be tried as such.”

(Hong Kong Civil Procedure 2013, Vol 1, para 33/4/9A)

Case management

18.  The CMC has been adjourned to be dealt with by me after the summonses are dealt with.  At the commencement of the hearing, I have explored with the parties a case management issue – whether the court should proceed with hearing the striking out application or direct a hearing of a preliminary issue.  Having heard the parties, I consider that the latter course is more preferable.

19.  The parties have filed witness statements.  They have each produced a set of Mainland legal opinion on the locus standi issue, with a joint statement of the experts on issues that they agreed, those that they disputed and reasons for the dispute.  It was after all these were done that the defendant immediately took out his summons for striking out.

20.  At the time the learned Master adjourned the summons for hearing before a judge, the state of affirmation evidence was not complete.  As thing stood then, the defendant did have substantial reasons for issuing the summons.  The plaintiff’s pleaded case was on the basis of the defendant holding Praiseup shares on behalf of VTI Shanghai, not VTI China.  [Mr Miu, counsel for the plaintiff, makes clear in paragraph 34 of his skeleton submission that the plaintiff is not pursuing the present action on behalf of VTI Shanghai but in its own name and right.  The amended reply and proposed re-amended reply did not accept that the 2^nd Confirmation bound anybody as it was only signed by the defendant.]  There was no alternative pleaded case that the plaintiff derived status to sue based on the 2^nd Confirmation.

21.  What the plaintiff was doing, effectively, was enforcing the company’s rights as a shareholder of VTI Shanghai.  Its case ignored all concepts of independent corporate identity.

22.  As things developed, the affirmations filed by the parties included new discovery from the plaintiff (including important agreements) and yet another around of Mainland legal opinions.  The defendant’s “legal opinions” came from an affirmation by one Mr Zhang who does not profess to be a Mainland lawyer.  Despite the fact that the defendant should have the last word on his summons, the plaintiff now applies to put in, 4 months after the defendant’s last affirmation, another affirmation of the plaintiff’s solicitor exhibiting a Mainland legal opinion.  Such delay was caused, allegedly by a change of legal team, which this court does not regard as a good explanation.

23.  Mr Man seeks to persuade me that this is an open-and-shut application such that even with the latest version of reply and affirmations from the plaintiff’s side, the claim should be struck out. 

24.  I have reservations on this view.  There are a number of Mainland legal provisions to consider.  The defendant has relied on new legal provisions in his expert report filed in reply.  The plaintiff’s latest expert evidence purports to answer them, lay emphasis on the distinction between清算組和清算責任人, challenges the relevance and weight of the authorities relied on by the defendant and alleges that the plaintiff is suing as the 清算責任人of VTI Shanghai.  This may require deeper analyses of the plaintiff’s case.

25.  The court could, of course, have disregarded the plaintiff’s late evidence when hearing the strike-out application.  However, the new expert evidence cannot be said to be irrelevant at least to the question of whether or not the statement of claim can be amended.  It will also be relevant if the court directs a trial on preliminary issue. 

26.  Of course, if the late expert evidence is admitted, Mr Man has indicated clearly that his client will have to answer some of the allegations and expert evidence in further reply is required.  Needless to say, once the new evidence is adduced, there is no point proceeding with the striking out application which may leave unresolved the question of locus standi if the application is unsuccessful.

27.  I have taken into account the following additional matters.

28.  The pleadings have closed.  The listing questionnaires filed by both parties only indicated further steps to be required for filing of list of documents and hearsay notices apart from dealing with the striking out application and anything that might arise from it.  There are no major obstacles to setting down for trial.

29.  The locus standi issue is a distinct issue involving uncomplicated and very limited factual dispute.  The bulk of the arguments is on Mainland law and whether Hong Kong trust law applies and is demonstrably well suited to trial as a preliminary issue.  The factual witnesses will be limited.

30.  The legal experts have had the opportunity to comment on each other’s views already and cross-examination is unlikely to be required, or, even if required, is unlikely to take more than an hour for each expert. Counsel have estimated the trial of preliminary issues would not take any more than 2 days (although it still sounds excessive to me).  The rest of the case, such as the loan from VTI China to VTI Shanghai, how the 2^nd Confirmation came about and its legal effect, are quite separate issues involving 3 factual witnesses.

31.  The outcome of a split trial will have a dispositive effect.  It is still time and costs saving.  Between a draconian strike-out application and trial on preliminary issue, the latter will achieve a more just and cost-effective result.  Having considered all the circumstances, I decline to deal with the striking out application and direct a hearing of preliminary issues with the following directions:

On application B – the plaintiff’s summons to amend:

(1)  There be leave to the plaintiff to file and serve the re-amended reply; service is dispensed with.

(2)  There be an order nisi that costs of and occasioned by the amendments be to the defendant.

On application C – the plaintiff’s summons to adduce evidence:

(3)  Leave to the plaintiff to file the affirmation of Mr Vincent Chin affirmed on 14 January 2013; service is dispensed with.

(4)  There be an order nisi that costs be to the defendant.

On application A – the defendant’s striking out summons:

(5)  There be a trial of the following preliminary issue: whether the plaintiff has locus standi to sue in this action.  For the avoidance of doubt, this issue will include whether or not Hong Kong trust law applies to give the plaintiff locus.

(6)  Leave to the defendant to file and serve a further affirmation in reply by 22 February 2013.

(7)  The parties’ experts shall prepare a joint statement by 8 March 2013, having regard to the 2 expert reports filed in relation to the striking out summons.  The joint statement shall set out the matters on which the experts agree, those on which they disagree and the reasons for disagreement.

(8)  No further affirmation or expert evidence shall be filed.

(9)  Leave to use the affirmations filed in relation to the defendant’s striking out summons at the trial of the preliminary issue.

(10)  Subject to filing of the statements of truth, all reports of the legal experts shall be adduced without the need to call the experts to give oral evidence, unless application is made to this court in writing on or before 22 March 2013 identifying the specific points on which cross-examination is needed.

(11)  Leave to each party to file and serve a supplemental list of documents by 22 March 2013.

(12)  Leave to each party to file and serve hearsay notices by 22 March 2013.

(13)  Any further directions needed for trial of the preliminary issues should be applied for by 22 March 2013 by a joint memorandum to this court.

(14)  Trial counsel’s certificates setting out the estimates of time shall be submitted to this court for determining the length of trial by 22 March 2013.

(15)  Leave to set down on or before 5 April 2013 for trial of the preliminary issue before a bilingual judge.

Costs on the defendant’s summons

32.  The plaintiff has resisted the striking out application.  But for the new evidence from its side, the striking out could well have proceeded. The plaintiff also resisted the trial of preliminary issues but has failed. Overall, the plaintiff should bear the costs of the defendant’s summons and I make an order nisi to that effect.

33.  There shall be summary assessment of costs on the papers on 25 February 2013 at 4:30 pm.  No attendance is required. The defendant shall file and serve his statement of costs by 15 February 2013.  The plaintiff shall file and serve its grounds in opposition by 22 February 2013.

34.  I thank counsel for their assistance.