SHAHINA PARACHA v. PARACHA AZHAR JAVED AND ANOTHER

HCA 1823/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1823 OF 2011

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REASONS FOR DECISION

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1.  This was an application by the 1^st, 2^nd and 3^rd defendants (collectively “the defendants”) by summons dated 28 October 2014 that this action (commenced by the plaintiff (“W”) on 25 October 2011) be stayed.  At the conclusion of the hearing, the summons was dismissed.  The reasons appear below.

BACKGROUND FACTS

2.  The 1^st defendant (“H”) and W were married in 1981.  They left Pakistan for the United States in 1985 and commenced a watch manufacturing business in 1988.  The business prospered.

3.  In 1996, H and W setup Techrich Development Ltd, later renamed N R Shahrukh (“NRS”).

4.  NRS entered into a provisional sale and purchase agreement in April 2000 to acquire a unit at the East Sun Industrial Centre (“the property”) for $2.625 million.  The formal agreement dated 19 April 2000 was made between its nominee the 2^nd defendant (“D2”) and the vendor.

5.  W and H were appointed D2’s directors on 10 April 2000 and W was also appointed its secretary.  Each of H and W held one issued share in D2.

6.  It is W’s case that she had provided 100% of the purchase price for the property and that H held his one share in D2 on trust for her.

7.  According to H, by 2004 the marriage was in difficulties and he left the matrimonial home in California to live and work in Hong Kong.

8.  H alleged that there was an oral property settlement arrangement between H and W in mid‑2005 whereby H would retain certain assets and businesses in Hong Kong; that they separated on 1 June 2006 and concluded a Talaq divorce; that sometime in June 2006, W signed bought and sold notes and the share transfer in respect of her one share in D2 as well resignation forms resigning as director and secretary of D2.

9.  However those remained undated until September 2008 when H was in need of funds for his business.  He caused his accountant to submit the transfer for stamping and registration on 1 September 2008.  The (amended) resignation forms dated 1 September 2008 were registered on 3 September 2008.

10.  On 30 September 2008, H caused D2 to charge the property to ICBC to secure banking facilities for D2 and D3.

11.  H has been the only director and shareholder of D3 since its incorporation in December 2006.

12.  According to W she only discovered in May 2009 that her share in D had been transferred to H on 1 September 2008 and that allegedly she had resigned as director and company secretary on 1 September 2008.

13.  When complaints to the police about the forgeries did not result in any prosecution against H, W issued the writ in this action on 25 October 2011 for fraud/forgery, breach of fiduciary duties by H etc and seeking declaratory relief, damages and equitable compensation.

CHRONOLOGY OF THE HONG KONG ACTION AND THE US PROCEEDINGS

14.  The Hong Kong action (HCA 1823/2011) commenced on 25 October 2011.

15.  In April 2012, H and D2 applied for and obtained an order dated 25 July 2012 that $400,000 be paid into court by W as security for costs.  Payment was made in August 2012.

16.  On 12 October 2012 the plaintiff filed her Timetabling Questionnaire and took out a case management summons scheduled for hearing on 22 January 2013.

17.  On 8 January 2013, H and D2 filed their Timetabling Questionnaire.  By that date lists of documents had been exchanged. H and D2 also stated that they intended to call an expert (Mr Radley) on the authenticity of the signatures in question and that the security for costs situation would be reviewed before trial.

18.  Then less than two weeks later, on 17 January 2013, H filed divorce proceedings in California (“the US proceedings”).

19.  W filed a response dated 21 March 2013 and served on 22 March 2013 seeking dissolution of the marriage and determination by the US court of her property rights in community property that included, inter alia, the property.

20.  Meanwhile, the plaintiff’s case management summons resulted in an order dated 22 January 2013 (“the January 2013 order”), inter alia, scheduling the 1^st CMC for 26 September 2013, directing that witness statements be exchanged and granting leave to the parties to adduce one expert report each with consequential directions. The 3^rd defendant (“D3”) a Hong Kong company with H as the sole director and shareholder was joined as a party on 21 February 2013, pursuant to a consent order dated 7 February 2013.

21.  Six months after W’s response to the US proceedings and in anticipation of the 1^st CMC, on 18 September 2013 H’s solicitors wrote to the Hong Kong court stating, inter alia, that:

(1) H would not be calling any expert;

(2) the order for exchanging witness statements had been complied with;

(3) H would be making a second security for costs application; and

(4) the defendants’ time estimate for the trial was seven days.

The defendants sought a fixture for the trial and requested that it be set down within 56 days (to allow for the renewed security for costs application). In other words, the defendants were ready for trial.

22.  The Timetabling Questionnaire filed in January 2013 was updated on 18 September 2013.  The defendants caused its solicitors to file the updated Questionnaire together with counsel’s certificate of even date (prepared by the defendants’ solicitors as counsel had not yet been instructed) with the Hong Kong court.  In the intervening period between the date of the January 2013 order and 18 September 2013, W having obtained her expert’s report, caused it to be filed.  The parties also exchanged witness statements and filed further lists of documents.

23.  On 19 September 2013, the defendants made the 2^nd application for security for costs.  The 1^st CMC then took place on 26 September 2013.

24.  The defendants’ security for costs application was heard on 29 November 2013.  W paid the 2^nd round of security ordered of $740,800 on 19 December 2013.

25.  Ten months later H issued the present summons for a stay on 28 October 2014.

26.  It is to be noted that, in the interim (between February and the end of July 2014) H took a number of further steps in the Hong Kong action: he obtained a charging order to show cause in respect of an unpaid allocatur in the sum of approximately $104,000 together with interest and costs which order was made absolute in April 2014.  There followed a summons for payment out of just under $120,000 from the amount paid in by W in respect of the initial order for security for costs to satisfy the charging order absolute and an order made on the summons for payment out on 26 May 2014.

27.  This was followed by an order made on a consent summons dated 18 July 2014 that the amount of security be topped up by W in an amount equal to the payment out made on 26 May 2014.

THE APPLICABLE LEGAL PRINCIPLES

28.  Both parties cited Linfield Ltd v Taoho Design Architects Ltd & Ors [2002] 2 HKC 204 at §14 as encapsulating the applicable principles.

“One starts with the basic principle: what would serve the ends of justice between the parties to the litigation and as far as the administration of justice is concerned?”

29.  Ma J (as he then was) made reference to that being the recurrent theme in all cases involving stays on the basis of lis alibi pendens (where there is not only identity of subject matter but also identity of parties) citing The Abidin Daver [1984] AC 398 at 412B‑D and also the ‘guiding principles’ adumbrated bySellers LJin Compagnie Nouvelle France Navigation S A v Compagnie Navale Afrique du Nord (The ‘Oranie’ and The ‘Tunisie’) [1966] 1 Lloyd’s Rep 477 at 487 (1), namely that:

“The guiding principles are:

(1) that the stay must not cause injustice to the claimant in the arbitration, and

(2) that the applicant for a stay must satisfy the Court that the continuance of the arbitration would be oppressive or vexatious to him or an abuse of the process of the Court: in short, that it would be unjust.”

30.  It is noteworthy that to this statement Ma J added the following observation:

“I would add that where a plaintiff institutes proceedings as of right (and not in breach of an arbitration agreement or exclusive jurisdiction clause) he is not to be deprived of carrying on those proceedings unless very good reasons exist to the contrary.”

31.  Mr Parker (counsel for the defendants) while accepting the basic principle set out in §28 above, submitted that the present case is not a lis alibi pendens matter.  The circumstances were said to be sui generis and for that reason he did not accept that the ‘guiding principles’ apply in their full rigour.  As I understand it, he contended that the defendants do not have the burden of establishing that it would be unjust to the defendants for the Hong Kong action to continue whereas Mr Kwok (who appeared for the plaintiff) relied on the whole of §14 of Linfield including the guiding principles set out above.

32.  Linfield was a case where the court considered that the application before it “approximates roughly” to an application made on the basis of forum non conveniens or lis alibi pendens (at §§11‑12) in that there existed multiple proceedings but not involving the same parties.  In the present case there are two sets of proceedings, one in Hong Kong and one in the US, with H being a party in both sets of proceedings.  Prima facie, it is not clear why the present case would not involve forum non conveniens or lis alibi pendens considerations.

33.  Be that as it may, even if the facts could be considered to be sui generis, it is unclear on what authority the submission — that the defendants need not show that it would be an injustice to the defendants to carry on the Hong Kong action — is based.  It is nothing more than a bare assertion.

34.  In any event, as the defendants are the applicants, the burden must be on them to show that the ends of justice between the parties to the litigation require that the Hong Kong action be stayed and, as W has instituted the Hong Kong action as of right, she is not to be deprived of carrying on those proceedings unless very good reasons exist to the contrary.  None has been shown to exist.

SHOULD THE HK ACTION BE STAYED?

35.  A number of points were argued.  I propose to consider them under the subheadings below.

Whether the Hong Kong action serves no useful purpose

36.  It is common ground that the US court has jurisdiction over the divorce between H and W and, in due course, it would decide how the matrimonial assets should be carved up.  It was said that the Hong Kong action would serve no useful purpose.

37.  Mr Parker chose to characterize the Hong Kong proceedings (in which W seeks declaratory relief as to who is currently the owner of the shares in D2) to be the ‘servient’ proceedings and the US proceedings to be the ‘dominant’ proceedings.  It was said that when there is an ongoing divorce, the US divorce courts have a ‘super jurisdiction’ that allows them “to override and erode and entirely depart from” or “wash away” any decision made in the servient proceedings.  It was reasoned that as it is for the US court to decide the fate of D2 and D3, any decision of the Hong Kong court in the Hong Kong action could be swept aside by the US court.  The thrust of his submission was that potentially the decision of the US court could be made without any reference to the Hong Kong judgment.

38.  If a party to a marriage were found to have committed wrongful acts in relation to assets belonging to the other party during the subsistence of the marriage, such misconduct or wrongdoing would be a factor to which a Hong Kong judge could properly have regard when deciding the question of financial provision upon the parties’ divorce.  As I understand it, Mr Parker accepted that in the US proceedings, a party’s conduct while the marriage subsisted was not necessarily irrelevant: it may affect the decision as to how the matrimonial pot is to be divided and may affect “who gets what”.

39.  If that is the case, then why should the Hong Kong judgment be considered as serving no useful purpose?  Why should one assume that the US court would pay no regard to a judgment of the Hong Kong court made after a full trial with factual findings?  When one takes into account the fact that the defendants have not led any evidence on either of those matters, those are but empty conclusory statements without substance.

40.  The scope of the powers that may be exercised by the US court in divorce proceedings and the relevance of factual findings made by the Hong Kong court in the Hong Kong action are different and distinct matters. It would appear from the submissions made that the defendants have conflated them.

41.  While it is accepted that the US court has jurisdiction to decide on the ownership and division of matrimonial assets between H and W, the outcome of the Hong Kong action could well be a factor to which the US court might or could have regard, absent any evidence to the contrary.  As the defendants have not adduced evidence to the effect that the US court would be bound to disregard any findings of fraud/forgery and/or breach of fiduciary duty, for my part, I am not persuaded that any proper basis exists to support the defendants’ submission.

42.  For those reasons, I do not accept that a judgment on the Hong Kong action would serve no useful purpose.  Whether the US court would give effect to it is beside the point.  That is not determinative of the purpose of obtaining such a judgment.

The defendants’ delay in seeking a stay

43.  The defendants’ case is that H and W came to an oral settlement arrangement in 2005/2006.  If that were the case, one might ask, rhetorically, why did H refrain from issuing the US divorce proceedings until January 2013 (about 15 months after W had commenced the Hong Kong action)?  Why did H wait for more than 21 months after the commencement of the US proceedings or 19 months after W submitted to the jurisdiction of the US Court before issuing his stay summons in the Hong Kong action?  He must have known by 22 March 2013 at the latest when he was served with W’s response that W was “submitting” to the US court the issue of ownership and division of the property.  Yet, the stay summons was not taken out until 28 October 2014, some 19 months later.

44.  The defendants accept that there has been delay on their part but they have not seen fit to provide the court with any explanation for the delay.  Not only that.  During the period of 19 months (between March 2013 to October 2014), H was hardly a passive participant in the Hong Kong action.  To the contrary, he actively initiated applications designed to advance the Hong Kong action.  Those steps are now rendered wholly redundant by, and cannot be reconciled with, his current stance.

45.  To recapitulate, in September 2013, H caused the solicitors for the defendants to:

(i) file the updated Timetabling Questionnaire;

(ii) attend the 1^st CMC;

(iii) provide the court with counsel’s certificate for the trial;

(iv) give notice of the defendants’ intention to renew their application for security for costs; and

(v) request a fixture to be set down for trial within 56 days (to allow for the determination of the 2^nd security for costs application.

46.  Then between February and July 2014 H caused his solicitors to:

(i) issue a notice to show cause why a charging order in respect of an unpaid allocatur should not be made absolute;

(ii) obtain a charging order absolute;

(iii) issue a summons for payment out from the amount paid into court by the plaintiff in respect of the initial order for security for costs to satisfy the charging order absolute;

(iv) obtain an order for payment out in May 2014; and

(v) cause a consent order to be made in July 2014 pursuant to which W had to make a further payment into court equal to the amount paid out in May 2014 to ‘top up’ the amount of security.

47.  Meanwhile, the plaintiff for her part complied very properly with the January 2013 order by obtaining a report by her expert on the authenticity of her signatures in question, producing additional lists of documents, exchanging witness statements, attending the 1^st CMC and responding to the various applications by H described above.

48.  It will be seen that during the period of delay of 19 months that remains wholly unexplained, W had to expend and incur considerable time and costs to deal with the numerous applications/steps H saw fit to take in the Hong Kong action.  Those applications/steps inevitably took up invaluable court resources that otherwise could have been devoted to other litigants.  In my view, that conduct is tantamount to an abuse of the court system and merits judicial disapproval in the strongest terms.

49.  While accepting that the delay involved was serious, the defendants disingenuously submitted that the delay nevertheless does not now justify throwing more public resources into what was said to be “a black hole”.  What I can say is that it ill becomes the party who has spent the previous three years vigorously defending W’s claim and actively progressing the action to a stage when it is ready for trial to advance a submission of that kind.  It is conduct that verges on dishonesty.

50.  To cap all that, the defendants even suggested that it would be open to the court (if it were minded to accede to the stay application) to impose a costs order that would compensate W in terms of costs that have been incurred thus far.  I do not consider that the ends of justice would be served by adopting such an approach.

51.  A bona fide litigant who has a viable claim is entitled to have his day in court.  He should not be deprived of that opportunity and ‘bought off’ with a sop just because the party sued is prepared to pay the costs so far incurred.

52.  I consider the delay in taking out the stay wholly inexcusable.

Applying the Linfield principles

53.  As Mr Kwok counsel for the plaintiff submitted, in the present case, W had instituted the Hong Kong action as of right.  She should not be deprived of carrying on the Hong Kong proceedings unless very good reasons exist to the contrary.

54.  That a stay would cause injustice to W is apparent.  The Hong Kong action concerns a Hong Kong company and an alleged fraud/forgery committed by one of its directors and distribution of the mortgage proceeds.  It also concerns filings made in the Companies Registry in Hong Kong that allegedly have been forged.

55.  The US proceedings are different in nature being concerned with family/divorce jurisdiction.  The defendants have not adduced any evidence that the US courts have jurisdiction to adjudicate the matters mentioned in §54 that largely took place in Hong Kong and in relation to Hong Kong incorporated companies.  The defendants accept that the US court may or may not deal with the forgery issue.  But it was suggested that as the stay sought is not a permanent stay, if there are issues that are left unaddressed by the US court, the Hong Kong action could be re‑animated.

56.  That is no answer.  It does not address the prejudice to W who started her action three years before H even thought of applying for a stay.  Importantly, D2 and D3 would not be bound by any decision made by the US court as they are not parties to the US proceedings.  It would be grossly unfair to W.

57.  Further, misconduct by H, a director of a Hong Kong company in Hong Kong and redress open to W plainly are matters W is entitled to pursue and have determined by the Hong Kong court.  The eventual disposition of matrimonial assets as a matter of US family law has no bearing on the question whether or not wrongdoing as alleged by W has occurred and her entitlement to redress for those wrongs.

58.  Moreover, from the case summary of the US proceedings, the next review hearing date shown is set for 17 March 2018.  The assets with which the US court has to deal are not limited to D2 and D3 and the property.  Instead, they encompass a wide range of assets of considerable value including several significant properties and other assets within the US, assets in Pakistan and assets in Hong Kong.  That might explain why the review date has been set for 2018.  Further, sight should not be lost of the fact that H would be in the driving seat of the US proceedings and there is no assurance that those proceedings will be prosecuted with due diligence.

59.  In contrast, the Hong Kong action is ready for trial now as is clear from the defendants’ updated Timetabling Questionnaire.  All that remains to be done is for the matter to be restored to the master at the earliest opportunity for a 2^nd CMC for setting down.  Having obtained security for costs which have been met in full, there is plainly no conceivable excuse for H not being able to proceed with the trial that would have been set down per his request by the end of February 2014 but for the stay application and its determination.

CONCLUSION

60.  Whether or not the court should accede to the application is a matter of case management and how the court should exercise its discretion.  Having regard to all the relevant factors considered above, the case for not staying the Hong Kong action was overwhelming.  Accordingly, the summons for a stay was dismissed with costs to the plaintiff.