PATRIARCH PARTNERS MEDIA HOLDINGS LLC v. WONG SIU WA SAMMY AND ANOTHER

CACV 248/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 248 OF 2014

(ON APPEAL FROM HCA 1865 OF 2013)

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REASONS FOR JUDGMENT

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Hon Poon J giving the Reasons for Judgment of the Court :

1. By an order dated 12 November 2014, Deputy High Court Judge Mayo struck out the amended statement of claim (“ASOC”) as against the 2^nd defendant on the ground that it disclosed no reasonable cause of action and set aside the service of the writ out of jurisdiction on the 2^nd defendant with costs.  The plaintiff then appealed.

2. On 13 May 2015, after hearing the parties, we allowed the plaintiff’s appeal, set aside the learned Judge’s order, gave leave to the plaintiff to apply to the court below for re‑amending the ASOC within 21 days and stayed the action in the meantime.  We did not disturb the costs order below but ordered the plaintiff to pay the 2^nd defendant costs of the appeal with a certificate for two counsel (as agreed by the parties).

3. We now hand down the reasons for our judgment.

Background

4. The plaintiff sues in its capacity as an assignee of the legal claims formerly belonging to Xinhua Sports and Entertainment Limited (“XSEL”), now in liquidation.

5. The 2^nd defendant is a BVI company owned and controlled by the 1^st defendant, a businessman in Hong Kong.  In 2007, the 2^nd defendant was the sole shareholder of Xinhua Finance Media (Convey) Limited (“XFML”), which owned three very profitable advertising companies in Hong Kong (“the Convey Companies”).

6. By an agreement dated 29 June 2007 (“the 2007 Agreement”) made between the 2^nd defendant as vendor, XSEL as purchaser, the 1^st defendant as covenantor and XFML as the subject company, the 2^nd defendant sold all its shareholding in XFML to XSEL at an initial payment of US$33 million together with two further payments in 2007 and 2008 to be calculated by reference to the post completion performance of the Convey Companies, resulting in a total purchase price of approximately US$93 million.

7. By another agreement dated 31 December 2008 (“the 2008 Agreement”), XSEL sold its 85% shareholding in XFML back to the 2^nd defendant for US$85 million to be paid by seven instalments.  XSEL them became a 15 % minority shareholder on XFML.  Subsequently, the 2^nd defendant only paid US$5 million due to XSEL under the 2008 Agreement.

8. By 2010, certain payment obligations under the 2007 Agreement and 2008 Agreement remained due and outstanding.  As of August 2010, the net position was that the 2^nd defendant owed at least US$50 million (on the plaintiff’s case) or US$30 million (on the 1^st defendant’s case) to XSEL.

9. By a deed of settlement dated 16 August 2010 made between XSEL, the 1^st and 2^nd defendants and XFML (“the Settlement Agreement”) :

(1)   XSEL agreed to waive its claims against the 2^nd defendant under the 2008 Agreement (Clause 1.1);

(2)   the 2^nd defendant agreed to waive its claims against XSEL under the 2007 Agreement (Clause 1.2); and

(3)   the 2^nd defendant agreed to transfer 34.5% of its shareholding in XFML to XSEL; whereas XSEL agreed to issue shares with a market value of US$5 million to the 2^nd defendant (Clause 1.3).

10. Fredy Bush (“Bush”), XSEL’s then CEO, executed the Settlement Agreement for and on behalf of XSEL.

11. The plaintiff’s case is that only after entering into the Settlement Agreement did XSEL discover that back in January and February 2010, the 1^st and 2^nd defendants secretly procured XFML to transfer its only assets, the Convey Companies to a third party company.  XSEL was therefore given a 34.5% stake in a worthless company in exchange for its waiver of a net debt of US$50 million.

The plaintiff’s pleaded case in the ASOC

12. In the ASOC, the plaintiff pleaded two main causes of action.  The first is fraudulent misrepresentation: see paragraphs 27 to 36 of the ASOC.  The essence of fraudulent misrepresentation is couched in these terms:

“27 In offering to transfer XFML shares as consideration for the release of XSEL’s claims in the August 2010 Deed, the Defendants, by conduct and/or through their omission, expressly or impliedly represented to XSEL that such shares were of the same value and conveyed the same ownership of the Convey Companies as they had in the earlier agreements.”

However, no further particulars giving the factual context in support of the fraudulent misrepresentations were given.  The second cause of action is conspiracy: see paragraphs 37 to 42 of the ASOC.  The gist of the complaint is that the defendant together with Bush, conspired together to use unlawful means (namely fraudulent misrepresentation, breach of directors’ fiduciary duties and fraud), intending to cause loss to XSEL by executing the Settlement Agreement.  The plaintiff claimed damages and/or equitable compensation to be assessed, including the sum of at least US$50 million and/or restitution.

Discussion

13. Very briefly, the Judge took the view that the ASOC, as it then stood, did not disclose a reasonable cause of action based on fraudulent misrepresentation or conspiracy, although it would appear that he was sympathetic towards the plaintiff’s grievance.

14. Before us, Mr Coleman SC, for the plaintiff, primarily submitted the ASOC had sufficiently pleaded the cause of action on fraudulent misrepresentation and conspiracy.  As a fall back, he relied on a proposed re‑amended statement of claim (“RASOC”) in which the two causes of action were pleaded in a fuller manner.  He submitted that instead of striking out the ASOC, the Judge ought to be given leave to the plaintiff to amend its pleadings to cure any perceived defect.

15. Mr McCoy SC (together with Mr Wong SC and Mr Lam), sought to support the Judge’s order by reference to the additional grounds set out in the respondent’s notice dated 31 December 2014.

16. For present purposes, we need not dwell on the Judge’s reasoning or counsel submissions.  Suffice it to say, as we indicated in the course of the hearing, that the plaintiff’s pleaded case in the ASOC on both fraudulent misrepresentation and conspiracy is clearly defective. In respect of fraudulent misrepresentation, the ASOC failed to provide the necessary factual context, in particular, the linkage between the 2007 Agreement and the 2008 Agreement on the one hand, and the Settlement Agreement on the other, to support the fraudulent misrepresentation complained of.  This also affected the claim on conspiracy which really stands on the fraudulent misrepresentation complained of.  However, these deficiencies can all be cured by amendments to be found in the RASOC : see paragraphs 27 to 33A on fraudulent misrepresentation and paragraphs 37 to 41 on conspiracy. Specifically, the factual context in support of the fraudulent misrepresentation including the necessary linkage indicated above is now particularized in paragraph 27 (i) – (iii) of the RASOC:

“ Particulars of the Misrepresentations Made

(i) As already pleaded above: (1) the Convey Holding Company never had any other business or value besides being the holding entity of the Convey Companies; (2) at the time of the earlier June 2007 and December 2008 Agreements, the Convey Holding Company owned 100% of the Convey Companies; (3) the very purpose and subject matter of the June 2007 and December 2008 Agreements was not merely the transfer of shares of the Convey Holding Company independent of its ownership of the Convey Companies, but the transfer of shares of the Convey Holding Company as the holding vehicle and 100% owner of the Convey Companies; and (4) the August 2010 Deed was specifically negotiated and entered into by the parties to settle out and cancel the known cross‑liabilities between the parties arising from the earlier June 2007 and December 2008 Agreements.

(ii) The 34.5% of the shares in the Convey Holding Company to be transferred from Pariya to XSEL under the August 2010 Deed was expressly described in the August 2010 Deed as ‘Settlement Shares’. By representing that the 34.5% shares were ‘Settlement Shares’, Sammy Wong and Pariya expressly represented that the shares were being transferred in settlement of XSEL’s debt and, therefore, necessarily had substantial value.

(iii)   Against the above context and circumstances, for Sammy Wong and Pariya to offer and/or negotiate for Pariya to repay its net liabilities of US$50 million owed to XSEL by transfer of shares in the Convey Holding Company effectively amounted to an implied representation and/or representation by conduct to XSEL that what Pariya was offering in settlement was the ‘same valuable thing’ which the parties had previously dealt with and transferred back-and-forth in the earlier June 2007 and December 2008 Agreements. Moreover, as noted above, at the time of the August 2010 Deed XSEL was owed a net debt of US$50 million.  Thus Sammy Wong and Pariya not only represented that the shares in the Convey Holding Company had value; they also impliedly and necessarily represented that the shares had value in the tens of millions of dollars so as to settle XSEL’s known claims.”

In our view, both causes of action are capable of being salvaged by the proposed amendments in the RASOC.

17. In the circumstances, it is not a case for striking out.  The proper course to take is to give leave to the plaintiff to apply to re‑amend the ASOC, and in the mean time, stay the action under Order 18, rule 19(1), Rules of the High Court.

18. We note in the proceedings below, although the counsel then representing the plaintiff (not Mr Coleman SC who only appeared in this appeal), had invited the Judge to consider the option of giving the plaintiff leave to re‑amend if necessary, no proposed re‑amendment was actually placed before the Judge for his consideration.  That is unsatisfactory.  Had the Judge been provided with the necessary assistance on the proposed re‑amendment, as is the case before us by virtue of to the RASOC, he might well have disposed of the striking out application in the same way as we did.

Conclusion

19. For the above reasons, we disposed of the appeal by the orders as set out in paragraph 2 above.

20. On the costs below, since we allowed the appeal on the basis of the RASOC, which was not placed before the Judge, we could see no reason to disturb his costs order.  For the same reason, the plaintiff should also bear the costs of the appeal.  We therefore made the costs order as set out in paragraph 2 above.