XIANG JUN v. CHENG CHIU TUNG GREGORY

HCA 47/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 47 OF 2016

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D E C I S I O N

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Background

1.  By summons dated 21 March 2016 the defendant applies for (1) a declaration that in the circumstances of the case the court should not exercise any jurisdiction it may have in the present proceedings, and/or (2) a stay of the present proceedings, on the grounds of forum non conveniens or that considering the best interests and convenience of the parties to the present proceedings and the witnesses in the present proceedings, the present proceedings should be conducted in the court of the People’s Republic of China (“the PRC”).

2.  The summons was made pursuant to Order 12, rule 8 of the Rules of the High Court.  At first the plaintiff, relying on Rambas Marketing Co., LLC v Chow Kam Fai, David, HCA 10190/2000, submitted that the defendant’s application must necessarily be made pursuant to the court's inherent jurisdiction, and on the basis that the court's jurisdiction is founded as of right.

3.  At the hearing, however, the plaintiff conceded that his submission was wrong and that the defendant can rely on Order 12, rule 8 to make the application.

4.  In fact, under Civil Justice Reform, forum non conveniens stays are granted under Order 12, rule 8(2) rather than the inherent jurisdiction, although the inherent jurisdiction remains especially where circumstances change after the expiry of the Order 12, rule 8 time limit (see Hong Kong Civil Procedure 2017, paragraph 11/1/10).

The plaintiff’s case

5.  According to the Statement of Claim and the plaintiff’s affirmation filed on 18 April 2016, the plaintiff is a director and owner of a company in Shenzhen, namely 深圳市創視達電子有限公司 (“the plaintiff’s company”), which is a producer of electronic products with a factory in Shenzhen.

6.  The defendant is a director of Synertech International Limited (“Synertech”), which is a Hong Kong company trading with electronic products including a CCTV intercom device.

7.  The plaintiff avers that the plaintiff as a director of the plaintiff’s company and the defendant as a director of Synertech had business relationship with each other.

8.  Synertech had been a customer of the plaintiff’s company since about 2005.  The plaintiff’s company supplied LCD monitors to Synertech and another processing factory in Dongguan called 清溪德豐塑膠電子廠 (“the Dongguan factory”) which was appointed by Synertech and would further process and assemble the products to be supplied to Synertech.

9.  The Dongguan factory has a close connection with the defendant because the defendant’s father-in-law is one of its 3 partners, and the defendant would visit the Dongguan factory from time to time.

10.  Synertech’s business was struggling since about 2013, when its payment to the plaintiff’s company began to fall behind.  Since then, when the defendant was pressed for payments, he often asked for some indulgence saying that business was tough.

11.  In 2014, the defendant asked the plaintiff to lend him some money to alleviate his dire financial situation.  The plaintiff agreed and 3 loans in the sums of RMB350,000, RMB343,000 and RMB 550,000 were advanced by the plaintiff to the defendant on 18 February 2014, 17 March 2014 and 9 April 2014 respectively.

12.  The 3 loans were all transferred from the plaintiff’s personal bank account at China Merchants Bank in the PRC.  The first 2 loans were transferred into the defendant’s account at China Merchants Bank in the PRC.  The last loan was transferred into the bank account of a staff of the defendant, namely 施月綿, at China Merchants Bank in the PRC.  The plaintiff did not know this staff personally and the transfer was made at the defendant’s request.

13.  The defendant promised to repay the loans within two months after their respective date of advancement, but despite repeated demands, the defendant failed to repay any sum to the plaintiff.  Thus, the plaintiff commenced the present action to claim against the defendant for the repayment of the loans together with interest and costs.

The defendant’s case

14.  In his Defence, the defendant specifically denies that the plaintiff as a director of the plaintiff’s company and the defendant as a director of Synertech had business relationship with each other. The defendant avers that there were business relationships between the plaintiff’s company and the Dongguan factory, both of which were formed under the laws of the PRC.

15.  The defendant also denies that there were loans advanced by the plaintiff to him.  The defendant avers that the plaintiff never lent to him personally as alleged or at all.  However, if the plaintiff had money lending transactions as alleged, which is denied, the money lending transactions were between the plaintiff, the plaintiff’s company, the Dongguan factory or other third parties, but not with the defendant directly as alleged or at all.

16.  In his affirmation filed on 19 July 2016, the defendant admits that there were business dealings between the Dongguan factory and the plaintiff’s company, and between the Dongguan factory and Synertech since about 2008.  The business dealings were that the plaintiff’s company would sell and supply to the Dongguan factory electronic parts including LCD monitor modules. After further processing and assembling by the Dongguan factory, the Dongguan factory would then sell and deliver the electronic parts to Synertech for its further trading.

17.  Throughout the course of business between the parties over the years, electronic parts would first be supplied by the plaintiff’s company to the Dongguan factory, and the Dongguan factory would thereafter settle the invoices issued by the plaintiff’s company. Occasionally, due to cash flow concerns of the Dongguan factory, these invoices were not immediately settled after issuance.  Throughout the years, such unsettled invoices had accumulated to an amount that the plaintiff’s company and the plaintiff may have found intolerable.

18.  The defendant had a 20% interest in the shares of the holding company of the Dongguan factory since 1999.  In or about November 2012, the defendant sold all his interest in the holding company to the other shareholders, and resigned from the position of director.  After the defendant ceased to be a shareholder and director in November 2012, the amount of the unsettled invoices has accumulated to a total amount of approximately RMB1,860,000 (“the Debt”).

19.  In 2013, the defendant visited the office of the plaintiff’s company in Shenzhen on several occasions and had discussions with the plaintiff to come up with a plan to satisfy the Debt owed by the Dongguan factory to the plaintiff’s company.  Regarding the same matter, the plaintiff also visited the Dongguan factory and had discussions with the staff of the Dongguan factory, namely two Mr Law, a Ms Fung, a Ms Cheung and a Mr Li.

20.  Eventually, it was mutually agreed that the Debt could be satisfied by a scheme that would enable the plaintiff’s company to enjoy a tax rebate from the PRC government to set off the Debt.

21.  The scheme involved the plaintiff’s company selling and delivering electronic parts (mainly LCD monitor modules) to another company in the PRC, namely 廣東致遠國際貿易有限公司 (“the Guangdong company”), which would then sell and deliver the electronic parts to Synertech.  As Synertech is a Hong Kong company, the whole process of sale and delivery of electronic parts from the plaintiff’s company to Synertech would be regarded as an “export of goods” by the State Administration of Taxation in the PRC.

22.  Thereafter, Synertech would sell and deliver back the electronic parts to the plaintiff’s company.  As a result, the plaintiff’s company would retain the electronic parts and enjoy a value-added tax rebate in the amount of 17% of the invoice value of the electronic parts “exported” from the plaintiff’s company to Synertech, which would not otherwise be entitled to by the plaintiff’s company.

23.  It was estimated by the plaintiff and the defendant that should the scheme run for about a year, the plaintiff’s company would enjoy a tax rebate of about RMB 1,860,000 which could be used to set off the Debt.

24.  In principle, the aggregate sum of the considerations paid by the Guangdong company to the plaintiff’s company should equal to the aggregate sum of the considerations paid by Synertech to the Guangdong company as well as the aggregate sum of the considerations paid by the plaintiff’s company to Synertech.

25.  However, the payments to Synertech by the plaintiff’s company were disguised as loans so as to avoid the scheme being noticed by the authorities in the PRC.

26.  It is the defendant’s case that the 3 loans claimed by the plaintiff were in fact part of the aggregate sum of the considerations to be paid by the plaintiff’s company to Synertech but disguised in the form of loans.  Thus, the defendant does not owe the plaintiff any money as alleged or at all.

27.  It should be noted that the defendant did not mention anything about the scheme in his Defence but only in the defendant's affirmation filed on 19 July 2016.  However, the defendant did aver in his Defence that the plaintiff never lent to the defendant personally as alleged or at all.

28.  The plaintiff submits that the purported defence advanced by the defendant in his affirmation is very different from the Defence filed, and the new version which is neither comprehensible nor makes sense would necessarily mean that when the application was taken out all the defendant had filed was an obscure and misleading defence.

29.  However, my view is that as the Defence has already stated that the plaintiff did not lent to the defendant personally, the matters mentioned in the affirmation should be regarded as the factual background for the defendant’s denial of the loans.  It may not be satisfactory for the defendant not to mention these matters in the Defence, but at this stage I should consider them as part of the defendant’s defence and I do not think that the defendant has raised a new line of defence.

30.  The defendant’s alternative defence as stated in his Defence is that if there were any money lending transactions, which is denied, the money lending transactions were between some other parties but not with the defendant directly.  This is also not inconsistent with the matters raised in the affirmation.

Legal principles of forum non convenience

31.  The parties have no dispute in relation to the legal principles of forum non convenience which are trite.  The relevant principles for the grant of stay have been summarised by the Hong Kong Court of Appeal in The Adhiguna Meranti (owners of cargo) v The Adhiguna Harapan (owners of ships) [1987] 2 HKLR 904 at 907 and in Wo Fung Paper Making Factory Limited v Sappi Kraft (Pty) Limited [1988] 2 HKLR 346.  A summary of the three-stage process there prescribed may be seen, in a slightly abbreviated form, in The Lanka Muditha [1991] 1 HKLR 741 at 744 as follows:-

Stage (I): Is it shown that Hong Kong is not only the natural and appropriate forum for the trial, but that there is another available forum which is clearly or distinctly more appropriate than Hong Kong…

Stage (II): If the answer to (I) is yes, will a trial at the other forum deprive the plaintiff of any legitimate personal or juridical advantages.  The evidential burden here lies on the plaintiff.

Stage (III): If the answer to (II) is yes, a court has to balance the advantages of (I) against the disadvantages of (II) … Deprivation of one or more personal or juridical advantages will not necessarily be fatal to the applicant provided that the court is satisfied that notwithstanding such loss substantial justice will be done in the available appropriate forum … Proof of this … rests upon the applicant for the stay.

(See Hong Kong Civil Procedure 2017, paragraph 11/1/10C).

32.  Apart from the 3 stages mentioned above, in Rambas Marketing Co., LLC v Chow Kam Fai, David, supra, Mr Recorder G Ma, SC (as he then was) held that there is a final stage of the court being satisfied in the overall circumstances and justice of the case whether it would be right to stay the action.  It is, at this stage, that the court will consider factors such as the conduct of the parties.

33.  I shall discuss these stages as mentioned below.

Stage (I)

34.  First of all, there is no dispute that the defendant is a Hong Kong resident, and the plaintiff, although a foreigner, brings this action in Hong Kong as of right (see Pei Zheng Middle School & another v China Pui Ching Education Foundation Ltd & others [2006] HKEC 316).

35.  When the proceedings are issued by the plaintiff as of right, the burden is on the defendant applying for a stay to show that there are factors and reasons that make the alternative forum (namely the PRC) clearly or distinctly the more appropriate forum than Hong Kong to try the action for the interests of the parties to obtain justice (see Shenzhen Futaihong Precision Industry Co Ltd v BYD Co Ltd [2008] HKEC 1093).

36.  In considering whether the factors raised by the defendant can show that the alternative forum is clearly or distinctly a more appropriate forum, the court should bear in mind that the plaintiff has found his action as of right in this jurisdiction, and such a right should not be lightly disturbed (see Shenzhen Futaihong Precision Industry Co Ltd v BYD Co Ltd, supra).

37.  The defendant submits that it is clear for the trial of this action, Hong Kong is not the natural forum and that the PRC is clearly a more appropriate forum, as the applicable law for this action is plainly the PRC law.

38.  In recovering the loans, the plaintiff is suing for breach of contract.  The claim depends on the interpretation of the contract, which is governed by the contract’s “proper law”.  The "proper law" of a contract is ascertained by the following principles:

"When the parties had expressed their intention as to the law governing the contract, their expressed intention, in general, determined the proper law of the contract, at any rate if the application of foreign law was not contrary to public policy and the choice was "bona fide and legal"... When the intention of the parties to a contract with regard to the law governing it was not expressed and could not be inferred from the circumstances, the contract was governed by the system of law with which the transaction had its closest and most real connection."

(underlines added and see Dicey, Morris and Collins on The Conflict of Laws, 15^th ed, vol 2, paragraph 32-006)

39.  In determining the system of law with which the transaction had its closest and most real connection, the court will have regard to (among others) the location of the subject matter of the contract, the place of intended performance, and the place of making or negotiating the contract, the currency, the domicile or residence of parties, and the governing law of related transactions (see Johnston: The Conflict of Laws in Hong Kong, 3rd ed, paragraph 5.009).

40.  In this case, all these factors suggest that the loans are governed by the PRC law.  First, the loans were denoted in RMB and originated from bank accounts in the PRC, which means that the subject matter of the contract is located in the PRC.

41.  Secondly, the intended place of performance of the contract is the PRC, as a debtor must pay the creditor at the creditor's residence or place of business.  At common law, where no place of payment is provided by the terms of the contract, it is the duty of the debtor to seek out his creditor at his residence or place of business (see Hong Kong Civil Procedure 2017, paragraph 11/1/26), and here the plaintiff resides and has his place of business in the PRC.

42.  Thirdly, there is no suggestion by the plaintiff that the loans were not made and negotiated in the PRC.  According to the defendant's case, the loans were part of the debt repayment scheme as mentioned above, and the scheme was negotiated and concluded in the PRC.  So the place of making or negotiating the contract was in the PRC.

43.  Fourthly, a related transaction between the parties was governed by the PRC law.  In the Tripartite Cooperation Agreement dated 30 December 2013, which was executed by the plaintiff’s company, Synertech and the Guangdong company in relation to the sale and delivery of electronic parts under the aforesaid scheme, it was expressly provided (in clause 7.1) that the agreement is governed by the PRC law.

44.  In The Eleftheria [1970] P 94 (at 105B), it was held that in general, and other things being equal, it is more satisfactory for the law of a foreign country to be decided by the courts of that country.  Accordingly, the fact that the applicable law for this action is the PRC law is a strong indicator that the PRC court is the more appropriate forum.

45.  I agree with the defendant that the proper law of the contract in the present case is the PRC law.  However, that is not the end of the consideration.

46.  Very often, the Hong Kong courts would apply foreign laws in determining disputes here in Hong Kong.  Calling legal expert from other jurisdiction to give evidence on foreign laws in Hong Kong is not unusual.  Thus, even though the proper law of the contract is the PRC law, it does not mean that the case must be tried in the PRC.

47.  As submitted by the plaintiff, the plaintiff’s claim is a simple debt action, and the defendant is a Hong Kong person.  There is no question of any need to have the action served on any party outside the jurisdiction of Hong Kong, and the defendant has been successfully served and has filed a defence.  Thus, the plaintiff has issued the present proceedings as of right and such a right should not be lightly disturbed (see Shenzhen Futaihong Precision Industry Co Ltd v BYD Co Ltd, supra).

48.  Although the proper law of the contract is the PRC law, the defendant has not established how the PRC law could affect the trial of this case.  The dispute here is mainly on whether the loans were genuine loans or whether they were payments under the said scheme.  This is a factual matter.  The Hong Kong court is clearly competent to deal with factual dispute like this.

49.  There is also no evidence to suggest that the PRC law would be different from the Hong Kong law in respect of a claim like this in the present case.  In the absence of such evidence, the Hong Kong court can assume that the PRC law is the same as the Hong Kong law (see Shenzhen Futaihong Precision Industry Co Ltd v BYD Co Ltd, supra).

50.  The defence raised by the defendant involves a scheme to obtain tax benefit from the PRC government and it appears that the transactions may be illegal, as the loans were used to disguise the payments from the plaintiff’s company to Synertech so as to avoid the attention of the PRC authorities.

51.  However, illegality has not been pleaded by the defendant in his Defence.  Even in the defendant’s affirmation, the defendant did not expressly state that the transactions were illegal.  In the absence of such defence or allegation, it would not be a matter that needed to be determined in Hong Kong, when the case is tried here.

52.  Even if illegality is relied upon, it still depends on the court’s finding on the factual dispute of whether the loans were genuine loans or whether they were part of the payment transactions under the scheme.  If the court’s finding is that they were genuine loans, the defence would fail.  If the court’s finding is that they were payments under the scheme, the plaintiff’s claim would fail.  Thus, in either case, there is no need to consider whether the scheme was illegal.  In other words, there is no need to introduce the PRC law to prove that the scheme was illegal.

53.  I agree with the plaintiff that the Hong Kong court is totally competent to decide whether the payments were loans or they were payments disguised as loans.  If there is any truth in what the defendant now suggests in his affirmation, the plaintiff's action would fail in the Hong Kong court and there does not exist a clearly or distinctly more appropriate jurisdiction in the PRC.

54.  Moreover, Recorder Ma (as he then was), in the case of Rambas Marketing Co. LLC v. Chow Kam Fai, supra, stated that:-

"Mere convenience is not enough nor is it enough simply to point to factors which connect a case or the parties to any particular jurisdiction.  The approach in forum non conveniens applications is not just an exercise in loading up with factors which point to any particular jurisdiction".

55.  In the same case, Recorder Ma (as he then was) quoted a passage of the Lord Ordinary (Lord Jauncey) in the case of Credit Chimique v James Scott Engineering Group Ltd (1982) SLT 131 as follows:-

"In this state of the authorities, I consider that there can be no hard and fast rule as to the effect of the necessity for the application of foreign law on a plea of forum non conveniens but that each case must depend upon its own circumstances.  In some cases the questions of foreign law likely to be involved may be numerous and complex and in such cases the necessity to apply the law might properly be a factor which the court would take into account in deciding whether or not to exercise its discretion to sustain the plea."

56.  Thus, the convenience for the PRC court to decide on the PRC law is not a conclusive factor for the court to decide on the issue of forum non conveniens.  In the present case, there is in fact no real controversy concerning the PRC law as discussed above.  In fact, even with the so called tri-partite agreement, it would not involve any interpretation of the PRC laws, as it is an allegedly sham document according to the defendant’s case.

57.  Even if any controversy concerning the PRC law exists, it is unlikely to be numerous or complex.  Thus, it is unlikely that the Hong Kong court would not be able to resolve such controversy, if any.

58.  The other factor raised by the defendant is that the key witnesses for the defendant, namely the staff of the Dongguan factory who can confirm that the loans were part of the scheme and were not in fact loans to the defendant, reside in the PRC.  The plaintiff himself also resides in the PRC.

59.  Further, the facts that the loans were advanced in RMB from Mainland bank accounts, that according to the plaintiff, the loans arose out of businesses conducted in the PRC, and that the key parties, entities and witnesses are all based in the PRC, suggest that most of the exhibits and evidence will be found in the PRC.

60.  However, there is no suggestion that these witnesses cannot come to Hong Kong to testify when the case is tried here.  After all, Guangdong, Dongguan and Shenzhen are all near Hong Kong and it is unlikely that it would be so inconvenient for them to come to Hong Kong that the case must be tried in the PRC.

61.  Likewise, there is no suggestion that the documents or evidence required to be produced at the trial cannot be transferred to Hong Kong.

62.  Thus, the location of the likely witnesses and evidence cannot in this case be a factor to disturb the jurisdiction of the Hong Kong court.

63.  In the circumstances, I find that the defendant has not been able to establish that Hong Kong is not the natural and appropriate forum for the trial or that the PRC is clearly or distinctly more appropriate than Hong Kong.

Stage (II)

64.  Since my finding in Stage (I) is against the defendant, there is in fact no need for me to go on to discuss Stage (II).

65.  However, the plaintiff submits that this is an obvious case in which the plaintiff would be deprived of a legitimate personal or judicial advantage if the action is tried in a forum other than Hong Kong.  The plaintiff has affirmed to the fact that the defendant is a Hong Kong person with a property in Hong Kong but no apparent connection with Mainland China.  This suggestion is not traversed by the defendant's affirmation.

66.  In the case of KFE Hong Kong Co Limited v Extract Group Limited, HCA 457/20100, Deputy High Court Judge Au-Yeung (as she then was) referred to the fact that a Hong Kong bank account of the defendant being his only known asset and held that the plaintiff has shown that litigating in the alternative forum may deprive it of a judicial advantage.

67.  However, if I were required to rule on this issue, I would agree with the defendant that the plaintiff would not be deprived of any legitimate personal or juridical advantage if the action is tried in the PRC.  A judgment obtained in the PRC can in fact be registered and enforced in Hong Kong under the Mainland Judgment (Reciprocal Enforcement) Ordinance, Cap 579.

Stage (III)

68.  Likewise, in view of my ruling in Stage (I), it is not necessary for me to rule anything in Stage (III).

Final stage

69.  The parties do not seem to appreciate that there is such a final stage mentioned in Rambas Marketing Co., LLC v Chow Kam Fai, David, supra.  In any event, in view of my finding in Stage (I), it is also not necessary for me to consider this final stage.

Conclusion

70.  By reasons aforesaid, I do not find any valid ground to support the defendant’s application for the declaration or stay sought in the defendant’s summons dated 21 March 2016.

71.  I therefore order as follows: -

(1)The defendant’s summons dated 21 March 2016 be dismissed.

(2)Costs order nisi: The defendant do pay the plaintiff costs of the said summons to be assessed summarily on paper.  The plaintiff do submit and serve his Statement of Costs on or before 25 September 2017 and the defendant do submit and serve his Statement of Objection on Costs on or before 9 October 2017.