LI XIAO YUN AND ANOTHER v. CHINA GAS HOLDINGS LTD

HCCL 18/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 18 OF 2011

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BETWEEN

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REASONS FOR DECISION

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Background

1.  The plaintiffs were the directors of the defendant (“Company”), a company incorporated in Bermuda, the shares of which are listed in Hong Kong.  The plaintiffs held options under the Company’s share option scheme for its directors and employees (“Scheme”).  On 24 March 2011, the plaintiffs served notice on the Company of the exercise of their options to subscribe for shares in the Company in accordance with the rules of the Scheme (“Rules”).  They claim that the Company refused to allot shares to them, and that the Company is accordingly in breach of the Rules.  In April 2011, the plaintiffs issued these proceedings against the Company, to seek specific performance that the Company should allot and issue shares to the plaintiffs in accordance with the Rules. 

2.  The action had been commenced under the Commercial List, and after a failed attempt at summary judgment, in September 2011, Reyes J ordered an early trial and imposed tight deadlines for interlocutory applications.

3.  In its defence, the Company claims that the plaintiffs had been summarily dismissed, and removed as directors of the Company by a resolution of the board on 3 March 2011, and by a resolution of the shareholders passed at the Special General Meeting of the Company on 26 April 2011.  The Company claims, in reliance on the board resolutions and shareholders’ resolutions that the plaintiffs’ contracts of employment had been terminated with effect from 3 March 2011, and that as such, the plaintiffs’ options had lapsed automatically in accordance with clause 8 of the Rules, upon their ceasing to be eligible persons by reason of summary dismissal for misconduct or other breach of the terms of their employment.  Alternatively, the Company claims that the Board was entitled under the Rules to exercise its discretion to adjust the amount of the share options granted to the plaintiffs, and that it had exercised its discretion to adjust the number of the share options to be granted to the plaintiffs to zero.  Further, the Company claims that the plaintiffs’ options had not been validly exercised for lack of compliance with the applicable PRC regulations on foreign exchange.

4.  The plaintiffs dispute the validity of the board and shareholders’ resolutions (“Disputed Resolutions”), on the ground that they had not been given notice of the passing of the relevant board resolutions, that the Board had no power to remove them as directors, and that no valid board resolution had been passed for the convening of the special general meeting of the Company.  Amendments were made to the Statement of Claim in November 2011, to introduce the challenges to the validity of the Disputed Resolutions for lack of notice.  As early as 15 December 2011, directions were given by Reyes J for expert evidence to be filed, inter alia on PRC law.

5.  Trial dates had been originally fixed for April 2012.  These dates were vacated in March 2012.  The trial was re-scheduled to commence on 12 March 2013.

6.  A pretrial review was fixed to be heard on 24 January 2013.  Shortly before the pretrial review, the plaintiffs changed their legal team.  Further directions were given at the pretrial review, in anticipation of the trial commencing on 12 March 2013.

7.  After the pretrial review, on 22 February 2013, the plaintiffs issued a summons (“Summons”), seeking leave to further amend the Statement of Claim, and to join 9 directors of the Company as additional defendants.  It is claimed that the directors had not been acting bona fide when they passed the disputed resolution of the Board, as they were motivated by a desire to prevent the plaintiffs from continuing their investigations into the corrupt or illegal conduct of the proposed 2^nd to 4^th defendants, and to retaliate against the plaintiffs for exposing the conduct of the 2^nd to 4^th defendants. It is further claimed that the directors had procured the Company’s breach of the Rules and had conspired to use unlawful means against the plaintiffs to deprive the plaintiffs of the allotment of shares under the Scheme. 

8.  The plaintiffs sought at the same time to file further expert evidence on PRC law.  The hearing of the Summons was expedited to 28 February 2013, which was already less than 2 weeks before the commencement of trial.  Not surprisingly, the applications for amendment and for leave to adduce further expert evidence were opposed by the Company.

9.  After hearing the parties on 28 February 2013, I refused the plaintiffs’ applications for leave to amend the Statement of Claim, to join the 9 additional defendants and to adduce further expert evidence.  The following are my detailed reasons for the refusal.

Whether there are exceptional circumstances to disrupt trial dates

10.  The principles for granting leave to amend pleadings are clear, and I accept the submissions made on behalf of the plaintiffs, that all such amendments should be made to enable the real questions between the parties to be decided, and that leave to amend can be granted before trial unless it can be shown that the new claim based on the proposed amendment is bound to fail.

11.  However, the trial is less than 2 weeks away.  At the pretrial review on 24 January 2013, no indications were made by the plaintiffs as to the necessity for the substantial amendments to the Statement of Claim, the joinder of 9 defendants, and the introduction of new claims made against the proposed defendants.

12.  I see no exceptional circumstances having been made out by the plaintiffs at all, to justify the disruption of the trial fixed for 12 days commencing 12 March 2013.  The majority of the matters complained of by the plaintiffs as forming the basis of their claims against the directors as proposed defendants were known to them from day one, in March 2011 when the Disputed Resolutions were passed, at the board meetings held on 3 March 2011 and 14 March 2011.  On their own case, the alleged close relationship between the proposed 2^nd to 10^th defendants, the alleged embezzlement by the proposed 2^nd and 3^rd defendants and the Public Security Bureau’s investigations against them, the arrest of the proposed 2^nd and 3^rd defendants in January 2011, the alleged illegal and corrupt conduct of the proposed 2^nd to 4^th defendants, and the alleged connected transactions with PRC entities connected with the proposed 2^nd to 4^th defendants, were all known to the plaintiffs at the time of the meetings.  According to the 2^nd plaintiff, their suspicion of the proposed defendants’ wrongful acts had led the plaintiffs to instruct lawyers in the PRC in July 2011 to carry out investigations.   The investigations were completed in August 2011, and the facts known to and discovered by the plaintiffs by then would have been sufficient for the plaintiffs to have pleaded a case of improper motive in November 2011, but the plaintiffs made the decision to frame their case on the Disputed Resolutions in the manner set out in their Amended Statement of Claim dated November 2011, and pursued this action on that basis until February 2013.  It lies ill in their mouth, 2 weeks before commencement of trial, to say that these same matters have suddenly become necessary and relevant to the determination of the key issues in dispute between the parties in Hong Kong. 

13.  The only new facts that can be discerned from the 2^nd plaintiff’s supporting affirmation are the alleged writing up of the Company’s accounts and the alleged writing off of the receivables of the Company, details or evidence of which were allegedly discovered between October 2012 and January 2013.  These are only at the end of a string of other complaints of alleged wrongful acts in the PRC, and are neither required, nor constitute justification for the delay, if the plaintiffs had intended before February 2013 to make and plead a genuine claim against the proposed defendants of alleged bad faith or improper motive. Moreover, as the 2^nd plaintiff admits in paragraph 39 of his supporting affirmation, the writing up of the Company’s accounts had already been brought to the plaintiffs’ attention before July 2011, when they suspected that the proposed 2^nd and 3^rd defendants might have included unrelated items to dress-up the financial returns of the Company.

14.  The attack on the motive of the directors as proposed defendants on the basis of the acts pleaded in the proposed amendments does not justify the investigation at trial of the series of alleged corrupt acts of the 2^nd to 4^th defendants in the PRC.  To allow the amendments and the joinder of parties would mean that the action would extend to discovery, and in due course at trial, cross-examination of witnesses on the activities of and transactions between the proposed defendants and the PRC entities with which the proposed defendants are allegedly connected.  Many of the proposed defendants are PRC residents, and the allegedly illegal or dubious transactions in question took place in the PRC under agreements made in the PRC.  It is indeed questionable whether Hong Kong can be seen to be the most appropriate forum to determine these claims of corruption, illegality or sham transactions in the PRC, and I see no justification for the trial of the plaintiffs’ existing claims against the Company to be delayed by these claims, with which Hong Kong cannot be clearly seen to have any real or substantial connection.

Whether amendments necessary

15.  Importantly, since the introduction of the CJR, amendments should only be allowed under Order 20 rule 8 (1A) if the amendment is necessary either for disposing fairly of the cause or matter or for saving costs.

16.  The amendments sought to be made to the Statement of Claim are in my view unnecessary for the determination of the real question in dispute at trial, which is whether the Disputed Resolutions made at the board meetings and general meeting of the Company are invalid, null and void as the plaintiffs claim, and whether the plaintiffs were entitled to exercise their options to subscribe for shares in the Company pursuant to the Scheme of the Company.  The plaintiffs’ claims against the directors as the proposed new defendants, on the basis of their procurement of the Company’s breach of the Rules and conspiracy to use unlawful means to injure the plaintiffs’ interests under the Scheme, depend on the Company’s alleged breach.  I agree with counsel for the Company that if the plaintiffs’ original cause of action against the Company succeeds, the plaintiffs would be compensated completely, and the new causes of action add nothing to the plaintiffs’ case for damages.  It has never been suggested that the Company is not in a position to redress the plaintiffs.

17.  The object of the introduction of Order 20 rule 8 (1A) is to confine amendment of pleadings to those which identify the real issues between the parties, in order to further the underlying objectives of the CJR.  To allow the introduction of the new causes of action against 9 additional directors of the Company, on the basis of their alleged conspiracy and procurement of the Company’s breach of the Rules of the Scheme, will considerably delay and prolong the 12 day trial.  It will unnecessarily include claims of alleged writing off of the Company’s receivables as a result of activities and agreements with entities in the PRC, and the alleged corrupt conduct of the proposed 2^nd to 4^th defendants in the PRC, and I fail to see how the introduction of these claims is necessary for disposing fairly of this action, which relates to the terms of the Scheme, and whether the Disputed Resolutions were invalid. 

18.  For the purpose of rule 8 (1A), the necessity for the amendment should be for the “fair disposal of the cause or matter”, and this involves consideration not only of whether it is necessary for the plaintiff, but also the consideration of fairness to the defendant, in the balancing of the effect of the amendments to both parties.  At this late stage on the eve of trial, it cannot be fair to the Company to have the trial of 12 days adjourned for the joinder of 9 additional parties and the introduction of new claims which cannot immediately be seen to have any substantial or real connection with Hong Kong. After the amendments, the adjourned trial will require substantially more than 12 days, meaning that the trial may not take place until the first part of 2014.

19.  This case was put on the Commercial List.  Disputes on the Commercial List are intended to be expeditiously and efficiently resolved, and delays of the present nature should not be tolerated.

Whether further expert evidence should be allowed

20.  As for the application to introduce new expert evidence, again, at this late stage, bearing in mind that as early as 15 December 2011, directions have been made by Reyes J for the filing of expert reports, on identified issues, and the plaintiffs have only complied with the directions for the filing of the joint expert report in February 2013, I see no justification to introduce expert evidence at this late stage on the effects of yet another circular on PRC law, promulgated in February 2012. 

Conclusion

21.  The plaintiffs’ applications were accordingly dismissed, with costs to the Company and certificate for counsel.