FIRST LASER LTD v. FUJIAN ENTERPRISES (HOLDINGS) CO LTD AND ANOTHER

CACV 97/2020

[2021] HKCA 864

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 97 OF 2020

(ON APPEAL FROM HCA 4414/2001)

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JUDGMENT

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Hon Lam VP (giving the Judgment of the Court):

1.  This is an application by the Defendants for stay of execution pending appeal. The appeal was brought by the Defendants against the judgment of Deputy High Court Judge To of 8 April 2020 (“the Remitter Judgment”) on the trial of the Remitter as ordered by the Court of Final Appeal in FACV 6/2011 (“the CFA Remitter Order”). By the Remitter Judgment, the judge adjudged that the Defendants do pay the Plaintiff the sum of $250,168,048 with interest.

2.  Previously, the Defendants had made the same application before the judge.  On 30 September 2020, DHCJ To granted a stay on condition that the Defendants paid into court the full judgment sum with interest (deducting the amounts already paid into court).  According to the judge’s calculation, the actual amount was $518 million less US$9,428,218.28 and its accumulated interest paid into court pursuant to his order dated 28 April 2008. 

3.  The Defendants did not comply with such condition.  Hence, at the moment, there is no stay.

4.  We shall process the summons of the Defendants of 29 October 2020 as a renewed application for stay.

5.  The principles governing this kind of application is well-established, see Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84; Astro Nusantara International BV c PT Ayunda Prima Mitra (No 2) [2016] 1 HKLRD 591.

6.  It is an exercise of discretion and the Court should pay regard to the principle that an appeal does not per se operate as a stay and, absent good reason otherwise, a successful litigant is entitled to enforce the judgment as the fruit of his success.

7.  In Hammond Suddard Solicitors v Agrichem International Holdings Ltd [2002] C.P. Rep 21 at [22], Clarke LJ succinctly summarized the essence of the discretion as follows:

“ Whether the court should exercise its discretion to grant a stay will depend upon all the circumstances of the case, but the essential question is whether there is a risk of injustice to one or other or both parties if it grants or refuses a stay. In particular, if a stay is refused what are the risks of the appeal being stifled? If a stay is granted and the appeal fails, what are the risks that the respondent will be unable to enforce the judgment? On the other hand, if stay is refused and the appeal succeeds, and the judgment is enforced in the meantime, what are the risks of the appellant being able to recover any monies paid from the respondent?”

8.  In the present appeal, in light of the agreement of the Plaintiff to have the judgment sum being paid into court instead of being paid outright to the Plaintiff, we do not see any valid objection in terms of the non-recovery of the same should the Defendants ultimately succeed in the appeal.

9.  As regards the stifling of the appeal, we do not agree with the submission of Defendants that the resources of their shareholders or funders are irrelevant.  Whilst the stifling of an appeal (if no stay is granted) can, in an appropriate case, be a ground for granting a stay, all the circumstances of the case have to be taken into account.  In a case where the Defendants are clearly funded by someone with means (say by incurring substantial costs with the instruction of leading and junior counsel in interlocutory applications), this must be a relevant circumstance in assessing whether the appeal would be stifled if a discretion is exercised in one manner or another.

10.  In Hammond Suddard, the English Court of Appeal did take into account the resources of those backing the appeal in deciding if a stay should be granted: see [19], [21] and [23].  See also Sunico v Commissioners for Her Majesty’s Revenue and Customs [2014] EWCA Civ 1108 at [26].  We reject Mr Yu SC’s submission that such an approach is only applicable when the court is considering if leave to appeal is to be granted.

11.  In the present context, DHCJ To explained the relevance of such financial backers at [18] to [35] of the Decision on stay of 30 September 2020. We respectfully agree with his analysis.  It is noteworthy that the present financial position of the 1^st Defendant was occasioned by the unaccounted disposal of the proceeds of sale of the FCL shares after the service of a summons seeking injunctive relief: see [33] of that Decision. 

12.  We do not accept there is a good reason for granting an unconditional stay on the ground of the stifling of the appeal.

13.  The remaining reason relied upon by the Defendants is the existence of strong ground(s) of appeal.  As held by Ma J (as he then was) in Star Play Development, the Court should not delve too deeply into the merit of the grounds of appeal in the context of an application for stay, see also Ming Hsieh v Xu Zhe [2018] HKCA 390 at [9]; Bright Gold Ltd v Mega Well Development Ltd [2019] HKCA 1440 at [13]; Ng Yuk Pui Kelly v Estate of Dung Wai Man (deceased) [2021] 1 HKLRD 1037 at [8].

14.  After hearing counsel, we come to the view that the Defendants’ appeal does have a strong prospect of success which warrants the grant of an unconditional stay.

15.  We find it sufficient for present purposes to focus on two grounds of appeal:

(a)  That the scope of the Remitter does not permit the Plaintiff to reconstitute its case on restitution to rely on an “actual and nominee investor” relationship under Article 18 of a Mainland judicial interpretation called Provision I of “Provisions of the Supreme People’s Court on Several Issues concerning the trial of disputes involving Foreign-Owned Enterprises”, which formed the primary basis on which the judge gave judgment in favour of the Plaintiff; and

(b)  That the finding of actual-nominee investor relationship is inconsistent with the conclusion of the Court of Final Appeal, in particular at [115] of its judgment.  

16.  We agree with Mr Yu that though the sealed CFA Remitter Order was expressed in general terms, the precise scope of the remitter should be determined by reference to the judgment of the Court of Final Appeal and the pleadings then before the court: see Sans Souci Ltd v VRL Services Ltd [2012] UKPC 6 at [13].

17.  In light of [70] of the judgment of the Court of Final Appeal, the Remitter plainly did not include any fault-based claim even if such a claim is viable as a matter of Mainland law.

18.  Moreover, the restitution claim which was remitted had to be the one the nature of which had been set out in the then Statement of Claim.  There was no plea of any nominee relationship between the Plaintiff and the 1^st Defendant.  The factual basis of the Plaintiff’s claim then was the First Laser Agreement for the sale and purchase of 51% of the FCL shares, full payment of the purchase price, the participation by the Plaintiff in control and management of FCL and FCO, and the remittance of funds to Casix Inc for investment in a project of FCL “on account of the Plaintiff’s beneficial interest and shareholding in FCL”.  It was also averred that the 1^st Defendant held the 51% shareholding on trust for the Plaintiff.

19.  The CFA Remitter Order was not intended to be a warrant for having a trial afresh without regard to what had previously been decided.  It has also to be remembered that by the time the CFA Remitter Order was made:

(a)  The agreements, including the First Laser Agreement, were held to be invalid under Mainland law (which the Court of Appeal held to be the governing law, as upheld by the Court of Final Appeal);

(b)  The Court of Appeal also held that the issue of compensation would not be remitted because the only compensation which the Plaintiff had claimed was disgorgement of profits and it was not entitled to the same.  This was also upheld by the Court of Final Appeal, see [70] of the judgment of the Court of Final Appeal; and

(c)  The Court of Appeal further held that there was no trust in favour of a purchaser under Mainland law.  There was no appeal against that decision.  Hence, as the Court of Final Appeal agreed with the Court of Appeal that Mainland law governed the transaction, no claim based on trust or beneficial interests could be advanced.

20.  In the judgment of the Court of Final Appeal, Lord Collins summarized the case of the Defendants against the plea of estoppel by convention at [107] as follows:

“ … FEHC has put before the Court in its Case dated 11 December 2011 a comprehensive argument designed to show that (1) there was no common assumption of validity; (2) there is no evidence that, notwithstanding the failure to obtain approval for the transfer of shares in FCL, First Laser was treated as being the owner of the shares; (3) on the contrary, First Laser did not participate in several capital contributions in FCL; (4) First Laser did not receive dividend payments from FCL; (5) much of what the parties did was inconsistent with the First Laser Agreement.”

21.  The Court of Final Appeal found these contentions to be so compelling that it refused to remit the issue of estoppel by convention to the Court of First Instance.  It would be self-contradictory if the Remitter could be seized upon as re-opening any of the conclusions reached in this regard.  The following paragraphs in the judgment of Lord Collins are relevant for the purpose of considering the scope of the Remitter:

“ 110.  The judge found ([108]) that Mr Ngan was aware of the requirement for governmental approval for the transfer of the FCL shares.  The First Laser Agreement provided that both parties were to form a working group and instruct lawyers in the Mainland to handle the transfer of shares.  Both parties knew that approval had not been obtained, by contrast with the transfer of the FCO shares to COM.  There was therefore no common assumption that notwithstanding the absence of approval for the transfer of FCL shares, the agreement was valid under Mainland law and that First Laser had a 51% shareholding notwithstanding the lack of approval.

…

115.  Nor does the evidence support the thesis that the FCL shares were treated as owned as to 51% by First Laser:

(1)  First Laser did not participate in the capital contributions which took place after December 1996. According to the capital examination reports for FCL in the years 1997, 1999 and 2000, about US$4 million was contributed by FEHC, and this is inconsistent with First Laser owning 51% in accordance with the First Laser Agreement.

(2)  The memorandum of March 1998 made it clear that ownership in the FCL shares had not been transferred and that FEHC was still holding them (and in context this does not mean holding them for First Laser).

(3)  Only FEHC received dividend payments from FCL, and First Laser did not receive any dividend from FCL.  At a board meeting of FCL in September 1998 it was resolved that the undistributed profits of RMB 10.986 million be distributed to FEHC.”

22.  Against such background, we have great difficulties in accepting that the Court of Final Appeal had remitted to the Court of First Instance a case of restitution based on nominee relationship.

23.  Mr Chan Chi Hung SC submitted that as the Mainland law on restitution was not before the Court of Final Appeal, it was natural that the question of nominee relationship (which was alluded to only in amendments the Plaintiff made to its Statement of Claim after the CFA Remitter Order) was not anticipated.

24.  DHCJ To considered the scope of the remitter in similar light, see [93] to [96] of the Remitter Judgment.  At [94], the judge referred to the decision of another division of this Court (Lam V-P and Kwan JA) in an application for leave to appeal, reported at [2016] 4 HKLRD 360 at [18].  Having read the paragraph in that judgment, we do not find anything which sheds any light on the scope of remitter. 

25.  All in all, we are of the view that there is a strong argument that the judge had gone astray in entertaining a claim of restitution based on nominee relationship which had not previously been advanced in the first round of the litigation and which was inconsistent with the conclusions drawn by the Court of Final Appeal (as explained further below).

26.  Turning next to the inconsistency between the finding of nominee relationship with the judgment of the Court of Final Appeal, in essence Mr Yu’s argument rested on the premise that the finding of nominee relationship between the Plaintiff and the Defendants is inconsistent with the CFA’s findings that (1) the terms of the joint venture had never been agreed and (2) the Defendants were not estopped by convention from denying that the Plaintiff owned 51% of FCL.

27.  Counsel referred us specifically to [17] to [18], [80] to [83] and [107] to [116] of the judgment of Lord Collins NPJ in the Court of Final Appeal which should be applicable to all causes of action instead of being confined to estoppel by convention.  Counsel submitted that the judge was not entitled to ignore these findings in the Remitter trial.

28.  At [147] to [173] of the Remitter Judgment, the judge analysed these findings one by one and set out the context in which such findings were made.  He also tried to explain the difference in context when the matter was considered in relation to “nominee investment contract” and how some evidence which had not been referred to in the Court of Final Appeal assumed greater relevance in the Remitter trial.

29.  At [186], the judge reached these conclusions:

“ 186.  In my view, Professor Yin’s opinion is very logical.  All the factual circumstances and the parties’ conduct I have mentioned above are legal facts which create a legal relationship with legal consequence.  Legal facts need not be the result of the parties’ intentional or conscious conduct.  They may arise from factual circumstances independent of the parties’ intention and may create legal consequences, including contractual consequence.  I accept Professor Yin’s opinion.  This nominee investment contract arose from the factual background including the Agreement, the three agreements, the 1998 Memorandum and the parties’ conduct.  The parties conducted themselves in accordance with the spirit of the First Laser Agreement as if they were partners in the joint venture and shareholders of FCO and FCO.  The fact that the FEHC permitted First Laser to participate as de facto partner in the joint venture and de facto shareholder in FCL and FCO is its recognition that its rights as shareholder of FCL and FCO is somehow and in some way subject to the rights of First Laser.  These legal facts enable this court to draw as the only irresistible inference that FEHC and First Laser were engaged in a relationship of nominee shareholder and actual investor under a nominee investment contract.  This contract is collateral to the Agreement, the three agreements, individually or collectively, which have been held to be void.  Under this nominee investment contract, which I conveniently call “collateral contract” using the common law term, FEHC was to hold 51% of the shares in FCL as nominee shareholder for First Laser and the balance of 49% in its own right as shareholder and actual investor until the shareholdings in FCO and FCL were regularized.  Similarly, COM was holding 49% of the shares in FCO as nominee shareholder for FEHC and the balance of 51% in its own right as shareholder and actual investor.”

30.  Quite apart from the difficulty of a finding of a collateral contract (and/or the “spirit” of the First Laser Agreement) when it had not been pleaded and its apparent inconsistency with the conclusion of the Court of Final Appeal at [116] of its judgment that there had not been any agreed terms of the joint venture, the finding that the Plaintiff actually had rights as a shareholder of FCL appears to us to be contradictory to the conclusion of the Court of Final Appeal at [110] and [115].  If the Plaintiff could not be an actual shareholder (as it was aware that it could not become a shareholder without obtaining the requisite approval), how could there be any nominee relationship?   

31.  The judge summarized his position in this regard at [16] and [17] of his judgment refusing to grant unconditional stay:

“ 16. … That the terms of the joint venture agreement were never agreed does not mean that there was no agreement in principle reached or that the spirit of the First Laser Agreement could not exist. The fact that decisions were made along the lines of the First Laser Agreement on ad hoc basis is evidence of the existence of the spirit of the First Laser Agreement. … From the paragraphs I quoted above, it can be seen that the parties conducted their affairs in accordance with the spirit of the First Laser Agreement.

17.  In my view, the [grounds of appeal] are no more than repetitions of arguments already considered and rejected by this court after careful deliberation.  I am not satisfied that there is any substance in these grounds of appeal. … I am prepared to proceed on the basis that the Defendants have an arguable appeal.  But, in my view, no palpable errors have been identified by the Defendants.  I am unable to come to any view that there is such a strong likelihood of success in this appeal that upon sight of the grounds of appeal the Defendant (sic) is entitled to an unconditional stay.  The appeal is not one for which the successful Plaintiff should be delayed of its fruits of the litigation.  The Defendants are at best only entitled to a conditional stay of execution.”

32.  Having given careful consideration to the submissions of counsel and the judgments of the judge, we agree with Mr Yu that there is a strong ground of appeal in this respect.

33.  As regards the alternative basis under Article 58 of《The Contract Law of the People’s Republic of China》and Article 61 of《General Principles of the Civil Law of the People’s Republic of China》(“GPCL”) under Mainland law, in recognition that the Court of Final Appeal had clearly excluded from the Remitter any claims of a fault-based nature at [70] of its judgment, Mr Chan confirmed before us that the Plaintiff is not advancing a case based on assessment of compensation under Article 58 on the ground that the 1^st Defendant was at fault in not causing FCL to obtain approval.

34.  However, Mr Chan submitted that the Plaintiff is entitled to include in the property to be restored (“因該合同取得的財產”) under Article 58 the improper profits (不當利益)under Article 92 of GPCL《民法通則》as construed by Article 131 of the GPCL Opinion.

35.  Article 92 of GPCL reads:

“ 沒有合法根據，取得不當利益，造成他人損失的，應當將取得的不當利益返還受損失的人。”

36.  Article 131 of the GPCL Opinion is a judicial interpretation of Article 92:

“ 返還的不當利益，應當包括原物和原物所生的孳息。利用不當得利所取得的其他利益，扣除勞務管理費用後，應當予以收繳。”

37.  It is thus plain from these primary materials that they apply in cases where there is 不當利益 which is a fault-based concept.

38.  In light of the exclusion of any fault-based claim from the scope of the Remitter (and this is a question on which expert evidence plays no part), we agree with Mr Yu that there is a strong argument that the judge erred in entertaining the same in the Remitter trial.  

39.  We come to the conclusion that the Defendants have strong grounds of appeal and an unconditional stay of execution should be granted in the circumstances.

40.  We therefore make an order in terms of the summons of 29 October 2020 with a costs order that the Plaintiff shall pay the costs of the Defendants in the summons with certificate for 2 counsel.