GUO JING JING v. ART MASTER INVESTMENT LTD AND OTHERS

HCA 1008/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1008 OF 2009

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D E C I S I O N

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1.  Art Master Investment Limited, (“AMI”), is the 1st Defendant in HCA1008/2009 (“the 1st action”) and the Plaintiff in HCA646/2001, (“the 2nd action”). It has taken out a summons in each action to stay the derivative claims in the 1st action and for both actions to be tried together, or one after the other.

2.  Since the trial of the 1st action has been scheduled to take place from 28 November 2011 to 14 December 2011, and the 2nd action has just reached the close of proceedings, if the two actions are to be tried together or one after the other, then they will not both be ready for trial on 28 November 2011.  AMI therefore also asks for the trial days of the 1st action to be vacated.  The trial dates are milestone days and to vacate them requires exceptional circumstances (see Order 25, Rule 1B(2) and (3)).

Background

3.  The 1st action was started by Guo Jing Jing, the plaintiff in the 1st action.  She pleaded in her amended statement of claim that she and Fang, the 3rd Defendant in the 1st action and the 2nd Defendant in the 2nd action, acquired AMI to purchase the Shen Garden Hotel, a hotel in Shanghai.  They intended that each of them would hold 50 per cent of the shares of AMI.  The purchase price as orally agreed with the vendor in November 2005 was RMB230 million.  If they should pay the vendor RMB110 million first, the vendor would transfer to AMI the certificate of ownership of the hotel pending completion of the purchase. 

4.  They obtained a valuation report on 5 December 2005 which gave the hotel a worth of RMB364.2 million.  Guo and Fang then paid AMI RMB25 million and RMB35 million respectively which sums were then paid to the vendor as deposit and part payment of the purchase price.

5.  Guo and Fang had to raise a further RMB50 million for payment to the vendor before AMI could obtain the certificate of ownership from the vendor.  They then agreed with Ng, the 2nd Defendant in the 1st action and the 1st Defendant in the 2nd action, that Ng would advance HK$50 million (then equivalent to RMB52 million) to AMI for a period of three months with interest at 24 per cent per annum.  As security for the loan, 51 per cent of the shares of AMI would be issued and allotted to Ng and Ng would be appointed a director of AMI.  Pursuant to this loan agreement, Ng advanced HK$50 million to AMI.  He was allotted 51 per cent of the shares of AMI and appointed to its board.  Ng is the husband of Fang’s stepdaughter and her son-in-law.

6.  AMI then entered into a written agreement with the vendor dated 13 December 2005.  The agreement understated the purchase price at RMB108 million for the vendor to evade some taxes payable in the mainland. Under the agreement, completion had to take place on or before 31 May 2006. 

7.  On 16 January 2006 the certificate of ownership of the hotel was issued to AMI.  Guo then alleged that Fang, on her own behalf and on behalf of Ng, had misrepresented to Guo in about May 2006 that Fang could not raise RMB120 million from any bank to complete the purchase because the price had been understated to RMB108 million in the sale and purchase agreement.  The only loan that could be raised was HK$60 million from the Bank of China (Hong Kong) Limited (“BOC”).  Shortly thereafter Guo approached the ICBC of the mainland which was prepared to advance at least RMB150 million to AMI, but Fang and Ng refused to sign any documentation to apply for this loan.

8.  In about June 2006, Fang, on her own behalf and on behalf of Ng, represented to Guo that Fang and Ng had the necessary funds to finance the completion by AMI of the purchase of the hotel.  Guo then orally agreed with Fang and Ng in about June 2006 that all the funds required by AMI for purchase of the hotel would be contributed to by its shareholders in the proportion of their respective shareholdings.  AMI would not borrow any fund from any third party including banks in Hong Kong for purchase of the hotel.  Ng would become a 51 per cent beneficial shareholder of AMI and had to advance to it RMB117.3 million.  Fang would be a 29 per cent beneficial shareholder and had to advance RMB66.7 million.  Guo would be a 20 per cent beneficial shareholder and had to advance RMB46 million.  The three shareholders’ loans would constitute the necessary RMB230 million for purchasing the hotel.

9.  However, unknown to Guo and without her consent, Fang and Ng obtained a loan of HK$60 million from BOC on the security of a mortgage over the hotel, and another loan of HK$100 million from the Hong Kong Bank on the security of a corporate guarantee of AMI.  The HK$100 million loan from Hong Kong Bank was advanced to Wing Li Trading Limited, (“Wing Li Group”). Wing Li Group is a Hong Kong company and its shareholders are Ng and one Lo Kam-wing each holding 50 per cent of its shares.  Lo Kam-wing is Ng’s brother-in-law and a stepson of Fang.  Wing Li Group is the 4th Defendant in the 1st action.

10.  The two loans of HK$60 million and HK$100 million were used by Fang and Ng to pay up their shareholders’ loans that they had to advance to AMI.  AMI then completed the purchase of the hotel in about June 2006. 

11.  AMI then attempted to sell the hotel in about August 2007.  A draft sale and purchase agreement was prepared for this purpose by a solicitor.  Guo then discovered these two loan transactions on 4 August 2007 from the terms of this draft agreement.

The first action

12.  Guo then started the 1st action claiming against Fang, Ng and Wing Li Group for loss and damage flowing from the misrepresentations of Fang and Ng and the two unauthorised loan transactions, which resulted in Fang and Ng being shareholders of 29 and 50 per cent shares respectively of AMI.  Guo wants Ng to transfer 30 per cent of the shares of AMI under his name to Guo so that she would be restored to a 50 per cent shareholder of the company.  She also wants to remove Ng from AMI’s board as she said Ng had no right to remain there after he had recovered the 50 million loan from the loans of BOC and Hong Kong Bank.  She also claims against Fang and Ng for damages for misrepresentation and seeks all necessary accounts and inquiries.

13.  In addition to her personal claims, Guo has also made derivative claims on behalf of AMI against Fang, Ng and Wing Li Group. She pleaded that the two loan transactions were entered into by Fang and Ng in breach of their fiduciary duties to AMI and are invalid.  She also claims on behalf of AMI against Fang and Ng for damages for their breaches of duty. 

14.  In addition to these claims, Guo also alleged that Fang and Ng had leased the hotel to a Shanghai Sheng Rong company, a company owned by one Zhang, an uncle of Fang, for two years at the rent of RMB1 million per month, when the then occupier was paying RMB18 million per annum (increased to RMB19 million per annum on 28 June 2008) for the possession and use of the hotel.  Guo, therefore, claims on behalf of AMI, against Fang and Ng for damages resulting from the unauthorised letting of the hotel to Zhang’s company.

15.  Guo further claims that the shares of one Shanghai Shen Garden Management Company Limited should have been transferred to AMI.  However, Fang and Ng wrongfully procured these shares to be transferred to one Xin Jia Company Limited, another company owned by Zhang.  Guo therefore claims on behalf of AMI against Fang and Ng for damages for their breach of fiduciary duties to AMI in relation to the transfer of these shares.  She also seeks, on behalf of AMI, all necessary accounts and inquiries.

The second action

16.  After the launching of the 1st action, Guo also obtained an order from this court appointing receivers for AMI.  The receivers then investigated into the affairs of AMI and found further allegations against Fang and Ng.  The receivers claim the market rental for the hotel, less the actual rental receivable under a lease granted by Fang and Ng on behalf of AMI for 10 years from 1 January 2009, and a sum of RMB20 million renovation costs that should not have been incurred by AMI.  This claim is quantified at RMB85.1 million.  They also want Fang and Ng to account for the rental receipts from April 2006 to December 2009 and a reserve fund set up for AMI’s benefit. 

17.  The receivers also claim against Fang and Ng for loss and damage to AMI because of the two loan transactions.  There are also some minor miscellaneous claims.  All these claims are made in the 2nd action brought by the receivers on 12 April 2011.

AMI’s applications

18.  Since there are receivers appointed for AMI, it is no longer appropriate for Guo to make the derivative claims for AMI in the 1st action.  All claims of AMI should now be prosecuted by the receivers for AMI[1]. 

19.  The legality and propriety of the two loan transactions are of major importance to Guo’s personal claims and AMI’s claims. AMI therefore applies to have both actions to be tried together or one after another.  It also wants the derivative claims in the 1st action to be stayed so that all AMI’s claims will be made in the 2nd action.  Guo and Ng also agree with this course and for the dates fixed for the trial of the 1st action to be vacated. 

Fang’s position and analyses

20.  Fang, however, disagreed.  She first suggested that the derivative claims in the 1st action could be stayed and Guo’s personal claims could be tried on 28 November 2011.  However, the findings on the two loan transactions to be made in this trial wil not bind AMI.  The reason being that upon the stay of the derivative claims in the 1st action, AMI will not take part in the 1st action.  AMI can then canvass the same issues in the two loan transactions again in the trial of the 2nd action.  There will be waste of time and resources as witnesses have to testify and be cross-examined on these issues again.  There will also be the risk of inconsistent judicial findings.

21.  Fang then suggested that AMI could remain in the 1st action to deal with the derivative claims therein from its own perspective.  However, this is also problematic because AMI, as the 1st Defendant in the 1st action, will be claiming against Fang, Ng and Wing Li Group, as the 3rd, 2nd and 4th Defendants, in the same action.  But the claims by AMI against them are not in the nature of indemnity proceedings. 

22.  Furthermore, AMI has not filed its own pleadings in the 1st action.  I do not think it right to require AMI’s legal representatives to take part at the trial of the 1st action and to deal with the issues in the derivative claims as raised and formulated by Guo’s lawyers. To require the trial of the whole of the 1st action to proceed on the days as fixed would also result in the truncation of AMI’s claims into two parts with the second part to be dealt with in the 2nd action.  This is undesirable as the question of credibility of witnesses will loom large in these disputes.

23.  It is desirable to have all issues to be ventilated at one go and for all disputes to be adjudicated at one trial.  To have the actions tried separately will also result in wastage as witnesses will be required to appear at two trials.  All in all it is undesirable to proceed with the trial of the 1st action on 28 November 2011 whether with or without the derivative claims.

Decision

24.  For the above reasons, I think it is more desirable to have the two actions tried together or one after another.  I am of the view that these reasons do constitute exceptional circumstances that justify the vacating of the trial dates fixed for the 1st action.  I therefore order:

(1)    The derivative claims in the 1st action be stayed.

(2)    The 1st and 2nd actions be tried together or one after another by the same judge as maybe decided by the trial judge with evidence in each case standing as evidence in the other.

(3)    The trial dates for the 1st action scheduled for 28 November 2011 to 14 December 2011 be vacated and the trial of the 1st action be adjourned to a day to be fixed.

25.  I also make the following directions in the 1st action:

(1)    Guo’s application for specific discovery in the 1st action to be heard on 6 September 2011 be vacated.

(2)    The pre-trial review of the 1st action which is fixed on 28 September 2011 be vacated.

(3)    Leave to Guo to file and serve her re-amended statement of claim in the 1st action within 21 days from today.

(4)    Leave to the defendants of the 1st action to file and serve their respective re-amended defence and counter-claim, if any, within 21 days thereafter.

(5)    Leave to Guo to file and serve the replies in the 1st action, if any, within 21 days thereafter.

26.  Regarding costs, I make an order nisi that the costs of the two summonses be in the cause except for the costs of argument.  Since Fang has lost the argument, I also make an order nisi that she should pay the costs of the argument to AMI, Guo and Ng forthwith with certificate for counsel.  I also order that there be a 9.30 am hearing to be fixed outside the next 14 days for summary assessment of the costs ordered to be payable forthwith unless an application for variation of the costs order nisi will have been made within the next 14 days.

27.  Finally I also mention that the legal representatives of AMI may reconsider the statement of claim in the 2nd action and see if any amendment needs to be made in the light of the stay of the derivative claims in the 1st action.