WILLWIN DEVELOPMENT (ASIA) CO LTD AND ANOTHER v. WEI XING AND OTHERS

HCA 797/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 797 OF 2012

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D E C I S I O N

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1.  This is an application made by the 1^st Defendant Wei Xing (“Xing”) in the acrimonious dispute between himself and his brother Wei Wen (“Wen”). Judgment was handed down by this Court in March 2016, whereby Xing, his wife the 3^rd Defendant and Evolution Solution Ltd the 2^nd Defendant are held liable to account to 1^st Plaintiff (“WW”) for profits, on account of the Defendants’ respective breach of fiduciary duties, dishonest assistance, passing off and breach of confidence owed to WW.

2.  Accounts are yet to be taken, directions having been made for affidavits to be filed.  An application for discovery of documents by the Plaintiffs for the accounting exercise is outstanding, as is taxation of the costs of WW and the 2^nd Plaintiff (“SWT”) in the action.

3.  It has transpired that after the conclusion of the trial of the action but before the handing down of the Judgment, SWT, which is a company incorporated on the Mainland, was made the subject of an Order made by the Shenzhen Intermediate Court in February 2016, that it be liquidated, or dissolved (“解散”) (“Liquidation Order”).  According to Wen’s evidence, upon the Liquidation Order coming into effect on 29 February 2016, he convened a shareholders’ meeting of SWT, at which meeting it was resolved that a liquidation committee be formed, consisting of a firm of accountants, Wen, Wei Xueli (“Wei”) and others (“1^st LC”). 

4.  By a Letter of Authorisation issued by the 1^st LC on 13 July 2016 (“Authorisation”), Benny Kong & Tsai (“BKT”) were appointed as the solicitors for SWT for these proceedings, and for the appeal made by Xing against the Judgment (“Appeal”). 

5.  Following an order made by the Luohu Court on 18 July 2016 (“July Luohu Order”), on Wei’s application for the compulsory liquidation of SWT, a second liquidation committee comprising Jingtian Law Firm was designated, by order of the Luohu Court made on 20 December 2016, as the liquidation committee of SWT (“2^nd LC”), with Madam Du Yanzhi (“Du”), a Mainland lawyer, named as the responsible person of the 2^nd LC.

6.  On 25 July 2016, directions had been made by this Court for the further conduct of the proceedings relating to the account of profits to be made by the Defendants under the Judgment.

7.  It was only in January and February 2017 that the Hong Kong Court received notices from the 2^nd LC, advising the Court of the compulsory liquidation of SWT by the July Luohu Order and of the appointment of the 2^nd LC.  The notices stated that during the period of SWT’s liquidation and pursuant to the provisions of the PRC Company Law, only the 2^nd LC is to represent SWT in dealing with all related matters and to take part in civil litigation proceedings.  In the notice to the Hong Kong Court dated 23 February 2017, the 2^nd LC sought to suspend the Appeal, and further stated that the representation of SWT in the litigation in Hong Kong can only be confirmed after the 2^nd LC had completed its taking over of the liquidation of SWT.

8.  The Appeal was dismissed on 7 March 2017 by reason of Xing’s failure to provide security for costs.

9.  On 6 March 2017, Xing applied by summons (“Summons”) for orders that BKT cease to act for SWT in these proceedings, for the 2^nd LC or its designated representatives to participate in the proceedings, and until the clarification of SWT’s authorized representatives in these proceedings, for these proceedings to be stayed, and for orders to be made in relation to the “breaches” of BKT, and for BKT to pay all related costs of Xing.  He argued that the 2^nd LC appointed by order of the Mainland Court had replaced the 1^st LC, that after the liquidation of SWT, SWT could only act through the 2^nd LC, and the 2^nd LC had never instructed BKT to act for SWT in these proceedings.  Xing claims that BKT had knowledge of their lack of authority, for absence of any engagement or authorization by Du, but that BKT had misled the Court in Hong Kong, by purporting to have the authority from Du to act.

10.  On behalf of BKT and WW, Counsel highlighted that BKT had originally been retained by SWT (acting through Wen), and that under a written letter of engagement dated 3 October 2014 (“Letter of Engagement”), which confirmed SWT’s engagement of BKT since May 2013, BKT was instructed to provide legal services to and act for SWT in these proceedings, upon SWT’s joinder as 2^nd plaintiff.  The engagement extended to the trial of the action and to the enforcement of orders made by the Hong Kong Court.  Clause 5 of the Letter of Engagement expressly provides that it remained effective until after the conclusion of the trial and the enforcement of the judgment or order of the Court.

11.  Under the Authorisation issued by the 1^st LC, BKT was authorized to represent SWT for these proceedings, the Appeal, the related legal procedures and the recovery of related damages and legal costs, for the protection of SWT’s rights.

12.  On the authority of Underwood Son & Piper v Lewis [1894] 2 QB 306 and Donsland Ltd v Van Hoogstraten [2002] EWCA Civ 253, Counsel therefore submitted that the contract of engagement between SWT and BKT is an entire contract, and that BKT is authorized, and contractually bound, to carry on these proceedings to the end, and to take all steps which are necessary to bring the action to a conclusion, pursuant to the terms of the Letter of Engagement and the Authorisation.  Relying on Donsland which was followed in Euroafrica Shipping Lines Co Ltd v Zegluga Polska SA [2004] EWHC 385 (Comm), it was argued for BKT that their authority to act continued even during any period when there was no one from whom to take immediate instructions, such as the time after the 2^nd LC replaced the 1^st LC but Du had not been able to confirm instructions to BKT to act as solicitors for SWT in Hong Kong. 

13.  The facts of Donsland and Euroafrica are obviously different to the facts of the present case, as Xing sought to distinguish them, but the principle relied upon by WW and BKT is that BKT’s contract with SWT is an entire contract, and their authority extends to the conclusion of their engagement for these proceedings.  These proceedings have not been concluded, in view of the ongoing accounts proceedings and taxation.

14.  Yet, as I have sought to point out in the course of the hearing, the pertinent and indisputable feature of this case is that SWT has been ordered to be put into “compulsory liquidation”.  WW and BKT sought to highlight the fact that SWT was still in existence and in operation, according to the records of the National Enterprise Credit Information Publicity System, of the State Administration of Industry and Commerce.  However, there is no expert evidence adduced on PRC law, as to the effect of a liquidation order made by the Mainland Court, and the effect the liquidation has on the powers of the directors, and on proceedings against the company put into liquidation.  In the absence of such expert evidence, this Court can only assume that Mainland law is the same as Hong Kong law, such that upon being put into liquidation and upon the appointment of liquidators as made by the Luohu Court, proceedings against SWT must be stayed, until the 2^nd LC (which has replaced the 1^st LC) decide to take over and continue such proceedings. Such is consistent with the stance of the 2^nd LC, as stated in its 2 notices to the Hong Kong Court.

15.  Irrespective of whether BKT is contractually bound, by their retainer with SWT under the Letter of Engagement, to remain on the court record in these proceedings and to take steps as may be necessary in order to protect SWT’s interests, these proceedings against SWT can only be stayed upon SWT being put into liquidation upon the making of the July Luohu Order, which order also has the effect of replacing the 1^st LC with the 2^nd LC.  The fact that the 2^nd LC had not terminated the authority given by the 1^st LC to BKT cannot alter the fact and effect of SWT’s liquidation.  If the 2^nd LC had not terminated BKT’s authority, it was because (as explained in her email of 9 May 2017, to be elaborated upon below) the 2^nd LC could not confirm any instruction before reporting to the Luohu Court, which they could not do.

16.  As solicitors and officers of the Court, BKT should have informed this Court of SWT having been put into liquidation, after the making of the Liquidation Order and/or the July Luohu Order.  The liquidation affects the status and standing of SWT as a party in these proceedings, its ability to continue the further conduct of the action and to pursue any of its claims made, the orders which may be made by the Court against SWT, and its liability under such orders including any costs order which may be made against it.  It was only when Xing made his application by the Summons that the question of SWT’s status and its capacity to continue these proceedings was brought into focus when Xing challenged BKT’s representation.  In my view, unnecessary time and costs were wasted as a result of BKT’s lack of full candour on this matter, as evidenced by the fact that there had to be 4 hearings, and 2 orders made by the Court, before BKT and Wen filed all their evidence on the question of BKT’s representation of SWT, in response to the Summons. 

17.  In particular, as Xing rightly pointed out, Du had emailed the solicitor at BKT on 9 May 2017, at 10:07am, to inform him that any alleged understanding that she had instructed BKT to continue acting for SWT in the Hong Kong proceedings was wrong.  Du explained in the email that as she had not been able to take over the receivership of SWT from Wen, the 2^nd LC would not instruct BKT to undertake any work on behalf of SWT in Hong Kong, and that they could only confirm their engagement of solicitors after the 2^nd LC had reported to the Luohu Court.  In the email, Du pointed out that BKT was only to report to the 2^nd LC in respect of any related steps or developments.  Xing pointed out that Du had specifically requested BKT to use her email as the basis of any communication to third parties with regard to BKT’s representation of SWT.

18.  I accept the submissions made by Xing, that in view of Du’s email of 9 May 2017, BKT should have informed the Court at the hearing on 10 May 2017 at the latest, in relation to their most recent communication with Du and the statements made in her email with regard to BKT’s role, which statements were not consistent with the claims made in the affirmation of Wen filed on behalf of WW and BKT on 24 March 2017, that Du had confirmed instructions for BKT to continue to represent SWT in these proceedings.

19.  Further, and as this Court observed in the course of the hearing on 26 July 2017, and as accepted by Counsel, at no stage did BKT acting for WW and, purportedly, SWT ever indicate to Xing that they would consent to the proceedings against SWT being stayed, by virtue of either the Liquidation Order in February 2016, or the July Luohu Order.  It was only at the hearing on 26 July 2017, that Counsel for BKT and WW agreed with the Court’s indication that the proceedings should be stayed against SWT.  If the position of WW and BKT as to the stay of proceedings against SWT had been made clear to Xing and the Court at an earlier stage, time and costs would have been saved.

20.  On the Summons, I accordingly make an order that further proceedings in this action be stayed as against SWT, until further order of this Court.  The liquidation of SWT does not affect WW being the 1^st plaintiff, and the conduct of the accounting exercise to WW, which continues.  Any need for documents to be obtained from SWT through the 2^nd LC, and whether WW has possession or custody of those documents, can be addressed at the hearing of the discovery application.

21.  Costs are in the discretion of the Court.  Xing has essentially obtained the stay he seeks by the Summons.  BKT’s resistance to Xing’s application for costs is on the basis that they had the authority to remain as solicitors for SWT by virtue of their retainer being an entire contract.  However, a party’s conduct in the carriage of the proceedings is a relevant matter to be taken into account, when liability for costs are determined. 

22.  In view of the lack of full and candid disclosure by BKT and Wen as to the status of SWT, the stance of the 2^nd LC, and the stay of proceedings against SWT by virtue of its liquidation, and by virtue of the fact that court time and Xing’s costs have been unnecessarily wasted as a result, I order that the costs of Xing’s application by the Summons should be paid by WW and BKT to Xing, to be taxed if not agreed.