LAM MAN LAI AND ANOTHER v. OJ VC LTD AND OTHERS

HCA 985/2019

[2020] HKCFI 975

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 985 OF 2019

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BETWEEN

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D E C I S I O N

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A. INTRODUCTION

1.  This matter comes before the Court on the plaintiff’s summons dated 8 October 2019 (“Summons”), by which the plaintiffs seek various declarations, and affirmations from the defendants providing certain requested information, or alternatively judgment in fixed sums for “restitution, damages, and equitable compensation”.  As the margin note identifies, the summons is for default judgment against the 1^st and 2^nd defendants pursuant to RHC Order 19 rule 7.

2.  The proceedings were commenced by writ of summons dated 5 June 2019.  On the writ was a specially endorsed Statement of Claim (“SOC”).  The plaintiffs claim against the 1^st defendant for breach of a declaration of trust dated 26 June 2014, in that the 1^st defendant sold certain shares without the plaintiffs’ instructions.  Those shares are two parcels (together, “Trust Shares”) of 18,000 shares and 6,000 shares in Semk Products (Holdings) Limited (“Semk Holdings”).  The plaintiffs claim against the 2^nd defendant for dishonest assistance of the 1^st defendant’s breach of trust.

3.  The plaintiffs claim four types of relief on a “further or alternatively” basis, being:

(1) tracing and a claim for equitable title against the 1^st defendant

(a) the 1^st plaintiff claims: (i) 843.75 shares in Semk International Holdings Ltd (“Semk International”), and (ii) 750 shares (being 1.5%) in ENS International Enterprises Limited (“ENS”) (Semk International and ENS together, “Two Companies”);

(b) the 2^nd plaintiff claims: (i) 281.25 shares in Semk International, and (ii) 250 shares (being 0.5%) in ENS;

(2) an account by the 1^st and 2^nd defendants;

(3) restitution by the 1^st defendant to the 1^st plaintiff of HK$2,160,000 and to the 2^nd plaintiff of HK$720,000;

(4) equitable compensation by the 1^st and 2^nd defendants.

4.  By summons dated 16 July 2019, the 1^st and 2^nd defendants sought an extension of time for filing their Defence and Counterclaim (if any).  On 18 July 2019, Master Kot made an unless order permitting the 1^st and 2^nd defendants until 4pm on 15 August 2019 to file their Defence and Counterclaim (if any), failing which they would be debarred from doing so and the plaintiffs would be at liberty to apply for judgment to be entered.  No Defence having been filed, the plaintiffs issued the Summons.

5.  The matter first came before me on 8 November 2019.  On that occasion, I was informed that the 1^st and 2^nd defendants had made an open offer by their solicitors’ letter dated 6 November 2019 (“Open Offer”), so that it ought not to be necessary nor appropriate to grant any form of order sought by the Summons.  As that letter was only shortly before the hearing, I was asked to and I agreed to adjourn the matter for a few days to permit further discussions between the parties.

6.  The skeleton argument filed by then Counsel appearing for the 1^st and 2^nd defendants also indicated that the 2^nd defendant has a claim against the 2^nd plaintiff for no less than HK$21 million in a separate matter, and that the 1^st and 2^nd defendants were desirous that a global settlement be reached.  That was part of the practical basis upon which I was invited to adjourn the Summons, to permit the parties to engage in settlement negotiation.

7.  When the matter came back before me on 28 November 2019, no resolution had yet been reached and there remained apparently unanswered queries between the parties.  I therefore directed the 1^st and 2^nd defendants to respond to the plaintiffs’ solicitors’ letter dated 21 November 2019 (see below) within 14 days, and further adjourned the matter to a hearing on 21 January 2020.

8.  That hearing was later vacated by consent and re-fixed for 10 March 2020.  Nevertheless, that date fell within the General Adjournment of Proceedings and so, following correspondence between the parties and the court on 9 and 17 March 2020, I made a further order dated 17 March 2020.  That order directed that:

(1) unless the matter had been resolved by consent between the parties before 27 April 2020, the parties should agree and lodge with the court an agreed bundle by 4:30pm on 27 April 2020;

(2) unless the matter had been resolved by consent between the parties before 18 May 2020, the parties should file and exchange written skeleton submissions by 4:40pm on 18 May 2020;

(3) the parties should file and exchange any reply submissions by 4:30pm on 28 May 2020;

(4) thereafter, the court would dispose of the matter on the papers without an oral hearing;

(5) costs reserved.

9.  The agreed bundle of court documents and correspondence has been filed, and written submissions have been filed and exchanged.  This is my Decision.

B. THE OPEN OFFER

10.  As already stated, the Open Offer from the 1^st and 2^nd defendants was made by letter dated 6 November 2019.

11.  After (a) summarising and confirming parts of the plaintiffs’ pleading in the SOC, and (b) acknowledging that the Trust Shares had been transferred to the 3^rd defendant, and (c) asserting that the 1^st and 2^nd defendants had not engaged in any further transaction, transfer or dealing with the subject matter of the consideration, but (d) identifying there had been certain dividends received in respect of Semk International (“Dividends”), the detail of the Open Offer was put forward.

12.  That detail was that there should be a consent summons for the plaintiffs to discontinue the action against the 1^st and 2^nd defendants on the following terms:

EITHER

(1) the 1^st defendant would

(a) transfer to the 1^st plaintiff within 14 days of the order to be made:

(i) 843.75 shares in Semk International

(ii) 750 shares (being 1.5%) in ENS

(iii) proceeds of sale of 18,000 shares of Semk Holdings at HK$0.01 per share, thus HK$180; and

(iv) the sum of HK$472,500 (being HK$3,150,000 x 15%) representing his share of the Dividends, plus interest at judgment right from the date of the writ until payment

(b) transfer to the 2^nd plaintiff within 14 days of the order to be made:

(i) 281.25 shares in Semk International

(ii) 250 shares (being 0.5%) in ENS

(iii) proceeds of sale of 6,000 shares of Semk Holdings at HK$0.01 per share, thus HK$60; and

(iv) the sum of HK$157,500 (being HK$3,150,000 x 5%) representing her share of the Dividends, plus interest at judgment right from the date of the writ until payment

OR

(2) the 1^st and 2^nd defendants would jointly and severally:

(a) pay to the 1^st plaintiff the sum of HK$2,160,000 as claimed in §36(a) of the SOC; and

(b) paid to the 2^nd plaintiff the sum of HK$720,000 as claimed in §36(b) of the SOC; and

(c) pay interest on both sums at judgment rate from the date of the writ until payment

AND

(3) pay the plaintiffs’ costs of the action, to be taxed if not agreed.

13.  The first alternate might be termed the “Share Claim Offer” and the second alternate the “Restitution Claim Offer”.  It was noted that the Restitution Claim Offer was the same as that sought in §5 of the Summons.

C. THE SUBMISSIONS

14.  In his submissions, Mr Kam Cheung, Counsel for the plaintiffs, reminds me that the parties have been in active settlement negotiations, but (as revealed in the open exchanges) the plaintiffs’ priority is to recover the subject shares.  Therefore, I shall proceed on the basis that the plaintiffs have elected to proceed by pursuit of the tracing of shares and relevant accounts, and not on the alternate possible pursuit of restitution or damages.

15.  Mr Cheung identifies the problem, however, is that the plaintiffs do not know what has happened to those shares, and in particular do not know whether the 1^st and 2^nd defendants’ shareholding has been diluted or whether the shares in question have been made subject to any encumbrance.  That is why the plaintiffs’ solicitors raised the two questions in their letter dated 21 November 2019, asking (1) whether ENS has been restructured, reorganised, or whether its total number of shares has been increased since 6 September 2016, and (2) whether Semk International has been restructured, reorganised, or whether its total number of shares has been increased since 25 February 2019.

16.  Mr Cheung says that, for reasons not known to the plaintiffs, the 1^st and 2^nd defendants have been refusing to allow the plaintiffs any chance to carry out due diligence. All that they are willing to provide is a personal indemnity in case the shares are subject to encumbrances.  As a result, the plaintiffs’ position remains the same as set out in their solicitors’ letter dated 29 January 2020.

17.  By the terms of that letter, the plaintiffs required a guarantee from the 1^st and 2^nd defendants to the court and to the plaintiffs that neither ENS nor Semk International had been restructured et cetera since the two respective dates, and an order that a due diligence investigation be carried out.  Upon the plaintiffs’ expression of satisfaction with the result of the investigation, then the 1^st and 2^nd defendants should make the transfers and payments identified in the first alternative, ie the Share Claim Offer, of the Open Offer.  But there should also be the provision of a written legal opinion from Cayman Islands lawyers for Semk International and from BVI lawyers for ENS regarding the companies’ establishment and existence in their places of incorporation, whether the transfer of the captioned shares by the 1^st defendant to the 1^st and 2^nd plaintiffs are valid, at the sole cost and expense of the 1^st and/or 2^nd defendants.

18.  Mr Cheung acknowledges that it is not the normal practice of the court to make a declaration without a hearing.  But he submits that, given that the defendants have demonstrated no serious intention to contest the claim, it would not be inappropriate to grant a declaration.  In the alternative, he suggests that the court might debar the 1^st and 2^nd defendants from filing any defence, and order due diligence investigation of the Two Companies to be carried out.

19.  In their submissions, Deacons, Solicitors for the 1^st and 2^nd defendants, remind the court that the 1^st and 2^nd defendants are not going to dispute the plaintiffs’ claim.  No Defence has been filed, because they are willing to compromise and to settle with the plaintiffs on a good faith basis. Therefore, the only question left to the court is as to the nature or scope of the relief which should be granted to the plaintiffs.

20.  Deacons say that the plaintiffs’ enquiry about restructuring et cetera was accommodated in their letter of 11 December 2019 which specified in terms that ENS and Senk International had not been restructured, reorganised or increased the total number of shares since 6 September 2016 and 25 February 2019 respectively.  But when the plaintiffs then selected to take the Share Claim Offer alternative from the Open Letter, they also sought to impose further conditions, indeed more and more conditions as the correspondence progressed.  Those additional conditions over and above the Open Offer and the offer of the personal indemnity were not acceptable to the 1^st and 2^nd defendants.

21.  Deacons point out that the major difference between the parties is the mechanism of transfer of the various shares in Semk International and ENS.  The 1^st and 2^nd defendants could sign whatever documents needed to effect the transfer, but the plaintiffs are trying to insist on the 1^st and 2^nd defendants’ procuring the transfer to take place in compliance with relevant law or otherwise to indemnify the plaintiffs for failure to do so.

22.  Deacons point out that the plaintiffs’ own pleaded case is to ask for a declaration that the plaintiff shall have equitable title to the shares held upon trust or an order for the 1^st defendant to deliver up the shares held upon trust to the plaintiffs.  That is in line with the Summons.  But it has never been the plaintiffs’ pleaded case that the 1^st and 2^nd defendants should secure the transfer of the shares.  Rather, the pleaded case is that the plaintiffs have the right to trace the shares held upon trust and to which the plaintiffs claim to have equitable title and for an account for the shares, which the 1^st and 2^nd defendants have been willing to do from the outset.

23.  Put shortly, in light of the fact that the 1^st and 2^nd defendants have from the outset offered to do what they could to effect transfer of the shares claimed by the plaintiffs, Deacons submit that there is no basis for the plaintiffs to claim any declaration as such or to impose upon the 1^st and 2^nd defendants any indemnity for any failure to secure the transfer, which is not and has never been the plaintiffs’ pleaded case.

24.  Hence, Deacons effectively reiterate the Open Offer, albeit referring specifically to the 1^st defendant signing all documents as reasonably required by the plaintiffs to effect transfer to them of the subject shares.  Both limbs of the Open Offer, namely the Shares Claim and the Restitution Claim are reiterated as open alternatives offered by the 1^st and 2^nd defendants.

25.  In his reply submissions, Mr Cheung makes the point that there can be no denying that the 1^st and 2^nd defendants have intermeddled with the Trust Shares in question, so are liable to account to the plaintiffs as to what had become of the shares and to satisfy the plaintiffs that the shares have not been depleted of their value.

26.  Mr Cheung also raises significant doubt as to the value of the personal indemnity offered by the 1^st and 2^nd defendants, not least against the apparent recent entering of a judgment against the 2^nd defendant and his wife, leading to the presentation of a bankruptcy petition against him.

27.  In their reply submissions, Deacons again point out that the plaintiffs’ claim is based on a declaration of trust, by which the 1^st defendant confirmed that it would hold on trust for the plaintiffs such shares when subscribing for them under the respective granted warrants.  Those Trust Shares were converted into shares of Semk International and ENS as a result of the reorganisation of the Semk Group, in anticipation of the listing of Semk International.  The 1^st and 2^nd defendants have not disputed the plaintiffs’ right to trace from the Trust Shares into the Semk International and ENS shares, and for which the 1^st and 2^nd defendants are prepared to account.  But, what the plaintiffs cannot demand is something beyond their pleaded case, and the conditions now sought to be imposed are beyond the plaintiffs’ pleaded case.  If the plaintiffs were to suffer any loss because the Trust Shares are somehow encumbered, the 1^st and 2^nd defendants have offered to indemnify their loss.

D. DISPOSITION

28.  It should be obvious that the plaintiffs are not entitled to judgment beyond the relief claimed by them in the SOC.  It is not an empty requirement that a plaintiff must claim the specific relief to which he says he is entitled.  Indeed, on an application made under Order 19 rule 7, “the Court shall give such judgment as the plaintiff appears entitled to on his statement of claim” (emphasis added).

29.  As set out above, each of the plaintiffs claims against the 1^st defendant for: (a) a declaration that he or she is entitled to trace the relevant trust shares into and claim equitable title to the shares in the Two Companies; (b) an order for delivery up of the shares in the Two Companies; (c) further or alternatively a declaration that the 1^st defendant is liable to account, with (d) an order for payment of such sums found due on the taking of such account; (e) further or alternatively restitution of the monies had received; and (f) equitable compensation.  Each of the plaintiffs also claims against the 2^nd defendant for: (a) a declaration that he is liable as constructive trustee and liable to account; with (b) an order for payment of such sums found due upon the taking of such account; and (c) equitable compensation.

30.  Unsurprisingly, the Summons by which the plaintiffs seek judgment pursuant to Order 19 rule 7 seeks similar, but not identical, relief.  By paragraphs 1 and 2 of the Summons, each of the 1^st and 2^nd plaintiffs respectively seeks a declaration that the 1^st defendant holds the traceable proceeds of the 18,000 and 6,000 shares of Semk Holdings on trust for them, and an order compelling the 1^st defendant “to pay, deliver, or transfer them to” the 1^st and 2^nd plaintiffs respectively.

31.  By paragraphs 3 and 4 of the Summons, the plaintiffs seek affirmations from the 1^st and 2^nd defendants respectively to disclose the proceeds received by them from the disposal of the 18,000 and 6,000 shares of Semk Holdings, that is the Trust Shares, with certain (without limit) particulars as identified.

32.  Those paragraphs 1 to 4 together essentially comprise the Shares Claim.  Paragraph 5 of the Summons seeks, in the alternative, judgment for the fixed sums of restitution, being the Restitution Claim.  As I have said above, in light of Mr Cheung’s focus on the shares, I am proceeding on the basis that the alternative in paragraph 5 of the Summons is not actually pursued.

33.  I accept, not least on the basis that the 1^st and 2^nd defendants have expressed a willingness to comply with this from the outset, that the plaintiffs have the right to trace the shares held upon trust and to which the plaintiffs claim to have equitable title and for an account for the shares.  I will therefore make a declaration or declarations as appropriate.

34.  I also accept that the plaintiffs are entitled to orders requiring the 1^st defendant to transfer and pay the traced trust proceeds to them.  Further, it seems to me that the plaintiffs are entitled to some form of accounting, and a suitable form would be to provide the affirmations sought by the Summons.

35.  However, though I accept that the 1^st and 2^nd defendants can also give a personal indemnity, I am not persuaded that any other form of relief should be granted.  Firstly, no other form of relief has really been pleaded.  Secondly, additional relief ought not to be necessary.  Payment of the traceable proceeds in the form of money, and transfer of the traceable proceeds in the form of shares, would not have been actually paid or transferred if they are somehow subject to some third-party or other rights.  If the Trust Shares were unencumbered at the time when the defendants acted in breach of trust or in dishonest assistance of breach of trust, the traceable proceeds would not be properly paid and/or returned if they are paid and/or returned subject to some encumbrance.  Further, a transfer of Shares which is not made in compliance with the law governing that transfer is not really a transfer.  Any exercise of due diligence ought to be unnecessary or be encompassed within the taking of the account.  I shall, however, give liberty to apply.

36.  As to costs, in the broad exercise of my discretion, to be exercised judicially, I take into account as seems appropriate the following matters: the 1^st and 2^nd defendants have in effect acknowledged acting in breach of trust and/or in dishonest assistance of breach of trust, though I note they have made proposals for compromise on a non-admission of liability basis; the 1^st and 2^nd defendants have from an early stage offered to compromise on one of the two main alternate bases of relief sought in the claim; the 1^st and 2^nd plaintiffs have pursued matters in submission which go beyond the scope of the pleaded relief in their claim and beyond the terms of the order sought by the Summons; the 1^st and 2^nd defendants have nevertheless understandably raised concerns when failing to meet some of the enquiries raised by the 1^st and 2^nd plaintiffs; there has been some “creep” in the stances taken through correspondence, and again through the submissions.  In those circumstances, whilst the bringing of the action was clearly justified, some of the costs have been incurred as a result of the expansion of claims or demands beyond the four corners of the pleaded claims to relief.

37.  Taking a relatively broad brush approach, it seems to me in the exercise of my discretion that the appropriate costs order is that the 1^st and 2^nd defendants should pay the 1^st and 2^nd plaintiffs’ costs of the action, including the costs of the Summons, but only as to 60%.

38.  In the circumstances, I make the following order:

Upon the 1^st and 2^nd defendants giving an undertaking personally to indemnify the 1^st and 2^nd plaintiffs for any loss caused by any encumbrance of the 18,000 and 6,000 shares of Semk Products (Holdings) Ltd (together, “Trust Shares”) referred to in this Order or their traceable proceeds:

(1) The 1^st plaintiff is entitled to a declaration that the 1^st defendant holds the traceable proceeds of the transfer of 18,000 shares of Semk Products (Holdings) Ltd on trust in favour of the 1^st plaintiff.

(2) The 2^nd plaintiff is entitled to a declaration that the 1^st defendant holds the traceable proceeds of the transfer of 6,000 shares of Semk Products (Holdings) Ltd (“Semk Holdings”) on trust in favour of the 2^nd plaintiff.

(3) The 1^st defendant shall transfer to the 1^st plaintiff within 14 days:

(i) 843.75 shares in Semk International Holdings Ltd (“Semk International”)

(ii) 750 shares (being 1.5%) in ENS International Enterprises Limited (“ENS”)

(iii) proceeds of sale of 18,000 shares of Semk Holdings at HK$0.01 per share, thus HK$180; and

(iv) the sum of HK$472,500 (being HK$3,150,000 x 15%) representing his share of the Dividends, plus interest at judgment rate from the date of the writ until payment.

(4) The 1^st defendant shall transfer to the 2^nd plaintiff within 14 days:

(i) 281.25 shares in Semk International

(ii) 250 shares (being 0.5%) in ENS

(iii) proceeds of sale of 6,000 shares of Semk Holdings at HK$0.01 per share, thus HK$60; and

(iv) the sum of HK$157,500 (being HK$3,150,000 x 5%) representing her share of the Dividends, plus interest at judgment rate from the date of the writ until payment.

(5) For the avoidance of doubt, the 1^st defendant shall sign all documents as are reasonably required to affect the transfers set out in paragraphs (3) and (4) above.

(6) The 1^st defendant shall within 28 days lodge with the Court and serve on the plaintiffs an affidavit/affirmation disclosing and accounting for all proceeds received by the 1^st defendant in disposing of the Trust Shares.

(7) The 2^nd defendant shall within 28 days lodge with the Court and serve on the plaintiffs an affidavit/affirmation disclosing and accounting for all proceeds received by the 2^nd defendant in providing assistance to the 1^st defendant’s disposition of the Trust Shares.

(8) The 1^st and 2^nd defendants shall pay to the plaintiff such sums as are found due from the taking of the account as provided for in paragraphs (6) and (7) above, and shall forthwith pay such sums to the plaintiffs save to the extent already paid or transferred to the plaintiffs in accordance with paragraphs (3) and (4) above.

(9) Liberty to apply.

(10) The 1^st and 2^nd defendants shall be jointly and severally liable to pay 60% of the 1^st and 2^nd plaintiffs’ costs of the action, including the costs of the Summons, to be taxed if not agreed.