CY FOUNDATION GROUP LTD AND OTHERS v. CHENG CHEE TOCK THEODORE

HCMP 1091/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1091 OF 2011

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J U D G M E N T

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1. This was an application by the Defendant seeking to strike out the 1^st to 3^rd Plaintiffs’ Statement of Claim against the him, and to dismiss these proceedings, on the grounds that the Statement of Claim failed to disclose any reasonable cause of action, and/or was scandalous, frivolous or vexatious, and/or would prejudice, embarrass or delay the fair trial of the action, and/or was otherwise an abuse of the process of the court.

2. The background to the proceedings, and to this application can be summarised as follows:-

(1)   The 1^st Plaintiff, C Y Foundation Group Limited, is a Bermudan company which is listed on the Hong Kong Stock Exchange.  The 2^nd Plaintiff, a Hong Kong company, is an indirectly wholly owned subsidiary of the 1^st Plaintiff, while the 3^rd Plaintiff, also a Hong Kong company, is a directly wholly owned subsidiary of the Plaintiff.  The 4^th to 8^th Plaintiffs are all wholly foreign owned enterprises established in the PRC.  The 4^th to 7^th Plaintiffs are wholly owned subsidiaries of the 2^nd Plaintiff, while the 8^th Plaintiff is a wholly owned subsidiary of the 3^rd Plaintiff.

(2)   According to the Statement of Claim, the 4^th to 8^th Plaintiffs are corporate vehicles used by the 1^st Plaintiff to hold assets and operate businesses on behalf of the 1^st Plaintiff on the Mainland.

(3)   The Defendant is, and has for some time been, the Chairman and an executive director of the 1^st Plaintiff. However, following a change in management of the 1^st Plaintiff in April 2011, in circumstances which are described in more detail in my judgment in Re C Y Foundation Group Limited  (unreported, HCMP 702/2010, 25 April 2012), his authorities and duties within the group of companies headed by the 1^st Plaintiff were suspended with effect from 8 April 2011.

(4)   Among other things, the Defendant was, prior to such suspension, the legal representative of the 4^th to 8^th Plaintiffs, a position of some importance in relation to Mainland companies.  Following his suspension, the Plaintiffs say that they requested the Defendant to deliver up to them documents and other things (such as seals and chops of the 4^th to 8^th Plaintiffs) belonging to the 1^st and 4^th to 8^th Plaintiffs, and to cooperate in the appointment of persons to replace him as legal representative of the 4^th to 8^th Plaintiffs, but that he failed to comply with such requests.

(5)   On 11 June 2011, the Plaintiffs commenced these proceedings against the Defendant by Originating Summons, seeking orders for the delivery up of items belonging to the 1^st and 4^th to 8^th Plaintiffs said to have been wrongfully detained or removed by the Defendant, damages for conversion, orders requiring the Defendant to cooperate in his replacement as legal representative of the 4^th to 8^th Plaintiffs, damages for breach of duty as the 1^st to 3^rd Plaintiffs’ agent, interest and costs.  The prayer for relief did not indicate which particular relief was sought by which Plaintiff.

(6)   Shortly prior to the issue of the Originating Summons, the 8^th Plaintiff commenced proceedings against the Defendant on the Mainland, seeking the return of its seals, certificates and licences.  After the issue of the Originating Summons, similar proceedings were commenced by each of the 4^th to 7^th Plaintiffs against the Defendant.

(7)   On 26 September 2011, after the Plaintiffs filed their evidence in support of the Originating Summons, the Defendant’s solicitors wrote to the Plaintiffs’ solicitors enclosing a draft summons seeking a stay of the proceedings together with a draft affirmation in support of such an application.  In response, the Plaintiffs proposed that the 4^th to 8^th Plaintiffs’ claims in Hong Kong should be stayed pending the determination of proceedings by those Plaintiffs in the PRC.  On 12 October 2011, a consent order (“the Consent Order”) was made to implement this proposal – it provided for the claims of the 4^th to 8^th Plaintiffs in the proceedings to be stayed pending the determination of the proceedings taken out by such Plaintiffs in the PRC.  It also provided for these proceedings to continue as if commenced by Writ, and for the service of pleadings, beginning with the service of a Statement of Claim by the 1^st to 3^rd Plaintiffs, which was eventually served on 25 November 2011.  The Statement of Claim claimed the same relief as had been sought by the Originating Summons, with the addition of a claim for an order requiring the Defendant to account to the 1^st to 3^rd Plaintiffs for the whereabouts of the items in respect of which delivery up to the 1^st and 4^th to 8^th Plaintiffs was sought.

(8)   So far as the Mainland proceedings commenced by the 4^th to 8^th Plaintiffs are concerned, the 4^th and 5^th Plaintiffs’ claims were dismissed on 12 December 2011, on the grounds that as the Defendant was still the legal representative of those Plaintiffs, he was the only person authorised to take legal proceedings on behalf of them, and the claims that had been brought were incompetent.  In effect, unless and until the Defendant was removed as its legal representative, proceedings brought by the company concerned against him on the Mainland would be ineffective and would be liable to be dismissed.  The 4^th and 5^th Plaintiffs appealed against this decision, but the appeal had not been heard by the time of this hearing.

(9)   Faced with this problem in the Mainland proceedings, it appears that the other proceedings have not been proceeded with.  The claims of the 6^th and 8^th Plaintiffs on the Mainland have been withdrawn, the items return of which was sought apparently having been recovered by them through other means which are not relevant for present purposes.  The position in relation to the 7^th Plaintiff’s claim in the Mainland is less clear, but it does not appear to have been proceeded with as yet.

3. Mr Litton, who appeared for the Defendant, contended that the 1^st to 3^rd Plaintiffs’ claims should be struck out, and the action dismissed on the following grounds:-

(1)   First, he contended that the action was an abuse of process, in that it sought in effect to litigate the claims of the 4^th to 8^th Plaintiffs, contrary to the terms of the Consent Order.

(2)   Second, he contended that the action was an abuse of process, in that it sought to litigate such claims in Hong Kong when proceedings had already been brought by the 4^th to 8^th Plaintiffs on the Mainland.

(3)   Third, he contended that on a proper reading of the relevant allegations in the Statement of Claim, there was no viable claim shown in respect of the relief sought, at least in respect of the items of which return was demanded for the 1^st and 4^th to 8^th Plaintiffs.

(4)   Fourth (and finally) he contended that at the very least, certain paragraphs of the Statement of Claim should be struck out as being scandalous, or, alternatively, likely to prejudice, embarrass or delay the fair trial of the action.  This complaint was directed to paragraphs 6(4), 7(4), 8(4), 9, 10, 24 and 26 of the Statement of Claim.

4. For the 1^st to 3^rd Plaintiffs, Mr Anson Wong responded as follows:-

(1)   There was no abuse of process of the sort suggested by Mr Litton’s first point, as the Consent Order dealt only with the claims by the 4^th to 8^th Plaintiffs, leaving the 1^st to 3^rd Plaintiffs free to litigate in Hong Kong whatever claims they might have available to them.  As the Statement of Claim (and the relief sought) was framed, all of the relief sought was sought on behalf of the 1^st to 3^rd Plaintiffs alone, in pursuance of causes of action vested in them, arising out of the Defendant’s duties owed to them as their agent.  Had it been desired to prevent claims for particular types of relief (such as delivery up of items to the 4^th to 8^th Plaintiffs), this could have been done by framing the Consent Order in terms, not of the parties whose claims were stayed, but of the claims to relief which should be stayed.  In other words, for Mr Litton’s point to be a good one, the Consent Summons should have stayed the claims for the relief claimed in paragraphs 2 to 6 of the Originating Summons by any Plaintiff, rather than staying only the claims of the 4^th to 8^th Plaintiffs, but this had not been done.

(2)   There was no abuse in litigating similar claims in different jurisdictions when the parties claiming the relief in each jurisdiction were different, as was the case here.  Further, given the difference in parties, and the fact that the Mainland proceedings had either never been determined, or (where determined) had not been determined on the merits, there could be no question of any res judicata arising against the 1^st to 3^rd Plaintiffs.  Finally, given that the Defendant had sought (successfully so far) to prevent the 4^th to 8^th Plaintiffs from pursuing their claims on the Mainland, there was no abuse in seeking to have the issues determined in these proceedings, on the basis of claims advanced by the 1^st to 3^rd Plaintiffs.

(3)   As to the suggestion that no reasonable cause of action had been shown, paragraph 18 pleaded all the necessary facts, which (if proven) would entitle the 1^st to 3^rd Plaintiffs to the relief sought.  Paragraphs 19 to 25 simply pleaded particulars, and if these were thought to be deficient in any respect (which was not accepted), the Defendant’s proper course was to seek further and better particulars, and not to make an application to strike out.  Mr Wong also suggested that it was open to the 1^st to 3^rd Plaintiffs to provide voluntary particulars if they should, at some future time, wish to do so, in order to amplify their allegations.

(4)   As to Mr Litton’s final point, the allegations complained of were simply allegations of background facts, which could be pleaded to by the Defendant without any real difficulty, inconvenience or expense.

5. So far as the suggestion that the claims advanced in the Statement of Claim are an abuse of process for being contrary to the terms of the Consent Order is concerned, I accept Mr Wong’s submissions.  The terms of the Consent Order clearly provide for a stay, not of particular claims for relief by whichever party brought, but of the claims for relief made by the 4^th to 8^th Plaintiffs alone, leaving such claims as the 1^st to 3^rd Plaintiffs might see fit to bring to be litigated in Hong Kong.

6. While it might be thought to be somewhat odd for the 1^st to 3^rd Plaintiffs to seek orders requiring the delivery up of items to the 4^th to 8^th Plaintiffs, it seems to me that if the 1^st to 3^rd Plaintiffs wish to advance a claim to such relief, they are entitled to do so, and are not prevented from doing so by the terms of the consent order, so long as such claims are reasonably arguable.  As to this, while the claims so formulated may not necessarily succeed at the end of the day, I am not satisfied that they are so unlikely to succeed as to be unarguable, and so susceptible to being struck out.  Given the way in which the 1^st to 3^rd Plaintiffs put their case (in particular in paragraphs 15 and 16 of the Statement of Claim) – namely, that as their agent, the Defendant owed them a duty to obey their instructions, and vacate the office of legal representative and return the items sought when called upon to do so – it seems to me to be arguable that such a duty might extend to delivering up the items sought to parties other than the 1^st to 3^rd Plaintiffs if this were required by those Plaintiffs.

7. Further, it seems to me that, even reading the Consent Order in the manner proposed by Mr Litton, it would not be appropriate to strike out the entire claim and dismiss the action altogether on this ground. At most, this argument would justify the striking out of the relief claimed in paragraphs (2) to (6) of the prayer (although for the reasons given in the previous paragraph, I do not think that it does).  It would provide no basis for striking out the claim for the return of the property of the 1^st Plaintiff, or the claims that the Defendant should account to the 1^st to 3^rd Plaintiffs for the whereabouts of the property of the 4^th to 8^th Plaintiffs, or the claims for the Defendant to cooperate in making arrangements for other persons to be appointed as legal representative of the 4^th to 8^th Plaintiffs in his place (an obligation which would appear to be owed, not to those Plaintiffs, but to their shareholders, the 2^nd and 3^rd Plaintiffs, or their ultimate shareholder, the 1^st Plaintiff, of which he was a director).

8. When this is appreciated, it seems to me that there is no particular benefit to be had in striking out the claims for delivery up of items to the 4^th to 8^th Plaintiffs, as the same factual territory would have to be traversed whether or not those claims remain in the Statement of Claim.  It seems clear that all of the allegations in paragraphs 18 to 25 (with the exception of paragraph 24, to which I will refer later in this judgment when discussing Mr Litton’s fourth ground pursuant to which he seeks to strike out specific parts of the Statement of Claim) would have to be gone into for the purposes of the claims mentioned in paragraphs (1), (7), (8), (9) and (10) of the prayer, and thus, the striking out of the claims mentioned in paragraphs (2) to (6) of the prayer would not result in any saving in time or costs.

9. I therefore do not think that the first ground advanced by Mr Litton provides a basis for striking out the Statement of Claim, or any part of it.

10. As for Mr Litton’s second ground, again I agree with Mr Wong’s submissions.  Given that the claims in Hong Kong are being brought by the 1^st to 3^rd Plaintiffs alone, who have made no claims in China (and there being nothing to suggest that they could or should have done so), I do not see that there is any abuse in their bringing the claims here.  The fact that the proceedings on the Mainland have been withdrawn or dismissed without any determination of the merits merely serves to strengthen Mr Wong’s argument.

11. I do not think that Mr Litton’s third ground for striking out is a good one either.  The argument here was essentially that paragraph 18 of the Statement of Claim contained no more than bare assertions, and that the subsequent paragraphs 19 to 25 which would appear to be in the nature of particulars of the paragraph 18 allegations did not in fact justify those allegations.

12. Paragraph 18 of the Statement of Claim alleges that notwithstanding that the Defendant had his authorities, duties and positions suspended, he had wrongfully refused to cooperate with the new board of the 1^st Plaintiff, and had removed or caused to be removed his own personnel files and other documents or things of the 1^st Plaintiff, had detained and/or converted to his own use seals, chops, documents, records and other things of the 4^th to 8^th Plaintiffs, and had failed to take all necessary steps to arrange for his replacement as legal representative of the 4^th to 8^th Plaintiffs.

13. Paragraph 19 of the Statement of Claim sets out the 1^st to 3^rd Plaintiffs’ allegations as to the removal, by the Defendant or as caused by him, of the Defendant’s personnel files owned by the 1^st Plaintiff.  Mr Wong submitted that although the allegations there pleaded might have been framed more elegantly or economically (and I should point out that he was not the pleader of the Statement of Claim), it was clear enough from what was pleaded, read in conjunction with paragraph 10 of the Statement of Claim (which explains that Madam Leonora Yung, who is referred to in paragraph 19 of the Statement of Claim) is the wife of the Defendant, that the 1^st to 3^rd Plaintiffs’ case was that Madam Yung, acting on behalf of or at the behest of the Defendant, had removed the personnel files of the Defendant from the possession of the 1^st Plaintiff.  It seems to me that this is right.

14. Paragraphs 20 and 21 of the Statement of Claim set out a request by the 1^st Plaintiff for the delivery up of various items belonging to the 1^st Plaintiff and the 4^th Plaintiff.

15. Paragraphs 22 and 23 of the Statement of Claim make allegations against the Defendant to the effect that he had removed certificates, seals, chops and accounts of the 4^th and 5^th Plaintiffs, and that their return was demanded on behalf of the 2^nd Plaintiff (the sole shareholder of those companies).

16. Paragraph 25 of the Statement of Claim pleads that despite being called upon to do so, the Defendant has failed to deliver up the seals, chops, documents and records of the 4^th to 8^th Plaintiffs, and has failed to take steps to arrange for other persons nominated by the Plaintiffs to be appointed to the offices he held in respect of the 4^th to 8^th Plaintiffs.

17. Mr Litton points out, rightly, that the only allegation of removal of property of the 4^th to 8^th Plaintiffs relates to the property of the 4^th and 5^th Plaintiffs alone, and that there is no allegation of removal of property belonging to the 6^th to 8^th Plaintiffs.  However, I do not think that this justifies the striking out of the claims advanced by the 1^st to 3^rd Plaintiffs.

18. It seems to me that the position is this: paragraph 18 of the Statement of Claim asserts, albeit without any real particularity, the breaches of duty said to have been committed by the Defendant.  Paragraph 19 then provides particulars of the breaches relating to the 1^st Plaintiff, while paragraphs 20 and 21 provide particulars of unsatisfied requests for their return.  Paragraphs 22, 23 and 25 provide the particulars of the matters on which the Plaintiff will rely in relation to the items belonging to the 4^th to 8^th Plaintiffs said to have been detained, and the failure to assist in the appointment of replacement legal representatives in respect of them (and by giving such particulars, limits the matters which the 1^st to 3^rd Plaintiffs will be able to rely on to the matters there pleaded).

19. In my view, these allegations sufficiently disclose to the Defendant the case that he has to meet, and to which he has to plead.  In essence, what is said is that his personnel file belonging to the 1^st Plaintiff was removed as alleged in paragraphs 18 and 19, that the seals, etc of the 4^th and 5^th Plaintiffs were removed as alleged in paragraphs 18, 22 and 23, that so far as the seals, etc of the 6^th to 8^th Plaintiffs are concerned, there is no allegation of removal, but only an allegation that they have not been delivered up by the Defendant when called upon to do so (this in itself being alleged to be a breach of his duties owed to the 1^st to 3^rd Plaintiffs), and that he has failed, in breach of his said duties, to cooperate in the appointment of replacement legal representatives of the 4^th to 8^th Plaintiffs.  Unless these allegations are supplemented by way of an amendment to the Statement of Claim, the 1^st to 3^rd Plaintiffs will not be permitted, come the trial, to stray beyond them by relying on other matters which have not been pleaded.  While what is alleged is, I think, sufficient to prevent the pleading being struck out, whether or not it will suffice to get the 1^st to 3^rd Plaintiffs home at the end of the day is another matter, on which I do not express any concluded view.

20. For these reasons, I do not think that Mr Litton’s third ground justifies striking out the Statement of Claim.

21. That leaves Mr Litton’s fourth, and more limited ground.  He submits that certain paragraphs of the Statement of Claim contain matters that can be described as scandalous, or that will prejudice, embarrass or delay the fair trial of the action.  Objection is taken to the following parts of the pleading:-

(1)   Paragraph 6(4), which alleges that the 6^th Plaintiff was the corporate vehicle used by the 1^st Plaintiff in connection with an investment known as the Suzhou Caidebao Project, which the Defendant procured the 6^th Plaintiff to enter into.  It goes on to allege that the “purported investments in the Suzhou Caidebao Project were held in limbo for around 3 years since the signing of [a letter of intent] and the payment of “earnest money” [on two occasions] without justification.”

(2)   Paragraph 7(4), which alleges that the 7^th Plaintiff was the corporate vehicle used by the 1^st Plaintiff to enter into certain transactions described as the Wuxi Yu Cai Secondary School Transactions, the entry into of which were also said to have been procured by the Defendant.

(3)   Paragraph 8(4), which alleges that the 8^th Plaintiff was intended to be used as an investment holding company and property management company of the Group in Shanghai.

(4)   Paragraph 9, which sets out details of the Defendant’s appointment as an executive director and chairman of the 1^st Plaintiff, the suspension of his duties and authorities, and the reason for this (regulatory investigations and prosecutions).  Paragraph 9 then goes on to provide details of his arrest and the criminal charges brought against him.

(5)   Paragraph 10, which sets out the Defendant’s relationship with Madam Yung and her position in the 1^st Plaintiff prior to her suspension by its new management.

(6)   Paragraph 24, which sets out a demand for delivery up of certain items belonging to a PRC company within the group of companies headed by the 1^st Plaintiff, known as T‑matrix (which is not a party to these proceedings) from a Mr Song Jie, its former legal representative (who is also not a party to these proceedings).

(7)   Paragraph 26, which sets out a list of proceedings which the 1^st Plaintiff and/or other companies in the group have brought against the Defendant.

22. As I have noted, Mr Wong submitted that all of these were simply matters of background, which could readily be responded to by the Defendant.  While I would accept that this is so for some of these allegations, it seems to me that others of these allegations are objectionable for the reasons suggested by Mr Litton.

23. So far as paragraph 6(4) is concerned, I see nothing objectionable about the description of the 6^th Plaintiff as a corporate vehicle used by the 1^st Plaintiff for the purpose stated.  Nor do I see anything objectionable about the statement that the transaction in question was entered into by, or at the instance of, the Defendant.  However, it seems to me that the rest of the paragraph (i.e. the last sentence) consists of allegations which suggest that the transaction in question was improper or was, at least, conducted in a manner that was improper.  This has no relevance to any of the issues in these proceedings, which are concerned only with the Defendant’s obligations as the agent of the 1^st to 3^rd Plaintiffs to comply with their directions.  I do not accept that it is mere innocuous background material.  If allowed to remain in the pleading, it does seem to me that it will have to be responded to by the Defendant, and that doing so is likely to lead to a widening of the scope of the proceedings in a way that is irrelevant, and which is likely to be prejudicial to the Defendant.  Mr Wong did not suggest that the Defendant could safely ignore this allegation, and given what is alleged, it is clearly likely to prejudice the fair trial of the action by raising a matter that might reflect badly on the Defendant without having any relevance or probative value in connection with the claims being advanced.  I am therefore satisfied that the final sentence of this paragraph should be struck out.

24. As for paragraphs 7(4) and 8(4), these are similar to the part of paragraph 6(4) which I have held to be unobjectionable. I therefore see no reason to strike them out, and decline to do so.

25. As for paragraph 9, I am of the view that the first two sentences plead relevant matters in relation to the appointment and suspension of the Defendant as an executive director and chairman of the 1^st Plaintiff. However, the last sentence of this paragraph, and sub‑paragraphs (1) to (5) appear to contain matters that would clearly be prejudicial to the Defendant which have no relevance to any of the claims advanced.  The details there set out as to his arrest and the charges against him are quite irrelevant to the 1^st to 3^rd Plaintiffs’ claims, particularly since paragraph 15 of the Statement of Claim makes it clear that the 1^st to 3^rd Plaintiffs’ case is that they (in particular the 1^st Plaintiff) were entitled to suspend his authorities if they saw fit to do so, without needing to show cause for taking such action.  That being so, it is unnecessary and clearly prejudicial to plead and rely upon the material set out in the last sentence of paragraph 9 and paragraphs 9(1) to (5) of the Statement of Claim, and these allegations should, like the last sentence of paragraph 6(4), be struck out.  Should the Defendant contend that the 1^st to 3^rd Plaintiffs could only take such action where there was some good reason for doing so, these matters could be introduced by way of the 1^st to 3^rd Plaintiffs’ Reply.  I would therefore strike out the last sentence of paragraph 9, and the whole of paragraphs 9(1) to (5) of the Statement of Claim.

26. Paragraph 10 of the Statement of Claim, however, sets out material which is relevant to the claim that Madam Yung acted on behalf of (or at the behest of) the Defendant in removing his personnel file from the 1^st Plaintiff.  It does not appear to contain any material that would be prejudicial to the Defendant.  I therefore decline to strike it out.

27. Paragraph 24 of the Statement of Claim makes allegations against a non-party in respect of a company which is not a party either.  It appears to have no relevance whatsoever to these proceedings, and there can be no reason to require the Defendant to plead to it, or to permit the matters pleaded in it to be explored at a trial.  I therefore agree with Mr Litton that it should be struck out.

28. As for paragraph 26 of the Statement of Claim, containing as it does a description of various proceedings taken by the 1^st Plaintiff against the Defendant, in respect of matters entirely unrelated to the subject matter of these proceedings, I am satisfied that it is both scandalous matter, and would be highly prejudicial to the Defendant to allow it to remain in the pleading, and accordingly strike it out.

29. In the result therefore, while I do not consider that the Statement of Claim as a whole should be struck out, I shall order that the last sentence of paragraph 6(4), the last sentence of paragraph 9, paragraphs 9(1) to (5), 24 and 26 are to be struck out for the reasons which I have given.

30. So far as the further progress of the action is concerned, it seems to me that it would be desirable that an Amended Statement of Claim should be filed to reflect the order which I have made. This should be a relatively simple process, and I shall therefore direct that this should be done within 14 days of this judgment.  So far as the filing of a defence is concerned, the Defendant’s summons sought an extension of time of 21 days from the date of the determination of his application to strike out in which to do so – this appears to me to be reasonable, and I shall therefore direct that the Defendant should file his Defence within 21 days thereafter.  Both of these directions are made on a nisi basis, and any application to vary them should be made within 14 days, failing which they will become absolute.

31. So far as costs are concerned, while the Defendant has had a limited measure of success, he has failed to secure the striking out of the whole claim, which was what was sought in his summons, and contended for at the hearing by his counsel.  Further, the partial strikeout was not signalled in his summons, and was only suggested in Mr Litton’s skeleton argument served shortly before the hearing.  Moreover, a significant proportion of the time and costs spent on this application was attributable to the unsuccessful attempt to strike out the claim in its entirety.  In the circumstances, I think that the appropriate course would be to make no order as to costs, again on a nisi basis.  As with the directions given in the last paragraph, this costs order will become absolute unless an application to vary it is made within 14 days.