CHINA METAL RECYCLING (HOLDINGS) LTD (IN LIQUIDATION) AND ANOTHER v. UBS AG AND ANOTHER

CACV 384/2022

[2023] HKCA 409

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 384 OF 2022

(ON APPEAL FROM HCA NO 1348 OF 2019)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon G Lam JA (giving the Reasons for Judgment of the Court):

1.  This is the plaintiffs’ appeal from the order of Anthony Chan J striking out parts of the amended writ of summons and the statement of claim. The primary issue raised is whether commencing a claim for fraudulent trading by a writ of summons instead of by summons as required by rule 58 of the Companies (Winding-up) Rules (Cap 32H) (“Winding-up Rules”) may be treated as a formal defect not invalidating the proceedings pursuant to rule 209(1).

2.  At the end of the hearing, we made an order allowing the appeal and dismissing the strike-out summons, with no order as to costs below and an order nisi that the plaintiffs do have the costs of the appeal as against the 1^st defendant. These are the reasons for our judgment.

Background

3.  The 1^st plaintiff is China Metal Recycling (Holdings) Ltd (in liquidation) (“China Metal”) and the 2^nd plaintiffs its joint and several liquidators. The defendants are UBS AG, an investment bank and a non-Hong Kong company registered in Hong Kong, and UBS Europe SE, a wholly-owned subsidiary of UBS AG. This appeal is relevant only to UBS AG, which we shall therefore refer to simply as “UBS”.

4.  For the purpose of an initial public offering (“IPO”), China Metal was incorporated in the Cayman Islands to become the holding company for a business in scrap metal recycling and metal trading founded and run by Mr Chun Chi Wai (“Mr Chun”) and his wife. UBS provided financial advice and acted as the exclusive placement agent in connection with certain notes and warrants issued by China Metal prior to the IPO. UBS was also one of the joint sponsors, the sole global coordinator, sole lead manager and sole bookrunner for China Metal’s IPO. The IPO successfully took place on 22 June 2009, raising over HK$1.7 billion in total for China Metal.

5.  About four years later, on 26 July 2013 the Securities and Futures Commission petitioned for the winding up of China Metal. On the same day, Mr Borrelli and Ms Chi, the 2^nd plaintiffs herein, were appointed joint and several provisional liquidators. On 26 February 2015, China Metal was ordered to be wound up on the ground that a large-scale fraud had been perpetrated by, among others, Mr Chun. On 14 May 2015, Mr Borrelli and Ms Chi were appointed joint and several liquidators of China Metal.

6.  The plaintiffs commenced the action below by writ of summons issued on 25 July 2019. On 23 June 2020, the amended writ and the statement of claim were served on UBS.

7.  The plaintiffs allege that even prior to the IPO, UBS had knowledge and suspicions that Mr Chun’s and its own disclosures to the Stock Exchange and potential investors were not true, accurate or complete, and acted dishonestly by concealing its knowledge and suspicions, by making or permitting or procuring Mr Chun to make representations which overstated China Metal’s revenues and profits and which UBS knew or suspected were false, and by continuing to assist China Metal in its listing applications and IPO without making the necessary investigations, enquiries or disclosures.

8.  It is alleged that UBS is liable to China Metal for dishonest assistance in and knowing receipt from Mr Chun’s breaches of fiduciary duties, and is liable to disgorge the fees and commissions UBS received in connection with the IPO in the sum of HK$79 million as well as the proceeds of the notes and warrants it held in the sum of HK$244 million.

9.  The subject matter of this appeal is the further or alternative claim that through its misconduct and participation and assistance in procuring China Metal’s IPO and listing, UBS was knowingly a party to the carrying on of the business of China Metal by Mr Chun in fraudulent breach of fiduciary duty with intent to defraud creditors and/or for a fraudulent purpose. It is alleged that UBS is therefore liable for all or any of the debts or other liabilities of China Metal under section 275 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“Ordinance”) including, without limitation, those particularised in the statement of claim.

10.  Section 275(1) of the Ordinance provides:

“ If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court, on the application of the Official Receiver, or the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.”

11.  On 24 December 2020, UBS filed its defence which, inter alia, denied liability for fraudulent trading.

12.  On 12 May 2021, the plaintiffs issued a summons in the winding up of China Metal claiming essentially the same relief for fraudulent trading under section 275 and served it on UBS on 28 May 2021 (the “section 275 summons”). At the same time the plaintiffs proposed that the section 275 summons and the action be consolidated.

13.  By amendment on 16 December 2021, UBS added a plea in its defence that the plaintiffs had failed to comply with rule 58 of the Winding-up Rules in making the application under section 275 of the Ordinance. On 27 January 2022, UBS issued an application by summons for the paragraphs of the amended writ of summons and statement of claim relating to the fraudulent trading claim[1] to be struck out.

14.  Rule 58 of the Winding-up Rules provides as follows:

“ (1) An application under any of the following provisions—

(a) section 276 of the Ordinance;

(b) section 275(1), (2) or (4) of the Ordinance;

(c) section 168I of the Ordinance, where such application relates to a company in course of being wound up by the court;

(d) section 904(1) of the Companies Ordinance (Cap. 622),

shall be made by a summons returnable in the first instance in chambers, in which summons shall be stated the nature of the declaration or order for which application is made, and the grounds of the application, and which summons, unless otherwise ordered by the court, shall be served, in the manner in which an originating summons is required by the Rules of the High Court (Cap. 4 sub. leg. A) to be served, on every person against whom an order is sought, not less than 8 days before the day named in the summons for hearing the application. Where the application is made by the Official Receiver or liquidator he may make a report to the court stating any facts and information on which he proceeds which are verified by affidavit, or derived from sworn evidence in the proceedings. Where the application is made by any other person it shall be supported by affidavit to be filed by him.

A copy of every report and affidavit intended to be used in support of the summons shall be served on every person against whom an order is sought not less than 4 days before the hearing of the summons.

(2) On the return of the summons the court may give such directions as it shall think fit as to the taking of evidence wholly or in part by affidavit or orally, and the cross-examination either before a judge on the hearing in court or in chambers of any deponents to affidavits in support of or in opposition to the application and as to any report it may require the Official Receiver or liquidator to make and generally as to the procedure on the summons and for the hearing thereof.”

The judge’s Decision

15.  In his decision dated 20 July 2022,[2] the judge acceded to UBS’s application. He considered that there was a breach of rule 58 which imposed a mandatory requirement. It was impermissible to commence a section 275 claim by writ. The fraudulent trading claim was a nullity by reason of the breach of rule 58.[3] The judge held that Order 2 rule 1(3)[4] and rule 2(1)[5] of the Rules of the High Court (Cap 4A) (“RHC”) are not applicable because, first, those rules which are designed to cure irregularities are irrelevant because the plaintiffs had cured the defect by taking out the section 275 summons. Secondly, by virtue of Order 1 rule 2(2), the RHC do not apply to winding up proceedings. Thirdly, the fraudulent trading claim should have proceeded in the manner prescribed by rule 58 and, if it had, any irregularities in the application would fall to be considered under rule 209(1) of the Winding-up Rules.[6] Fourthly, the power of dispensation under the RHC could not apply to requirements imposed by statute other than those underlying those rules.[7]

16.  The judge also held that the plaintiffs could not rely on rule 209(1) of the Winding-up Rules because they had relied upon the inapplicable regime under the RHC in making the fraudulent trading claim.[8]

17.  Further, the judge considered that after the section 275 summons had been taken out, there was no reason to maintain the same claim in the action, and that such duplicitous proceedings constituted an abuse of process rendering the relevant paragraphs liable to be struck out.[9]

The appeal

18.  On this appeal, the plaintiffs’ primary contention is that the judge erred in holding that rule 209(1) of the Winding-up Rules did not apply. Alternatively, they contend that if rule 209(1) was inapplicable, then the judge erred in holding that RHC Order 2 rule 1(3) could not be relied upon to cure the irregularity.

19.  It is not in dispute that by making the fraudulent trading claim in the writ action, the plaintiffs did not follow the procedure for making such a claim by summons as prescribed by rule 58. The claim is therefore prima facie invalid in form. Nevertheless, in our view, if rule 209(1) of the Winding-up Rules applies, such non-compliance is not necessarily fatal. Rule 209(1) provides:

“ No proceedings under the Ordinance or the rules shall be invalidated by any formal defect or by any irregularity, unless the court is of opinion that substantial injustice has been caused by the defect or irregularity, and that the injustice cannot be remedied by any order of the court.”

20.  The equivalent rule found in rule 7.55 of the Insolvency Rules 1986 of the United Kingdom was discussed and applied in Phillips v McGregor-Paterson [2010] 1 BCLC 72. That rule provided:

“ No insolvency proceedings shall be invalidated by any formal defect or by any irregularity, unless the court before which objection is made considers that substantial injustice has been caused by the defect or the irregularity, and that the injustice cannot be remedied by any order of the court.”

There the liquidators of a company brought an action against a former director for relief in relation to void dispositions of the company’s property after commencement of winding up, misfeasance, wrongful trading, preferences and transactions at an undervalue. The action was commenced by way of a standard claim form (broadly equivalent to a writ of summons in Hong Kong) pursuant to Part 7 of the Civil Procedure Rules, rather than in the form of an “ordinary application” (broadly equivalent to a summons) in the winding up proceedings under the Insolvency Rules. The defendant contended that the proceedings were, as such, “fatally and irremediably flawed, because of the liquidators’ failure to use the form of application prescribed by Parliament for insolvency proceedings”. It was argued that the liquidators had used a form of originating process that “[fell] entirely outside the scope of the Insolvency Rules”, with the consequence that there were no “insolvency proceedings” before the court which could be validated by application of rule 7.55. Rejecting that argument, Henderson J held:

“ 25. … I agree with the submission of Mr Couser for the liquidators that the present proceedings are plainly insolvency proceedings, a term which is nowhere defined in the Insolvency Rules, by virtue of the fact that they are brought under various provisions of the Insolvency Act 1986. Accordingly, they are proceedings to which Part 7 of the Insolvency Rules applies, and the use of the wrong form of application is in my judgment a ‘formal defect’ which is capable of being cured under rule 7.55. If that is right, the effect of rule 7.55 is that the present proceedings are not to be invalidated by the formal defect unless the court considers that substantial injustice has been caused by it, and that the injustice cannot be remedied by any order of the court. In my view no substantial injustice has been caused in the present case …”

21.  Although rule 7.55 referred to “insolvency proceedings” whereas rule 209(1) refers to “proceedings under the Ordinance or the rules”, it seems to us the reasoning in Phillips is instructive here. “Proceedings” are defined in rule 2 of the Winding-up Rules as “the proceedings in the winding up of a company under the Ordinance”. China Metal is being wound up by the court under the Ordinance, as pleaded in the statement of claim. The fraudulent trading claim is one by which the power under section 275 of the Ordinance – available only in the winding up of a company – is expressly invoked to make UBS liable. The claim is brought in the correct court, i.e. the Court of First Instance, which is the “court” within the meaning of section 275.[10] The liquidators who have standing to apply for an order under section 275 have from the outset been joined as the 2^nd plaintiffs, apparently solely for the purpose of this claim. There is no suggestion that any essential averment is missing. The relevant remedy sought is a declaration that UBS is liable for the specified debts or other liabilities of China Metal – a distinctive remedy available only under section 275. There is no apparent defect other than that the claim is made by writ rather than by summons under rule 58.

22.  It seems to us that in so far as the fraudulent trading claim is concerned, the action is clearly a claim brought under the provisions of the Ordinance in the winding up of China Metal, and falls within “proceedings under the Ordinance”. The judge considered that rule 209(1) and Order 2 rule 1(3) are “separate regimes” that do not permit “cross-over”.[11] But this does not address the question whether the fraudulent trading claim is “proceedings under the Ordinance” within the meaning of rule 209(1). To say it is not such proceedings because the claim is not brought by summons under rule 58 would be to elevate form over substance. As explained above, the claim is unmistakably one made by the liquidators under section 275 in the winding up of China Metal for relief against UBS for (allegedly) being knowingly party to fraudulent trading. Indeed the judge also ruled that the RHC did not avail the plaintiffs because their claim was “proceedings relating to the winding-up of companies” to which the RHC do not apply by virtue of Order 1 rule 2(2).[12] But if rule 209(1) does not apply because a writ has been used for the claim, and at the same time Order 2 rule 1(3) does not apply because the claim was proceedings in winding up, there would be a surprising lacuna where formal defects are irremediable, as Mr Manzoni SC submitted on the plaintiffs’ behalf.

23.  The use of the wrong form to bring the claim is in our judgment a “formal defect” or “irregularity” within the meaning of rule 209(1): see Phillips, §25. In China Medical Technologies Inc & others v Bank of China (Hong Kong) Ltd [2021] HKCFI 3042, the very same defect of bringing a claim for fraudulent trading by writ was also characterised by Ng J as a “procedural irregularity”, although it was unnecessary there to decide whether it could be cured by rule 209(1) or Order 2 rule 1(3).[13]

24.  Mr Jat SC, appearing on behalf of UBS, relied on Leung Chi Kai Mintis v China-Tech Engineering Co Ltd (HCMP 209/2002, 22 April 2002) where a claim for relief against unfairly prejudicial conduct was commenced by originating summons rather than by petition as required by section 168A of the then Companies Ordinance. Chung J considered that RHC Order 2 rule 1(3) did not apply because of Order 1 rule 2(2) and that rule 209(1) of the Winding-up Rules was irrelevant. We do not think this decision assists UBS. Although there was originally a claim for a winding up order, it had been abandoned. This may have been the reason why the judge considered rule 209(1) irrelevant. Further, Chung J actually held that the court had the power to treat the proceeding as having been commenced by the correct mode even though in fact it had not been so commenced, although he did not exercise his discretion in the applicant’s favour.

25.  Mr Jat also relied on Re Osea Road Camp Sites Ltd [2005] 1 WLR 760, a decision of Pumfrey J in the English High Court, where a claim form seeking relief against unfairly prejudicial conduct under section 459 of the Companies Act 1985 was struck out because that section required such proceedings to be commenced by petition. Again, with respect, we do not think that UBS can derive much assistance from this case, because it was decided on the basis of r 3.10 of the Civil Procedure Rules and not concerned with the equivalent of rule 209(1) of the Winding-up Rules.

26.  Similarly, the case of China Medical Technologies Inc v Wu Xiaodong [2020] 1 HKLRD 342 does not assist UBS. There Ng J struck out a misfeasance claim from a writ action on the ground that it should have been commenced by summons pursuant to rule 58 of the Winding-up Rules. There was little discussion of whether there was power to remedy the defect and no mention of rule 209(1) at all.

27.  For the reasons above, we take the view that unless there is substantial injustice caused by the defect or irregularity which cannot be remedied by any order of the court, there is power under rule 209(1) to hold that the fraudulent trading claim, as it stands in the action, is not invalidated by the formal defect or irregularity.

28.  UBS submitted that if the claim was not struck out, it would deprive them of an accrued substantive right to rely on a valid limitation defence. The limitation point arises in this way. UBS contends that the fraudulent trading claim is time-barred after 6 years from the making of the winding-up order on 26 February 2015, when Mr Borrelli and Ms Chi, who had previously been appointed provisional liquidators, continued to act as provisional liquidators upon the winding-up order being made. The plaintiffs, in contrast, contend that time did not start to run until 14 May 2015 when Mr Borrelli and Ms Chi were appointed liquidators. We assume both contentions are arguable and do not express any opinion on their merits. The section 275 summons, issued on 12 May 2021, would be out of time according to UBS’s contention, but within time under the plaintiffs’ contention. The fraudulent trading claim in the writ action, instituted on 25 July 2019, is within time on either view.

29.  In our judgment, the limitation argument against the section 275 summons is not an impediment to treating the fraudulent trading claim in the writ action as not invalidated by its form. UBS does not claim to have a limitation defence to that claim as made in the writ action. It asks the court to strike it out for breach of rule 58. If the court does so, UBS will gain a potential limitation defence towards the claim which remains only in the section 275 summons. This does not assist UBS for the purpose of rule 209(1), which focusses on injustice caused by the defect or irregularity, not on any disadvantage suffered from the curing of that defect or irregularity: see Re Continental Assurance Co of London plc (in liq) (No 2) [1998] 1 BCLC 583, 587h, and see by analogy cases decided under RHC Order 2 rule 1 or its English equivalent, such as 3D-Gold Jewellery Holdings Ltd v PricewaterhouseCoopers [2014] 4 HKC 528, §34, and Re Taunton Logs Ltd [2020] EWHC 3480 (Ch), §45.2. The fact that UBS has to face a fraudulent trading claim that is not affected by limitation is not injustice that precludes the application of rule 209(1).

30.  Further, Mr Jat pointed out that Ng J’s decision mentioned above in China Medical Technologies Inc v Wu Xiaodong striking out a misfeasance claim from a writ action based on breach of rule 58 was handed down on 10 December 2019. Mr Borrelli, one of the liquidators here, was a liquidator and a plaintiff in that case. The claim here should be struck out, and no indulgence available under any rule should be granted in the plaintiffs’ favour, said Mr Jat, because it was an abuse of process for the liquidators to commence the claim by writ with knowledge that that would fail to comply with rule 58.

31.  It seems to us that the judge did not approach the matter in this way, and did not find any abuse of process in this regard. His Lordship considered that the matter did not turn on the conduct of the plaintiffs at all, although he did comment that Mr Borrelli was aware of the requirement under rule 58 and that it was not easy to see any ground for complaint about the consequences of not following that rule.[14]

32.  In this context, while we find it surprising that the plaintiffs did not change tack at least after the court’s decision in China Medical Technologies Inc v Wu Xiaodong, it is also relevant to take into account the overall conduct of the proceedings below.

33.  The writ was issued on 25 July 2019. After the plaintiffs duly served the proceedings by writ on UBS in June 2020 for, inter alia, fraudulent trading, UBS did not then take any objection to the form of the fraudulent trading claim. On the contrary, it proceeded to conduct its defence of the action including that claim. It sought and obtained from the plaintiffs documents referred to in the pleading of, inter alia, the fraudulent trading claim. It sought security for the costs of defending the action including the fraudulent trading claim. It filed and served its defence on 24 December 2020, denying the allegations comprised in the fraudulent trading claim and raising no objection to the form of the claim. On 5 May 2021, it filed and served further and better particulars of its defence.

34.  On 12 May 2021, the section 275 summons was filed by the liquidators, according to them as a precautionary measure to avoid dispute regarding the inclusion of the fraudulent trading claim in the writ action. Ms Chi’s affirmation of the same date explained the rationale and mentioned rule 58. On 9 September 2021, UBS asserted in correspondence that the section 275 summons was time-barred and raised the possibility of seeking a trial of the limitation point as a preliminary issue. The plaintiffs replied that a preliminary issue was inappropriate as the fraudulent trading claim was also made in the writ action. It was only after this, on 2 November 2021, that UBS for the first time indicated that it intended to apply to strike out the fraudulent trading claim from the writ action based on rule 58. The strike-out summons was eventually issued on 27 January 2022.

35.  In short, the writ was issued prior to China Medical Technologies Inc v Wu Xiaodong, and the action had proceeded, after service on UBS, for over 18 months before the strike-out application was issued. In these circumstances, we do not accept Mr Jat’s submission. We disapprove of the non-compliance with rule 58, but it would be a disproportionate response to strike out the claim on the ground of the formal defect, in circumstances where the subsequent section 275 summons is arguably time-barred and the application to strike out was issued even later. Nor do we accept that not striking out the claim would mean rule 58 could be ignored without consequences.[15] Quite apart from the serious costs consequences that may be visited upon a party for non-compliance with procedural rules, it does not follow from our decision here that proceedings will always be treated as valid despite a breach of the Winding-up Rules or the RHC.

36.  Finally, as to the existence of both the fraudulent trading claim in the writ action and the section 275 summons, it is a matter for case management in the Court of First Instance, and the plaintiffs may perhaps be put to election to pursue one or the other, but it is in our view not in itself a ground for striking out the claim in the action.

Conclusion on the appeal

37.  For the above reasons, we concluded that the fact that the fraudulent trading claim was commenced by writ rather than by summons as required by rule 58 of the Winding-up Rules is a formal defect that by virtue of rule 209(1) does not invalidate the claim. Accordingly, we made the orders mentioned in §2 above.

38.  We should record that at the hearing we asked the 2^nd plaintiffs to make further submissions as to why their remuneration and disbursements occasioned by the non-compliance with rule 58 should be paid out of China Metal’s assets. No such submissions or order are now necessary as the 2^nd plaintiffs have by letter undertaken not to claim or to seek to recover from China Metal’s assets their own costs (including remuneration) and disbursements in connection with the strike-out summons or the appeal which are not paid by UBS and, to the extent such costs have been paid from China Metal’s assets, to refund them.