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

HCA 1348/2019

[2023] HKCFI 1943

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1348 OF 2019

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D E C I S I O N

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A.  Introduction

1.  This is a complex piece of litigation that is worthy of a judge’s attention at the upcoming case management stage. The only question is whether it should be a judge in the general civil list (as suggested by the Plaintiffs) or transferred to a judge in the Commercial List (as suggested by the 1^st Defendant, “UBS”).

2.  On 26 February 2015, China Metal was wound up, on the petition of the SFC in HCCW 210/2013. The ground was that a fraud had been committed by its management, including Chun Chi Wai (“Chun”), on China Metal’s investors and Hong Kong Stock Exchange through an IPO on 22 June 2009.

3.  Shortly after the 2^nd Plaintiff was appointed joint and several liquidators of China Metal, the Plaintiffs commenced this action on 25 July 2019. It is alleged that Chun, the Chairman of China Metal and the CEO of the group, perpetrated a large-scale fraud using fictitious transactions to inflate China Metal’s revenue and profits, and then to cause China Metal to raise funds through the IPO, relying on false or misleading disclosures.

4.  UBS was under a duty as IPO sponsor to ensure that disclosures were true, accurate and complete. Alan Fung (“Fung”) was UBS’ project director responsible for day-to-day conduct of the matter. He allegedly had knowledge or suspicion of certain false information whilst conducting due diligence. Fung nevertheless dishonestly caused UBS to permit those disclosures to be made, and dishonestly caused UBS itself to make disclosures that were not true, accurate or complete.

5.  It is the Plaintiffs’ case that UBS is liable for dishonestly assisting Chun’s breach of fiduciary duties, knowing receipt of funds paid as a result of the breach, and/or as a knowing participant in China Metal’s fraudulent trading under section 275 of Companies (Winding Up and Miscellaneous Proceedings) Ordinance, Cap 32.

6.  The core issues turn on whether Chun had perpetrated the fraud. Much of the evidence that the Plaintiffs will rely on has been advanced in China Metal Recycling (Holdings) Limited v Chun Chi Wai [2021] HKCFI 378 for this fraud. That action was assigned to a trial judge under PD 5.7 and judgment was handed down by DHCJ MK Liu on 25 February 2021.

7.  This case also turns on the extent of Fung’s knowledge and his conduct in the light of that knowledge with respect to false or suspicious disclosures concerning:

(1)  China Metal’s sales to a top customer of a group that was connected to Chun;

(2)  China Metal being the largest scrap metal recycling company in Mainland China; and

(3)  Chun’s suitability to act as director of a listed company having regard to Chun’s failure to disclose his former directorship of companies that had been deregistered or whose business licence had been revoked, and that Chun had been implicated in a criminal case in Mainland China.

8.  The allegations are denied by UBS, who also rely on the defence of circuity of action and limitation.

B.  Legal principles for assigning cases

9.  As stated in §2 of PD SL 1.1, the function of the Commercial List is to facilitate the disposal of actions involving commercial matters.

10.  Cases are put in the Commercial List with the objective of having disputes resolved in a way which commercial people can understand and appreciate, and this necessarily involves having the disputes resolved promptly, efficiently, without unnecessary costs and delay. Cases on the Commercial List can be dealt with more speedily since the Commercial Judge can take control of the court diary to accommodate hearings, and interlocutory applications are heard by the judge and not by a master. However, this cannot be achieved if the Commercial List diary is clogged with unnecessary interlocutory applications and unwarranted hearings which are not confined to matters of substance, with the objective of facilitating an early and effective trial for the resolution of the core issues of the real dispute between the parties. It is with these objectives in mind that trial dates are fixed for cases on the Commercial List at the first case management hearing which is to be initiated upon close of pleadings, pursuant to PD SL 1.1: Enrich Future Ltd v Deloitte Touche Tohmatsu (a firm) (unrep., HCCL 10/2011, 8 February 2017), Mimmie Chan J at §7.

11.  In considering the question of transfer to the Commercial List, the most important factors are the subject matter of the case and whether there are issues which would particularly benefit from the experience or expertise of judges in the Commercial List as compared to that of judges in the general civil list: Southern Rock Insurance Co Ltd v Brightside Group Ltd [2015] EWHC 757 (Comm), at §§3-4, Leggatt J.

12.  In Southern Rock, the court dismissed the application to transfer to the Commercial Court List because although the context of the claim was the insurance industry, it was not part of the industry which was particularly within the specialist province of the Commercial Court; and the dispute essentially concerned interpretation of agreement and factual questions of how the agreement was actually applied. Those were not issues requiring specialist knowledge.

13.  Many cases have a “commercial” element, eg sale of goods, claims under insurance policies, claims against banks. Assigning every such case to the Commercial List would clog that List and prevent the prompt and efficient resolution of commercial disputes: Skechers Sarl v Eternity International Freight Forwarder (HK) Ltd, HCCL 5/2015, 6/2016, 22 August 2016, §20, Mimmie Chan J.

14.  Hence, the Commercial List should be reserved for cases that require the specialist commercial expertise of a judge, eg one involving novel issues of law in a particular commercial area or industry practice.

C.  Application of the legal principles

15.  In a broad sense, this is of course a “commercial case”. Ms Cheung, counsel for the 1^st Defendant, submits that the complex commercial context of this case in itself, namely, the proper role of an IPO sponsor and its due diligence duties, means that the judge on the Commercial List would be better placed to grasp the issues of fraud and knowledge within that special context.

16.  However, the pleadings and affirmations do not appear to me as disclosing eg novel interpretation of the Listing Rules, any specialist area of commercial law or practice of a particular industry. There is only a reference to Rules 3A.11 and 3A.12 of the Listing Rules in §64.2 of the Re-Re-Amended Defence about the duty of a sponsor to conduct due diligence inquiries and to use reasonable endeavours to address all matters raised by the Stock Exchange in a timely manner. Whilst a judge’s knowledge of the process of IPO may be an advantage, there is no suggestion that this case involves specialist knowledge in respect of IPOs. Neither party suggests adducing expert evidence on the IPO aspect. This case substantially concerns fraud, dishonesty, breach of fiduciary duties, knowledge of a person and falsity of documents. There are many judges who have sufficient knowledge of the commercial world in order to be able to try this case: Idmiston Ltd v Asian Master Enterprises Ltd, CACV 1-3/1989, 17 March 1989.

17.  The related case of China Metal v Chun decided by DHCJ Liu was not under the Commercial List. It was a case involving, amongst others, Chun’s fraud in the context of the same IPO, with long and detailed pleadings and extensive documentary evidence. I note, however, that the defendant in that case was not legally represented and probably it was not expected that there were substantial arguments on law.

18.  Ms Cheung also contends that this case is suitable for transfer because (i) Anthony Chan J seems to share the view of transfer; (ii) it is unlikely for the trial to last over 15 days to bring the case within PD 5.7 and (iii) there will be greater procedural discipline in the Commercial List, which would ensure that the action is disposed of more effectively and expeditiously than otherwise would be the case if assigned to the general list.

19.  With regard to contention (i), the view of the Commercial List Judge should be respected but I note that he merely asked whether this case should be transferred to the Commercial List during a hearing on an interlocutory matter. At that time the parties were not in a portion to advance arguments. I therefore adopt an approach guided by the authorities and look at this application independently.

20.  With regard to contention (ii), the Plaintiffs suggest that the trial will last not less than 20 days. The Defendants say that it will take much less.

21.  In my view it is unlikely to last less than 10 days. It has always been the practice of the Court that even for cases with a 10-14 day estimate, a trial judge will be assigned under PD 5.7 pursuant to the letter of Poon J (as CJHC then was, as a listing judge) to the Law Society dated 5 July 2013.

22.  In the present case, however, the number of trial days is of less importance compared to the complexity of the case, the underlying facts of which spanned over 7 years, involving many entities and enormous amounts.

23.  With regard to contention (iii), greater procedural discipline and tighter trial timetable is welcome by the Court in all cases. There will be continuity in case management by the assigned judge under PD 5.7 for interlocutory and final matters, unless he/she otherwise directs. There is nothing to prevent the parties in any case from inviting an assigned judge to adopt the case management mode of the Commercial List.

24.  At the hearing, I have queried if there are related cases involving China Metal that I should take into account in determining how to assign this case. Post hearing, I learn that there are 2 other related cases. One is HCCW 210/2013 which, by its nature, was and is handled by the Companies Judge. The other case is where China Metal sues its former auditors for breach of contract, breach of regulatory and fiduciary duties and negligence in connection with the same IPO. It is handled by another firm of solicitors for China Metal. These 2 cases do not affect my exercise of discretion in the present case.

D.  Conclusion

25.  Taking all the circumstances into account, I am of the view that this case should be assigned to a judge in the general list.

26.  This application is in substance an issue on case management. UBS’ stance is not unreasonable. On a nisi basis, I order costs to be in the cause, with certificate for junior counsel.

27.  I thank counsel for their assistance.