ZHANG XIUHONG v. LIU WENCHEN AND OTHERS

HCA 2118/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2118 OF 2012

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D E C I S I O N

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Introduction

1.  This the hearing of the plaintiff’s summons dated 29 July 2016 (the “Summons”) for leave to amend his Statement of Claim in respect of his claims against the 5^th to 7^th defendants.

Background

2.  The full background of the case has been set out in the Statement of Claim.  The summary below is adopted from the plaintiff’s Skeleton Submissions.

3.  The 4^th defendant is a Hong Kong company with an authorized share capital of HK$40,000 divided into 40,000 shares. 

4.  The 4^th defendant’s major asset is its 45% interest in a Sino-foreign joint venture company in the People’s Republic of China (“PRC”), called Hebei Chengjin Real Estate Development Co Ltd (“Chengjin RED”). The other 55% interest is held by the Chinese joint venture party, Shijiazhuang City Economic Development Company (“Shijiazhuang EDC”).

5.  Chengjin RED’s scope of business was to build and develop a project called “Fashion Big World”.  In this connection, it holds a valuable piece of land in Shijiazhuang City, the PRC. 

6.  A domestic enterprise called Hebei Chengjin Asset Management Services Co Ltd (“Chengjin AMS”) was set up in Shijiazhuang City to manage the assets, operations, finance and personnel of Chengjin RED.

7.  By a shares transfer agreement dated 19 December 2010, the 1^st defendant agreed to transfer to the plaintiff, at a consideration of RMB45 million, the following: (i) the 4^th defendant; (ii) the 1^st defendant’s 45% interest in Chengjin RED held through the 4^th defendant; and (iii) the 1^st defendant’s 45% interest in Chengjin AMS.

8.  On 11 January 2011, the 1^st defendant transferred all 40,000 shares in the 4^th defendant to the plaintiff and his nominees, namely: (i) 14,000 shares to the plaintiff; (ii) 13,200 shares to Mr Chen Chengji; and (iii) 12,800 shares to Mr Zhang Xutong.  On 18 March 2011, Mr Chen and Mr Zhang transferred the said 13,200 and 12,800 shares to the plaintiff, who had since then become the sole legal and beneficial owner of the 4^th defendant.

9.  On the other hand, the plaintiff alleges that in breach of the shares transfer agreement, the 1^st defendant has failed to transfer his 45% interest in Chengjin AMS to the plaintiff.  Further, on 16 February 2011, a gang showed up at the office of Chengjin AMS, alleging that a Hebei Bo Shi Investment Company Limited has been entrusted by the PRC authority to take over Chengjin AMS.

10.  In addition, Shijiazhuang EDC has commenced proceedings in the PRC to apply for compulsory liquidation of Chengjin RED.  A “Liquidation Group” was formed. 

11.  In September 2011, Chengjin RED acting through the Liquidation Group commenced a civil action against the 4^th defendant in the PRC, alleging that the 4^th defendant is not the foreign joint venture party of Chengjin RED.  If Chengjin RED succeeds in that action, the 4^th defendant’s 45% interest in Chengjin RED would be completely lost.

12.  The plaintiff therefore caused the 4^th defendant to instruct a PRC lawyer to contest that action.  It was in these circumstances that the plaintiff became aware of the following: –

(1)   On or around 1 March 2012, the 40,000 shares in the 4^th defendant registered in the plaintiff’s name were purportedly re-transferred to the 1^st defendant.  The plaintiff and his nominee ceased to be directors of the 4^th defendant, whereas the 1^st defendant was purportedly appointed as a director.

(2)   On or around 5 April 2012, the 1^st defendant purportedly transferred 14,000 shares in the 4^th defendant to the 2^nd defendant, and the 2^nd defendant was purportedly appointed as a director of the 4^th defendant.

(3)   On or around 30 April 2012, the 1^st defendant ceased to be a director of the 4^th defendant, and then the 3^rd defendant was purportedly appointed as a director.  On or around 8 May 2012, the 1^st defendant purportedly transferred the remaining 26,000 shares in the 4th defendant to the 3^rd defendant.

13.  It was discovered by the plaintiff in July 2012 that there were various documents with the forged signatures of the plaintiff in respect of the transfer of shares from the plaintiff to the 1^st defendant, and the removal of the plaintiff and his nominee as directors of the 4^th defendant, which were contained in a witnessing certificate dated 1 March 2012 (“1/3/2012 Witnessing Certificate”). 

Principles on amendment of pleadings

14.  The principles under which the court exercises its discretion to allow or refuse amendments to pleadings can be summarized as follows (per DHCJ Lok, as he then was, in Li Shiu To v Li Shiu Tsang, HCA 416/2003 (Decision dated 14/08/2012), at paragraphs 14 to 17 and 32): –

(1)   All amendments should be made as are necessary to enable the real questions between the parties to be decided.

(2)   Amendments should not be refused solely because they have been made by the honest fault or mistake of the party applying for leave to make them; it is not the function of the Court to punish parties for mistakes which they have made in the conduct of their cases by deciding otherwise than in accordance with their rights.

(3)   However blameworthy (short of bad faith) may have been a party’s failure to plead the subject-matter of a proposed amendment earlier, and however late the application for leave to make such amendment may have been, the application should, in general, be allowed, provided that allowing it will not prejudice the other party.

(4)   There is no injustice to the other party if he can be compensated by appropriate orders as to costs.

(5)   If the amendment application is made in circumstances offending the underlying objectives of the CJR, the court may have to balance all the factors in the case in determining whether to grant the application.

(6)   There is a heightened concern to guard against late applications after the implementation of the CJR.  If a party makes a late application to amend the pleading with the effect that the trial date may have to be adjourned, the court would be very reluctant in allowing the application unless there are exceptional circumstances.

(7)   The primary aim in exercising the case management powers of the court is to secure the just resolution of disputes in accordance with the substantive rights of the parties.

15.  To the above principles, Mr Wilson Leung, counsel for the 5^th to 7^th defendants, added the following: –

(1)   The court will not allow an amendment which has no prospect of success: C&A Consultants Ltd v Hong Kong Airlines Ltd, HCA 279/2007 (Judgment of DHCJ Carlson dated 17/08/2010), paragraph 28.

(2)   Thus, the court will scrutinise whether a proposed amendment has any substance.  This is especially important where a party is seeking to introduce an allegation of fraud or other serious wrongdoing for the first time (“the court will ask why this was not pleaded originally, and may require to be satisfied as to the truth and substantiality of the proposed amendment”: Dias v Cathay Pacific Airways Ltd, HCA 2372/2002 (Ruling of DHCJ Muttrie dated 18/11/2005), paragraph 33).

Existing pleas against the 5^th to 7^th defendants in the Statement of Claim

16.  The existing claims against the 5^th to 7^th defendants are set out in paragraphs 75 to 87 of the Statement of Claim. 

17.  In gist, the 5^th defendant is a practising solicitor in Hong Kong and is the sole practitioner of Messrs Augustine CY Tong & Co (“ACYT”).  The 7^th defendant is an employee (Office Manager and Legal Clerk) of ACYT, and the sole director and shareholder of the 6^th defendant. 

18.  From 7 May 2009 to 10 August 2012, the 6^th defendant was the company secretary of the 4^th defendant.  The plaintiff alleges that the 6^th defendant provided such secretarial service for and on behalf of the 5^th defendant, and as an agent of the 5^th defendant, for the following reasons: –

(1)   The bills for the company secretary services were issued by ACYT, not the 6^th defendant.  The fees were also paid by the plaintiff to ACYT’s bank account.

(2)   ACYT and the 6^th defendant share the same office premises.

(3)   In numerous forms and returns in respect of the 4^th defendant submitted to the Companies Registry, ACYT was the “presentor”.

19.  The 5^th to 7^th defendants acted for the plaintiff in relation to the 40,000 shares in the 4^th defendant and the affairs of the 4^th defendant.  In particular, the 5^th defendant acted for the plaintiff in the acquisition of the shares from the 1^st defendant.

20.  In implementing the purported re-transfer of the shares from the plaintiff to the 1^st defendant, and the changes of directors in the 4^th defendant, the 5^th to 7^th defendants have acted in breach of their duty of care to the plaintiff.  The 7^th defendant implemented the transfer as the 5^th defendant’s employee and the 6^th defendant’s representative, and the 6^th defendant implemented the transfer as the 5^th defendant’s agent. 

21.  The 5^th to 7^th defendants have breached their duty of care under tort and contract to the plaintiff in implementing the transfer, in that: –

(1)   They have failed to obtain instructions and confirmations from the plaintiff.

(2)   They have failed to verify with the plaintiff whether the purported signature and fingerprints on the documents contained in the 1/3/2012 Witnessing Certificate belonged to the plaintiff.

(3)   They have failed to notice the discrepancies between that purported signature of the plaintiff and his usual signatures.

(4)   They have relied on a fake email from a person impersonating as the plaintiff’s assistant as instructions of the plaintiff that the plaintiff intended to transfer his 40,000 shares to the 1^st defendant.

22.  The above pleas are not subject to any strike-out application.  In other words, it is accepted that those are triable issues, including the basis on which each of the 5^th, 6^th and 7^th defendant is said to owe a duty to the plaintiff.

Proposed additional pleas against the 5^th to 7^th defendants in the Amended Statement of Claim

23.  In paragraph 82A of the Amended Statement of Claim, the plaintiff pleads that in relation to the 40,000 shares and the 4^th defendant’s affairs, the 5^th to 7^th defendants owe fiduciary duties to the plaintiff.  In paragraph 83, the plaintiff proposes to add that the 5^th to 7^th defendants have breached not only their duty of care, but also their fiduciary duties.

24.  In section I3 of the proposed Amended Statement of Claim (ie paragraphs 85A to 85O), the plaintiff pleads the additional factual matters concerning the email correspondence between the 7^th defendant and the 1^st defendant or his associates (most of the emails were disclosed by the 5^th to 7^th defendants in February 2016): –

(1)   In the emails between 16 and 23 November 2012, the 7^th defendant was (i) liaising with the 1^st defendant’s PRC lawyer on the question of service of legal process in this action out of jurisdiction on the 1^st to 3^rd defendants; (ii) arranging with the PRC lawyer for the 1/3/2012 Witnessing Certificate to be notarized even when the 7^th defendantbecame aware that the signatures and fingerprints had been found to be false; and (iii) organizing the 2^nd to 4^thdefendants’ legal representation in this case.  In particular, the 7^th defendant in his email dated 23 November 2012 stated that “…科學鑒証，証明該律師見証書及其所有文件都是假的，基於這點，我們與律師需儘快見面開會商討應對方案，請儘快安排。”

(2)   In the email correspondence between the 1^st defendant and the 7^th defendant in February and March 2012, the 1^st defendant instructed the 7^th defendant on the steps to be taken by the 7^th defendant in relation to the transfer of shares from the plaintiff to the 1^st defendant and the change in directorship of the 4^th defendant, without any consultation with the plaintiff.  In particular, in the email dated 23 February 2012, the 1^st defendant wrote as follows to the 7^th defendant: “很高興深圳相見並感謝老弟的好主意！望時刻關注和幫助我事情搞成功，我定重酬謝！…關於註冊公司事宜…關鍵是註冊時間問題，我和合資中方(政府)商量一下…”.

(3)    In their email correspondence in March 2012, the 1^st defendantand the 7^th defendant created the fake email to be sent by the person who impersonated as the plaintiff’s assistant (one Li Hui).  In particular, in the two emails both dated 8 March 2012, the 7^th defendant provided the specimen of the wording of the fake email: “著他發過電郵給我 ，說: ‘公司所有股份已由張秀紅轉給了劉文臣，有關公司事情以後你可直接與劉先生聯絡’ ”and “…書信樣辦…本人張秀紅已將中系國際集團有限公司所有股份轉給了劉文臣先生，有關該公司日後事情，請直接與劉先生聯絡，而不須再與李輝先生聯絡”.

(4)   In the email correspondence in February 2012, the 7^th defendant actively assisted the 1^st defendant to set up a new company in Hong Kong with a name almost identical as that of the 4^th defendant, as part of the scheme to use this new company to take over the 4^th defendant’s 45% interest in Chengjin RED.  In this connection, the 1^st defendant informed the 7^th defendant in his email dated 8 May 2012 that he would cancel the original appointment of the PRC lawyer by the 4^th defendant and cause the 4^th defendant to withdraw from the PRC litigations.

(5)   In the email correspondence after May 2012, the 1^st defendant still gave directions to the 7^th defendant in relation to the 4^th defendant’s affairs, even though the 1^st defendant had transferred his shares to the 2^nd and 3^rd defendants.  The 7^th defendant also had a stake in the 1^st defendant’s endeavours.  In particular, in the email dated 29 June 2012, the 1^st defendant said to the 7^th defendant that “…咱弟兄的事業一定順利，一定會成功。老弟靜候佳音吧，成功之日我赴港請兄弟喝酒一醉方休。”

25.  In section I4 of the Amended Statement of Claim (ie paragraph 85P), the plaintiff pleads that by virtue of the above matters pleaded in section I3, the 5^th to 7^th defendants have breached their fiduciary duties to the plaintiff.

26.  In section I5 of the Amended Statement of Claim (ie paragraphs 85Q and 85R), the plaintiff pleads that the 1^st defendant has committed the tort of unlawful interference and breach of trust in respect of the transfer of the 40,000 shares from the plaintiff to the 1^st defendant (for which judgment has been obtained).  By virtue of the matters pleaded in section I3, the 5^th to 7^th defendants have also committed the tort and dishonestly assisted the 1^st defendant in his breach of trust.

27.  In section I6 of the Amended Statement of Claim (ie paragraphs 85S to 85V), the plaintiff pleads that by virtue of the matters pleaded in section I3, the 5^th to 7^th defendants have conspired and combined with the 1^st defendant to defraud the plaintiff or injure the economic interests of the plaintiff.

28.  In paragraph 86 of the Amended Statement of Claim, the plaintiff pleads that in addition to being liable for the 6^th defendant’s and the 7^th defendant’s breach of duty of care, the 5^th defendant is also liable for the 6^th defendant’s and the 7^th defendant’s breach of fiduciary duties, tort of wrongful interference, conspiracy and dishonest assistance.  Further, the 6^th defendant is also liable for the 7^th defendant’s acts.

29.  In paragraph 87 of the Amended Statement of Claim, the plaintiff pleads that his loss comprises not only the loss of the value of the 40,000 shares, but also the financing cost, and the legal and other costs and expenses incurred by the plaintiff in the PRC to preserve his rights in respect of his shares in the 4^th defendant.

No prejudice to the 5^th to 7^th defendants

30.  The starting point in determining whether the amendments should be allowed is to consider whether the plaintiff’s proposed amendments would cause prejudice to the 5^th to 7^th defendants.  After all, generally speaking, amendments to pleadings should be allowed unless the other party would be prejudiced and such prejudice cannot be compensated by costs.

31.  In this regard, it is clear from the 7^th defendant’s own Affirmation filed herein on 9 September 2016 that no prejudice is alleged by the 5^th to 7^th defendants as a result of the proposed amendments.

32.  In any event, I agree there is really no conceivable prejudice that will be caused to the 5^th to 7^th defendants: –

(1)   No trial date has been fixed.  In fact, in respect of the 5^th to 7^th defendants, these proceedings are still at an early stage, as the parties have only recently finished the process of general discovery of documents.

(2)   Any concern on the 5^th to 7^th defendants’ part for the need of proper case management (as alleged by the 7^th defendant in Paragraph 18 of his Affirmation) can be and should be addressed in their application to stay this action pending the resolution of the proceedings in the PRC. 

Whether the proposed amendments have prospect of success

33.  Mr Wilson Leung submits that the emails pleaded simply do not support the imputations cast upon them by the plaintiff in the Amended Statement of Claim.  Mr Leung submits that the emails show nothing more than the 7^th defendant (in his role as a law clerk and company secretary) communicated with the 1^st defendant and others to deal with matters relating to the 4^th defendant, such as the disputed transfer of shares by the plaintiff to the 1^st defendant.  Taken to their highest, such emails may be adduced by the plaintiff to support his existing case of negligence.  But the emails do not logically and reasonably justify the inference which the plaintiff is now asking them to support, ie that the 7^th defendant knew all along about the forgeries and colluded with the 1^st defendant in a dishonest scheme.

34.  Mr Leung further submits that, in fact, many of the emails flatly contradictthe plaintiff’s new allegation that the 7^th defendant conspired in a scheme with the 1^st defendant.  In the emails, the 1^st defendant repeatedly assured the 7^th defendant that the transfer documents were genuine.  Meanwhile, the 7^th defendant consistently referred to the transfer documents actually being prepared by the plaintiff and the plaintiff’s assistant Li Hui.  Such dialogue makes no sense if (as the plaintiff now alleged) the 7^th defendant was in on the fraud all along.

35.  In short, Mr Leung submits that there is inadequate material to support, even on a prima facie basis, the plaintiff’s new allegations of fraud.  The amendments are based on mere suspicion that is wholly unsubstantiated by the emails cited to support them. The plaintiff has failed to move beyond the realm of conjecture into the realm of legitimate inference.

36.  I do not agree with Mr Wilson Leung’s submissions.

37.  The proposed amendments in section I3 of the Amended Statement of Claim (ie the email correspondence) are not objectionable – the plaintiff is entitled to expressly place reliance on the documents disclosed by the 5^th to 7^th defendants in February 2016, and pleads the plaintiff’s interpretation of the implication of such emails.

38.  In the 7^th defendant’s Affirmation, the 7^th defendant attempts to explain that those emails are not as sinister as they appear to be or as the plaintiff suggests them to be.  In fact, that appears to be the main ground on which the 5^th to 7^th defendants oppose to the amendments.

39.  Their contention, however, is neither here nor there.  After all, how those emails should be interpreted and what inferences can be drawn from those emails are matters for trial.

40.  For the present purpose, it suffices for this court to come to the view that the implications of those emails and the proper inferences to be drawn therefrom are definitely not as clear-cut as suggested by the 7^th defendant.  This is not a case where the proposed amendments have no prospect of success.

41.  The 7^th defendant on the one hand tries to belittle his role by emphasizing that he just provided company secretarial service.  However, on the other hand, a case can be made that he was extensively involved in the 1^st defendant’s fraudulent scheme, to the extent that: –

(1)   He did not find it necessary to consult the plaintiffor Li Hui directly on the transfer of shares from the plaintiff to the 1^st defendant.  Instead, he took instructions from the 1^st defendant.

(2)   He would help the 2^nd to 4^th defendants to line up their legal representation in Hong Kong.

(3)   He found it necessary to discuss with the 1^st defendant in response to the forensic report showing that the fingerprints and signatures of the plaintiff are false.

(4)   The 1^st defendant said he would give heavy reward to the 7^th defendant.

(5)   The 1^st defendant would call the 7^th defendant “brother” and say the “brothers’ career” would succeed.

42.  All these are arguably inconsistent with the 7^th defendant’s professed innocence and his saying that he just provided usual company secretarial services.  I agree that these disputes must be resolved at trial.  The proper inferences to be drawn is a matter for trial.

43.  In sections I4, I5 and I6 of the Amended Statement of Claim, the plaintiff pleads that because of the matters pleaded in section I3, the 5^th to 7^th defendants have: –

(1)   Breached their fiduciary duties to the plaintiff.

(2)   Committed the tort of unlawful interference.

(3)   Dishonestly assisted the 1^st defendant in his breach of trust.

(4)   Conspired and combined with the 1^st defendant to defraud the plaintiff or injure the economic interests of the plaintiff.

44.  It is necessary for the plaintiff to include such amendments so as to formulate his claims against the 5^th to 7^th defendants as a consequence of those email correspondence.  Whether the plaintiff can prove his case is a matter for trial.

45.  It is also necessary for the plaintiff to amend paragraph 86 so as to make clear the ground on which he contends that the 5^th defendant is liable for the acts of the 6^th defendant and the 7^th defendant, and that the 6^th defendant is liable for the 7^th defendant’s acts. 

46.  Further, it is well established that if there is any special damage attributable to a wrongful act, that special damage must be averred and proved: McGregor on Damages (19^th Ed, 2014) at paragraph 3-005.

47.  It is therefore necessary for the plaintiff to amend paragraph 87 to specifically plead that he intends to recover the financing cost, and the legal and other costs and expenses incurred by the plaintiff in the PRC as a result of the 5^th to 7^th defendants’ wrongful acts.  In this regard, at the hearing, the plaintiff clarified that the reference therein to “4% per month based on the principal sum of RMB 50 million (fluctuating)” is a reference to the actual sum which the plaintiff has to borrow and the actual interest which the plaintiff has to pay.  Whether the plaintiff can prove such loss is of course a matter for trial.

Conclusion and Disposition

48.  To conclude, I am of the view that: –

(1)   This action is still at a relatively early stage, and the plaintiff’s proposed amendments willnot cause any prejudice to the 5^th to 7^th defendants that cannot be compensated by an appropriate order as to costs.

(2)   It is necessary for the plaintiff to introduce the amendments in order for him to refer to the email correspondence and formulate his claims against the 5^th to 7^th defendants arising from those emails.  It cannot be said that the proposed amendments have no prospect of success.

49.  In the premises, I make an order an order in terms of paragraphs 1 to 5 of the Summons.

50.  Further, I make the following order regarding costs: –

(1)   The plaintiff’s costs of the correspondence with Smyth & Co and the court regarding the arrangements and directions for the hearing of the Summons;

(2)   The plaintiff’s costs of and occasioned by the 7^th defendant’s Affirmation and the 20^th Affirmation of Wai Yip Hin; and

(3)   The plaintiff’s costs of the hearing on 21September 2016,

be paid by the 5^th to 7^th defendants to the plaintiff forthwith, such costs are to be taxed if not agreed.

51.  The order as to costs set out in paragraph 50 above is nisi and shall become absolute in the absence of any application within 14 days to vary the same.

52.  Lastly, I express my gratitude to counsel on both sides for their helpful assistance in this matter.