QIYANG LTD AND OTHERS v. MEI LI NEW ENERGY LTD AND OTHERS

CACV 146/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 146 OF 2016

(ON APPEAL FROM HCA NO 420 OF 2011)

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JUDGMENT

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Hon Lam VP (giving the Judgment of the Court):

1.  By a Notice of Appeal taken out by on 23 June 2016, an appeal was brought against the decision of To J in HCA 420 of 2011 on 26 May 2016. To J determined that the solicitors firm which purportedly act for the 1^st Defendant had no authority to act for the 1^st Defendant and set aside the Notice of Change of Solicitors of 16 April 2013 and a Leave to Appeal Summons taken out by that firm on 19 March 2013.

2.  The background to the decision of To J and history of the proceedings in HCA 420 of 2011 were set out in the judgment of the learned judge at [2] to [15]:

“ 2. The 1^st Plaintiff (“Listco”) is a company listed on the Stock Exchange of Hong Kong. 

3. The 1^st Defendant (“Mei Li”) is a company incorporated in the British Virgin Islands (“BVI”).  The 2^nd Defendant (“Chung”) was its only shareholder and sole director.

4. In January 2010, Listco and the other two plaintiffs in this action acquired certain assets from Chung, Mei Li and other vendors.  Then dispute arose in respect of that sale and purchase.  The plaintiffs commenced the present action against Mei Li, Chung and the other vendors.  On 28 September 2011, shortly after the defendants had filed their defence and counterclaim, Chung transferred his only share in Mei Li to Rare Earth Battery International Holdings Co Ltd (“Rare Earth”) for US$1, but retained his sole directorship in Mei Li.

5. The other vendors also commenced action against Chung in HCA 1283/2011 and obtained judgment against him in excess of HK$210 million.  On 20 June 2012, they presented a petition for Chung’s bankruptcy in HCB 4005/2012.  A bankruptcy order was issued against Chung on 27 February 2013.  On 28 March 2013, Beryl Yu and Sammy Choi of Messrs TK Choi & Co (the “Trustees”) were appointed joint and several trustees of the property of Chung.

6. As the bankruptcy proceedings were progressing, Chung caused Mei Li to commence a fresh action against Listco under HCA 1071/2012, the subject matter of which was identical to its counterclaim in the present action.  On 9 July 2012, Mei Li applied for summary judgment.  That application was dismissed by Deputy High Court Judge Le Pichon and the action was struck out on the ground of abuse of process of the court.  Then, on 7 August 2012, Mei Li took out a summons seeking summary judgment on its counterclaim against Listco, pursuant to Order 14 of the Rules of the High Court.  That application was heard before me on 7 February 2013.

7. On 27 February 2013, i.e. the date of issue of the bankruptcy order, Chung resigned as the sole director of Mei Li.  His niece, Huang, on behalf of Rare Earth as the sole shareholder of Mei Li, passed a resolution in writing appointing herself as the sole director of Mei Li.

8. Six days later, i.e. on 5 March 2013, I handed down my decision (the “Decision”) dismissing Mei Li’s application for summary judgment on its counterclaim. 

9. On 19 March 2013, Messrs DS Cheung & Co (“DSC”) issued a summons on behalf of Mei Li applying for leave to appeal my Decision dismissing its application for summary judgment (the “Leave to Appeal Summons”). 

10. On 9 April 2013, after ascertaining from the Official Receiver that she was unaware of the filing of the Leave to Appeal Summons and had not instructed DSC to issue the same, Listco’s former solicitors, Messrs Sidley Austin (“SA”) questioned DSC’s authority in issuing the Leave to Appeal Summons or in continuing to act for Mei Li.  DSC did not respond.

11. On 16 April 2013, CLCMC, who is Chung’s solicitors in the proceedings following his bankruptcy, filed a notice of change of solicitors for Mei Li and the 3^rd to 7^th Defendants in place of DSC.

12. On 7 May 2013, Listco issued the Authority Summons applying to set aside the Leave to Appeal Summons and notice of change of solicitors filed by CLCMC on the ground of DSC’s & CLCMC’s want of authority. 

13. In an affirmation dated 9 May 2013, Huang produced a resolution purportedly passed on 8 May 2013 ratifying the action taken by DSC in issuing the Leave to Appeal Summons and in instructing CLCMC to proceed with that application for and on behalf of Mei Li.

14. The hearing of these two summonses was then deferred, principally to enable the Trustees to make known their views, in particular, whether they would proceed with Mei Li’s intended appeal.  In the meantime, Chung left the jurisdiction to reside in the People’s Republic of China and the United States where he continued his business.

15. Three years having lapsed, these summonses are now restored for hearing.  The Trustees’ position is that neither DSC nor CLCMC has authority to act on behalf of Mei Li.  They are in support of the Authority Summons; but are unable to form a position as regards the Leave to Appeal Summons due to lack of sufficient information and co-operation from Chung and CLCMC.  The Trustees ask for an adjournment of the hearing of the Leave to Appeal Summons.  I refused that application and proceeded to hear the Authority Summons.  At the conclusion of the hearing, I allowed the application which resulted in the automatic setting aside of the Leave to Appeal Summons. …”

3.  By this appeal, the solicitors purportedly acting on behalf of the 1^st Defendant seeking to set aside the order of To J and a dismissal of the challenge to the solicitors’ authority to act for the 1^st Defendant and reinstated the Leave to Appeal Summons.

4.  On 25 November 2016, the Court identified 3 issues that should be determined before the substantive appeal is heard:

(a) Whether leave to appeal is required;

(b) Whether the appeal should be brought in the name of the 1^st Defendant or by the person purportedly instructing the solicitors for the 1^st Defendant;

(c) If the appeal should be brought in the name of the person instructing solicitors for the 1^st Defendant and if such person is Chung, whether the appeal is competent in view of his bankruptcy.

5.  Written submissions were filed and on 9 March 2017 the Court directed that the matter be processed on papers.  Further submissions were filed subsequently.  We are grateful to counsel for their submissions.

6.  This is the determination of these issues.

Leave to appeal

7.   Mr Lam submitted that the decision of To J was a final decision as the question of authority was finally determined, not an interlocutory one, as such leave is not necessary.  Counsel referred to Russian Commercial & Industrial Bank v Comptoir d’Escompte de Mulhouse [1925] AC 112; Kammy Town Ltd v Super Glory Corporation Ltd HCA 3524 of 2003, 14 January 2005; 惠陽市新墟合興製衣廠v Elbex Video (Hong Kong) Ltd HCMP 2432 of 2015, 5 November 2015.

8.  On the other hand, Ms Cheung submitted that the decision was an interlocutory one (following the approach in Shell Hong Kong Ltd v Yeung Wai Man Kiu Yip Co Ltd (2003) 6 HKCFAR 222) because it would not finally dispose of the whole action and the issue determined is not a substantive part of the final trial or a crucial issue in the case or a point that goes to the root of the cause or a dominant feature of the case. 

9.  It is well-settled that other than cases provided for in Order 59 Rule 21 (in respect of which that rule shall guide the courts in determining if a decision is interlocutory or final: see Champion Concord Ltd v Lau Koon Foo (No 2) (2011) 14 HKCFAR 837), the nature of a decision is to be determined according to the “application approach”.  Under that approach, a decision can still be regarded as final notwithstanding that does not finally determine the whole action if the issue dealt with and determined by the court is “a substantive part of the final trial” or “a crucial issue” in the case or a point which “goes to the root of the case” or “a dominant feature of the case”, see Shell Hong Kong, supra at [31].  It is equally well-settled that a challenge to authority has to be taken promptly instead of being raised at the trial.  Such challenge would have to be determined definitively at a hearing by way of striking out application, trial of preliminary issue or other pre-trial applications: see Liquidation Committee of Foshan Hongda Development Ltd v East Legend Investment Ltd [2009] 1 HKLRD 169 and Waddington Ltd v Chan Chun Hoo Thomas CACV 10 of 2014, 20 May 2016.

10.  The crucial difference between the parties is whether the decision of To J constitutes a final determination of an issue which is “a substantive part of the final trial” or “a crucial issue” in the case or a point which “goes to the root of the case” or “a dominant feature of the case”.  As held by Chan PJ in Shell Hong Kong, supra, the court should adopt a broad common sense approach in this respect.

11.  The proper assessment of the nature of the decision of To J must start with a proper understanding of the context in which the decision was made and the issues determined.  At [17] to [20], To J said the following in his judgment:

“ 17. The factual and legal basis of the case advanced by Mei Li of CLCMC’s authority is as follows:

(1) Chung had transferred the only issued share in Mei Li to Rare Earth on 28 September 2011, making Rare Earth the sole shareholder in Mei Li;

(2) on 27 February 2013, the date the bankruptcy order was made, Chung resigned as the sole director of Mei Li; and Huang as the representative of Rare Earth signed a written member’s resolution appointing herself as the sole director of Mei Li with effect from the same date;

(3) on 15 April 2013, Huang as the sole director of Mei Li signed a written board resolution, appointing CLCMC as solicitors for Mei Li in this action;

(4) on 8 May 2013, Huang as the sole director of Mei Li signed another board written resolution, ratifying DSC’s action in issuing the Leave to Appeal Summons and resolving that CLCMC be instructed to proceed with the application; and

(5) while admitting Chung’s beneficial ownership in Mei Li, Mei Li argues that Chung’s beneficial ownership is irrelevant because of two principles of company law.

18. Simply put, Mei Li’s case is that according to its register of members and register of directors, Rare Earth is the sole shareholder of Mei Li entitled to vote for Huang’s appointment as Mei Li’s director, and Huang was duly appointed as the sole director of Mei Li in place of Chung upon Chung’s bankruptcy.  Thus, Huang has power to ratify the action taken by DSC and to authorise CLCMC to act in the Leave to Appeal Summons.

19. Listco disputes the facts set out in paragraph 17(1) to (4) above and the authenticity of the documents relied on by Mei Li as proof of the same.  Listco argues that Chung remains as the sole registered member of Mei Li and his interest in the share in Mei Li is vested in the Trustees upon his bankruptcy by virtue of sections 12 and 58 of the Bankruptcy Ordinance. Thus Mei Li cannot act unless with the consent and direction of the Trustees and the Trustees have not consented to Mei Li taking out the Leave to Appeal Summons or retaining CLCMC.  In the alternative, Listco argues that if Chung had transferred his share in Mei Li to Rare Earth, Rare Earth holds the share in Mei Li beneficially for Chung.  Rare Earth’s interest in Mei Li comes within the meaning of “property” as defined in section 2 of the Bankruptcy Ordinance which have become vested in the Trustees by operation of sections 12 and 58 of the Bankruptcy Ordinance.  It was Chung who caused the appointment of Huang as the sole director of Mei Li and the board resolution passed by her to retain DSC and CLCMC.  As these resolutions were passed without the consent of the Trustees, they are invalidated by sections 12 and 58.

20. The Trustees support Listco’s application in the Authority Summons.  In addition, the Trustees argue that section 43(5) extends the definition of “property” to include the power exercisable by the bankrupt to require Huang to cause CLCMC to cease to act for Mei Li.  As Huang ignored the Trustees’ direction to cause CLCMC to cease acting for Mei Li, she was in breach of duty owed to the Trustees. The Trustees seek to invoke the court’s inherent jurisdiction to debar CLCMC from continuing to act for Mei Li.

21. Mei Li accepts that Chung was the indirect beneficial owner of the share in Mei Li.  It does not dispute the well established principle that a registered shareholder who is not also the beneficial owner of the share must vote at the instruction of the beneficial owner or the trustee in bankruptcy in the event of his bankruptcy.  There is also no argument that sections 12 and 58 do not have the effect of vesting a bankrupt’s equitable interest in shares in the trustee in bankruptcy.  Mei Li’s case is run solely on the basis that by reason of two well established company law principles Chung’s beneficial ownership of Mei Li is irrelevant or that sections 12 and 58 are rendered inapplicable to equitable interest in shares held by the bankrupt.  The first of the two company law principles relied on by Mei Li is that a company does not take notice of the beneficial interest behind the share register.  The second principle is that the management powers of a company are vested in the board of directors and where there is an effective board, the shareholders cannot in general meeting usurp the powers of the board. 

22. The issues raised by the Authority Summons are:

(1) whether Chung had transferred his share in Mei Li to Rare Earth;

(2) if yes, whether Rare Earth and Mei Li are beneficially owned by Chung;

(3) if yes, whether Huang and Mei Li had knowledge of Chung’s bankruptcy and beneficial interest in Rare Earth and Mei Li;

(4) whether the two company law principles has the effect of rendering sections 12 and 58 of the Bankruptcy Ordinance inapplicable to the interest, legal or equitable, in shares held by the bankrupt; and

(5) whether the court has inherent jurisdiction to debar solicitors from acting for their client and, if it has, whether that jurisdiction should be exercised in the present case.”

12.  To J found that there was a transfer of share to Rare Earth but that such transfer was only an attempt by Chung to insulate his assets from his imminent bankruptcy and he remained as the beneficial owner with effective control over the share and Huang and Mei Li (the 1^st Defendant), see [33] and [45]. He further held that Chung could not rely on the principle that a company does not have regard to beneficial ownership of share to avoid the consequence of the statutory provisions in the Bankruptcy Ordinance, see [43]. He found the resolution purportedly passed on 15 April 2013 to be invalid, see [47]. 

13.  To J also concluded that solicitors for the 1^st Defendant had no authority to act on behalf of that defendant, see [51].

14.  Thus, the decision of To J is not confined to a determination of the authority of the solicitors.  It is a final determination on a number of substantive issues which has the effect of barring Chung or Huang from proceeding with the counterclaim of the 1^st Defendant.  

15.  Though Huang is not a party to the action, Chung is.  Hence, it is a judgment determining in a summary way the substantive rights of a party to an action and pursuant to Order 59 Rule 21(1)(a) leave to appeal is not necessary.

16.  Alternatively, assuming that Rule 21(1)(a) is not applicable, we accept Mr Lam’s submission that this is a determination of preliminary issues which are crucial issues in the action, now that the Trustees are involved in the action disputing the right of Chung and Huang to give instructions to pursue claims on behalf of the 1^st Defendant.  Even if one were to apply the common law “application approach” we would hold that the decision is final in nature.

17.  We conclude that leave is not necessary for the purpose of bringing this appeal.

The proper party to bring the appeal

18.  As mentioned, the Notice of Appeal was issued by the solicitors in the name of the 1^st Defendant.  It is plain to us that the 1^st Defendant itself has no interest in the appeal and the real protagonist is either Chung, Huang or the solicitors. 

19.  We do not accept the submission of Mr Lam that it is of no moment to have the proper person named as the appellant.  At the very least, it has costs implication.  If the real appellant is Huang, she would have to bear the costs consequence if the appeal is dismissed.  Also, the 3^rd Plaintiff or the Trustees may consider seeking security for costs against her.

20.  Further, if the real protagonist is Chung, he is not in a position to pursue the appeal in view of his bankruptcy.

21.  If the real protagonist is the solicitors, then the firm should not be permitted to pursue the appeal without taking the role of appellant.  That would of course expose the firm to potential costs liability for the appeal.

22.  Mr Lam in his submissions informed this Court that the real protagonist is Huang.  He said the solicitor can undertake to procure Huang to be added as a party to the appeal within 14 days. 

23.  In light of that, we need not consider the position of Chung or the solicitors.  We simply make an order that unless Huang applies to substitute herself as the appellant in this appeal within 14 days, the appeal shall be dismissed with costs without further order.

24.  The costs of the determination of these issues shall be costs in the cause of the appeal.