KATHERINE CHING YIP v. HORST JOACHIM FRANZ GEICKE

HCA 676/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 676 OF 2016

________________________

________________________

________________________

JUDGMENT

________________________

Background

1. This is an application by the defendant to strike out the plaintiff’s Statement of Claim as set out in the defendant’s Summons dated 25 April 2016.

2. The plaintiff and the defendant were married on 11 January 1987.  The defendant petitioned for divorce on 15 September 2009. On 20 July 2010 a divorce decree nisi was granted.

3. The matrimonial assets relating to the plaintiff’s claim for ancillary relief in the divorce proceedings included, inter alia, the shares of the companies in the Pacific Alliance Group of Companies (“the PAG Group”), in particular the Pacific Alliance Group Ltd (“PAGL”), Pacific Alliance Investment Management Ltd (“PAIM”) and the Pacific Alliance Group Holdings Ltd (“PAGH”).  PAGH was incorporated in the Cayman Islands on 28 June 2010.

4. Shortly after the divorce decree nisi, the PAG Group was restructured and PAGH became the primary holding company in the PAG Group, holding 99.17% of PAGL shares.  The remaining 0.83% shares of PAGL was held by Bridgewell Worldwide Limited, a nominee of the plaintiff.  The defendant held the shares in PAGH through Primo Orient Limited.  The defendant and the other shareholders of PAGH and PAGH itself entered into the Principal Shareholders Agreement (“PSA”) dated 4 November 2010.  The plaintiff was not made a party to the PSA and did not obtain any shares in PAGH.

5. In June 2012, the defendant disclosed pages 21 and 27 of the PSA to the advisors of the plaintiff.  The full copy of the PSA was not produced until October 2014.

6. The PSA contains recital stating that PAGH has issued 900,000,000 ordinary shares and 100,000,000 series A convertible preferred shares and there is a general restriction on the transfer of PAGH shares subject to the approval of the PAGH Board.  Of particular relevance is that Annex III of the PSA provides that the defendant, through Primo Orient Limited, held 29,069,924 ordinary shares and 1,423,750 preferred shares.

7. Settlement negotiations relating to the ancillary relief started in around July 2011 and Mr Borrelli of Borrelli Walsh acted for the plaintiff and BDO Financial Services Limited acted for the defendant.  The defendant himself was involved personally throughout the negotiation process and in meetings with Mr Borrelli.  The negotiations resulted in the 1^st Consent Order made by the court on 22 December 2011.

8. The 1^st Consent Order provides in the recital clause C, inter alia, that the parties were fully satisfied with the financial disclosure of each other, that they would not require further disclosure and that no claims would be made or legal proceedings issued by either party in respect of any claim or allegation of non‑disclosure or a lack thereof.  It also provides that the defendant shall transfer or procure to be transferred 11,977,675 shares in PAGH to the plaintiff and that these shares represented “50% of the shares in this company held by Primo”.

9. The plaintiff was not able to transfer the PAGH shares within three months as stipulated in the 1^st Consent Order and by agreement, and the parties extended the time for the transfer of the shares to the plaintiff “as soon as practicable”.  This is set out in the 2^nd Consent Order dated 4 July 2012.

10. On 17 December 2012, the decree absolute for divorce was issued.

11. The defendant submits that the plaintiff refused to sign the Shareholders Agreement as required by the board of PAGH and that was why the PAGH shares could not be transferred.  As a result, the board of PAGH withdrew their consent to the transfer of the PAGH shares to the plaintiff.

12. In July 2013, the defendant applied for a variation of the 1^st and 2^nd Consent Orders to enable him to pay cash to the plaintiff in the sum of HK$223,016,689.  This sum is made up of HK$198,000,000 for the 11,977,675 shares of PAGH and HK$25,016,689 for the shares of PAIM.

13. The plaintiff opposed the summons to vary and also applied by summons issued on 20 September 2013 for a Letter of Request to be issued to the judicial authority of the Cayman Islands to direct PAGH and PAIM to disclose and produce documents relating to them which the plaintiff contended were relevant to the issue of the defendant’s breach of the 1^st and 2^nd Consent Orders and the enforcement thereof.  The two applications were heard before Hon Mimmie Chan J and the Decision was rendered on 8 November 2013.  The Letter of Request was granted.  The defendant’s application to vary the consent orders was stayed in around December 2013.

14. Pursuant to the order of the Grand Court of the Cayman Islands dated 22 May 2014, PAGH disclosed amongst others, the PSA in around October 2014.

15. Further discovery applications were made by the plaintiff as set out in a summons issued on 14 April 2015.

16. Then, the board of PAGH agreed to the transfer of the PAGH and PAIM shares and agreed to waive the requirement for the plaintiff to sign the Shareholders Agreement.

17. The plaintiff’s solicitor issued a letter dated 26 August 2015 contending that the defendant has failed to disclose the number and classes of shares in PAGH and that this was only revealed after the PSA was received by the plaintiff in October 2014.

18. The plaintiff withdrew the discovery application filed on 14 April 2015 but commenced the current proceedings on 15 March 2016.

Principles on setting aside consent orders

19. There is no dispute that as a matter of general principle, parties in ancillary relief claims owed each other a duty to make full and frank disclosure of material facts and a failure to comply with such duty which led the court making an order substantially different from an order that it would otherwise have made would amount to a ground for setting aside.[1]  Such duty is not owed only to each other but also to the court.[2]

20. As to how a disclosure should be made, Deputy High Court Judge Nicholas Mostyn QC stated in GW v RW that it not only has to be fulland frank but also clear so that it would be understandable by the other party     : 

“Moreover, when a person’s financial affairs are complicated it is incumbent on him, as part of the duty of full, frank and clear disclosure to give a presentation that is immediately understandable by a solicitor of average financial sophistication. It is no good to present very complex material in such a way that only an accountant of enormous financial acumen can understand it. …. It cannot be emphasised often enough in these cases that a party’s obligations of disclosure are not confined to providing the information and documents prescribed by Form E and as ordered by the court in response to a questionnaire. There is a continuing duty to provide, without being asked, new information and documents that may affect the exercise of the statutory discretion.”[3] (Emphasis added)

21. Furthermore, where the financial affairs are complicated involving complex offshore structures, the standard of duty is heightened and as held by Coleridge J in J v V (Disclosure: Offshore Corporations):[4]

“In order to prevent the instigation of an exhaustively searching enquiry, respondents to such applications [involving complex offshore structures] are required to be from the outset perhaps even fuller and franker in the exposure and explanation of their assets than in conventional onshore cases. ‌Otherwise skulduggeryis instantly presumed. ‌Applicants justifiably believe that advantage is being taken to hide assets from view amongst complex corporate undergrowth.” (Emphasis added)

22. The court should not easily set aside a consent order unless the non‑disclosure is material or would result in an order that would be substantially different from the order that had been made.  Mere technicalities would not suffice.

Ordinary and Preferred Shares of PAGH

23. One of the main complaints relates to the non‑disclosure of the PAGH preferred shares held by the defendant through Primo Orient Limited. The defendant’s response to that was that it has been disclosed by its accountant, BDO Financial Service Limited in its second letter dated 11 August 2011.  The defendant contends that the holding of the preferred shares were already shown in Appendix F.

24. The 11 August 2011 letter from BDO was made with respect to the clarification of the schedule of documents for the specific discovery application—new documents in response to an application made by the plaintiff dated 3 June 2011. ‌The passage relied on is at item 5, “Incompletestatutory documents”, which reads:

“5. Incomplete statutory documents

5.1 Provide the complete and up‑to‑date set of statutory documents (including Register of Members, Register of Directors, etc) of ARC Capital Partners Limited, Pacific Alliance Investment Management Limited, Pacific Alliance Real Estate Limited, VinaCapital Investment Management Ltd, Pacific Alliance Group Limited, Pacific Alliance Equity Partners Limited and VinaCapital Group Ltd.

Answer: Register of Members of these companies have been provided previously [BDO Folder A / 4–10] and only pages showing the Petitioner’s equitable interests could be provided due to confidential information of other shareholders.

There was a reorganization of the Pacific Alliance Group companies in December 2010.  The Petitioner’s equitable interest in Pacific Alliance Cayman after the reorganization is 15.91%.  Please refer to an updated Pacific Alliance Cayman group structure chart and a schedule showing the change of the Petitioner’s equitableinterest in Pacific Alliance Cayman from 2007 to 2010 in Appendix F.”

25. A total of 20 appendices were attached to this letter and the defendant refers to one page of Appendix F which is exhibited as part of  Exhibit HJFG 16.  In the “Chart showing the [defendant’s] interest in Pacific Alliance Group”, Primo Orient Limited is shown as holding 16.04% of PAGH shares.  In another page, showing the shareholding of PAIM, PAG and PAGH, it can be seen that Primo Orient Limited’s shareholding in PAGH is listed as:

“PAGH
Primo Orient Limited’s shareholding:	2010 Ordinary
	29,069,924 / 144,913,153
	= 20.06%
	2010 Preferred
	1,423,750 / 45,147,953
	= 3.15%
	2010 Overall
	30,493,674 / 190,061,106
	= 16.04%”

26. Apart from this one‑page document in Appendix F, there was no other document referencing the preferred shares of PAGH.  There is no dispute that all other documents that were exchanged between the parties in the settlement negotiations referred only to the 16.04% without referencing the preferred shares.  It was suggested by Counsel for the defendant that the 16.04% that was repeatedly used by Mr Borelli in the settlement negotiations must mean that he was aware of the holding of the preferred shares.  Mr Borrelli denies that.

27. The context in which this one‑page document was disclosed should be noted.  The question asked relates to the statutory documents such as register of members and directors for a number of the companies but not PAGH.  In the answer, a specific reference is made to the updated Pacific Alliance Cayman Group structure chart and the schedule showing the change of the defendant’s equitable interests from 2007 to 2010 in Appendix F. Mr Borrelli, in his affidavit, pointed out that the discussions relating to the matrimonial estates interest held in PAGH waspremised on the representation of Primo’s holding of 16.04% of PAGH shares without referencing to the actual number of shares or the type of shares involved.  Mr Borrelli also emphasised that from his experience differentclasses of shares would not be added together to reach an overall percentageof ownership especially when there are different rights, dividend entitlementsand priorities associated with each class of shares.  He stated that preferred shares would be more valuable and that it was therefore a material non‑disclosure.  He further pointed out that in subsequent discussions no further reference was made to that one‑page document in Appendix F and the discussions were premised on 16.04% as the total beneficial percentage.  The defendant does not dispute that but contends that the information has already been provided and it is up to Mr Borrelli and the other advisors engaged by the plaintiff to take note of such information.

28. If the plaintiff's case is accepted, which has to be so assumed at this stage, there is an arguable case of failing to make full and frank disclosure in a clear and understandable manner on the preferred shares held by the defendant.

Partial disclosure of PSA in June 2012

29. Mr Borrelli pointed out that a two‑page extract (pages 21 and 27) of the PSA was provided by the defendant in June 2012.  He pointed out that there was a modification to page 27 whereby the heading of “3.5 Repurchase upon death, divorce or bankruptcy” was put at the top of the disclosed page 27 when in its original form in the original PSA it was at the bottom of page 26.  The significance of this seemingly clerical adaptation is that in that previous page, page 26, there includes four references to preferred shares. The two‑page extract that was disclosed in June 2012 (pages 21 and 27 with the added heading on page 27) has no such references.  As to whether this when viewed in the context of the duty to disclose would be adequate for the Consent Order to be set aside will be a matter for the trial judge but such convenient adaptation has some bearing on the extent of disclosure intended to be made by the defendant at the time of negotiating a settlement.

Alleged misrepresentation of the percentage shareholding of the defendant in PAGH

30. The total number of shares represented by the defendant and evidenced in Mr Borrelli's handwritten note made at the time of the settlement negotiations was shown to be incorrect by reference to the PSA.  This is set out in paragraph 35 of Mr Borrelli’s affidavit.

31. Clause F(ix) of the 1^st Consent Order was the first representation made that 11,977,675 shares in PAGH represented 50% of the shares held by the defendant through Primo Orient Limited.  This representation is now said to be a mistake according to the affidavit of the defendant. The premise was that this was drafted by the plaintiff and the defendant did not spot the error.  There is no need at this stage to form any definitive view on the veracity of the defendant’s assertion here, suffice it to observe that if it was drafted by the plaintiff’s advisors, it would conform with the plaintiff’s case that her understanding at the time was that 11,977,675 shares represented 50% of the shares held by the defendant.

32. The second representation made of the same effect is in the defendant’s own application to vary the 2^nd Consent Order.  In the Summons dated 16 July 2013, it states:

“[Thedefendant]dopaytothe[plaintiff]thesumofHK$198,000,000within 14 days of the date of this Order in lieu of this obligation to transfer to the respondent 50% of the value of the shares held by[thedefendant]viaPrimoOrientCompanyLimitedin[PAGH]. ”

33. In his own affirmation, the 18^th affirmation in HCMC 11/2011, he stated that he “understood that the Board of PAGH would agree to allow me to transfer my half of the shares in PAGH (held via Primo) to [the plaintiff].”  He again repeated that the cash cheque of HK$198,000,000 represented 50% of the value of the shares held by him in PAGH.

34. These representations, position and statements of the defendant that he was intending to transfer 50% of the shares in PAGH to the plaintiffcould not be said to have been a mistake that he failed to correct as was his contention in relation to the representation made in the 1^st Consent Order.  The defendant also suggests that no attention was paid to this representation in the 1^st Consent Order because all that the plaintiff was seeking to achieve was to reach a settlement in the order of HK$750 million.  Mr Borrelli disputed that and produced a handwritten contemporaneous meeting note taken by him at a meeting with the defendant which resulted in the settlement. The number of shares was recorded as 143,113,153 shares and 16.04% would represent 22,955,350 shares.  As indicated in the handwritten note, 500,000 shares representing Bridgewell’s entitlement was added to half of 22,955,350 shares which resulted in the final figure of 11,977,675 shares which was reflected in Clause F(ix) of the 1^st Consent Order.  As is now known by reason of the production of the full PSA, the defendant’s representation that the total number of shares was 143,113,153 at the time of the negotiation of the settlement discussions (as evidenced in Mr Borrelli’s handwritten note) is false when in fact it is 144,913,153 ordinary shares and 45,147,953 preferred shares.

Dividend Notices

35. Between the time of the 1^st Consent Order and the current action, Dividend Notices have been issued.  These Dividend Notices were dated 29 May 2013, 11 April 2014, 6 June 2014, and 8 May 2015.  In each of these Dividend Notices that was disclosed by the defendant’s solicitors to the plaintiff’s solicitors, it referred only to the ordinary shares of 23,955,350 being held.  The number of shares shown to be held by Primo was instead 29,069,924 by reference to the PSA.

36. The plaintiff pointed out the difference between the number of shares in the Dividend Notice of 23,955,350 with that as set out in the PSA, namely 29,069,924 was in fact a result of an ex post transfer of 5,114,574 ordinary shares to a company called Cornerstone which was owned by the defendant and his children.  Furthermore, this transfer in June 2012 included the transfer of the 1,423,750 preferred shares from Primo to Cornerstone. ‌This transfer of shares was made after the 1^st Consent Order and that explained a reduction in the receipt of dividends by the plaintiff as evidenced in the four Dividend Notices that were provided.

Whether Recital Clause C of the 1^st Consent Order has any legal effect

37. The defendant contends that given the provisions of Recital C in the 1^st Consent Order, the plaintiff’s commencement of this action is oppressive and abusive.  I do not agree.  If the various bases for the orderto be set aside by reason of the failure to make full and frank disclosure of material facts and/or misrepresentation made by the defendant are made out, the legal grounds for setting aside would be established and the“consent” to not issue any new action relating to the settlement cannot debar the plaintiff from proceeding and definitely her behaviour could not be said to be oppressive and abusive.

38. Similarly, the obligation to keep the settlement and financial affairs confidential would not be adequate to establish a right to strike out.  In the UK Supreme Court judgment in Gohil v Gohil (No 2)[5] Lord Wilson stated that “[i]n the present context, namely that of a financial order in divorce proceedings, a form of words such as recital 14 has no legal effect.    ” 

Materiality

39. Counsel for the plaintiff provided a summary regarding the number of shares at its oral submissions illustrating in sections A to D what the financial impact would have been had the correct number of ordinary shares and the existence of the preferred shares been disclosed. ‌In calculating shortfall, the monetary value of HK$62,304,231 was derived based on the proposed monetary payment of HK$198,000,000 for 11,977,675 shares of PAGH. No distinction between the value of the ordinary and preferred shares was made in this illustration. ‌On that basis alone, and notwithstanding that the value of the preferred shares should be higher, the defendant contends, and the court agrees, that this is of materiality.

40. This materiality, as stated above, is met by reference to the calculation of the amount involved. ‌As to whether Mr Borrelli’s evidence is to be preferred and whether the inference as suggested by the defendant here by reference to that one‑page document should prevail, is a matter for the trial judge. It certainly cannot be concluded at this stage that therewas no reasonable cause of action.  Given that there is a duty to make fulland frank disclosure in a clear and fair manner, especially when offshore corporations are involved and in particular when the PSA was not fully disclosed at the time, the defendant’s duty of full and frank disclosure of material facts cannot be said, based on the current information and for reasons set out above, to be adequately discharged such as to render the plaintiff’s case subject to being struck out.

41. It will be a matter for the trial judge to make inferences from the facts based on the documents that have been disclosed as well as the oral evidence involved to decide if the duty of disclosure was discharged.

Delay

42. The plaintiff is under an obligation to set aside a final consent order with reasonable promptitude. ‌However, as stated in Shaw v Shaw:      [6]

“What then constitutes reasonable promptitude? Obviously each case must be determined upon its own facts and circumstances. In cases falling within the Livesey v Jenkins category no applicationcan precede the discovery of the evidence that suggests or proves the wrongful advantage taken by the adversary at the trial. … In either case any judgment must recognise the need to comprehend the extent and consequence of the discovery, the need to obtain competent legal representation and, in many cases, the need to obtain public funding.” (Emphasis added)

43. In considering the relevant circumstances one of the important factors is the way in which disclosure of documentary evidence and information has been made available in this case.  The full PSA was only made available in October 2014, and a further discovery application was thought to be necessary in April 2015 albeit it withdrawn so as to commence this action in March 2016.  The production of documents as can be seen in the defendant’s conduct has not been forthcoming or readily made.  In the circumstances, the plaintiff has acted with reasonable promptitude.  Furthermore, the defendant has not suggested any prejudice that would be caused, safe for the embarrassment and the exposure of his financial position now in the public domain.  That would not be adequate, in the court’s view, to strike out this action at this stage on the ground of the action being frivolous.

Whether the whole Consent Order should be set aside

44. The defendant’s final argument seems to be that even if there were non‑disclosure relating to the PAGH shares, the action as a whole should be struck out because the plaintiff is seeking to set aside the whole of the Consent Order. ‌This proposition needs only be stated to be rejected.  The remedy that the trial judge may decide to give is a matter for trial and the material non‑disclosure if made out would be adequate for the ConsentOrder to be set aside in whole or in part in light of what has been implemented or enforced after the issuance of the 1^st Consent Order. ‌This is not a matter that this court at this stage should be concerned with.

Conclusion

45. In the premises, the defendant’s application to strike out is dismissed and there is no reason why costs should not follow the event.  The defendant is therefore directed to bear and pay the plaintiff’s costs of the application forthwith, to be taxed if not agreed.