JADE HARBOUR LTD v. ELTONES PROFITS LTD AND ANOTHER

HCA19549/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.19549 OF 1998

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REASONS  FOR  JUDGMENT

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1. The 2^nd defendant is appealing against the decision of the master dismissing its application for security for costs under Order 23, rule 1(1)(a) of the Rules of the High Court, Cap.4A.  I have dismissed the appeal at the hearing.  I now give my reasons.

The claims

2. I shall only state the parties’ respective cases very briefly. 

3. The plaintiff claims that the 2^nd defendant, as sponsor to a proposed listing of the 1^st defendant in the Hong Kong Stock Exchange, induced Miss Wong Hoi Ping (“Wong”) to subscribe for a convertible note entitling the holder to convert for shares in the 1^st defendant, on the representation that (i) the listing of the 1^st defendant would take place in March or April 1998; (ii) the convertible note would mature in 10 months’ time on 31 July 1998 by when the convertible note would be repayable with interest if the 1^st defendant had not been listed; (iii) the 2^nd defendant and Messrs Richards Butler would attend to the formalities and Wong’s interest would be protected.  On 30 September 1997, Wong procured the payment of $16,520,000 to the 2^nd defendant to be held on client’s account. 

4. In early October 1997, when Wong was about to execute the subscription agreement, she was informed that the contemplated listing would not take place until August 1998.  Wong refused to execute the Subscription Agreement unless the 1^st and 2^nd defendants would confirm that the public listing would occur by March or April 1998. 

5. It is stated that the plaintiff was the intended vehicle for the subscription had it taken place.  No convertible note was ever issued, and the $16,520,000 was allegedly paid (after deduction of the 2^nd defendant’s commission) to the 1^st defendant and for use in its production.

6. The plaintiff claims against the 1^st and 2^nd defendants, inter alia, the return of $16,500,000.  The plaintiff’s claim against the 2^nd defendant lies in, inter alia, (i) breach of agreement or warranty as per the terms of the alleged representation; (ii) release of the $16,520,000 without prior consent and/or upon execution of the subscription agreement and in exchange for the subscription certificate duly issued by the 1^st defendant.

7. There is no dispute in the payment of the $16,520,000.  The 1^st defendant’s case is that the subscription agreement was “effectively performed” by the plaintiff in October 1997 although the convertible note was never issued.  The 2^nd defendant’s case is that as the subscription agreement is performed, the dispute is between the plaintiff and the 1^st defendant and has nothing to do with the 2^nd defendant.

The law

8. The proper construction of where a company is “ordinarily resident” under Order 23, rule 1(1)(a) is by reference to the location of its central management and control (Insurance Co. of the State of Pennsylvania v. Grand Union Insurance Co. Ltd & anor [1988] 2 HKLR 540, 544G per Cons VP).

9. Inre Little Olympian Ltd [1995] 1 WLR 560, Lindsay J held that the adverb “ordinarily” does add something of importance to the word “resident”.  It connotes a degree of continuity being required, a reference to the way in which things are usually or habitually ordered.  It is more difficult for a corporation to be ordinarily resident in more than one place than it would be for it merely to be resident in more than one place.  Other than in exceptional circumstances, one should be able to envisage only one such residence.  In relation to a trading corporation, the meaning of “ordinarily resident” requires one to look for where the company’s central management and control actually abides.  In applying the test of central management and control to a non-trading corporation, in the absence of features arising from the carrying on of its business, one may need to look to the plaintiff’s corporate activity. 

10. Inre Little Olympian Ltd has been considered and applied by Keith J in Charter View Holdings (BVI) Ltd. v. Corona Investments Ltd & anor [1988] 1 HKLRD 469.  His Lordship said that three propositions could be derived from the judgment of Lindsay J :

“	(i)	The mere assertion of where the company’s central management and control is unsatisfactory.  What is needed are the primary facts on which that assertion is cased.
	(ii)	All the circumstances in which the company carries on its business should be taken in account.  Those factors include the provisions of the company’s objects clause, the place of incorporation, the place where the company’s real trade and business is carried on, the place where the company’s books are kept, the place where the company’s administration is carried out, the place where the directors with power to disapprove of local steps or to require different one to be taken themselves meet or are resident, the place where its chief office is or where the company secretary is to be found, and the place where the most significant assets are.
	(iii)	In applying the test to a non-trading company, it may be more important than would otherwise be the case to have regard to the nature of the company’s corporate activities.”

The plaintiff

11. The plaintiff is incorporated in the British Virgin Islands (BVI) as a shelf company.  It was acquired by Wong for investment purpose in November 1996.  It is wholly owned and controlled by its sole director and shareholder Wong and there has been no change in shareholding or directorship.  The first ever intended investment was the disputed subscription of the convertible note in question.  The plaintiff has no assets.  The $16,500,000 was funded by Wong and paid though another nominee company controlled by her.  Apart from maintaining a registered office in the BVI through a secretarial agent, the plaintiff has no activity there.  The books and accounts are kept in Hong Kong. 

12. Wong is a Hong Kong resident and all her family and business ties are in Hong Kong.  She is solely responsible for the management and control of the plaintiff.  Wong has no connection with the BVI. 

Jurisdiction?

13. Mr Patterson for the 2^nd defendant referred to Winvar Investment Inc v. Southern Mark Ltd,DCCJ4768/2001 where Carlson DJ stated that the place of incorporation is, prima facie, where the plaintiff is ordinarily resident.

14. Mr Patterson submitted that it is somewhat artificial to speak of the plaintiff’s central management and control when it was used for the sole purpose of subscribing for the convertible note.

15. Mr Patterson also referred to Charter View Holdings (BVI) where Keith J said at p.472D :

“	To say a non-trading company is managed and controlled in Hong Kong, simply because that is where its sole director and shareholder lives and where it has a name-plate, is in my view disingenuous when :
	(a)	It was incorporated out of Hong Kong, and its assets are, and its registered office is out of Hong Kong;
	(b)	I must assume that the company secretarial functions are being carried on out of Hong Kong;
	(c)	It has been reticent in disclosing what its assets are, where its books are kept, and where its administration is performed;
	(d)	By not registering under Pt. XI of the Companies Ordinance (Cap.32) (when regisytration is mandatory for an overseas company which has established a place of business in Hong Kong, and when failure to do so constitutes a criminal offence), the company has been asserting that it has not established a place of business in Hong Kong.”

16. With respect, the place of incorporation is only one factor amongst all the circumstances to be taken into account in determining where a company is ordinarily resident.  I note that in Winvar Investment Inc, the information before Carlson DJ about the plaintiff was sparse,andin Charter View Holdings (BVI), the plaintiff was reticent in disclosing what its assets were, where its books were kept, and where its administration was performed.

17. The situation with the plaintiff here is different.  Granted that the plaintiff has not been registered under Part XI of the Companies Ordinance, it is known that the plaintiff is intended to be used as the vehicle to subscribe for a convertible note in a company intended to be listed in Hong Kong, and the sole controlling shareholder and director, Wong, made the relevant decision in Hong Kong.  It is also common ground that the plaintiff’s books are kept in Hong Kong.  Hence, I am not satisfied that it has been shown that the plaintiff is ordinarily resident out of Hong Kong.

Discretion

18. As I have found against jurisdiction, it does not befall me to consider the exercise of the discretion.                                                                                                   

19. However, even if I were to find that the plaintiff was ordinarily resident out of Hong Kong, I would have refused the 2^nd defendant’s application in the exercise of my discretion.

20. I have considered the plaintiff’s prospect of success against the 1^st defendant, in that if the subscription agreement were treated as performed as claimed by the 1^st and 2^nd defendants, the plaintiff had got neither the convertible note, nor the return of the $16,500,000 with interest upon the maturity of the note in July 1998.  On this aspect alone, I would have exercised the discretion against the 2^nd defendant.

21. The plaintiff’s prospect of success against one or other of the defendants is an proper consideration in the exercise of the discretion (see Lauria v. Le Salon Orient (Hong Kong) Ltd & anor [1996] 2 HKLRD 37 per Le Pichon J (as she then was).

22. I have also considered the role and the alleged acts of the 2^nd defendant in the transaction between the plaintiff and the 1^st defendant.  There is nothing to indicate that I should exercise the discretion any differently.