DINGWAY INVESTMENT LTD (Provisional Liquidators Appointed) v. CHINA CITY CONSTRUCTION & DEVELOPMENT CO (HONG KONG) LTD AND OTHERS

HCA 309/2022 & HCA 356/2022
(Heard together)

[2023] HKCFI 1649

HCA 309/2022

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 309 OF 2022

______________

______________

AND

HCA 356/2022

ACTION NO. 356 OF 2022

______________

______________

(Heard together)

_______________

D E C I S I O N

_______________

A.  INTRODUCTION

1.  Before me there are four summonses relating to two actions, HCA 309/2022 (“HCA 309”) and HCA 356/2022 (“HCA 356”).

1.1  HCA 309 is a claim brought by the Plaintiff therein (“P”) against a number of defendants, relating to a transfer from P of the entire shareholding (“the Subject Shares”) in CCCC Holdings LLC (“CCCC Holdings”). CCCC Holdings indirectly held a piece of land in Miami (“the Miami Land”). P says that the Subject Shares were wrongfully transferred away from it to D1, then wrongfully sold to D4, and that the Miami Land was ultimately wrongfully sold with the sale proceeds dissipated to various of the defendants.[1]

1.2  HCA 356 is a claim brought by D1 against China City Construction (International) Co., Limited (“CCCI”), the former sole owner of P. D1 alleges that the shares in P, which were held by and registered in the name of CCCI, were held on trust by CCCI on behalf of D1 (“the Trust Arrangement”).

2.  The four summonses are as follows:

2.1  a summons of 11^th November 2022 by CCCI and P in both actions, seeking to stay HCA 356 pending the resolution of HCA 309; alternatively that the two actions be tried together;

2.2  a summons of 28^th November 2022 by D1 and D3 who held various positions in D1 in HCA 309, seeking to stay HCA 309 pending the resolution of HCA 356;

2.3  a summons of 28^th November 2022 by D4, D5, D7 and D9 (collectively, “the Rega Ds”) in HCA 309, seeking to stay HCA 309 pending resolution between P and D1 of a question termed “the Title Issue”, namely “As of October 2019, was [P], or was [D1], the beneficial owner of the [Subject Shares] and/or [the Miami Land]?”;

2.4  a summons of 3^rd January 2023 by D6 (“D6”) in HCA 309, seeking the same relief as the Rega Ds.

3.  By the time of the hearing before me, D1 and D3 no longer sought to pursue their summons. Instead, they took the position that the two actions should be tried together, but that there should first be a trial of a preliminary issue between P, D1 and CCCI, with the other defendants in HCA 309 (“the HCA 309 Ds”) being agreeable to be bound by its result. The preliminary issue was termed as “the Title/Trust Issue” and was identical to the Title Issue, save for an addition (shown in underlining as follows): “As of October 2019, was [P], or was [D1], the beneficial owner of the [Subject Shares] and/or [the Miami Land] and/or was [D1], or was [CCCI], the beneficial owner of the entire shareholding in [P]?”.

B.  THE BACKGROUND

4.  For present purposes, it is not necessary to delve extensively into the factual background. It suffices to mention the following.

B1.  The transfers of the Subject Shares in October and November 2019 and the sale of the Miami Land

5.  P (a BVI company), originally held 100% of the shares in CCCC Holdings (a Delaware company), that is, the Subject Shares. Through this holding and further Delaware subsidiaries, P indirectly held the Miami Land (which was registered in the name of D5). However, on 15^th October 2019, D2 caused P to transfer away the Subject Shares to D1, for no consideration. The transfer agreement was signed by D2 on behalf of P, and D3 on behalf of D1.

6.  Shortly thereafter, on 8^th November 2019, D4 purchased the Subject Shares from D1 for US$70m.

7.  On 4^th March 2021, D4 caused D5 to sell its interest in the Miami Land to a company named Mast Capital for US$103m (“the Sale Proceeds”). Various portions of the Sale Proceeds ended up with, inter alia, D1, D5, D6, D7, and D8.

8.  It is P’s case that the transfer of the Subject Shares to D1 and then to D4, and the subsequent disposal of the Miami Land and distribution of the Sale Proceeds, was part of a conspiracy by the HCA 309 Ds to deprive P of the Miami Land and its economic value. P says that the sale to D4 was not a genuine transaction, with D4 interposed as a purported purchaser, but the Sale Proceeds then being routed back to entities connected with D1.

9.  P pleads that the HCA 309 Ds are liable to P as follows.

9.1  D2, as P’s director, was in breach of fiduciary duties owed to P by procuring P to transfer the Subject Shares to D1 for no consideration and without justification.

9.2  D1 (who received the Subject Shares) and D3 (who signed the transfer document on D1’s behalf) dishonestly assisted D2’s breach of duty.

9.3  D1 is liable as a knowing recipient of the Subject Shares, which were transferred in breach of D2’s fiduciary duties.

9.4  D1 then further dishonestly executed the transfer of the Subject Shares to D4 in breach of its duties as constructive trustee.

9.5  D4 received the Subject Shares dishonestly, held the Subject Shares as constructive trustee for P, and is liable as a knowing recipient of the Subject Shares. D4 then dishonestly caused D5 to execute the sale to Mast Capital and to dissipate the Sale Proceeds.

9.6  D5, D6, D7 and D9 are liable for dishonestly assisting in the breaches of duty by D1, D2, and D4.

9.7  D4 to D9 are liable for conspiracy to injure P.

10.  P also pleads that D4, D5, D6, D7 and D9 acted as the vehicles, conduits or proxies of D1 in depriving it of its interest in the Miami Land, based on the connections between these defendants and D1:

10.1  D6, which received US$45-odd million of the Sale Proceeds, was the sole shareholder of D1 from 23^rd August 2021 to 20^th July 2016, as the nominee of China City Development Academy Co., Limited (“CCDA”).

10.2  Sunny Ea, who was at all material times the sole shareholder and director of D6 and who also held positions in D8, had earlier been nominated by CCDA to hold shares in D1 for it from 8^th January 2006 to 22^nd August 2012.

10.3  D8, which received US$33-odd million of the Sale Proceeds, shared a business address with D4. D2, D3 and D9 held positions in D8. It was also connected with D1 as referred to above.

10.4  D7, which received US$13-odd million out of the Sale Proceeds, was, together with D9, a member / manager of D4 in around October 2021. It also held a bank account at the same branch as D1.

10.5  US$200,000 out of the Sale proceeds was remitted to CCCC US International Corp, which shared a business address with D4 and D8. D2 and D9 held positions in CCCC US International Corp.

10.6  D9, who received US$33m of the Sale Proceeds, was the authorised person and Manager / President of D8 in 2020, 2021 and 2022 and was its registered agent in 2022. D2 and D3 held positions in D8 during overlapping times (D2 being the authorised person and registered agent of D8 in 2018, and D3 being the authorised person and registered agent of D8 in 2020 and 2021). She was also the Manager of D4 in around October 2021 and the “sole manager” of D5 as at 7^th December 2021. She is the sole shareholder and director of D7.

B2.  D1’s Trust Claim

11.  The shares in P were originally owned by CCCI. On 2^nd October 2015, CCCI sold 45% of the shares in P to Champ Prestige International Limited (“Champ Prestige”).

12.  It is D1’s case that the shares in P, whilst registered in the name of CCCI, were in fact held on trust for it, so that (1) CCCI’s sale of 45% of the shares in P to Champ Prestige, and (2) CCCI’s agreement with Champ Prestige to agree on a mechanism for the sale of P’s shares, were a breach of trust. On 5^th October 2018, D1 commenced HCA 2343/2018 against CCCI, asserting the Trust Claim. D1 filed a Notice of Discontinuance in HCA 2343/2018 on 17^th December 2019.

13.  On 5^th March 2020, D1 acquired Champ Prestige, thereby acquiring an indirect 45% shareholding in P.

B3.  HCA 309

14.  D1 and D3 rely on the Trust Claim for their defence in HCA 309. They say that CCCI executed a written declaration of trust of its shares in P (“the Shares in P”), declaring that they were held on trust for D1. It is said that:

14.1  D1, as the sole beneficial owner of the Shares in P, was lawfully entitled to dispose of any property owned by P, including the Subject Shares; and

14.2  the transfer of the Subject Shares on 15^th October 2019 to D1 was duly authorised and/or in any event ratified by the person solely beneficially entitled to the Shares In P.

15.  As for D2, he pleads that he was not in breach of fiduciary duty as the transfer of the Subject Shares on 15^th October 2019 to D1 was approved and/or ratified by P’s shareholders, being the liquidators of CCCI and Champ Prestige. It has been pointed out that this allegation was made but withdrawn by D1 and D3 at the hearing for the continuation of various injunctions against the defendants in June 2022 before A Chan J.

16.  The Rega Ds say that they were not involved in the transfer of the Subject Shares on 15^th October 2019, and that the sale of the Subject Shares to D4 on 8^th November 2019 and the sale of the Miami Land in 2021 were genuine commercial transactions.

17.  P sought various injunctions against the HCA 309 Ds. By a decision of 29^th July 2022 (“the Injunction Decision”), A Chan J continued the proprietary injunction against D1 in respect of the US$70m it received from D4 for the Subject Shares. The proprietary injunctions against D6, D7 and D9 regarding the Sale Proceeds were discharged, but Mareva injunctions against them (and D1 to D3) up to US$103m, (the value of the Subject Shares), were continued. The court declined to strike out P’s pleading against D6 and D7 in respect of the claims in conspiracy and dishonest assistance.

18.  On 29^th March 2023, the Court of Appeal refused leave to D6 and D7 to appeal against the refusal to strike out the entirety of P’s Statement of Claim against them.

19.  Pleadings have, or have almost, closed in HCA 309.

B4.  HCA 356

20.  It should be noted that D1 had previously commenced proceedings in HCA 2343/2018 against CCCI, asserting the Trust Claim. The liquidators of CCCI and Champ Prestige had filed defences denying the Trust Claim. D1 then filed a Notice of Discontinuance on 17^th December 2019. P says that by this time, D1 presumably no longer found it necessary to pursue the Trust Claim, given that the Subject Shares had been transferred to D1 on 15^th October 2019 and then sold on to D4 on 8^th November 2019 to D4.

21.  Yet the Trust Claim was revived in HCA 356, commenced on 12^th April 2022, shortly after the writ in HCA 309 against D1 to D8 was filed on 1 April 2022.

22.  It is not denied by D1 that the Trust Claim in HCA 356 mirrors the defence advanced by D1 and D3 in HCA 309, namely, that CCCI held the Shares in P on trust for D1, so that D1 was lawfully entitled to dispose of P’s property.

23.  Only the Statement of Claim has been filed in HCA 356, with the time for CCCI to file and serve its Defence and Counterclaim being extended pending the final determination of the current summonses.

C.  THE APPLICABLE PRINCIPLES

24.  There is no dispute as to the applicable principles.

C1.  Ordering a stay of proceedings

25.  By virtue of s.16 of the High Court Ordinance (Cap.4) and RHC O.1B r.1(2)(e), the court has power to stay the whole or part of any proceedings either generally or until a specified date or event. The court has a general and wide power to stay proceedings before it, in the exercise of its case management and statutory powers, and its inherent jurisdiction to control and regulate the conduct of proceedings before the court: Xiamen Xinjingdi Ltd v Eton Properties Ltd & others [2018] HKCFI 910 at [23].

26.  Where two or more causes or matters are pending, the court may order any of them to be stayed until the determination of any other of them, where some common question of law or fact arises in both, where the rights to relief claimed therein are in respect of or arise out of the same transaction(s), or where for some other reason it is desirable to make an order under the rule: O.4 r.9(1).

27.  In Eastman Chemical Ltd v Heyro Chemical Co Ltd [2012] 2 HKLRD 135 at [29], DHCJ Lisa Wong SC (as she then was) set out the following relevant principles, in the context of an application by a defendant to stay proceedings brought against him.

27.1  The court must consider what would serve the ends of justice between the parties to the litigation and the administration of justice generally.

27.2  The stay should not cause an injustice to the plaintiff.

27.3  The applicant for the stay must satisfy the court that continuing the proceedings would be unjust.

27.4  Where a plaintiff commences proceedings as of right, he should not be deprived of the right to continue those proceedings in the absence of very good reasons to the contrary.

C2.  Ordering actions to be tried together

28.  Under O.4 r.9(1), where two or more causes of matters are pending and they satisfy the requirements set out above, the court may also order them to be tried at the same time: O.4 r.9(1).

29.  The court has a wide discretion under this rule. The court will take a practical and common sense approach to meet the justice of the situation, taking into account considerations such as saving costs and time, furthering the underlying objectives under O.1A, and always recognising that the primary aim is to secure the just resolution of disputes in accordance with the substantive rights of the parties. Cf. Hong Kong Civil Procedure 2023 at note 4/9/2.

C3.  Ordering the trial of a preliminary issue

30.  Under O.33 rr.3 and 4(2), the court has power to order that any question or issue, whether of fact or law or both, and whether raised by the pleadings or otherwise, to be tried as a preliminary issue.

31.  The principles as to whether to order the trial of a preliminary issue were set out by A Chan J in Asia-Pac Infrastructure Development Ltd (in liq) & ors v Shearman & Sterling (a firm) & ors [2020] 1 HKC 13 at [8] to [9].

31.1  The general rule is that all issues are to be tried at the same time. The burden is on the applicant to demonstrate that it is just and convenient to depart from the general rule.

31.2  The exercise for the court is not one of balancing the advantages against the detriment or prejudice to the opposing party.

31.3  Instead, a trial of a preliminary issue should only be ordered in exceptional circumstances or on special grounds.

31.4  The court should be mindful that a trial of a preliminary issue may add to difficulties for appellate courts and tends to increase the costs and time of legal proceedings.

31.5  The factors to be considered in determining whether to order the trial of a preliminary issue include:

31.5.1  whether the determination of the preliminary issue would dispose of the whole case or at least one aspect of the case;

31.5.2  whether the determination of the preliminary issue would significantly cut down the costs and the time involved in pre-trial preparation or in connection with the trial itself;

31.5.3  where the preliminary issue is an issue of law, the amount of effort involved in identifying the relevant facts or the extent to which it could be determined on agreed facts;

31.5.4  where the facts are not agreed, the extent to which that impinges on the value of a preliminary issue;

31.5.5  whether the determination of the preliminary issue would unreasonably fetter the parties all the court in achieving a just result;

31.5.6  the risk that ordering a preliminary issue would increase the costs or delay the trial, and (conversely) the prospects that such an order may assist in settling the dispute;

31.5.7  the extent to which the determination of the preliminary issue may be irrelevant. The more likely it is that the issue will have to be determined by the court, the more appropriate it can be said to have it tried as a preliminary issue;

31.5.8  the risk that the determination may lose its effect by triggering an application to amend the pleadings.

32.  It is rare, and highly undesirable, to order preliminary issues of disputed facts: Mai Gou v Mak Chik Lun [2001] 3 HKLRD 248 at 252E (Le Pichon JA).

D.  THE VARIOUS COURSES UNDER CONSIDERATION

33.  It is common ground that there is a risk of inconsistent findings on the Trust Claim if HCA 309 and HCA 356 are heard separately. The question is therefore which of the following courses should be adopted:

33.1  Option 1: stay HCA 356, pending resolution of HCA 309 (P’s primary position);

33.2  Option 2: hear HCA 309 and 356 together (P’s secondary position);

33.3  Option 3: hear HCA 309 and 356 together, but with there first being a trial of a preliminary issue between P, D1 and CCCI in terms of the Title/Trust Issue (D1’s position);

33.4  Option 4: stay HCA 309, pending the trial of a preliminary issue between P and D1 in terms of the Title Issue (the Rega Ds’ and D6’s position).

34.  Options 3 and 4 are, in substance, largely the same, as both would require the trial and determination of the Title/Trust Issue before trial of any other issues arising in HCA 309. The Title Issue, whilst on its face referring only to the level of the Subject Shares (in CCCC Holdings) by P, of course also involves the Trust Issue, in that whether or not the transfer of the Subject Shares to D1 on 15^th October 2019 was wrongful depends on whether D1 was indeed in a position to direct the disposition of P’s property, including the Subject Shares.

35.  I agree with Ms Esther Mak, counsel for P, that no exceptional circumstances or special grounds have been shown to justify ordering a trial of the Title/Trust Issue as a preliminary issue between P (and CCCI) and D1 (as required by Options 3 and 4), leaving out the other HCA 309 Ds.

35.1  Even if the Trust Issue were to be determined in favour of the HCA 309 Ds, it is not at all clear that this would determinatively resolve the issue of whether the transfer of the Subject Shares to D1 on 15^th October 2019 was wrongful.

35.1.1  Ms Mak submits that even if the Shares in P were held on trust for D1, this would not have conferred the right on D1 to direct P what to do with the Subject Shares. In particular, under s.175 of the Business Companies Act of the BVI, any disposition of more than 50% of a company’s assets, if not made in the usual course of business, is subject to various procedural requirements, and it is not suggested that these were complied with in the present case. However, leading counsel for D1 and D3, Mr Douglas Lam SC (appearing with Mr Alex Fan), says that any non-compliance was addressed by ratification.

35.1.2  P’s response is that in the case of misappropriation of company assets, it is no defence for the shareholders to say that they sanctioned or ratified the transaction. See Mortimore, Company Directors (3^rd ed.,) paragraph 20.58; Tradepower (Holdings) Ltd v Tradepower (HK) Ltd (2009) 12 HKCFAR 417 at [123] to [127]. Mr Lam acknowledges such authorities, but says that there are judicial observations, albeit obiter, that the rule that certain breaches are unratifiable is unsatisfactory, citing Wang Pengying v Ng Wing Fai and ors [2021] 1 HKLRD 997 at [82.2] and Re Styland Holdings Ltd (No.2) [2012] 2 HKLRD 325 at [121].

35.1.3  Moreover (P says), D1 cannot rely on the Duomatic principle where the impugned transaction is one that renders the company insolvent, citing Ball v Hughes [2018] BCLC 58 at [148]. None of the HCA 309 Ds take issue with this principle. Ms Mak submits that P was wound up in the BVI in March 2022, as the transfer of the Subject Shares in October 2019 meant that it had no means to repay its debts.[2] However, Mr Lam submits that there is a factual dispute as to whether P was indeed rendered insolvent as a result of the transfer of the Subject Shares.

35.1.4  It is not of course for me to determine the respective merits of these arguments at this stage. However, at best, the arguments of the HCA 309 Ds[3] are that it is arguable that the transfer of the Subject Shares to D1 in October 2019 could have been ratified by D1, and was therefore not wrongful. It is, at the very least, arguable that the transfer could not have been ratified. The Title/Trust Issue cannot therefore said to be dispositive of the legitimacy of the transfer of the Subject Shares to D1 in October 2019.[4] This does not amount to showing exceptional circumstances or special grounds for trying the Title/Trust Issue as a preliminary issue.

35.2  Counsel for the Rega Ds, Ms Frances Lok, says that they were not involved in the transfer of the Subject Shares on 15^th October 2019, and that they came onto the scene only afterwards when the Subject Shares were sold to D4 on 8^th November 2019. They say that they should therefore not be dragged into the trial of the Title/Trust Issue, and the issue of whether D1 was the beneficial owner of the Subject Shares should first be determined: if the transfer of the Subject Shares to D1 was not wrongful as alleged by P, then the claim for accessory liability against the Rega Ds will collapse. However, if the question of whether the transfer of the Subject Shares to D1 was wrongful cannot be determined solely by determining the Title/Trust Issue, it will be necessary to determine the factual allegations raised by P as to why the transfer of the Subject Shares to D1 was wrongful. P’s pleaded case is that D2 wrongly procured P to make the transfer to D1 and that D3 dishonestly assisted D2’s breach of duty, and that D4 to D9 acted as the vehicles, conduits or proxies of D1 in conspiring to deprive P of its interest in the Miami Land. Merely determining the Title/Trust Issue first would not, it seems to me, necessarily dispose of any significant or discrete aspect of the parties’ dispute. On the contrary, it risks increasing the costs and time involved in resolving the parties’ disputes, and complicating such resolution by segregating the consideration of what P says was an interconnected series of events into separate trials.

35.3  The Title/Trust Issue turns on disputed facts, including the authenticity of the shareholding trust agreement of 28^th November 2014, and the declaration of trust dated 20^th January 2015, relied on by D1 and D3 for the Trust Claim. Given the allegations of conspiracy against the HCA 309 Ds, it would be unsatisfactory for only a limited portion of the factual disputes to be considered, and in the absence of most of the HCA 309 Ds.

35.4  The declaration of trust which D1 seeks in HCA 356 (and which it implicitly seeks as part of the Title/Trust Issue) is subsidiary to the real dispute between the parties, and is not in itself of particular significance, since P currently has no assets to distribute to its shareholders, whether de jure or beneficial. As Ms Mak points out, this could well be why D1 did not pursue the Trust Claim in HCA 2343/2018 once the Subject Shares had been transferred away from P. Mr Lam disputes this, pointing to the fact that in addition, in HCA 356, D1 claims damages of US$44-odd million, being the amount which D1 had to pay in March 2020 to acquire Champ Prestige and regain control over P. However, there is no explanation as to why this was not pursued until the commencement of HCA 356 in April 2022, two years later, and only after HCA 309 had been commenced.

35.5  Determining the Title/Trust Issue before determining HCA 309 would unnecessarily delay the resolution of the latter. If D1 should be unsuccessful in the Title/Trust Issue and seek to appeal against any determination of the issue, this would give rise to further delay. This is not a remote possibility, given the conduct of the parties so far.[5]

36.  I consider that staying HCA 356 (Option 1) is preferable to having it heard together with HCA 309 (Option 2).

36.1  D1 and D3 have already raised the Trust Claim in HCA 309. It can be determined without the need for the duplication which having HCA 356 as a separate action would involve. Staying HCA 356 would save time and costs. There is no need for parallel sets of pleadings and witness statements and rounds of discovery to be carried out.[6]

36.2  Mr Lam submitted that CCCI is not party to HCA 309. However, no reason has been given as to why CCCI could not have been (or could not now be) joined as a party to HCA 309 by counterclaim if it was (or is) thought necessary. In any event, the application by P and CCCI to stay HCA 356 is put on the basis that the joint and several liquidators of CCCI agree on behalf of CCCI to abide by any decision in HCA 309 as regards the Trust Claim, so that CCCI would be bound as if it were a party.

36.3  Mr Lam submitted that an undertaking from CCCI was “unworkable”, because if CCCI is not a party to HCA 309, then it will not participate in the action, giving discovery and evidence, and it will not explain why it disputes the Trust Claim. D1 and D3 would be forced to issue third party notices to join CCCI to HCA 309 to enable the Trust Claim to be resolved. It is not clear to me why this is an insurmountable problem, since Mr Lam has proposed what D1 and D3 (at any rate) consider to be an appropriate solution, viz. the issuance of third party notices.

E.  DISPOSITION

37.  I therefore make an order in terms of paragraph 1 of P’s summons of 11^th November 2022, staying HCA 356 pending resolution of HCA 309, upon the giving of CCCI’s undertaking. I dismiss the other three summonses.

38.  I further make a costs order nisi that (1) the costs of and occasioned by P’s summons be paid by the HCA 309 Ds to P in any event, to be taxed if not agreed, and (2) the costs of and occasioned by (a) D1 and D3’s summons, (b) the Rega Ds’ summons, and (c) D6’s summons, be paid by the respective HCA 309 defendant(s) issuing the summons to P in any event, to be taxed if not agreed.