HUI YIN SANG AND OTHERS v. TSOI PING KWAN AND OTHERS

HCA 392/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 392 OF 2008

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DECISION

Background

1.  This is an application by the 1st Defendant ("Tsoi") and the 2nd Defendant ("Lam"), firstly under Order 23 rule 1 (1) (a) and (b), for security for costs to be provided by the 3rd Plaintiff ("Shanghai Consultants") and the 4th Plaintiff ("Direct Properties") ; and further, for striking out various claims for relief made by the 1st Plaintiff ("Hui") and the 2nd Plaintiff ("Wong") under 18 rule 19 (1).

2.  Shanghai Consultants and Direct Properties are companies incorporated and registered in the BVI. Hui is a shareholder and the sole director of Shanghai Consultants. Wong is a shareholder and the sole director of Direct Properties. There is no serious dispute that Shanghai Consultants and Direct Properties were acquired and held by Hui and Wong respectively for the main if not sole purpose of holding shares in New Land Holdings Ltd. ("New Land Holdings"). New Land Holdings is another BVI company within a corporate structure devised for Hui, Wong and Tsoi to hold a property development project in the PRC, known as the New Land Plaza in Shanghai ("Project"). New Land Holdings holds all the shares in another BVI company, Catford Development Ltd. ("Catford"), which in turn holds the shares in a PRC company, Shanghai New Land ("Shanghai New Land").

3.  Shanghai New Land owns the land rights in the Project. Shanghai Consultants and Direct Properties have brought these proceedings as a derivative and multiple derivative action on behalf of New Land Holdings and Catford respectively. New Land Holdings and Catford have been joined as the 4th and 3rd Defendants.

Order 23 rule 1 (1) (a): are Shanghai Consultants and Direct Properties ordinarily resident out of the jurisdiction?

4.  On the issue of whether Shanghai Consultants and Direct Properties are ordinarily resident out of Hong Kong within the meaning of Order 23 rule 1 (1) (a), the parties are not in dispute as to the applicable legal principles. The residence of a limited company is decided by reference to the location of its central management and control. This is the test applied in Insurance Co of the State of Pennsylvania v. Grand Union Insurance Co Ltd & Another [1988] 2 HKLR 541.  

5.  Mr. Chow SC, Leading Counsel for Shanghai Consultants and Direct Properties, highlights the fact that the burden is on the applicants for security, namely Tsoi and Lam, to establish that Shanghai Consultants and Direct Properties are ordinarily resident out of Hong Kong. He further highlights the fact that the question of whether they are ordinarily resident in Hong Kong is to be determined by reference to the circumstances prevailing at the time of the application for security, relying on Lindsay J's judgment in Re Little Olympian Each Ways Ltd. [1995] 1 WLR 560 at 563.

6.  The propositions derived from the judgment of Lindsay J, and applied in Hong Kong in the cases of Charter View Holdings (BVI) Ltd. v. Corona Investments Ltd. [1998] 1 HKLRD 469, Silver Stone Development Ltd. v. Lau Kwong Ching, James HCA 2206/2000, 27 June 2002 and Jade Harbor Ltd. v. Eltones Profits Ltd. [2005] 3 HKLRD 158 are:

(1)  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 based.

(2)  All the circumstances in which the company carries on its business should be taken into account, though the weight to be applied to each factor will obviously differ from case to case. 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 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 ones 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 its most significant assets are.

(3)  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.

7.  Determination of the residence of a company is essentially a question of fact.  There are obviously extreme cases when determination of the ordinary residence of a company is more straightforward. On the one hand, there are companies incorporated outside Hong Kong, with its registered address and place of maintenance of its books and records outside Hong Kong (as in the case of Re Charter View Development Ltd. HCCW 45/2006, 21 December 2006), or where despite having a registered office and nameplate in Hong Kong where secretarial functions are carried out, the company is reticent in disclosing what its assets were, where its books were kept, and where its administration was performed (as in the case of Charter View Holdings (BVI) Ltd. supra), when the courts would be ready to conclude that the company is not ordinarily resident in Hong Kong. On the other hand, there are cases (Jade Harbour Ltd. v. Eltones Profits Ltd. being an example) where the sole controlling shareholder and director of the company incorporated outside Hong Kong is a Hong Kong resident, with family and business ties in Hong Kong, and who was solely responsible for the management and control of the company in Hong Kong, where the company's books were kept and its substantial asset was. The court would be ready to find in such a case that the company is ordinarily resident in Hong Kong. The question is to be decided on the facts and evidence available in each case.

8.  I agree with Mr. Mok SC who appears for Tsoi and Lam that the facts in Jade Harbour are distinguishable from the present case. In addition to the fact that the shareholder and director in Jade Harbour was resident in Hong Kong and made decisions in Hong Kong, the BVI company in Jade Harbour had entered into a subscription agreement in Hong Kong for shares in a company to be listed in Hong Kong, under which agreement loans had been made which were convertible into shares of the company to be listed. The BVI company in question therefore had activities and assets in Hong Kong, and cannot strictly be said to be a non-trading company without any trading activities.

9.  It is not disputed that neither Shanghai Consultants nor Direct Properties is registered under Part XI of the Companies Ordinance. Nor do they have any registration under the Business Registration Ordinance. Their only function is to hold their interests in the Project through New Land Holdings and Catford, and the Project is outside Hong Kong.

10.  Mr. Mok for Tsoi and Lam relies on the judgment of Muttrie J in Silver Stone Development Ltd. (supra) where, in ruling that the BVI company in the case before him was ordinarily resident out of Hong Kong, the learned judge relied essentially on the fact that the sole reason for existence of the BVI company was the holding of the shares in and the exercise of the rights of a registered shareholder of the company out of the jurisdiction of Hong Kong, for tax or other benefit or reason. That is no doubt an important consideration, but to base the determination of the ordinary residence of a company on that factor alone would be tantamount to equating the place of ordinary residence of the company with its place of incorporation. The judgment of Lindsay J in Re Little Olympian Ltd. makes it clear that the place where the company is incorporated is only one of the factors to be considered when the question of the ordinary residence of the company is determined. It is also clear from the authorities that the question of the domicile of the company is separate to the question of its ordinary residence.

11.  On the evidence produced in this case, despite the fact that Shanghai Consultants and Direct Properties had been stuck off the register in the BVI in 1999, allegedly due to the wrongful acts of Tsoi who was hitherto responsible for maintaining and managing the BVI companies, the companies were restored by Hui and Wong respectively in January 2009. The evidence of Hui is that he had come to Hong Kong from the Mainland in 1976, was married in Hong Kong in 1982, and now resides with his wife in Hong Kong at a property purchased by him and registered in his wife's name. Hui has 2 sons who live in Hong Kong. He has a permanent Hong Kong identity card, is a Hong Kong permanent resident, and holds a bank account in Hong Kong.

12.  Hui claims that the shares in Shanghai Consultants are held by himself and his elder sister, and accepts that Shanghai Consultants' only activity is to hold the investment in the Project. Hui claims that he controls and manages Shanghai Consultants in Hong Kong, and that all the board resolutions of Shanghai Consultants were passed in Hong Kong. Its books and statutory records are kept by Hui in Hong Kong. Its corporate secretary is a Hong Kong company, with a Hong Kong address at Lippo Centre. Meetings of the shareholders of Shanghai Consultants are conducted by Hui and his sister in Hong Kong.

13.  According to the evidence of Wong, the shares in Direct Properties are held by Wong and his nephew ("Lai"). Wong is the sole director of Direct Properties, and a permanent Hong Kong resident. He came to Hong Kong from the Mainland in 1978 with his wife and 2 sons. Wong's eldest son carries on business in Hong Kong, and his younger son is studying at a university in Hong Kong. Wong and his family reside at a property rented in Wong's name. Wong currently works in Hong Kong.

14.  Wong claims that Direct Properties is solely managed by him in Hong Kong. The only function and activity carried on by Direct Properties is to hold the investment in the Project. According to Wong, Direct Properties is controlled and managed by him in Hong Kong. All directors' resolutions are passed in Hong Kong. The books and statutory records of Direct Properties are kept by Wong in Hong Kong, with the same company secretary as Shanghai Consultants. According to Wong, meetings of the shareholders of Direct Properties are conducted by Wong and Lai in Hong Kong.

15.  The facts in this case are accordingly distinguishable from those in Re Charter View Development Ltd. and Charter View Holdings (BVI) Ltd v. Corona Investments Ltd, with Hui and Wong deposing to facts which support a closer relationship with and presence in Hong Kong. I have given heed to the reminder in the judgment of Lindsay J in Re Little Olympian Ltd. that "ordinarily resident" connotes "a degree of continuity" and "a reference to the way in which things are usually or habitually ordered". In support of their claim that Shanghai Consultants and Direct Properties are controlled and managed in Hong Kong, Hui and Wong have only produced 2 sets of directors' resolutions passed in October 2008 and July 2009, for restoration of the companies and for commencement of these proceedings. However, the lack of evidence of any other resolution passed or meeting held in Hong Kong may be explained by the fact that Shanghai Consultants and Direct Properties have in truth no other business or activity save for their shareholding in the Project. The companies had been struck off in 1999 for lack of maintenance, but the time for consideration of the companies' corporate activities is the time of the current application, and not what had happened before.

16.  Mr. Chow has argued that the sole purpose for the existence of Shanghai Consultants and Direct Properties now is to carry on these proceedings in Hong Kong. I agree with Mr. Mok that this is at most a neutral factor, and cannot add weight to the 2 companies' connection with Hong Kong. All the foreign companies in the cases cited have proceedings in Hong Kong to deal with, and that factor cannot give them a closer link to Hong Kong.

17.  I accept that the different factors set out in Lindsay J's judgment in Re Little Olympian Ltd. can carry different weight in the consideration of the test of the ordinary residence of the company. Even after giving due weight to the fact that Shanghai Consultants and Direct Properties were acquired for no other apparent reason than the holding of and the exercise of the rights in the shares in New Land Holdings and Catford offshore, when the other factors of where the shareholders and directors ordinarily reside and meet, and where the companies' books and registers are kept are considered, I come to the conclusion that the most that can be said, on the evidence available in this case, is that the offshore and the Hong Kong elements are equal on the balance. On that basis, it cannot be said that Tsoi and Lam have discharged their burden of showing that Shanghai Consultants and Direct Properties are not ordinarily resident in Hong Kong.

Order 23 rule 1 (1) (b): are Shanghai Consultants and Direct Properties nominal plaintiffs?

18.  Again, the burden lies on Tsoi and Lam to show that Shanghai Consultants and Direct Properties are nominal plaintiffs suing for the benefit of Hui and Wong (as they allege), and that there is reason to believe that Shanghai Consultants and Direct Properties will be unable to pay the costs of Tsoi and Lam.

19.  Mr. Mok does not dispute that in relation to their derivative action, Shanghai Consultants and Direct Properties are suing in a representative capacity.  It is clear from Wallersteiner v. Moir (No. 2) [1975] 1 QB 373 that a shareholder in a derivative action sues as representing the company, although in form, he sues on behalf of himself and all other shareholders. What Mr. Mok seeks to establish is that in these proceedings, Shanghai Consultants and Direct Properties are at the same time acting as mere nominees of Hui and Wong, as these companies have at all material times being maintained by Hui and Wong for the sole purpose of holding their shares in New Land Holdings and in Catford respectively. It is argued on behalf of Tsoi and Lam that if the claims made against Shanghai Consultants and Direct Properties in these proceedings are successful, the benefit will all go to Hui and Wong for whom Shanghai Consultants and Direct Properties act, but if the claims fail, Shanghai Consultants and Direct Properties will not have the resources to pay the Defendants' costs. In these respects, it is argued that Shanghai Consultants and Direct Properties fall within Order 23 rule 1(1)(b) as nominal plaintiffs of Hui and Wong, and that security should be ordered against them.

20.  Convincing as the argument may appear to be, I have difficulty in readily concluding that Shanghai Consultants and Direct Properties can properly be said to be "nominal plaintiffs" in the context in which the term is used and applied in the cases, and when the rationale and mischief behind Order 23 rule 1(1)(b) is examined. Mr. Chow referred to the part of the judgment of Bowen LJ in Cowell v. Taylor (1885) 31 Ch D 34 at p. 38:-

"…The general rule is that poverty is of no bar to a litigant… There is an exception in the case of appeals… There is also an exception introduced in order to prevent abuse, that if an insolvent sues as nominal plaintiff for the benefit of somebody else, he must give security. In that case the nominal plaintiff is a mere shadow. The two most familiar classes of cases of this kind are cases where a person has divested himself of his interest and handed it over to someone else that the transferee may sue for him, and cases where a person who has commenced a suit divests himself of his interest during the course of the suit in order that another person may carry it on for his benefit…"

21.  The emphases made in cases such as Cowell v. Taylor and later in White v. Butt [1909] 1 KB 50 are that some other person, and not the nominal plaintiff, is in truth beneficially interested in the cause of action and the results of the action, or that the person in whom the cause of action was actually vested has assigned that cause of action to another nominee, who is put forward to sue in respect of a cause of action in which he is not really interested. The rationale for ordering security against these nominal plaintiffs in such cases is to prevent abuse.

22.  Applying these tests to the present case, Shanghai Consultants and Direct Properties are in law beneficially interested in the fruits or results of these proceedings, as they are the shareholders divested of their shares, and interests in the Project. They are in truth the only possible plaintiffs who can sue for the relief claimed. Hui and Wong do not have any cause of action in relation to the alleged wrongful transfer of the shares in Catford and in Shanghai New Land. I do not see how Shanghai Consultants and Direct Properties can be considered as mere nominal plaintiffs of Hui and Wong, with no interests in the subject matter of the proceedings.

Are Shanghai Consultants and Direct Properties able to pay costs?

23.  Even if the meaning of "nominal plaintiff" is not to be confined in the sense I referred to above, and can be extended to include the case of a mere shadow, or a corporate veil used by astute businessmen to conceal their personal interests (as in the case of Silver Shadow and Bugsy Development Company Ltd. v. Hyndai Engineering & Construction Company Ltd. HCA 5397/2001), and that such is the situation in the case of Shanghai Consultants and Direct Properties, I am not satisfied that there is reason to believe from the available evidence that Shanghai Consultants and Direct Properties will be unable to pay the costs of Tsoi and Lam.

24.  Mr. Mok referred to the Affirmation of Mr. Wilson Yeung of the Plaintiffs' solicitors and the correspondence exchanged between the parties, to show the "lack of legal costs" from the Plaintiffs in early 2011. Be that as it may, legal costs were made available by the Plaintiffs to their solicitors in April 2011, and according to the said affirmation, Hui and Wong had been able to pay to Tsoi and Lam assessed costs of over $450,000 in around July 2010, and over $230,000 of taxed costs in around September 2010. They were thus able to pay over $2 million in total as legal costs, to their own lawyers as well as to Tsoi and Lam. At this stage, I cannot draw the necessary inference from the evidence to which I have been referred that Shanghai Consultants and Direct Properties will not be able to procure further funds as may be required.

25.  Other than what is apparent from the affirmation of Mr. Yeung, there is nothing else in the evidence of Tsoi and Lam to support the contention that there is reason to believe that Shanghai Consultants and Direct Properties are either impecunious or will be unable to pay costs. Mr. Chow has highlighted the fact that the burden is on Tsoi and Lam to establish inability to pay under Order 23 rule 1 (1) (b). He further urged the Court to bear in mind the fact that Shanghai Consultants and Direct Properties had valuable assets, i.e. their interests in the Project, but for the wrongful acts of Tsoi which are the subject matter of the complaints made in these proceedings.

26.  What is significant is that I accept the submission made by Mr. Chow that analogy can be drawn from s. 357 of the Companies Ordinance, which deals with security for costs against a company incorporated under the Companies Ordinance and which uses the same language as that in Order 23 rule 1 (1) (b): namely, "there is reason to believe that the company will be unable to pay the costs of the defendant". In Brand Farrar Buxbaum LLP v. Samuei-Rozenbaum Diamond Ltd. & Another (No. 2) [2003] 1 HKLRD 600 at 611A, Ma J (as he then was) held that:

" …The appropriate test under s. 357 of the Companies Ordinance is not there is credible testimony that the company may be unable to pay but that it will not be able to pay: see Re Unisoft Group (No. 2) [1993] BCLC 532 at p. 534E-F (Chancery Division of the English High Court)."

27.  Having considered all the evidence, I am not persuaded that Tsoi and Lam have established that Shanghai Consultants and Direct Properties are nominal plaintiffs and that there is reason to believe that they will be unable to pay the costs of Tsoi and Lam if ordered to do so.

Should the contested claims of Shanghai Consultants and Direct Properties be struck out?

28.  The principles of striking out are clear. It is only in plain and obvious cases that the court should exercise its summary powers to strike out the endorsement on any writ or any pleading under Order 18 rule 19. Disputed facts are to be taken in favor of the party sought to be struck out. The court should not decide difficult points of law in striking out proceedings. The claim must be obviously unsustainable, the pleading unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out. It is for the party seeking to strike out to demonstrate that the case is a plain and obvious one in which the other party's claim is bound to fail.

29.  By the time of the hearing on 30 June 2011, the dispute has been narrowed down to whether the claims for relief made by Hui and Wong and set out in paragraphs 2 and 5 of the Re-re-amended Statement of Claim should be struck out. Paragraph 2 seeks a declaration that a disputed board resolution of Shanghai New Land dated 8 October 2001 ("Shanghai Resolution") is void and unenforceable. Paragraph 5 seeks a declaration that a disputed board resolution of New Land Holdings dated 1 December 2000 ("Holdings Resolution") is void and unenforceable.

30.  The Shanghai Resolution relates to the purported transfer of "all future management rights and property ownership and obligations of Shanghai New Land" to Tsoi on the basis of Catford's transfer of all its shares in Shanghai New Land to Tsoi. Hui claims that he never signed the Shanghai Resolution, that the signature purported to be his thereon was forged, and that Tsoi had procured the forgery of Hui's signature (paragraphs 23 (b) (i) and (iv) of the Re-re-amended Statement of Claim).

31.  The Holdings Resolution relates to the purported sale of New Land Holdings' 5 million shares in Catford to Tsoi, and New Land Holdings' resignation as a director of Catford. Wong claims to have signed the Holdings Resolution without knowing the content of what he signed, and on the basis of an alleged misrepresentation made by Tsoi as to the nature of the Holdings Resolution (paragraph 23 (j) (i), (ii) and (iv) of the Re-re-amended Statement of Claim). It is pleaded in paragraph 23 (j) (ix) of the Re-re-amended Statement of Claim that the Holdings Resolution was a fraud on New Land Holdings, and that Tsoi knew that he had not paid for the transfer of the shares.

32.  It is claimed that Tsoi had acted in breach of his fiduciary duties owed to Hui, Wong, New Land Holdings, Catford and Shanghai New Land by producing or procuring the Shanghai Resolution and the Holdings Resolution.

33.  It has been argued on behalf of Tsoi and Lam that a claimant has standing to seek a declaration in private law only if he can establish that his rights are either being infringed or are threatened with infringement by the defendant (Gouriet [1978] AC 435). In the case of In re S (Hospital Patient: Court 's Jurisdiction) [1995] 3 WLR 78 at 94, Millett LJ observed, after referring to Gouriet:

"…In my judgment, the passage which I have cited from Lord Diplock's speech in the Gouriet case [1978] AC 435, 501, can no longer be taken to be an exhaustive description of the circumstances in which declaratory relief can be granted today. It is to be regarded rather as a reminder that the jurisdiction is limited to the resolution of justiciable issues; that the only kind of rights with which the court is concerned are legal rights; and that accordingly there must be a real and present dispute between the parties as to the existence or extent of a legal right. Provided that the legal right in question is contested by the parties, however, and that each of them would be affected by the determination of the issue, I do not consider that the court should be astute to impose the further requirement that the legal right in question should be claimed by either of the parties to be a right which is vested in itself."

34.  Hui claims in these proceedings that his signature had been forged on the Shanghai Resolution and that the forged signature had been procured by Tsoi. Since disputed facts are to be taken in favor of Hui and Wong for the purpose of this application, I do not consider that it is obviously unarguable for Hui to claim for a declaration that the Shanghai Resolution is void by reason of the deceit or forgery procured by Tsoi. There is obviously a contested question relating to the forged signature which is to be determined by the Court and which affects Hui. If the Court should find that Hui's signature on the Holdings Resolution was forged, it is arguable that Hui is entitled to the declaration which he seeks, in order to be relieved from liability arising from his signature to the Holdings Resolution.

35.  On the same basis, I do not consider it to be obviously unarguable that Wong is entitled to a declaration that the Holdings Resolution is void by reason of the misrepresentation allegedly made by Tsoi. There is a real and present dispute between Wong and Tsoi as to Wong's signing of the Holdings Resolution, and Wong will obviously be affected by the Court's determination of the validity of his signature to the Holdings Resolution. It cannot be said that Wong's claim for the declaration is bound to fail.

Conclusion

36.  For the reasons set out above, I do not accept that Tsoi and Lam have established that they are entitled to seek security for costs from Shanghai Consultants and Direct Properties under Order 23 rule 1 (1). I accordingly dismiss the applications for security and for a stay made under paragraphs 1 and 2 of the Summons issued on 12 November 2010 ("Summons").

37.  Nor do I accept that the claims for declarations made by Hui and Wong under paragraphs 2 and 5 of the relief sought in the Re-re-amended Statement of Claim should be struck out. I also dismiss the application made under paragraph 3 of the Summons.

38.  It follows that Tsoi and Lam should pay the costs of the Summons to Hui, Wong, Shanghai Consultants and Direct Properties, with Certificate for Counsel, and I will make an order nisi to such effect.