TRENUS OCEANWAY LTD v. RICHLAND INTERNATIONAL LTD AND ANOTHER

CAMP 249/2021

[2022] HKCA 200

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 249 OF 2021

(ON AN INTENDED APPEAL FROM HCCW NO 352 OF 2014)

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J U D G M E N T

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

Introduction

1.  This is the petitioner’s renewed application for leave to appeal against the decision of Harris J on 1 February 2021 (“the Decision”) refusing to allow the petitioner’s summons dated 16 October 2020 to strike out parts of the 1^st respondent’s Amended Points of Defence (“APOD”).

2.  The petitioner sought leave from the judge to appeal the Decision. On 25 June 2021, the judge handed down reasons refusing the application for leave to appeal with costs to the 1^st respondent with certificate for counsel.

3.  On 9 July 2021, the petitioner issued the present summons in the Court of Appeal in a renewed effort to seek leave to appeal the Decision.

4.  Having considered the papers and the submissions filed on behalf of the petitioner and the 1^st respondent, we exercise our discretion under Order 59 rule 2A(5)(a) to determine this application without a hearing on the basis of written submissions only.

Legal principles

5.  For leave to appeal to be granted under section 14AA of the High Court Ordinance (Cap 4), the court must be satisfied that the intended appeal has a reasonable prospect of success or that there is some other reason in the interests of justice the appeal should be heard. Reasonable prospect involves the notion that the prospect must be more than fanciful without having to be probable.

6.  In addition, this is an appeal against the exercise of discretion of the judge. The appeal court is not to exercise an independent discretion of its own but rather review the decision of the judge. It may set aside the judge’s exercise of discretion if it can be shown that the judge did so under a mistake of law or in disregard of principle, or under a misunderstanding of the evidence, or had taken into account irrelevant matters, or failed to take into account relevant ones, or that the conclusion reached in the exercise of discretion is outside the generous ambit within which reasonable disagreement is possible. It is only if the appeal court has reached the conclusion that the judge’s exercise of discretion must be set aside for one or more of these reasons that it becomes entitled to exercise a discretion of its own.

Background

7.  We do not propose to go into the background matters in detail and the following brief account would suffice for the purpose of this judgment.

8.  The 2^nd respondent, Smartplace Ltd (“the Company”), was incorporated in the British Virgin Islands. The petitioner, Trenus Oceanway Ltd, which is the corporate vehicle of Chu Kong (“Mr Chu”), owns 50% of the Company. The other 50% of the Company is owned by the 1^st respondent, Richland International Ltd, which in turn is owned by Lau Wing Yan (“Mr Lau”). The Company has a wholly owned subsidiary known as Pacific Bulk Shipping (Cayman) Limited (“PB Cayman”).

9.  In 2000, Mr Lau established the Pacific Bulk shipping group (“PB Group”), which Mr Chu joined in 2002. PB Cayman was formed in 2008 to carry out their dry shipping business.

10.  As observed by the judge, eventually the relationship between Mr Chu and Mr Lau soured and the petition forms part of wider litigation between Mr Chu and Mr Lau concerning the PB Group.

11.  The petition in the present case was filed on 24 November 2014.

12.  On 20 August 2018, the petitioner filed its Points of Claim.

13.  On 20 November 2018, the 1^st respondent filed its Points of Defence.

14.  On 1 February 2019, the petitioner filed its Points of Reply.

15.  On 26 September 2019, the 1^st respondent issued a summons for, inter alia, leave to amend the Points of Defence. This application was contested, though the judge ultimately granted leave to amend on 29 April 2020 in his decision of the same date ([2020] HKCFI 634).

The Decision

16.  By the petitioner’s summons dated 16 October 2020, it sought to strike out §§29.10(a) to (d), parts of §§ 44.1 and 46, and the annex (“the Annex”) to the APOD (collectively “the Subject Paragraphs”). Unless specified otherwise, the paragraph numbers mentioned hereinafter refer to those of the APOD.

17.  §29.9 (which is not the subject of the striking-out application but helps put in context the Subject Paragraphs) and §§29.10(a) to (d) read as follows:

“29.9 Moreoever, since the PB Restructuring Agreement, Mr Chu fully acknowledged and recognised that the PB Restructuring Agreement was binding and effective. Richland will rely inter alia on the correspondence between and/or involving Mr Lau and Mr Chu both prior to and/or subsequent to the PB Restructuring Agreement. Subsequent to the PB Restructuring Agreement, Mr Chu immediately withdrew from the management of the PB Group and moved out of the office premises used by the PB Group in early 2014, and began to set up his own shipping and logistics business using companies with the different brand/prefix ‘Quadrolink’ in April 2014.

29.10 Further to and/or by reason of the matters aforesaid in this Paragraph and insofar as is necessary, it is averred that (i) it would be unconscionable for Mr Chu (and his corporate vehicles, including the Petitioner) to deny, and/or (ii) Mr Chu (and his corporate vehicles, including the Petitioner) are estopped, debarred or prevented from denying, the PB Restructuring Agreement, the PB Trust Arrangement and/or that Mr Lau’s full beneficial ownership over the PB Companies (including the Company and PB Cayman) as from around January 2014. Richland further avers as follows:

(a) For the purposes of implementing the auditing process under the PB Restructuring Agreement, Mr Lau caused reviews to be conducted on the accounts of a number of the operating and cash management entities of the PB Group in around April to May 2014.

(b) Following the said reviews, Mr Lau discovered that, without the knowledge or consent of Mr Lau, Mr Chu had transferred or caused to be transferred more than US$200 million from the companies jointly owned by Mr Lau and Mr Chu (including the PB Companies), to Mr Chu himself (and/or his associates).

(c) Pending discovery and/or interrogatories, it is averred that approximately US$70 million had not been returned by Mr Chu (and/or his associates) to the PB Companies, and it is averred that the said transfers constituted wrongful misappropriations from the PB Group (including PB Cayman) for the personal benefit of Mr Chu (and/or his associates) (the ‘Unlawful Misappropriations’). A table setting out the aforesaid transfers, including the Unlawful Misappropriations, is attached as the Annex herein.

(d) Despite repeated requests from Mr Lau, Mr Chu has failed to return the sums wrongfully transferred by way of the Unlawful Misappropriations, nor provided any proper explanation as to the Unlawful Misappropriations.”

18.  §§44.1 and 46 are pleaded as follows (the underlined parts being the subject of the striking-out application):

“44.1 Paragraph 48(1) is denied in its entirety. It is denied that the affairs of the Company and/or PB Cayman have been and/or continued to be conducted by Mr Lau in an ‘oppressive’ and/or ‘unfairly prejudicial’ manner, whether as alleged or otherwise. Further or alternatively, by reason of the matters aforesaid, the Petitioner and/or Mr Chu in seeking to wind-up the Company on just and equitable grounds did not come to the Court with clean hands.

…

46 Paragraph 50 is denied in its entirety. It is denied that Richland should be ordered to purchase the Petitioner’s shares in the Company, and/or that Mr Lau had committed any ‘breaches’, whether as alleged or otherwise. Richland repeats the matters aforesaid, and avers that Mr Lau is and remains the full beneficial owner of the Company, pursuant to the PB Restructuring Agreement. Further or alternatively, by reason of the matters aforesaid, Mr Lau’s conduct was not unfairly prejudicial to the Petitioner and/or Mr Chu, and/or Mr Chu should not be granted any of the relief’s pleaded in the Points of Claim (and the Petition); and that if (which is denied) the 1^st Respondent is to be ordered to purchase the Petitioner’s shares in the Company, any valuation must take into account the Unlawful Misappropriations.”

19.  We agree with the judge’s observation at §11 of the Decision that the application to strike-out §§44.1 and 46 stands or falls depending on the determination of the application in respect of §§29.10(a) to (d).

20.  In short, the judge summarized the 1^st respondent’s “clean hands” defence as seeking to rely on the alleged misconduct of Mr Chu as defence against the petition, as the relief sought (ie winding-up) is equitable in character.

21.  Broadly speaking, the 1^st respondent seeks to rely on two forms of misconduct allegedly perpetrated by Mr Chu.

22.  Under §29.10(a) to (d) of the APOD, the 1^st respondent alleges that Mr Chu had misappropriated approximately US$200 million from the companies jointly owned by Mr Lau and Mr Chu and that approximately US$70 million had not been repaid. The Annex lists out 153 transactions from 4 August 2003 to 14 June 2013 which the 1^st respondent alleges are wrongful misappropriations from the PB Group (including PB Cayman) for the personal benefit of Mr Chu (and/or his associates) (“the Alleged Misappropriation Claim”).

23.  Under §29.9 and §40.3, the 1^st respondent alleges that subsequent to the PB Restructuring Agreement, Mr Chu withdrew from the management of the PB Group and moved out of the office premises used by the PG Group in early 2014 and began to set up his own shipping and logistics business using companies with different brand/prefix “Quadrolink” in April 2014” (“the Alleged Competition Claim”).

24.  The judge rightly reminded himself of the legal principles in relation to striking-out applications and found that it was at least arguable that Mr Lau could rely on the alleged misconduct of Mr Chu regardless of whether or not it caused the behaviour by Mr Lau, of which Mr Chu complains and says led to the breakdown of their relationship. Therefore, the alleged misconduct, whether pre-dating (the Alleged Misappropriation Claim) or post-dating (the Alleged Competition Claim) the breakdown of their relationship, may be relevant to the consideration of whether Mr Chu is entitled to the relief he currently seeks.

25.  Primarily for this reason, the judge dismissed the petitioner’s striking-out application.

Grounds of Appeal

26.  In summary, the petitioner advances 4 grounds of appeal:

(1)  The judge erred in holding that the pleaded matters were capable of giving rise to a lack of “clean hands” on the part of the petitioner;

(2)  The Alleged Misappropriation Claim is unsustainable;

(3)  The Alleged Competition Claim is unsustainable; and

(4)  The judge erred in dismissing the petitioner’s other grounds for striking-out as curable.

27.  The petitioner advances a number of arguments under Ground (1) suggesting that the judge erroneously held that it was at least arguable under Ng Yat Chi v Max Share & Another [2001] 1 HKLRD 561, that the Alleged Competition Claim and the Alleged Misappropriation Claim were capable of giving rise to a lack of “clean hands” defence, notwithstanding that the conduct in question was not causative of the breakdown in relationship between Mr Chu and Mr Lau.

28.  Firstly, relying on Ng Yat Chi and Re China International Business Development (Hong Kong) Limited (HCCW 603/2001, 14 February 2005 at §58), the petitioner argues that the Alleged Competition Claim is incapable of giving rise to a lack of “clean hands” defence because the alleged wrongdoing not only did not cause the breakdown of relationship, but occurred after the breakdown.

29.  We agree with the 1^st respondent that based on the pleadings, there appears to be dispute as to whether and when an irretrievable breakdown in mutual trust and confidence of the relationship between Mr Chu and Mr Lau occurred. The 1^st respondent has not admitted there was a breakdown in mutual trust and confidence in January 2014 as alleged in the petition, nor was it the case of the 1^st respondent that the two Restructuring Agreements were reached as a result of, or after, any irretrievable breakdown.

30.  As to the authorities cited by the petitioner in support of the proposition that misconduct, being not causative of the breakdown in mutual trust and confidence, could not be considered by the court in the context of a clean hands defence if the misconduct occurred after the breakdown, the 1^st respondent argues that it is not possible to identify any principled basis for imposing such a temporal limitation. We think this contention is arguable.

31.  Secondly, relying on Ng Yat Chi at 572I, the petitioner argues that the Alleged Misappropriation Claim did not constitute any “consistent and persistent abuse” of the petitioner’s position to defraud the Company as required for non-causative misconduct under Ng Yat Chi. This is evidenced by the fact that only one out of the 153 transactions (“the Subject Transfer”) concerned the Company.

32.  We agree with the 1^st respondent’s submissions that neither the Court of Appeal in Ng Yat Chi v Max Share Limited & Another [2001] 1 HKLRD 561 nor the Court of Final Appeal in Ng Yat Chi v Max Share Limited & Another (2001) HKCFAR 299 introduced the requirement that the abuse of position to defraud the subject company must be done so “consistently and persistently” for non-causative misconduct. Neither did Kwan J (as she then was) do so in Re China International Business Development (Hong Kong) Limited at §§57-58. The degree and severity of misconduct of Mr Chu, if any, and the extent to which Mr Lau can rely on such misconduct as a defence to Mr Chu’s claim for relief is a matter to be determined at trial and not in a striking-out application.

33.  Furthermore, whether or not the Subject Transfer, as well as the other transfers in the Annex formed part of the misappropriation committed by Mr Chu (as alleged by Mr Lau) is a question of fact and law to be determined at trial. See Lau v Chu [2020] 1 WLR 4656 at §§23 to 32, being the decision of the Privy Council in a dispute also between Mr Chu and Mr Lau. It is not appropriate at this stage of the proceedings to determine the nature of such transfers.

34.  Thirdly, relying on the dicta of Barma J (as he then was) at §91 in Cheung Sai Lun v Lau Tai Chin Francis and Another (HCCW 677/2004, 18 May 2007), the petitioner argues that the judge failed to take into account the relevant factor that the Company and PB Cayman were no longer in operation.

35.  However, a closer reading of §91 shows that Barma J only stated that “where a company concerned is still in operation (as was the case in Ng Yat Chi’s case), there will perhaps be a greater reluctance to wind it up at the instance of an undeserving petitioner”. The weight to be attached to the Company having ceased its business and whether or not the petitioner in this case is “undeserving” are matters to be determined at trial, not in a striking-out application.

36.  Fourthly, the petitioner argues that the interests of justice for the precise scope and application of Ng Yat Chi should be ventilated at an appellate level. We disagree as this inevitably depends on a finding of facts to be determined at trial.

37.  Under Ground (2), the petitioner argues that the judge failed to consider that the Alleged Misappropriation Claim is unsustainable because the APOD contains no pleading or particulars as to the nature of the alleged transfers and why such transfers would constitute misappropriations.

38.  Having read §29, in particular §§29.10(a)-(d) and the Annex and upon considering them as a whole, we are satisfied that sufficient particulars have been pleaded to support a claim of fraud so as to give the petitioner sufficient notice of the case it has to meet. We agree with the judge that the complaints about the adequacy of the pleadings are “arid”.

39.  Under Ground (3), the petitioner argues the judge failed to consider that the Alleged Competition Claim is unsustainable because the Alleged Competition only arose after the alleged PB Restructuring Agreement, at which time PB Cayman was no longer in operation and that Mr Lau had taken over the PB Cayman business and Mr Chu set up his own business in April 2014. Hence, as a result of Mr Lau’s own misconduct, there was no longer any business for Mr Chu to compete with. There is also complaint about a lack of proper pleading on wrongdoing or “competition” in the APOD.

40.  However, according to the petition, the Alleged Competition Claim is advanced at §40.3, which is not the subject of the striking-out application. We have already dealt with the arguments about the wrongdoing in the Alleged Competition Claim which allegedly occurred after the breakdown. We reject also the contention there is no proper pleading of any wrongdoing in the Alleged Competition Claim or that this is inconsistent with the 1^st respondent’s primary case, having considered Answer §1(i)(a) of the 1^st respondent’s Answers to the petitioner’s Requests for Further and Better Particulars.

41.  Under Ground (4), the petitioner argues the judge erred in dismissing the petitioner’s other grounds for striking out as being subsidiary points on the adequacy of pleadings or curable by amendments to the APOD and the 1^st respondent’s Answers to the petitioner’s Requests for Further and Better Particulars.

42.  Other than making this assertion, the petitioner fails to further elaborate how the judge had erred in exercising his discretion, especially in light of the judge’s observation at §17 of the Decision that based on the APOD, the Answers to the Requests for Further and Better Particulars, and the debates at various hearings, there is no room for misunderstanding about what the defences are.

Conclusion

43.  For all the above reasons, the threshold requirements for granting leave to appeal are not met. We refuse to grant leave and dismiss the petitioner’s application.

44.  As this application is totally without permit, pursuant to Order 59 Rule 2A(8), we further order that no party may request our determination herein to be reconsidered at an oral hearing inter partes.

45.  Costs of this application should follow the event. We make an order nisi that the petitioner is to pay the 1^st respondent’s costs. If there is no application to vary the order nisi or the summary assessment of costs within 14 days of the handing down of this judgment, they will be made absolute.

46.  In the 1^st respondent’s Statement of Costs dated 23 July 2021, the 1^st respondent asked for total costs in the sum of $156,941. We assess reasonable costs payable to the 1^st respondent at $130,000 by gross sum assessment.