YIFUNG PROPERTIES LTD AND OTHERS v. MANCHESTER SECURITIES CORP AND OTHERS

HCA 1341/2014 &
HCA1359/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1359 OF 2014

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AND

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1341 OF 2014

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D E C I S I O N

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1.  These are applications for striking out before me:

A. In HCA 1359/2014, 2 summonses by D1 and D4 (“MSC” and “Elliott” respectively) on one part and D2 and D3 (“the Receivers”) on the other part to strike out the amended writ of summons and the statement of claim; and

B. In HCA 1341/2014, by the plaintiff (“YDL”) to strike out part of the   defences of D1, D2 and D3 (“the ex-directors”).

BACKGROUND

2.  These 2 Actions have gone through prior injunction proceedings which led to 3 Decisions.  The first decision was given by me dated 17 November 2014 (“the Decision”) refusing to grant an injunction to the plaintiff Mortgagors in the 1359 Action to restrain the Receivers’ exercise of powers; but granting an interim mandatory injunction in the 1341 Action to YDL for the ex-directors to hand over company records and assets to YDL.  Applications for leave to appeal have been refused by me and the Court of Appeal (“the Leave Decision” and “the CA Decision” respectively). 

3.  The facts have been summarized in §§2-13 the CA Decision and I rely on the same.  I also adopt the abbreviations therein. 

4.  Briefly, YDL did not repay the 2^nd and 3^rd instalments of a loan to MSC, which remained outstanding since 17 March 2014.  MSC declared an event of default and exercised its rights under the security arrangements to appoint the Receivers over the YDL shares and obtained possession of a property subject to a legal charge.  MSC also exercised its rights under the equitable mortgages to change the directors of YDL and the WFOE owned by YDL.  The new directors are the same persons who had been appointed the Receivers.

5.  In 1341 Action, YDL (acting under the new directors) seeks (a) a declaration that as from 4 June 2014 the ex-directors had no authority to hold themselves out as directors of YDL; and (b) a mandatory injunction for the handing over of corporate records, assets and business premises to YDL, and to restrain the ex-directors from giving instructions to YDL’s auditors and banks. 

6.  In 1359 Action, the Mortgagors claim that there was no event of default and that MSC was estopped from declaring an event of default by virtue of an oral assurance given by James Smith on behalf of MSC to Ricky Liu for YDL (“the Assurance”).

7.  The core issues in the injunction proceedings were whether an event of default had occurred to justify the appointment of receivers and whether ex-directors have been rightly removed by the Receivers. The parties argued extensively over what were known as the Estoppel Point, the MLO Point and the Agency Point (“the 3 Points”).

8.  The 3 Points were held to be demurrable on their faces and did not raise serious issues to be tried.  Apart from refusing to grant the injunction sought, I also dismissed the plaintiff’s application to amend the writ in 1359 Action to raise the MLO Point and the Agency Point.

9.  Following on the CA Decision, the present summonses for striking out were restored or taken out.

LEGAL PRINCIPLES FOR STRIKING OUT

10.  Striking out is a draconian remedy.  A party should not lightly be denied his day in court.  Accordingly, pleadings should be struck out only in clear and obvious cases.  Disputed facts are to be taken in favour 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 pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out.  The mere fact that the case is weak and not likely to succeed is no ground for striking it out. Hong Kong Civil Procedure 2015, §18/19/4. 

11.  Where the limb of lack of reasonable cause of action or defence is relied on, no evidence is admissible.  The court should only look at the pleadings and decide whether on the assumption that the facts as pleaded are true the cause has some chance of success: O. 18, r 19(2).

12.  A proceeding is “frivolous” when it is not capable of reasoned argument, without foundation or where it cannot possibly succeed: Hong Kong Civil Procedure 2015, §18/19/8.  Where a litigant brings a claim knowing that there is no substance in it or that it is bound to fail, or if the claim is on its face so manifestly misconceived that it can have no prospect of success, it may be deemed frivolous and an abuse of process: see ET Marler Ltd v Robertson [1974] ICR 72 at 76D-E.  The court should see what the party in question knew or ought to have known if he had gone about the matter seriously: Cartiers Superfoods Ltd v Laws [1978] IRLR 315 at 317, §18.

13.  A proceeding is “vexatious” when it is oppressive and/or lacks bona fides: Hong Kong Civil Procedure 2015, §18/19/8. Vexatiousness implies the doing of something over and above that which is necessary for the conduct of the litigation, and suggests the existence of some spite, or desire to harass the other side to the litigation, or some other improper motive: Cartiers Superfoods, §16.

14.  To decide that the litigant has been frivolous or vexatious and thus abused the process of the court is a serious finding to make, for it will generally involve bad faith on his part and one would expect the discretion to be sparingly exercised: ET Marler Ltd v Robertson [1974] ICR 72 at 76G-H.

15.  Each limb under Order 18, rule 19(1) forms a separate ground for striking out as is evidenced by the disjunctive “or”. Accordingly, although a cause of action might appear to be reasonable on the face of a set of pleading, the court is at liberty to consider evidence and decide if the pleading should be struck out under another limb.

16.  The test for showing serious issues to be tried in order to grant an injunction under the American Cyanamid principles are different to those for striking out.  In respect of the former, the court undertakes “what is in effect a preliminary trial of the action upon evidential material different from that upon which the actual trial will be conducted”: American Cyanamid Co. v Ethicon Ltd [1975] AC 396, at 406H, per Lord Diplock.  Showing a “serious issues to be tried” is not a high threshold.  An applicant (then Ricky Liu’s camp) needs only to show that the matter is not demurrable on its face, regardless of whether its chances of success in establishing liability at the trial are 90% or 20%: §§21-22 of the Decision.  In respect of striking out, the applicants (here being the defendants in the 1359 Action and the plaintiff in the 1341 Action) must show that the pleadings are unarguably bad.

APPLICATION OF THE LEGAL PRINCIPLES – THE 1359 ACTION

17.  The applicants rely on Order 18, rule 19(1)(a), (b) and (d), ie that the statement of claim discloses no reasonable causes of action, is frivolous or vexatious, and an abuse of the process of the court.

Lack of reasonable cause of action

18.  The only cause of action in the amended writ and statement of claim is based on the Estoppel Point.  Ms Chan SC argues that the viability of this cause of action, namely the clarity of the meaning in substance of the Assurance, is fact-sensitive and can only be resolved at trial. As such, the court must give the Mortgagors the opportunity to prove their case at trial.

19.  On the assumption that the facts in the statement of claim are true, there may be a reasonable cause of action in the Estoppel Point.

Frivolous or vexatious and abuse of court process

20.  The court is at liberty to consider evidence under limbs (b) and (d) of Order 18, rule 19(1).

21.  The findings in the Decision that the 3 Points did not give rise to serious issues to be tried and refusal of leave to amend the writ to include the MLO Point and Agency Point satisfied the high threshold for striking out a statement of claim: Ren Yun Liang v China Merchants Bank Co Ltd, HCA 1456 of 2005, 29 January 2007, Recorder B Yu, SC, §32; followed in GDH Ltd v Creditor Co Ltd [2008] 5 HKLRD 895, DHCJ To (as he then was), §19; Dong Shing F & T Co Ltd v Hanmec Co Ltd [2010] 5 HKLRD 261, §42, Fok J (as he then was). 

22.  There has been no material change to the factual circumstances since the Decision save that the writ in 1359 Action has been amended to plead some uncontroversial facts.

23.  I take note of the fact that things moved quickly since the Event of Default was declared in March 2014.  Pleadings and affirmations had to be filed in haste.  Discovery is incomplete.  Allegedly there was insufficient time for Ricky Liu to recount to its former solicitors the history of the Mortgagors’ dealing with MSC.  In addition, the Ricky Liu’s camp was not a sophisticated financial body (like MSC) acting with the assistance of legal counsel. 

24.  However, as noted in §19 of the CA Decision, the Ricky Liu’s camp was not deprived of any opportunity to present its factual case.  It has had 4 hearings to present its case, ie a call-over hearing and substantive hearings which led to the 3 Decisions.

25.  Specifically, on the Estoppel Point, Ricky Liu’s camp argued that this court has “erred in determining significant disputes of fact based on hotly disputed affidavit evidence and the [plaintiffs] were deprived of the opportunity to properly explain and adduce evidence in the possession, custody and control of the defendants yet to be discovered and to cross-examine the defendants’ witnesses”.  It also argued that in deciding whether the assurance was given and relied on, this court has failed to take into account certain matters.  Those arguments were held to be a re-run of the arguments at the substantive hearing: §§7 and 8 of the Leave Decision; §§16 and 17 CA Decision.

26.  Assuming that Ricky Liu’s camp had genuinely thought that it had a viable claim when the writ was first filed, having gone through 2 levels of court in the injunction proceedings, it should have known that there was no substance in the 3 Points. Ricky Liu’s camp might have been keen to avoid the consequences of default in repayment rather than harassing the other side.  However, had it seriously considered the 3 Decisions, it would have known that its causes of action were so manifestly misconceived that they could have no prospect of success: ET Marler Ltd v Robertson.  This is particularly so since I have held that the proposed causes on the MLO Point and Agency Point would have been struck out for being frivolous and vexatious (§123 of the Decision) when I refused leave to amend the writ.  The resistance to the striking out is thus another “try on” with the same arguments. It is frivolous and an abuse of process.

27.  Separately, I have considered whether or not I should preserve the action since there is an arguable issue on whether MSC has charged the right amount of interest (§54 of the Decision).  Mr Mok SC convinces me that I should not.  This is because there is no pleaded cause of action for the court to rule on the amount due under the facility arrangement.  It is not a claim by MSC against YDL for repayment.  If MSC does make such a claim after I strike out the 1359 Action, there is no bar to YDL or the Mortgagors contesting the quantum of interest.

28.  In the premises, the amended writ and the statement of claim were not just weak but ought to be struck out for being frivolous and an abuse of process of the court; and the action ought to be dismissed.

APPLICATION OF THE LEGAL PRINCIPLES – THE 1341 ACTION

29.  Ricky Liu and the other 2 ex-directors have filed separate defences of similar substance.  The relevant parts of those defences that YDL seeks to strike out can be classified as follows:

(a) That there was no event of default which would have entitled MSC to enforce any of the securities given by the Mortgagors (“the No Event of Default Point”);

(b) That the FA, the Equitable Share Mortgage Agreements, the Escrow Agreement, the Property Mortgage and the IRD (collectively “the Agreements”) were subject to implied terms (“the Implied Terms Point”);

(c) The Estoppel Point;

(d) The MLO Point; and

(e) The Invalid Appointment of Receivers Point.

30.  YDL relies on all limbs of Order 18, rule 19(1) and the inherent jurisdiction of the court.  Ms Linda Chan SC made her submission without prejudice to her position under another summons filed on 21 July 2015 whereby Ricky Liu’s camp challenged the authority of the Receivers (“the authority summons”).

The No Event of Default Point

31.  This point is plainly unarguable.  It was not pursued at the injunction proceedings.  An event of default occurred upon non-payment on the due day of any amount payable, in this case, the 2^nd and 3^rd instalments: §54 of the Decision. 

The Implied Terms Point

32.  Ms Linda Chan SC submits that the court will readily imply a term that each party to a contract will cooperate with the other to secure performance of the contract and that neither party will, by his own act or default, prevent performance of the contract: Chitty on Contracts, (31^st ed) §24-033.  She contends that the implied terms were necessary to give business efficacy to the Agreements.

33.  She contends that the combined effect of the FA and the IRD was that YDL was unable to repay the Loan or the 2^nd Settlement Sum without MSC’s consent.  Knowing that to be the case, and that the only way for YDL to raise funds was to obtain re-financing from a new lender, MSC never gave consent to YDL to do so.  MSC thus acted in breach of the Implied Terms, which prevented an event of default from occurring.

34.  With respect, the contentions are unsustainable.  In the 1341 Action, MSC is not a party.  In the 1359 Action, the Implied Terms and MSC’s breach of them were not pleaded.  Clause 6.1 of the FA required YDL to repay instalments by specific dates (subject to extensions) which were not conditional upon YDL’s financial ability.

35.  In any case, the Implied Terms Point is to undermine the occurrence of an event of default.  For the reasons given in paragraph 31 an event of default would have occurred anyway.  This Point is plainly unarguable.

The Estoppel Point and MLO Point

36.  For the same reasons given as for the 1359 Action, these 2 Points are plainly unarguable.

The Invalid Appointment of Receivers Point

37.  This court has already found no serious issue to be tried on this Point: §§89-90, 100 of the Decision; §28 CA Decision.  Ms Linda Chan SC, however, relies on section 66(7) of the BVI Business Companies Act 2004 “as modified by clause 7.9(c) of the Equitable Share Mortgages”. Those provisions require a period of one hour to elapse from the occurrence of an event of default and the Event of Default had not been rectified within one hour of service of a notice specifying the default and requiring rectification thereof.

38.  This point was originally taken in the injunction proceedings but abandoned when the Receivers issued a 2^nd notice of default on 28 March 2014 that met the requirements of the 2004 Act (§8 of the Decision).  This is a desperate attempt of the defendants to revive an admittedly unarguable point.

39.  In summary, I find that the subject paragraphs of the defence are incurably bad and ought to be struck out.

COSTS

40.  Insofar as HCA 1341/2014 is concerned, costs shall be reserved until after disposal of the authority summons as I have indicated to the parties at the beginning of this hearing. 

41.  Insofar as HCA 1359/2014 is concerned, costs should follow the event and be borne by the plaintiffs.  In principle, there should be indemnity costs to the defendants, given that Ricky Liu’s camp has made a desperate re-run of the arguments advanced for the injunction proceedings and revived abandoned points.

42.  I remind myself that there is overlap in evidence and arguments of Mr Bartlett SC in both Actions and so the costs to be awarded under the 1359 Action has taken into account the need for apportionment.

43.  Mr David Chen (counsel for the plaintiffs) objects to the huge costs claimed by the defendants.  I share his sentiments.  This is the 5^th occasion when the same teams of counsel appeared to argue on the merits of the 2 Actions.  Almost all the costs for preparing the evidence were incurred in the injunction proceedings.

44.  The law on striking out is well-settled.  The present applications are not difficult since the various Points have been fully canvassed in the injunction proceedings and there was heavy reliance on the 3 Decisions.  It was unnecessary for the defendants to recite the facts in detail in their affirmations or for Mr Bartlett SC to do so in his skeleton submission.  Without disrespect, there was no need to engage junior counsel notwithstanding the importance of this case to D1 and D4.

45.  Further, there was no coordination in photocopying amongst parties so, eg, I have over one set of the 3 Decisions and related orders.

46.  I had substantially cut down the costs for the 1359 Action in the injunction proceedings and so had the Court of Appeal.  The costs statements in the present applications are for the following sums:

(a) For the plaintiffs: $320,292.00 in respect of the 1359 Action (and for comparison purpose, plaintiffs’ costs of $358,052.00 in respect of the 1341 Action, totalling $678,344.00);

(b) For D1 and D4: $991,230.00 in respect of HCA 1359/2014;

(c) For D2 and D3: $250,735.00 in respect of HCA 1359/2014 (and for comparison purpose, YDL’s costs of $394,993.00 in respect of the 1341 Action).

47.  Ricky Liu’s camp had filed lengthy skeleton submissions though not lengthy affirmations.  Being in debt, it was desperately finding a way out but that should not prevent the defendants from exercising good sense and focusing on the real issues.  The level of costs claimed by the defendants is not just grossly excessive but oppressive – to the client, the paying party and probably the entities liable under the Agreements.  I disallow all costs beyond one fee earner.

48.  I summarily assess costs on indemnity basis (disallowing unreasonable costs), at $202,343 for D1 and D4, and $82,868 for D2 and D3, to be borne by the plaintiffs.

CONCLUSION

49.  I order as follows:

(A) In respect of HCA 1359 of 2014,

(1) The statement of claim should be struck out and the action dismissed;

(2) On a nisi basis, costs of D1 and D4 are summarily assessed at $202,343 to be paid by the plaintiffs; and

(3) On a nisi basis, costs of D2 and D3 are summarily assessed at $82,868 to be paid by the plaintiffs.

(B) In respect of HCA 1341 of 2014,

(4) Those paragraphs of the defence of D1 and that of D2 and D3 as set out in paragraph 2 of the summons be struck out; and

(5) Costs are reserved to be dealt with after the hearing of the authority summons.

50.  I thank counsel for their assistance.