張才奎所託管中國山水投資有限公司股份 AND ANOTHER v. 張才奎 AND ANOTHER

HCA 1661/2014,
HCA 1766/2014,
HCA 2191/2014,
HCA 623/2015,
HCA 939/2015 &
HCA 1564/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1661, 1766 & 2191 OF 2014 AND 623, 939 & 1564 OF 2015

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D E C I S I O N

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INTRODUCTION

1. The present consolidated action consists of 6 separate actions brought by a total of 2,631 individual plaintiffs residing in the PRC who claim to be beneficially entitled to a total of 456,325 ordinary shares in a Hong Kong company known as China Shanshui Investment Company Limited (“CSI”), amounting to approximately 45.63% of all the issued share capital thereof, presently held by the 1^st defendant as trustee on their behalf.

2. On 20 August 2015, G Lam J made an order consolidating the 6 actions.

3. On 8 September 2015, a consolidated statement of claim was filed on behalf of the 2,631 plaintiffs.

4. On 13 October 2015, 2,277 of the plaintiffs (“the 2,277 plaintiffs”), whose names and PRC Identity Card numbers are more particularly set out in exhibit “GY-60” to the 10^th affirmation of Gao Yong filed on 13 October 2015, took out a summons under Order 14 of the Rules of the High Court seeking (inter alia) an order that the 1^st defendant do forthwith transfer a total of 399,600 shares in CSI beneficially owned by them to a trustee or trustees to be named by them or their solicitors.

5. The 1^st defendant opposes the present application on two grounds, namely:-

(1)  the court has no jurisdiction to enter summary judgment for the 2,277 plaintiffs because their action includes a claim based on an allegation of “fraud”; alternatively

(2)  there are triable issues, in particular, whether the trust as alleged by the plaintiffs existed at all.

SUMMARY OF PLAINTIFFS’ CASE

6. These actions have already generated a number of decisions by the Court of First Instance and the Court of Appeal, including a decision of G Lam J handed down on 13 May 2015 in HCA 1661, 1776 and 2191 of 2014 relating to the 1^st defendant’s application to set aside certain orders for substituted service of the writs on him made in the three actions and another order for leave to serve the writ out of the jurisdiction on him made in HCA 1661 of 2014 (“the Jurisdiction Decision”).

7. A comprehensive summary of the background facts leading to this consolidated action can be found in paragraphs 1 to 44 of the Jurisdiction Decision. No useful purpose would be served by my seeking to summarise the facts again in my own words.  I would gratefully adopt the summary of facts given by G Lam J for the purpose of this decision.

8. In paragraphs 55 to 62 of the Jurisdiction Decision, G Lam J also gave a summary of the plaintiffs’ claims in this consolidated action.  A concise statement of the plaintiff’s case can be found in paragraph 2.6 of the 1^st skeleton argument of Ms Audrey Eu SC and Mr Lam Man‑Chung (counsel for the plaintiffs) dated 7 January 2016, as follows:-

(1)  The plaintiffs contributed capital to and obtained corresponding equity interests in a PRC company named Jinan Chuangxin Investment Management Company Limited (“Jinan Innovation”), later renamed Shandong Shanshui Cement Group Company Limited (“Shandong Shanshui”).  As a result of certain restructuring, the plaintiffs’ ownership of the shares in Shandong Shanshui was converted into shareholding in CSI, which in turn currently holds 25.09% of the shareholding in China Shanshui Cement Group Co Ltd (“CSC”), a Cayman company whose shares are listed on the Stock Exchange of Hong Kong, with stock code 691.

(2)  The 1^st defendant has admitted that he holds the total of 456,325 CSI shares (including those CSI shares previously held in the name of the 2^nd defendant which were later transferred to the 1^st defendant) on trust for the plaintiffs.

(3)  The 1^st defendant does not assert any absolute beneficial interest in those 456,325 CSI shares.

(4)  However, in breach of trust and without the consent of the plaintiffs, the 1^st and 2^nd defendants wrongly placed those CSI shares beneficially owned by the plaintiffs into two BVI discretionary trusts, respectively namely the Zhang Trust and the Li Trust (collectively the “BVI Trusts”).  As a result, the plaintiffs’ proprietary interest in the shares in CSI was wrongfully converted into a mere hope or expectancy under the BVI Trusts.

(5)  Hence, the plaintiffs sue the 1^st defendant for the return and transfer of their shares in CSI.

SUMMARY OF 1^ST DEFENDANT’S CASE

9. A brief synopsis of the 1^st defendant’s case appears in paragraphs 63 and 64 of the Jurisdiction Decision.  Although the 1^st defendant has not yet filed any defence in the present consolidated action, a draft defence has been produced as exhibit “ZCK-97A” to the 1^st defendant’s 14^th affirmation filed on 9 December 2015.

10. The following summary of the 1^st defendant’s case is based on paragraph 19 of the 1^st defendant’s skeleton argument for the Order 14 application of Mr Paul Lam SC and Mr Jean-Paul Wou (counsel for the 1^st defendant) dated 8 January 2016:-

(1)  Under the Employees Stock Ownership Scheme (“the Scheme”) promoted by Jinan Shanshui Group Limited, a state-owned enterprise established under PRC law, in 2000, the contributing employees enjoyed economic rights only, namely, a contractual right to receive from the shareholders distributions of profits made by three PRC Companies, namely, (a) Shandong Shanshui, (b) Jinan Shanshui Lixin Investment and Development Co Ltd, and (c) Jinan Shanshui Jianxin Investment and Development Co Ltd, but no rights and status as beneficial shareholders in those companies.

(2)  According to the 委托代理協議 (“Entrustment Letter”) signed in February 2001 and reaffirmed by the股權委託聲明 (“Equity Interest Entrustment Declaration”) signed in early 2005, the relationship between the defendants and the contributing employees was a contractual relationship governed by the PRC Contract Law.

(3)  Under PRC law, the said contractual arrangement constituted a 完全隱名投資.  While the contributing employees could claim against the defendants for an account of their economic rights, they could not demand to become the registered shareholders of the PRC Companies.

(4)  Such contractual arrangement also did not constitute a trust under PRC law.

(5)  The Scheme was terminated in September 2005 when Shandong Shanshui became a foreign wholly owned enterprise.

(6)  In about April 2008, as part of the listing exercise for CSC, the contributing employees signed the 確認函 (“Letter of Confirmation”).

(7)  The 1^st defendant never holds any shares in CSI pursuant to the trust as alleged by the plaintiffs (“the Hong Kong Trust”).  The Hong Kong Trust never exists.

(8)  The BVI Trusts were established in order to continue the spirit and substance of the Scheme.  Hence, the contributing employees were named as beneficiaries under those trusts.  Further, there was an implied understanding that the trustees under the BVI Trusts would exercise their discretionary powers to ensure that the contributing employees would enjoy the same economic rights as under the Scheme.

(9)  The contributing employees were aware of, and had consented to, the creation of the BVI Trusts.

(10)  Pursuant to the said implied understanding, the defendants had, in their capacity as trustees of the BVI Trusts, distributed profits of CSI to the contributing employees on three occasions.

(11)  Hence, the rights of the contributing employees have not been diminished, let alone, extinguished as alleged.

11. In paragraph 20 of the 1^st defendant’s skeleton argument, it is said that the central issue in the present case is whether the Hong Kong Trust existed at all.

THE “FRAUD EXCEPTION”

12. Order 14, rule 1(2)(b) of the Rules of the High Court provides as follows:-

“Subject to paragraph (3)[1] this rule applies to every action begun by writ other than –

(b) an action which includes a claim by the plaintiff based on a allegation of fraud”.

13. As is well known, the Hong Kong courts have departed from the approach of the English courts regarding the scope of the exception (“the fraud exception”) referred to in Order 14, rule 1(2)(b) of the Rules of the High Court.  The scope of the fraud exception in Hong Kong has recently been comprehensively reviewed by the Court of Appeal in Zimmer Sweden AB v KPN Hong Kong Limited [2016] 1 HKLRD 1016  (11 January 2016).  Yuen JA, with whom Lam VP and Kwan JA agreed, set out the applicable principles in paragraph 18 of her judgment in that case, as follows:-

“(1) The court should determine whether ‘the fraud exception’ applies at the time when the application for summary judgment is heard. Therefore the court should not be restricted to a consideration of the statement of claim only, but should examine all relevant materials existing at the time of the hearing, including subsequent pleadings and the affidavits. (It would be noted that in Pacific Wire, the court even took into account the skeleton argument of the plaintiff’s counsel at first instance. With respect I tend to the view that given the nature of skeleton submissions, they should be considered only where they serve to clarify an ambiguity in the plaintiff’s case).

(2) Having regard to all the relevant materials, the question to be asked by the court is ‘does this action include a claim for which an allegation of fraud would have to be made by the plaintiff in order to establish or maintain that claim?’ If the answer is affirmative, ‘the fraud exception’ is engaged and the court has no jurisdiction to hear the summary judgment application, even if the plaintiff seeks to hive off that claim from another claim (eg for dishonoured cheque) for which summary judgment would have been available. That consequence follows from the wording of ‘the fraud exception’ (Pacific Wire para. 19).

(3) In considering whether an allegation of fraud would have to be made to establish or maintain a claim, one must look at thesubstance, and not the mere form, of the plaintiff’s case. If all the factual constituents of fraud are alleged and relied upon, it does not matter whether the actual word ‘fraud’ has or has not been used (Newton p.1301).

(4) The court must consider whether those factual constituents of fraud are relied upon in order to establish or maintain a claim. In Newton, the court accepted that the factual constituents of a Derry v Peek fraud had been set out in the pleadings. However in order to establish the plaintiff’s claims of breach of contract, breach of fiduciary duty and negligence, it did not need to make any allegations of fraud. On the facts of that case, the breach of contract, breach of fiduciary duty and negligence would still be established, even if the defendant had been completely honest, and was only mistaken (p.1302). It would appear from the report that the defendant had not pleaded a defence which the plaintiff needed to reply to by alleging fraud on the part of the defendant. This may be contrasted with A-1 discussed below.

(5) It may be that originally a claim (eg breach of fiduciary duty) may be established without the plaintiff having to make an allegation of fraud (as in Newton). But the nature of the defence (whether disclosed in a pleading or an affidavit) may be such that in rebuttal (whether in a Reply or in an affidavit in reply), the plaintiff would have to allege fraud, in which case, ‘the fraud exception’ would be engaged. So for example, in A-1 the defence was that there was no breach of fiduciary duty because the receipt of money was pursuant to a declaration of dividend. In reply to this defence, the plaintiff alleged that the declaration was an ex post facto fabrication. Consequently, by the time of the hearing of the summary judgment application, the plaintiff would have to make out an allegation of fraud by the defendant in order to maintain the claim for breach of fiduciary duty.

(6)  Finally, as to what is an allegation of fraud for the purpose of ‘the fraud exception’, this court is bound by the judgment in Pacific Wire to adopt the wide/liberal meaning.  The rationale for adopting a wide meaning had been suggested by Kaplan J in Skink and adopted by this court in the Pacific Wire judgment.  That judgment cannot be said to be plainly wrong. Further if the narrow meaning is adopted, the anomaly observed in Newton would arise, viz summary judgment would not be available for only one type of dishonest conduct, but available for all other types of dishonest conduct.  To conclude, ‘the fraud exception’ would be engaged where what is alleged is an intentional or reckless dishonest act (or omission) done with the purpose of deceiving.”

14. From the above exposition by the Court of Appeal of the fraud exception, three points should be noted:-

(1)  In considering whether the fraud exception applies, the court is not restricted to a consideration of the statement of claim only, but should examine all relevant materials existing at the time of the hearing, including subsequent pleadings and affidavits.  If pleadings and affidavits can be considered, I can see no reason in principle why allegations raised in letters before action cannot also be considered.

(2)  The court should consider the substance, and not the mere form, of the plaintiff’s case in deciding whether the fraud exception applies.

(3)  For this purpose, “fraud” means an intentional or reckless dishonest act (or omission) done with the purpose of deceiving.

15. In my view, the fraud exception applies in the present case.

16. In the consolidated statement of claim, it is alleged (inter alia) that:-

(1)  The plaintiffs’ shareholding (ie, their beneficial interests in the shares) in CSI were transferred by (inter alia) the 1^st defendant into the BVI Trusts without their knowledge or consent (paragraph 1.6).

(2)  The aforesaid transfer was carried out in breach of the Hong Kong Trust (paragraph 4.1).

(3)  Under the Hong Kong Trust, the plaintiffs had absolute interests and total rights in the CSI shares.  However, under the BVI Trusts, they no longer had any interest or right in the CSI shares.  Instead, they became subject to the absolute discretion of the 1^st defendant, and had only a hope or expectancy that the 1^st defendant would exercise his discretion in their favour, under the BVI Trusts (paragraphs 4.2 to 4.4).

17. Although a breach of trust does not necessarily involve dishonesty, in the context of the present claims, it seems to me obvious that the plaintiffs are complaining that the 1^st defendant acted dishonesty in seeking to deprive them of their beneficial interests in the CSI shares.

18. In this regard, the allegation that the 1^st defendant transferred the CSI shares beneficially owned by the plaintiffs into the BVI Trusts, thereby putting them under his absolute discretion, without the plaintiffs’ knowledge or consent cannot be looked at in isolation.  That allegation must be viewed in the light of further allegations of wrongdoing complained of by the plaintiffs in the consolidated statement of claim and affidavits, including:-

(1)  a share repurchase plan by the 1^st defendant to effectively buy out the plaintiffs’ interests in the BVI Trusts using dividends paid by CSI to him as trustee of the shares under the BVI Trusts (see paragraphs 4.5 of the consolidated statement of claim);

(2)  the board of directors of CSC granting options to various persons (including the 1^st defendant and his son) to subscribe for new shares in CSC with the intention of further diluting CSI’s shareholding in CSC from 25.09% to 23.64% (see paragraphs 38 to 39 of the Jurisdiction Decision); and

(3)  the proposal to hold an EGM of CSC to grant the said share options to the 1^st defendant and his son (see paragraph 42 of the Jurisdiction Decision).

19. It seems to me to be clear that the plaintiffs, by raising these further allegations, are imputing that the 1^st defendant was seeking to improperly deprive the plaintiffs of their beneficial interests in the CSI shares, and/or consolidate his improperly obtained control of CSI/CSC.

20. Further, in an open letter signed by over 140 contributing employees to (inter alia) the 1^st defendant in November 2013, it was alleged, amongst other things, that:-

(1)  “It can be clearly seen that, [the 1^st defendant] and his son, one is hidden behind and the other is directing in front, staging a farce of using both intimidation and inducement to cheat all shareholders into share surrender and transfer.”

(2)  “From [the 1^st defendant’s] deliberately planned so-called ‘repurchase’ plan and ‘Distribution Scheme of Income on Withdrawal”, we can clearly see the word ‘rob’, as well as [the 1^st defendant’s] attempts to turn our property into heritage, heritage to no property and finally into [the 1^st defendant’s] property, making us slaves, penniless vagrants!  And [the 1^st defendant] will become a billionaire.  We are all aware of that in what [the 1^st defendant] did this time.  ‘Repurchase’ is only [the 1^st defendant’s] cover to embezzle the properties of others.”

21. I should mention that the aforesaid letter was written in the Chinese language, and the above quotes are taken from an English translation of the letter which has also been produced as part of the relevant exhibit.

22. In my view, although the words “fraud” and “dishonesty” have not been used in the consolidated statement of claim, the plaintiffs’ allegation that the 1^st defendant transferred their beneficial interests in the CSI shares into the BVI Trusts without their knowledge and consent, thereby seeking to deprive them of all legal rights and entitlements to those shares, must amount, in substance, to an allegation of intentional or reckless dishonest act done with the purpose of deceiving.  It follows that the court has no jurisdiction to grant summary judgment under Order 14 of the Rules of the High Court in the present case.

TRIABLE ISSUE: EXISTENCE OF HONG KONG TRUST

23. Having reached the conclusion that the court has no jurisdiction to grant summary judgment in the present case and therefore this action has to go to trial, it would not be appropriate for me to express any firm views on the merits of the plaintiffs’ claims against the 1^st defendant.

24. I would merely state that, even if I were to come to the view that the court has jurisdiction to grant summary judgment, I would still not be prepared to do so in this case.  My brief reasons for taking this view are as follows.  In order to make out their case, the plaintiffs will have to establish not only that the 1^st and 2^nd defendants’ original holding of part of the shares in Jinan Innovation was on trust for the plaintiffs, but also that they held the CSI shares on trust for the plaintiffs on the same or similar basis.

25. There is, I accept, considerable force in Ms Eu’s submission that, having regard to contents of the contemporaneous documents, including in particular the Entrustment Letter signed in February 2001 and the Equity Interest Entrustment Declaration signed in early 2005, the 1^st and 2^nd defendants’ original holding of part of the shares in Jinan Innovation was on trust for the plaintiffs notwithstanding the expert opinion on PRC law produced by the 1^st defendant.

26. However, the subject matter of the plaintiffs’ claims in this consolidated action relates to shares in CSI, not shares in Jinan Innovation.  The establishment of CSI, and the subsequent allotment or transfer of shares in CSI to the 1^st and 2^nd defendants, were the result of a restructuring exercise which began in 2005 in connection with the eventual listing of CSC on the main board of the Stock Exchange of Hong Kong in 2008.  There is a description of the restructuring exercise in CSC’s prospectus dated 20 June 2008.  The underlying documents relating to the restructuring exercise are not before the court.  It is not clear, on the presently available materials, as to how the trust in respect of the shares in CSI as claimed by the plaintiffs (ie, Hong Kong Trust) was constituted.  It may that the 1^st and 2^nd defendants were under some legal obligation to constitute a trust in respect of the shares in CSI which mirrored the substance of the previous trust on which they held the shares in Jinan Innovation.  The determination of this issue requires, however, a detailed examination of the nature and effect of the documents executed in relation to the restructuring exercise as well as the circumstances in which those documents came to be executed which can only be done in a trial.

27. There are some subsequent documents signed by the defendants, including two declarations for the Register of Foreign Exchange for Overseas Investment of Individual Resident in China (境內居民個人境外投資外登記表) in respect of 52.37% shareholding in CSI signed by the 1^st defendant and two declarations for the Register of Foreign Exchange for Overseas Investment of Individual Resident in China (境內居民個人境外投資外登記表) in respect of 9.4% shareholding in CSI signed by the 2^nd defendant, which Ms Eu submits support the plaintiffs’ case in respect of the Hong Kong Trust.  However, the meaning and effect of those documents are disputed by the 1^st defendant.  I do not feel able to find the plaintiffs’ case in respect of the Hong Kong Trust proved on the strength of these subsequent documents, whether on their own or in conjunction with other materials relied on by the plaintiffs.

28. In all, I consider that the issue of whether the 1^st defendant holds the CSI shares upon the Hong Kong Trust for the plaintiffs is an issue which ought properly to be determined in a trial in the light of all relevant contemporaneous documents and evidence.

DISPOSITION

29. In view of my conclusion that the fraud exception applies in this case, I dismiss the 2,277 plaintiffs’ summons dated 13 October 2015.  I also make an order nisi that the 2,277 plaintiffs shall pay the 1^st defendant’s costs of and occasioned by the summons, to be taxed if not agreed with certificate for two counsel.

30. Lastly, it remains for me to thank counsel for the assistance that they have rendered to the court.