CLEAR SUCCESS LTD v. 北京北大高科技產業投資有限公司

HCMP 1092/2019

[2019] HKCFI 2438

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1092 OF 2019

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REASONS FOR DECISION

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1.  On 25 July 2019, the plaintiff (“P”) took out the Originating Summons herein. It is supported by the 1^st affirmation of Zheng Zhong (“Zheng” and “Zheng #1”). The action concerns 169,446,298 shares (the “Shares”) in 天安保險股份有限公司 (“Tian An Insurance”) which have been registered in the name of the defendant (“D”). P seeks a Declaration that it is the sole beneficial owner of the Shares and that they have been held by D on trust for it (the “Declaration”). It also seeks an order that D do forthwith return or otherwise procure the transfer of the Shares or the same amount of unencumbered and fully paid up shares of Tian An Insurance to P.

2.  At the hearing, P sought leave to amend the Originating Summons so as to extend P’s claim to the traceable proceeds of the Shares.  Leave was also sought to place before me the 2^nd affirmation of Zheng (“Zheng #2”) to give me what has been described as an update on the matter.  I granted those 2 applications.

3.  D does not seek to defend the claim.  In a letter dated 19 August 2019 from its legal advisers (“Gall”) to P’s legal representatives, Gall said that D did not see any basis to oppose P’s claim, would adopt a neutral stance, and did not intend to file any evidence in opposition.

4.  P now seeks before me what is in effect a summary judgment under Order 28 rule 4(1).

5.  The issue that I am concerned with is whether, on the facts of this case, in the light of the legal proceedings in the Mainland, and in the light of the parities’ conduct, all of which I will explain below, I should summarily grant a declaration on the beneficial ownership of a very substantial holding of shares.

6.  Having heard Mr Zimmern, counsel for P, I dismissed the application and gave directions on the filing of evidence for the substantive hearing of the Originating Summons.  I said that I will hand down my reason.  I now do.

The facts, and P’s case

7.  P is a Cayman incorporated investment holding company.  Its shares are indirectly held in equal portions by SBI Hong Kong Holdings Company Limited and Beijing Beida Jade Bird Universal Sci‑Tech Company Limited (“Jade Bird”). Zheng has been a director of P since June 2010.

8.  D is a company incorporated in the Mainland.  It engages in the business of investment and asset management.  According to Zheng #1 (§6), D appears to have “a connection to a group of companies which can be loosely referred to as the Bedia [sic] Jade Bird Group”.  Mr Zimmern has confirmed that that indeed was a typographic error.  The word “Bedia” should be “Beida”. 

9.  Tian An Insurance is a Shanghai-based company incorporated in the Mainland with approval from the China Insurance Regulatory Commission.  It provides services and products relating to property insurance.

10.  According to Zheng (§9 of Zheng #1):

“ In about June 2000, as the joint‑venture investment body of SBI and the Beijing Beida Jade Bird Group, [P] decided to follow the investment strategy of the two parties and subscribe to the shares of [Tian An Insurance]. However, due to foreign exchange restrictions, there was not enough time for an offshore company like [P] to go through the normal approval process for remitting the amount of RMB required for the investment. As such, [P] decided to engage [D] to hold the shares on trust for [P].”

11.  It is P’s case that the Shares were then purchased in 2 batches. Two sets of documents have been produced, one in respect of each batch. Representative of each set of those documents are:

  (a)  an Investment Deed between P as investor and D relating to the subscription of the relevant batch (the “Investment Deed”); and

  (b)  a Share Subscription Agreement between Tian An Insurance and D for subscription of the relevant batch (the “Share Subscription Agreement”); and

  (c)  payment records said to evident P’s funding of the relevant subscription price.

12.  Mr Zimmern points to a number of clauses in the Investment Deed and submits that D owes P certain duties.  In particular, it is said that D has covenanted that it will not create any encumbrance over the Shares.  It is P’s case that in breach of those duties and in breach of trust, D without P’s knowledge and consent entered into guarantee agreements with a third party in 2011 and 2012 to serve as guarantor for loans unrelated to P.  When D subsequently became liable as guarantor for those loans, it allowed the Shares to be subject to a freezing order granted by the Sichuan Higher People’s Court (the “Freezing Order”).  The Freezing Order was on 25 July 2018 continued by the People’s Court of Zhongjiang County of Sichuan Province (the “Zhongjiang Court”) with its validity period extended to 24 July 2021.  Mr Zimmern submits that this is an encumbrance of the Shares and in breach of the Investment Deeds.

13.  According to §37 of Zheng #1:

“ …on or about 28 August 2018, [P] (after learning of the extended Freezing Order) applied to the Zhongjiang Court to set aside the Freezing Order. By a judgment dated 22 October 2018 (see pages 100‑105), the Zhongjiang Court rejected [P’s] application and upheld the Freezing Order. [P] has subsequently commenced proceedings at the Zhongjiang Court on or about 16 January 2019 raising formal objections to the enforcement action and the Freezing Order.”

Mr Zimmern in his written submission (§16) has picked up §37 of Zheng #1 and submitted that “P has sought to set aside the Freezing Order, but to no avail”. 

14.  In Zheng #2, it is said that the Zhongjiang Court will be holding a judicial auction of the Shares through the internet platform Taobao.com on 11 and 12 October 2019.  P hence seeks the Declaration urgently.  Zheng says, at §7 thereof, that:

“ …If [P’s] application [herein] were to succeed, I verily believe that it would go a long way to support [P’s] ongoing proceedings in the Zhongjiang Court, where [P] is objecting to enforcement actions…If the Zhongjiang Court were to have sight of the Hong Kong Court’s decision on the trust arrangement under the Investment Deeds governed by Hong Kong law, it may well re‑assess whether to hold the judicial auction in October.”

Discussion

15.  P is seeking a binding Declaration that it is the sole beneficial owner of the Shares.

16.  The power of this Court to make binding declaration of right is a discretionary one.  Though not a rule of law, it is a rule of practice of the court that a declaration can only be made after proper argument, and will not be granted by consent or in default without a trial — Hong Kong Civil Practice 2019, Vol 1, §15/16/2.

17.  P is seeking to invoke the Court’s equitable jurisdiction.  P is basing its claim, as framed by Mr Zimmern, upon express trust, resulting trust, and/or common intention constructive trust.  He who seeks equity must come with clean hands.

18.  With the above considerations in mind, having considered the evidence now before me, and for the following reasons, I refuse to exercise this Court’s discretion to grant the Declaration summarily at this stage.

19.  According to Zheng, D is apparently related to the Beida Jade Bird Group.  One of the “equal portions” shareholders of P is Jade Bird.  I have set out its full name above.  Its name suggests that it has a connection with the Beida Jade Bird Group.  If it is indeed the case, P and D are indirectly connected.

20.  The parties (nor Zheng) do not see fit to explain their exact relationship to this Court.

21.  In Gall’s letter of 19 August 2019 to P’s legal representatives (which I have referred to above), D said “As your client is aware, our client’s hands are tied by the [Freezing Order] made by the PRC Court, which renders our client unable to transfer the [Shares] to your client”.

22.  I note §9 of Zheng #1, which I reproduced above.  One way to look at the evidence is that D was in fact utilized by the parties to get round certain foreign exchange restrictions in the Mainland.  P and D in this sense are further clearly connected.

23.  If P and D are indeed connected, as they do appear to be, P may be regarded as in effect seeking to obtain, with no opposition from D, the Declaration from this Court in the hope of using the same to have the Freezing Order (which it appears both P and D find inconvenient) got rid of in the Mainland.

24.  As set out above, the Zhongjiang Court has upheld the Freezing Order. Its relevant Judgment (the “Zhongjiang Court Decision”) has been exhibited by Zheng as part of “ZZ‑1” (at pp 100 to 105).  Despite that, neither Zheng nor Mr Zimmern saw fit to explain the reasons of the Zhongjiang Court in affirmations or submissions.  I have received no assistance in this regard from D.    

25.  I took the initiative to study the Zhongjiang Court Decision.  It is in simplified Chinese.  I note its contents, and find the following matters significant:

  (a)  A party described as the “Disputer” has been named.  It is “北大青鸟思倍基金SPV”, but not P.  I do not know on the evidence as to whether they are the same;

  (b)  According to the Disputer, the Disputer provided the funds to D to subscribe the Shares, and D only held the Shares as its trustee (“受托人”).  On that basis, the Disputer sought to dispute the Freezing Order;

  (c)  The Zhongjiang Court however observed that D was in fact the registered holder of the Shares.  It pointed out that under Art 8 of the “保險公司股權管理規定”, unless with the permission of the China Insurance Regulatory Commission, no unit or person shall entrust another to hold any shares in any insurance company, and no one should accept to be so entrusted.  On that basis, the Zhongjiang Court held that the arrangement between the Disputer and D was in contravention of that regulation, and the grant of the Freezing Order was appropriate.

26.  In the light of the above, and even ignoring the fact that the Disputer might not be P, it appears that P and D are connected, the arrangement between them was put in place to get around foreign exchange restrictions in the Mainland to start with, and that those arrangements were further contrary to the “保險公司股權管理規定” in the Mainland.  The evidence at this stage at the very least gives rise to such interpretations.

27.  I note further that D has made certain warranties to Tian An Insurance in the Share Subscription Agreement.  The warranty at clause 3.4 is to the effect that D warrants that it fits the requirements imposed by the China Insurance Regulatory Commission on the qualifications of shareholders of insurance companies.  I have concern about the validity of that warranty in the light of the observations of the Zhongjiang Court in the Zhongjiang Court Decision, and have received no assistance on the issue.  

28.  In the circumstances, I am concerned about whether P comes with clean hands.  I am further concerned about whether in the light of such facts, I should exercise my discretion to grant the Declaration sought.

29.  No evidence has been adduced to address those concerns.

30.  I note further that at §15/16/3 of the Hong Kong Civil Procedure, it is suggested that “nor will a declaration be made merely to enable the plaintiff to utilize it in a foreign action (see Guaranty Trust of New York v Hannay [1915] 2 KB 536)”.  I at this stage form no view as to whether that decision is significant in the exercise of my discretion.  Counsel is not aware of that case, and I have received no submissions on the same.

31.  If there are any cases which may best illustrate the need and wisdom of the practice of the Court not granting binding Declaration without full argument and without a trial, this is one of them.

32.  I note further that:

  (a)  while the subject matters of this Originating Summons are shares, the remedy that P may ultimately obtain does not necessarily have to be in specie. P itself claims in the alternative the same amount of unencumbered and fully paid up shares of Tian An Insurance; and

  (b)  as revealed in Zheng #2 at §8, the scheduled auction of the Shares is subject to the provision by the judgment creditor of sufficient security, akin to an undertaking to pay damages which we are familiar with.  P’s only complaint in this regard is that it is not in a position to determine the sufficiency of the security provided.

33.  In all the circumstances, I refuse to exercise this Court’s discretion to grant the Declaration summarily at this stage.

34.  As a postscript, I add, as is obvious from the above, that the Zhongjiang Court Decision is clearly important.  I am disappointed by P’s (and its legal advisers’) decision not to explain why the Zhongjiang Court decided to uphold the Freezing Order whether in affirmation or submissions and to appropriately address them.  It is particularly so when no assistance is expected from D.  The parties are reminded that Courts in Hong Kong will not accept whatever half‑baked applications served on them without being satisfied judicially of their validity.  This is particularly so when it is an uncontested declaration of rights which the Court is concerned with.