CHINA BAOLI TECHNOLOGIES HOLDINGS LTD (formerly known as REX GLOBAL ENTERTAINMENT HOLDINGS LTD) v. ORIENT EQUAL INTERNATIONAL GROUP LTD AND OTHERS

HCA 1399/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1399 OF 2016

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R U L I N G

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Introduction

1.  There are three summonses before me[1]:

(1) the defendants’ summons dated 24 August 2016 (together with an application by summons to amend the same) for striking out of Squadron Holdings SPV0164HK Limited (“Squadron”) on the basis that it was non‑existent and had no authority to sue (“the Authority Summons”); and

(2) an application by Squadron Holdings SPV0164HK Limited (incorporated on 17 August 2016) dated 24 October 2016 to have leave to adopt these proceedings or part thereof, and for Mr D Sean Nottage or Squadron Holdings Limited (“SHL”) to have leave to be joined as an interested party and to adopt these proceedings in the name of Squadron (“the Joinder Summons”), together with a summons dated 7 November 2016 for Squadron to have leave to file and serve the 2^nd  Affidavit of Gordon David Michael George Oldham and for abridgement of time for the summons.

2.  The parties were last before me on 22 August 2016 at a hearing at which the plaintiff, Squadron (whether it be Squadron or Incorporated Squadron) together with SVK Capital Management (“SVK”) were due to argue various matters, the substance of which was the question of whether Squadron and SVK should be bound by an injunction obtained by the plaintiff against the defendants, or otherwise should be enjoined by the terms of a similar injunction by the defendants against them.

3.  A brief history of the proceedings was set out in my ruling on 23 August 2016, and I do not propose to repeat the same.

4.  At the conclusion of the last hearing, I gave orders that the Authority Summons be heard before me on 10 and 11 November 2016, that the other applications be heard at a four day hearing to be fixed not in consultation with counsels’ diaries not earlier than 28 days from the conclusion of the hearing of the Authority Summons, together with directions for filing of evidence to ensure that the Authority Summons could be properly dealt with.

5.  The Authority Summons is dated 24 August 2016, one day after my ruling.  This unusual state of affairs arose because the Authority Summons required leave to be issued during the court vacation, which leave was granted as part of my ruling on 23 August 2016.

6.  The matter that led to the Authority Summons was the discovery of the non‑existence of Squadron in that evidence had been produced by the defendants that Squadron did not exist and did not appear on the companies registry of the Bahamas.

7.  Squadron did not seek to deny its non-existence as a corporation, but sought to deal with the Authority Summons by production of a certificate of incorporation showing that it was incorporated on 17 August 2016 (which was the Wednesday before the hearing on 22 August 2016), and pleading reliance on s 70 of the International Business Companies Act 2000 of the Bahamas (“the Act”), which provides that a company may, within 90 days of incorporation, adopt a pre incorporation contract and that in the circumstances, the company shall be bound by and entitled to the benefits of such pre‑incorporation contract as if the company had been in existence at the date of the contract and had been a party to it.

8.  Squadron’s position was (and is) that the subsequent incorporation, and adoption pursuant to s 70 of the Act was a complete answer to the Authority Summons and the various applications could be heard then and there.

9.  I declined to proceed then because:

(1) The defendants should be given an opportunity to deal with the Squadron’s late incorporation and the effect thereof under Bahamian law, and in any event, the evidence in that regard from Squadron was still unsatisfactory.

(2) There were other defects in the evidence, in that Squadron had previously filed affirmations which stated that it had been incorporated, and that an apparently false address was given in the six affirmations filed on its behalf in these proceedings.

10.  Hence the Authority Summons was adjourned to be dealt with as a preliminary issue, with directions for filing of evidence.

Matters which have occurred since 23 August 2016

11.  Much has occurred since the last adjournment.

12.  On 26 August 2016, Squadron took out an ex parte application via an originating summons (“the 1^st Originating Summons”) in the Bahamas and obtained an order ex parte on 1 September 2016 from Hilton J of the Supreme Court of the Commonwealth of the Bahamas granting declarations that Squadron had validly adopted the underlying contracts, and that Squadron can also adopt the legal proceedings taken out in its name including the legal steps in the present action.

13.  The defendants were unaware of the 1^st Originating Summons (despite having been named parties therein) and on 6 September 2016 filed a writ of summons in the Bahamas against Squadron and Mr Nottage for declarations inter alia that the underlying contracts were incapable of being ratified under s 70 of the Act, that Squadron lacked capacity to commence arbitration and the ratification of the pre-incorporation acts were ineffective as falling outside the ambit of s 70 of the Act (“the Bahamian Writ Action”).  An application for an interim injunction in respect of the arbitration proceedings already initiated was taken out on the same day and granted on 15 September.

14.  On 9 September 2016, the defendants were informed of the order obtained under the 1^st Originating Summons, and took steps to set aside the order.

15.  On 23 September 2016, Hilton J set aside his earlier order on the basis that the defendants should have the right to be heard.  Hilton J further stayed the 1^st Originating Summons proceedings pending determination of the Bahamian Writ Action to effectively deal with the disputed common questions of law and fact and to avoid a multiplicity of proceedings and to ensure that all matters in dispute between the parties are completely and fully determined.

16.  Unfortunately, it appeared that Squadron was not satisfied with how matters stood in the Bahamas.  On 2 November 2016, Squadron took out a 2^nd Originating Summons in respect of the underlying agreements and the present legal proceedings, essentially seeking exactly the same relief as in the 1^st Originating Summons, but this time proceeding against Mr Nottage (president and director of Squadron) only, without naming the defendants as party.  On the same day, Squadron made an application before Isaacs J of the Bahamian Supreme Court and obtained the declarations sought in the 2^nd Originating Summons (“the 2^nd November Order”).

17.  Having obtained the declarations on 2 November, Squadron then exhibited the same in an affidavit from its solicitors on 7 November 2016, the same day their skeleton argument for the present hearing was filed.  This same order was heavily relied on by Squadron who in their skeleton argument said that the question is now conclusively answered by the order of Isaacs J.

18.  The defendants say that they first became aware of the 2^nd Originating Summons upon receipt of the affidavit on 7 November, whereupon they immediately took steps to join in and set aside the same and on 8 November 2016 obtained an order that the 2^nd November Order be set aside, and the other applications be adjourned sine die.

19.  The upshot of all this is that both originating summons proceedings in the Bahamas appear to have been stayed, but the Bahamian Writ Action will proceed to determine the question according to Bahamian law.

20.  Quite why Squadron initiated the 2^nd Originating Summons in the Bahamas on 2 November 2016 more than a month after the 1^st Originating Summons had been stayed (and after it had on 29 September 2016 decided not to proceed with its application for leave to appeal the same) was not explained. Nor was it ever explained why Squadron would take out the 2^nd Originating Summons seeking the same relief without joining the defendants, when the 1^st Originating Summons had been stayed pending the Bahamian Writ Action which was still going on.  These would be questions which the Bahamian Supreme Court would probably be interested in.

21.  It has also not been explained why the defendants were not informed of the 2^nd November Order until two days before the present hearing despite this being heavily relied on the Squadron. These are matters which are likely to be relevant to costs. which as I will explain later should be dealt with by the judge hearing the substantive applications.  Suffice it to say at this stage that the defendants on the presently available material could justifiably accuse Squadron of sharp practice, and Squadron would be well advised to explain its actions prior to the substantive hearing.

22.  The substantive actions have in the meantime been fixed to be heard over the course of four days commencing from 9 May 2017.

Abuse of process

23.  One of the reasons for the adjournment to a preliminary hearing to decide the Authority Summons was that there had been no explanation regarding a number of matters, including why Mr Holland on behalf of Squadron had gone on oath saying that it had been incorporated when it had not, and that why it had given a false address over six affirmations deposed to in these proceedings.

24.  A fuller explanation has been provided, namely that Squadron through its officers had thought that it had been incorporated admitting frankly that there had been an oversight in confirming the same, and saying that the address provided had previously been used by Mr Nottage and that there was no intention to mislead.

25.  Although the explanations given were subject to criticism from the defendant, and could certainly have been dealt with more carefully, for example by exhibiting a copy of the paper application for incorporation which Mr Nottage says was dropped off at the Registrar General’s Department in the Bahamas, I do not find that in light of the explanations provided by Squadron, it would be right to shut it out entirely from proceedings which potentially affect its interests.

Application of s 70 of the Act

26.  Mr Joffe for the defendants was keen to press the argument that s 70 of the Act did not assist Squadron and that Squadron should be struck out. He was prepared to proceed and had made arrangements for cross-examination of the expert witnesses on Bahamian law, Mr Moree QC, Mr Malins QC and Mr Millett QC.[2]

27.  With no disrespect to the eminence and learning of these counsel, I have grave reservations as to whether it would be helpful in any way to hear live evidence from them.  The reason is because their expert reports do not assist by pointing to any particularly unique aspect of Bahamian law applicable to the present issues.  Instead, they apply common-law reasoning to the problem, drawing on jurisprudence from various common-law jurisdictions including England, Canada and the British Virgin Islands on the interpretation of a statute.  To hear live evidence from these eminent counsel would be akin to having the same point made from the witness box instead of from the Bar, with the added peculiarity of cross-examination on principles of law with which both bar and bench are familiar.

28.  However, I was reluctant to continue with the present hearing of the Authority Summons because of a more fundamental issue, namely that there would be no benefit (save perhaps as to costs) to striking out Squadron’s prior steps in the present litigation.  It cannot be disputed that Squadron has been incorporated since 17 August 2016. It cannot be disputed that it is potentially affected by the injunction taken out by the plaintiff in this action.  As a party affected or potentially affected by an injunction, it would be entitled to apply to the court, independently of any acts done in its name prior to its incorporation, to set aside the injunction or so much of the injunction as affects it.  If I did order a striking out of all the steps taken by Squadron in the present litigation, Squadron (as incorporated on 17 August 2016) could make an application to be heard on the substantive hearing in May, seek directions for filing fresh evidence and the only thing that would be achieved would be destruction of a few trees to supply the extra paper for these additional steps.  Such a step would be very much against the underlying objectives set out in Order 1A of the RHC, in particular the quest for cost-effectiveness reasonable proportion and procedural economy.

29.  Mr Joffe sought to persuade me that one basis for the strike out application would be that s 70 of the Act was inapplicable not only to the steps taken in the present legal proceedings, but also to the underlying contracts themselves.  If I were to hear the application and make a ruling on such a basis, Squadron would not be in a position to make an application that it was affected by the plaintiff’s injunction.

30.  However, this brings up an even more vexed question.  The question of the application of s 70 of the Act is patently a question of Bahamian law.  Given that there are extant proceedings in the Bahamas to decide the very issue, I cannot see how or why I should as a judge exercising jurisdiction under Hong Kong law, make a decision on what the law of the Bahamas is when the very same parties will litigate the same issues in the Bahamas.

31.  Apart from judicial comity, there is the very real question of what would happen if I made a ruling one way and the Bahamian courts on the same facts and questions of law made a ruling the other way.  The undesirability of having divergent rulings is particularly acute in the circumstances of this case.

32.  In the circumstances, I decline to make any ruling on the Authority Summons and more specifically the question of s 70 of the Act to the present case.

33.  Mr Joffe was keen to preserve the argument on s 70 of the Act for the substantive argument in May, and requested that I adjourn the Authority Summons instead of making no order, which I do.

The Joinder Summons

34.  The Joinder Summons seeks the following orders:

(1) To the extent necessary Squadron do have leave to adopt these proceedings or part thereof, including but not limited to the Summons taken out in Squadron’s name on 2 June 2016 for a declaration that the Order of Mr Justice Ng made in Chambers on 27 May 2016 herein does not affect, or impact upon, the 233,925,000 shares in the plaintiff legally owned by Squadron and currently held in the HSBC Account no 002-899-011-085 on behalf of, or under the control of Squadron.

(2) Further and/or alternatively, Mr D Sean Nottage or Squadron Holdings Ltd do have leave to be joined as an interested party to these proceedings and adopt these proceedings in the name of Squadron.

35.  I have certain problems with the way the summons is formulated.  Whilst s 70 of the Act speaks of a party adopting of a contract with the consequence that it shall be bound by and entitled to the benefits of the contract as if it had been in existence at the date of the contract and had been a party to it, it does not provide any mechanism for “adoption” of Hong Kong legal proceedings.

36.  Instead of the order sought, I will instead make the following orders:

(1) Squadron Holdings SPV0164HK Ltd. incorporated in the Commonwealth of the Bahamas on 17 August 2016 have leave to appear and to take part in the hearing of the applications by way of summonses filed herein in the name of Squadron Holdings SPV0164HK Ltd. on 2 June 2016, 4 July 2016 and 11 August 2016 (“the 2^nd Third Party Summonses”) for the purpose of seeking the same relief, and that they have leave to rely on the evidence already filed by or on behalf of Squadron Holdings SPV0164HK Ltd.

(2) Mr D Sean Nottage and Squadron Holdings Ltd have leave to appear and to take part in the hearing of the applications by way of summonses filed herein in the name of Squadron Holdings SPV0164HK Ltd. on 2 June 2016, 4 July 2016 and 11 August 2016; (“the 2^nd Third Party Summonses”) for the purpose of seeking the like relief alternative to the relief sought by Squadron Holdings SPV0164HK Ltd, and that they each have leave to rely on the evidence already filed by or on behalf of Squadron Holdings SPV0164HK Ltd.

Costs

37.  Given that the judge hearing the substantive applications would be in a better position to deal with all the issues, including the applicability of s 70 of the Act, and also that Squadron should be given an opportunity to address the allegations made against it in relation to inter alia the matters surrounding the issuing of the 2^nd Originating Summons and the failure to notify the defendants as to the same, costs will be reserved to the Judge dealing with the substantive applications in May 2017.

38.  I thank counsel for their assistance.