ZHANG XIUHONG v. LIU WENCHEN AND OTHERS

HCA 2118/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2118 OF 2012

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D E C I S I O N

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INTRODUCTION

1.  There are 2 applications before this court:

(1)   The plaintiff’s summons seeking an order for split trial on liability and quantum; and

(2)   The question of costs upon withdrawal of the 5^th to 7^th defendants’ summons seeking to stay the present action pending determination of 4 actions in Mainland China.

BACKGROUND

2.  The following facts are adopted from the helpful summary in the skeleton submission of Mr Patrick Siu, counsel for the plaintiff.

3.  The 4^th defendant is a Hong Kong company with an authorized share capital of HK$40,000 divided into 40,000 shares (“the Shares”).  Its major asset is its 45% interest in a Sino-foreign joint venture company in the PRC called Hebei Chengjin Real Estate Development Co Ltd (“Chengjin RED”).  The other 55% interest is held by the Chinese joint venture party.

4.  Chengjin RED’s scope of business was to build and develop a project called “Fashion Big World”.  In this connection, it holds a valuable piece of land in Shijiazhuang City, the PRC.

5.  A domestic enterprise called Hebei Chengjin Asset Management Services Co Ltd (“Chengjin AMS”) was set up in Shijiazhuang City to manage the assets, operations, finance and personnel of Chengjin RED.

6.  By a series of transfers in January and March 2011, the plaintiff became the sole legal and beneficial owner of the 4^th defendant.  However, allegedly in breach of the shares transfer agreement, the 1^st defendant has failed to transfer his 45% interest in Chengjin AMS to the plaintiff.

7.  On 16 February 2011, a gang showed up at the office of Chengjin AMS, alleging that a Hebei Bo Shi Investment Company Limited has been entrusted by the PRC authority to take over Chengjin AMS.

8.  In addition, the Chinese joint venture partner has commenced proceedings in the PRC to apply for compulsory liquidation of Chengjin RED.  A “Liquidation Group” was formed.

9.  In September 2011, Chengjin RED acting through the Liquidation Group commenced a civil action against the 4^th defendant in the PRC, alleging that the 4^th defendant was not the foreign joint venture party of Chengjin RED (referred to as “Case 2” in the skeleton submission of Mr Leung, counsel for the 5^th to 7^th defendants).  If Chengjin RED were to succeed in that action, the 4^th defendant’s 45% interest in Chengjin RED would be completely lost.

10.  The plaintiff therefore caused the 4^th defendant to instruct a PRC lawyer to contest Case 2.  It was in these circumstances that the plaintiff became aware of a fraud whereby his shares in the 4^th defendant were purportedly re-transferred to the 1^st defendant and later to the 2^nd and 3^rd defendants respectively (“the disputed transfers”).  The plaintiff and his nominee were also removed from directorship and were replaced by the 2^nd and 3^rd defendants.

11.  The plaintiff alleges that the disputed transfers were effected through signatures and fingerprints purported to be his but were in fact forged.

12.  The plaintiff has since obtained default judgment against the 1^st to 3^rd defendants in June 2016 to set aside the disputed transfers and has recovered the Shares.  It was further ordered that the 1^st defendant do pay the plaintiff equitable compensation for breach of trust, and damages for wrongful interference with the plaintiff’s legal and contractual rights by unlawful means, with such compensation and damages to be assessed. 

13.  As regards the 5^th to 7^th defendants, in gist, the 5^th defendant is the sole practitioner of Messrs Augustine CY Tong & Co (“ACYT”), a firm of solicitors.  The 7^th defendant is an employee (Office Manager and Legal Clerk) of ACYT, and the sole director and shareholder of the 6^th defendant.

14.  The 5^th to 7^th defendants had acted for the plaintiff in the transfer of the Shares from the 1^st defendant to the plaintiff.  The plaintiff says that in implementing the disputed transfers and change of directorship in the 4^th defendant, the 5^th to 7^th defendants have acted in breach of their duty of care to the plaintiff.  In particular:

(a)   They have failed to obtain instructions and confirmations from the plaintiff.

(b)   They have failed to verify with the plaintiff whether the purported signature and fingerprints on the documents contained in the 1/3/2012 Witnessing Certificate belonged to the plaintiff.

(c)   They have failed to notice the discrepancies between that purported signature of the plaintiff and his usual signatures.

(d)   They have relied on a fake email from a person impersonating the plaintiff’s assistant as instructions of the plaintiff to transfer the Shares.

15.  The plaintiff has pleaded further causes of action against the 5^th to 7^th defendants in the tort of unlawful interference, breach of trust in respect of the re-transfer of the Shares from the plaintiff to the 1^st defendant, dishonest assistance of the 1^st defendant in his breach of trust, conspiracy to defraud or injure the economic interests of the plaintiff. 

SUMMONS ON SPLIT TRIAL

Legal principles

16.  The principles on ordering a split trial can be summarized as follows:

(a)   The general rule is that all the issues in a case should be tried together.

(b)   An order for split trial should only be made in “exceptional circumstances or on special grounds”. The Court should be “extremely cautious” before ordering a split trial.

(c)   The party who seeks a split trial has the burden of demonstrating exceptional circumstances which justify a split trial.

(d)   That party must inter alia provide information that enables the Court to estimate, with a reasonable degree of accuracy, how much time and costs would be saved by a split trial.  A failure to provide such information could, by itself, justify the Court in rejecting the application.

(e)   The Court would take into account, amongst others, the duplication of calling witnesses in the first trial and again in the second trial; and the delay to the second trial if the decision reached in the first trial is appealed against.

(f)   A split trial may be ordered where there is clear demarcation between the issues on liability and quantum or the issue of damages itself is detailed and complicated.

See: Secretary for Justice v Lau Hon Mo [2015] 3 HKLRD 561, §§22-23 per Registrar Lung; Pagoda Ventures Ltd v Je Fulfilment Ltd (13 June 2008) HCCL 39/2007, §§14-20 per Stone J; Mai Gou v Mak Chik Lun [2001] 3 HKLRD 248, 251B-J per Le Pichon JA; Telford Development Ltd v Shui On Construction Co Ltd [1990] 2 HKC 110 (CA), 117B-F per Bokhary J (as he then was).

17.  As far as the 5^th to 7^th defendants are concerned, the plaintiff no longer claims the loss in value of the Shares as those Shares have been returned to the plaintiff.  Rather, the plaintiff will be seeking:

(a)   Financing costs, ie the actual sum which the plaintiff had to borrow and the actual interest which the plaintiff had to pay: decision dated 14 November 2016, §47, DHCJ Wilson Chan (as he then was).

(b)   Administrative, legal and other costs and expenses incurred by the plaintiff in the PRC to preserve his rights in respect of the Shares.

(c)   Account of profits.

18.  In addition, the plaintiff has to show that those damages were not remote, were foreseeable and that he had mitigated loss. 

19.  Mr Siu gives 3 reasons for having a split trial:

(a)   The issue of quantum may be complicated in itself and that there was a clear demarcation from the issue of liability.  There could be substantial saving of time and costs saved if the liability is determined against the plaintiff.  (reason 1)

(b)   The plaintiff seeks an account of profits and order of equitable compensation from the 5^th to 7^th defendants, in the alternative to damages.  As a matter of recognized practice, the account taking exercise would be conducted separately.  (reason 2)

(c)   The plaintiff has obtained default judgment against the 1^st defendant. There would be a separate trial of the issue of equitable compensation for breach of trust, damages for wrongful interference with the plaintiff’s legal and contractual rights by unlawful means anyway. (reason 3)

20.  With regard to reason 1, although there are multi-issues (fraud, conspiracy, forgery of documents, legal relationship and whether fiduciary duties existed) in the case against the 5^th to 7^th defendants, essentially this is a case of tort and “professional negligence” which harmed only one plaintiff.  I query if the case can be said to be complicated.  There is no estimate as to the time needed for a trial on liability.

21.  Mr Leung has demonstrated that the issue of liability and quantum may have a significant degree of factual overlap.  In that regard, the plaintiff has pleaded, amongst others, the following facts as part of his case on liability:

(a)   In February 2011, the operations of Chengjin AMS (the company which manages the assets of Chengjin RED) were forcibly taken over by a gang.

(b)   In June 2011, Chengjin RED was put into liquidation in the PRC.

(c)   In August 2011, a sum of RMB 40 million was seized from Chengjin AMS by the “Liquidation Group” (清算組) of Chenglin RED.

(d)   In September 2011, Case 2 was commenced.

(e)   The 2^nd and 3^rd defendants did not contest Case 2, which (as pleaded by the plaintiff) demonstrated that the 2^nd and 3^rd defendants were not bona fide purchasers of the Shares.

(f)   The 2^nd and 3^rd defendants did nothing to cancel the board resolution of the 4^th defendant by which the 4^th defendant withdrew from Case 2. This (according to the plaintiff) again demonstrated that the 2^nd and 3^rd defendants were not bona fide purchasers of the Shares.

22.  I agree with Mr Leung that the events in the preceding paragraph would also affect the quantum of the plaintiff’s loss.  This is because the value of the Shares might have changed. It would have affected the plaintiff’s decision to borrow (presumably on security of the Shares) and the difference in interest rates if he could deploy the Shares than when he could not.  In that regard, he may have to commission a valuation report showing value of the Shares at different points in time when he had taken out or intended to take out loans.  It cannot be said that there was a clear demarcation of the issues of liability and quantum.

23.  More importantly, I am not satisfied on the amended statement of claim that the issue of damages is complicated.  The plaintiff claims for financing costs.  It is up to him to prove the interest rate, the interest period and the principal sum(s).  For administrative, legal and other costs, it would be a matter of adducing relevant invoices and receipts and establishing causation. 

24.  Mr Siu has not given the estimated time that would be saved if the issue of quantum is tried separately.  That is not fatal, provided there is evidence to enable the court to make an informed estimate.  The 5^th to 7^th defendants have no knowledge of much of the background and the plaintiff’s allegations. Presumably the evidence would largely come from the plaintiff’s side.  Given what needs to be proved as set out in paragraphs 22-23, it appears that the time for cross-examination of the plaintiff and the valuation expert would be about 2-3 days.  Saving of 2‑3 days for trial on quantum could hardly be regarded as substantial saving. 

25.  Reason 1 is not substantiated.

26.  Reason 2 is a relevant factor for ordering a split trial.  Mr Siu relies on the following case:

(a)   Re the Estate of Kong Wing Hong, HCMP 2045/2012, 24 February 2015, at §85: the ex-executor was found to have used the estate’s money for his own business, failed to lease out property of the estate and breached fiduciary duties.

(b)   Tagtrends Asia Ltd & anor v Tagtrends Global Ltd & ors, HCA 1847/2011, 3 February 2017, at §§12-19 was a case involving intellectual property rights, breach of fiduciary duties and the remedy of accounts.

27.  It was plainly correct to make a split trial order in those cases. However, I doubt if they have purported to establish a “practice” to order split trial whenever the remedy of accounts is sought.

28.  Reason 3 does not assist the plaintiff.  The 1^st defendant has never taken part in this action.  Even if he will take part in any assessment (eg to show the dividends received and profits made therefrom), his part will hardly be longer than a day.  There is no order for assessment as against the 2^nd and 3^rd defendants.

29.  Without disrespect, none of the reasons given by Mr Siu weigh in favour of a split trial. 

30.  More importantly, this case has only reached the stage of exchange of list of documents 5 years since its commencement.  For about 17 months, the plaintiff has refused to give discovery on quantum on the excuse that the summons for a split trial has not yet been disposed of.  This has hindered the 5^th to 7^th defendants in negotiating a settlement and is contrary to the underlying objective of facilitating settlement of disputes:  Order 1A, rule 1(e) of the Rules of the High Court.

31.  In the course of the arguments, I have asked Mr Siu whether, if I was minded to order a split trial, I could impose a condition for the plaintiff to provide, say, a statement of damages with a valuation report on the Shares. This would address the concern of the 5^th to 7^th defendants in negotiating a settlement.  Mr Siu was open to that idea and asked for 3 months to prepare the valuation report.  However, on reflection, I wonder if that course would result in substantial saving of costs.

32.  I am not satisfied that there are exceptional circumstances or special grounds to order a split trial.  The summons is dismissed with costs to the 5^th to 7^th defendants.

Costs on withdrawal of stay summons

33.  The 5^th to 7^th defendants have withdrawn the stay summons on their own volition.  As a starting point, costs should follow the event and be to the plaintiff.

34.  These proceedings were commenced by the plaintiff as of right and an application for stay of proceedings could only be granted in rare and compelling circumstances.  Any stay must not cause injustice to the plaintiff. The 5^th to 7^th defendants must satisfy the court that continuing the proceedings would be unjust to them.  AIG Europe Ltd & ors v Fast-Link Express Ltd & ors, HCAJ 114/2014, 10 January 2017, §§9-13. 

35.  There were 4 cases in the PRC that the 5^th to 7^th defendants had wanted to wait for the outcome.  Amongst them was Case 2, and Case 3 by one Mr Liu against the plaintiff, which apparently had been dismissed. 

36.  At the time the summons for stay was taken out (ie before Deputy Judge Wilson Chan granted leave to amend the statement of claim on 14 November 2016), the plaintiff’s own case was that the 4^th defendant’s major valuable asset was its 45% interest in Chengjin RED.  If Chengjin RED were to succeed in the PRC proceedings, the 4^th defendant would not be recognized as the foreign joint venture partner.  The 4^th defendant’s investment in Chengjin RED would then be lost and it would become completely worthless.  The only relief that the plaintiff sought against the 5^th to 7^th defendants then was for loss of value of the Shares. 

37.  Case 2 was thus highly relevant to the plaintiff’s case.  The 5^th to 7^th defendants have kept asking the plaintiff for information as to progress of the PRC actions but met with no reply.  They thus issued the stay summons.

38.  Mr Siu submits that the 5^th to 7^th defendants were bound to fail on the stay application because:

(a)   They have proceeded on an unsubstantiated basis that the 4^th defendant had no other asset except its interest in Chengjin RED.  The plaintiff has since filed an affirmation through his solicitor (Mr Wai) that the 4^th defendant does have other assets.  (reason (a))

(b)   In respect of Case 3, the 1^st defendant claimed that the plaintiff should return the Shares to him.  The 1^st defendant has already lost that case, the appeal thereunder and his application for retrial. It was fanciful for the 5^th to 7^th defendant to suggest that the present action should be stayed pending any other step by the 1^st defendant to overturn all previous decisions.  (reason (b))

(c)   Mr Siu further submits that the stay sought was too wide in scope as it sought to stay the whole action, ie even that part involving the 1^st to 4^th defendants (when there was no default judgment entered then).  (reason (c))

(d)   The stay, if granted, would be for an indefinite period given the progress of the PRC proceedings.  There was no reason why the plaintiff should need to wait for the outcome of the PRC proceedings.  (reason (d))

39.  With respect to Mr Siu, reason (a) would not assist the plaintiff.  At all stages of an action, parties have a duty to ensure that the court’s time will not be wasted on futile litigation.  On the plaintiff’s own case, it would have been unjust to the 5^th to 7^th defendants to continue this action.  I am of the view that the stay summons was taken out properly.

40.  However, such bases would have been erased when Mr Wai filed an affirmation to show that the 4^th defendant has other assets or upon amendment to the statement of claim.

41.  I accept Mr Siu’s submission on reason (b).

42.  For reason (c), once the court accepts the significance of Case 2 alone, there is a good case for a stay.   The width of the summons would not affect the stay except on the question of costs.

43.  For reason (d), this may be a valid reason that the court may weigh to refuse a stay.

44.  Taking all circumstances into account, it cannot be said that the stay summons was hopeless from inception.  I am of the view that the costs up to and including the filing and service of the affirmation in support of the stay summons should be costs in the cause.  Costs thereafter should be borne by the 5^th to 7^th defendants. 

45.  I order a set-off of the 2 sets of costs.  Overall, there shall be no order as to costs on both summonses save that costs of the stay summons up to and including the filing and service of the affirmation in support shall be in the cause.

CONCLUSION

46.  I order as follows:

(a) The summons for a split trial is dismissed;

(b) Leave is granted to the 5^th and 7^th defendants to withdraw the stay summons;

(c) On a nisi basis, there be no order as to costs on both summonses save that costs of the stay summons up to and including the filing and service of the affirmation in support shall be in the cause.

47.  I thank counsel for their able assistance and succinct arguments.