SINO BRIGHT ENTERPRISES CO., LTD v. FOK HEI YU AND ANOTHER

HCA 92/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 92 OF 2014

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D E C I S I O N

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1. I have before me an application by summons to strike out the plaintiff’s Statement of Claim in these proceedings. The plaintiff is a sister company of The Grande Holdings Limited, a company incorporated in the Cayman Islands with its shares listed for trading on the Stock Exchange of Hong Kong. The plaintiff is a wholly-owned subsidiary of Accolade (PTC) Inc, which was also the controlling shareholder of Grande.

2. The 1^st defendant is a certified public accountant in Hong Kong.  The 2^nd defendant is a company that carries on in Hong Kong the business of, inter alia, providing consultancy services on financial matters including corporate restructuring. The 1^st defendant is the senior managing director of the 2^nd defendant. 

3. Mr Christopher Ho was the Chairman and still is a Director of Grande.

4. The writ endorsed with the Statement of Claim was issued on 15 January 2014 by the plaintiff against the two defendants.  The Statement of Claim pleads that:

(1)  The plaintiff was a major creditor of Grande, its sister company.

(2)  In 2010, Grande was sued by certain claimants in the United States. 

(3)  As a result, in June to late 2010 the 1^st defendant and Christopher Ho had a number of meetings in which the 1^st defendant made certain representations and gave certain advice to Mr Ho.

(4)  Thus, in paragraph 4.2 of the Statement of Claim it is pleaded that the 1^st defendant represented and advised that:

“(1) Grande could be put into provisional liquidation and the trading of the shares of Grande on the HKSE would be suspended.

(2) In the case of a distressed company being suspended from trading on the HKSE (such as Grande), resumption of the trading of the shares of, say, Grande could be achieved through the following:-

(a) Subject to the requisite approval of shareholders and creditors, the underlying assets and liabilities of Grande be transferred to a private special project vehicle (‘SDV’).

(b) The listed shell of the company could then be transferred to a third party investor, who would inject cash into the company partly as its working capital; and partly as the incentive repayment to its creditors in return for their agreement to move their debt to the SPV.

(c) Upon the requisite approval of the shareholders and creditors, the HKSE would allow the resumption of the trading of the shares in the company in question, albeit that the investment by the third party investors would only involve cash alone without bringing in any operations.

(3) For the purpose of resumption of the trading of the shares in, say, Grande, the HKSE might require the restructure to have injection of some small business operations, which were not necessarily profit‑making.

(4)  In such event, the third party investors could also arrange for some small business operations to be acquired by the relevant distressed company in order to satisfy the requirements imposed by the HKSE.”

(5)  In paragraph 4.4 of the Statement of Claim it is pleaded that the 1^st defendant further represented and advised that:

“(1) The 1^st defendant himself was acquainted with a number of investors, who were interested in purchasing a ‘listed shell’ and would be prepared to inject cash as the investment into Grande for acquiring its listing status based upon the aforesaid restructuring plan. The details of the restructuring plan (such as the amount of investment by the third party investor) could be negotiated and worked out after putting Grande into provisional liquidation and the review of its financial information.

(2) If the proposed scheme became successful, any difficult creditors could be moved to the relevant SPV as its minority shareholders, such that their interruption to the relevant SPV or Grande could be minimise avoided.

(3) The plaintiff should be approached and convinced of petitioning winding up against Grande such that the 1^st defendant and Roderick Sutton (‘Shutt on’), his colleague from the 2^nd defendants [sic], could be appointed as the provisional liquidators of Grande given that the plaintiff was the major creditor of Grande and was associated with Grande’s major shareholder; hence would be more amenable to participating in the proposed plan to selvage Grande.

(4) Wilkinson & Grist (‘WKG’) (a firm with whom the 1^st defendant then have already had business dealings) could be engaged to act for the plaintiff and that would enable the 1^st defendant to work closely with W&G for the restructure of Grande. The 1^st defendant would check the availability of W&G.

(5)  Upon being appointed as the provisional liquidators of Grande, the 1^st defendant and Sutton would review Grande’s financial information and work out the details of the plain for restructure and resumption of trading of the shares in Grande.”

(6)  The defendants knew or ought to have known that the representations and advice would be relayed to and relied upon by the plaintiff.

(7)  In late May 2011 at a meeting with Christopher Ho and one Paul Law, the 1^st defendant repeated the above representations and advice to Paul Law who attended on behalf of the plaintiff and further represented to and advised the plaintiff that it could issue a statutory demand against Grande and could present a winding-up petition against if the statutory demand was not met. 

(8)  The 1^st defendant intended and knew or ought to have known that the plaintiff would rely on the representations and advice and be induced thereby to nominate the 1^st defendant and Mr Sutton as the provisional liquidators and to put Grande into provisional liquidation. 

(9)  The defendants, therefore,

“...at all material times owed to the Plaintiff a duty to exercise all reasonable care and skill in:

(1) advising the Plaintiff on whether the restructure plan for Grande based upon the Representations and Advice would be approved by the HKSE; and

(2) if not, advising the Plaintiff on any other feasible restructure plan for Grande, which would be approved by the HKSE”.

(10) Relying on the representations and advice, the plaintiff decided to put Grande into provisional liquidation, serve the statutory demand on Grande for repayment of its debts to the plaintiff, presented a winding‑up petition against Grande together with an application for the appointment of the 1^st defendant and Mr Sutton as Grande’s provisional liquidators, and engaged W&G to prepare the requisite documentation.

(11) On 31 May 2011, the High Court did, on the plaintiff’s application, appoint the 1^st defendant and Mr Sutton as provisional liquidators of Grande with power to pursue a corporate rescue.

(12) On 31 May 2012 and 13 March 2013 respectively, two successive proposals for the resumption of trading of shares were made by the provisional liquidators to the Listing Division of the Stock Exchange of Hong Kong for the purpose of the restructuring of Grande. These proposals were not accepted by the Stock Exchange and Grande has, since July 2013, been placed in the third delisting stage.

(13) The representations and advice were false in that on the basis of the representations and advice there was no prospect of such restructure plan being approved by the Stock Exchange.

(14) The 1^st defendant made the representations and gave the advice knowing they were false or recklessly. Alternatively, the defendants acted negligently and in breach of their duty of care when the 1^st defendant made the representations and advice to the plaintiff.

(15) It is also said that the defendants acted negligently and in breach of duty of care when the 1^st defendant,

“as the Provisional Liquidator for Grande, …failed to put forward to the HKSE, an alternative restructure and resumption of trading plan for Grande which would be approved by the HKSE, leading to Grande being put to the 3^rd stage of delisting with effect from 11 July 2013.”

(16) The plaintiff suffered loss and damage as a result. The relevant particulars are pleaded in paragraph 9.1(1) and (2) of the Statement of Claim as follows:

“(1) The Plaintiff repeats the matters pleaded in Section 7 herein (which relates to the first two Restructure Proposals to the Stock Exchange of Hong Kong which were not accepted).

(2)  In the light of the repeated failure on the Plaintiff’s part to submit a successful resumption plan to the HKSE so as to preserve the listing status of Grande, the Plaintiff incurred substantial costs and expenses and multiple millions of Hong Kong dollars in engaging a separate team of professionals consisting of Optima Capital Limited and Deloittes & Touche Financial Advisory Services Limited for preparing a viable proposal for the resumption of the trading of shares of Grande.”

It appears from the evidence that this relates to a “self‑rescue plan” prepared by the plaintiff with its provisional advisers, namely Deloitte and Optima, which the plaintiff provided to the provisional liquidators on 2 December 2013 after the failure of the second resumption proposal. 

5. The evidence shows that that proposal was submitted to HKSE on 20 December 2013.  There was an amendment of that proposal in April 2014.  The Stock Exchange has not yet made a decision on whether to approve this resumption proposal.

6. The summons before me was taken out by both defendants seeking to strike out the writ and the entire Statement of Claim on the ground that it discloses no reasonable cause of action, or is scandalous, frivolous or vexatious, or is otherwise an abuse of the process of the court.

7. The basis of the application, according to the supporting affirmation and a pre-summons letter, was wide-ranging and included, for example, that the allegation of representations and advice was incredible, that no duty of care could possibly arise in these circumstances, that on the facts it was plain that no reliance was placed by the plaintiff on the alleged representations and advice, and that the whole action was an abuse of process having been brought for ulterior motives.

8. However, for the purposes of this application, Mr Charles Manzoni, SC, on behalf of the defendants, whilst castigating the plaintiff’s claim as “manifestly weak”, accepts that many of the matters in dispute can only be properly resolved at trial.

9. He accepts, in particular, that the court should proceed on the assumption that:

“(1) The duty of care alleged is established;

(2) The representations and advice were given and fall within the scope of the duty of care alleged; and

(3)  The plaintiff relied upon the representations and advice in deciding to petition for the winding-up of Grande and the appointment of the provisional liquidators.”

10. Nevertheless, the defendants maintain that the Statement of Claim should be struck out in its entirety because the damages claimed are irrecoverable from the defendants as a matter of law.

11. In his skeleton argument, Mr Manzoni submits that:

(1)  The claim in paragraph 9.1(1) of the Statement of Claim is an impermissible claim for reflective loss; and

(2)  The claims in both paragraphs 9.1(1) and 9.1(2) of the Statement of Claim are premised upon allegations of breach of duty by the provisional liquidators, acting as such, and are not actionable other than by way of a misfeasance summons.

12. For their part, Mr Benjamin Yu, SC, and with him Mr Law Man‑chung, clarified in their skeleton in response that no reflective loss is being claimed.  In particular, they stated in paragraph 31 of their skeleton argument:

“Paragraph 9.1(2) of the Statement of Claim begins with the words ‘In the light of the repeated failure on the plaintiff’s...’ ”

Which should be a reference to the defendant,

“…to submit a successful resumption plan to the HKSE, the plaintiff incurred substantial costs and expenses for preparing a viable proposal. Properly construed, §9.1(1) only repeats §7 of the Statement of Claim, so that the readers could understand the context in which P suffered its loss and damage, i.e, that due to the rejection of the previous proposals, Sino Bright had no choice but to incur significant costs and expenses in instructing Deloitte and also Optima for the preparation of its own self-rescue plan for submission to the HKSE.”

On that basis, the defendants’ attack on the ground of reflective loss has fallen away. 

13. Mr Manzoni says the claim for loss in the form of the expenses pleaded in paragraph 9.1(2) of the Statement of Claim is still bad because, in essence, it is premised on allegations of negligence and breach of duty on the part of the provisional liquidators acting as such, which are not actionable other than by way of a misfeasance summons for damages for the benefit of the company, ie, the class of the creditors as a whole.  The provisional liquidators’ duties are owed to the company and the general body of creditors.  Absent a special relationship, the provisional liquidators do not owe any individual creditor any duty of care.  Without a viable plea of recoverable loss, there is no cause of action for negligence.  In particular, Mr Manzoni says that the loss pleaded flowed from the alleged negligent failure on the defendants’ part to put forward a viable restructure proposal for Grande, not from any breach of the duty of care in advising the plaintiff. 

14. The narrow issue for me today is, therefore, whether the Statement of Claim should be struck out for that reason.

15. The principles applicable to strike-out applications are well‑known and set out in many authorities.  For example, in Ha Francesca v Tsai Kut Kan (No 1) [1982] HKC 382, Silke JA said at 392:

“My attention has been directed by counsel to the principles upon which the court acts on striking out applications. If I may encapsulate them, striking out should only be done in plain and obvious cases, there should be no trial upon affidavit. Disputed facts are to be taken in favour of the party sought to be struck out. The claim must be obviously unsustainable, the pleadings unarguably bad and that it be impossible, not just improbable, for the case to succeed before a court will strike out. If the court does not think the matter to be clear beyond doubt or if it fails to be satisfied that there is no reasonable cause of action or that the proceedings are frivolous or vexatious then there should be no striking out. One must be careful not to drive a plaintiff from the judgment seat nor should the court decide difficult points of law in proceedings such as this.

But that having been said, however difficult it may be, if the issue is plain, then the court can accede to a striking out application.  There lies a discretion in the judge which discretion must, of course, be exercised judicially,….”

16. It seems to me that the plaintiff’s claim is simple enough.  It claims that it is a major creditor of Grande, that certain representations were made and advice given to it about a restructuring proposal for Grande, that the proposal involved putting Grande into provisional liquidation and getting the 1^st defendant and Mr Sutton appointed as provisional liquidators, that in reliance on the representations and advice, it took steps which it would not otherwise have taken to put Grande into provisional liquidation and cause the 1^st defendant and Mr Sutton to be appointed provisional liquidators.  It claims that the representations and advice and were false and misleading and were negligently made.  Two proposals were put forward by the provisional liquidators which failed, but no further viable proposal was put forward.  As a result, the plaintiff incurred expenses to engage advisers and devised its own restructuring proposal. 

17. The defendants accept a duty of care, as alleged, arose in these circumstances.  It should be noted that the duty is not, as pleaded, confined to late May 2011 when the provisional liquidators had a meeting with the 1^st defendant.  It was pleaded to be, “at all material times”, a duty to exercise all reasonable care and skill in, inter alia, advising the plaintiff on any other feasible restructure plan for Grande which would be approved by the HKSE. 

18. Mr Manzoni argues, however, that once the advice was acted upon by the plaintiff and the 1^st defendant was appointed one of two provisional liquidators, the statutory scheme under the law of liquidation set in, with the result that the provisional liquidators as such owe duties only to the creditors as a class and cease to owe any duties to the plaintiff.

19. However, the Statement of Claim pleads a continuing duty which is accepted by the defendants for present purposes as being at least arguably capable of arising out of the pleaded facts.  The submissions that there was no further duty after 31 May 2011 when the provisional liquidators were appointed seems to me to be inconsistent with the concession made. 

20. As a matter of principle, I see no reason why a common law duty of care in giving advice that has admittedly arisen in favour of a specific creditor should necessarily be terminated and superseded by the appointment of the person who owed that duty as a provisional liquidator who, as such, is subject to general duties to the creditors as a class.

21. Quite apart from this, the principle laid down by the authorities is not that liquidators or provisional liquidators can never owe duties specifically to an individual creditor, but that they do not do so in the absence of a special relationship between the parties.  This has been made clear in the various authorities cited to me, including Kyrris v Oldham [2004] 1 BCLC 305 at paragraph 141; Grand Gain Investment Ltd v Borrelli (HCCW 1463/2005, 1 June 2006 at paragraphs 46-47); and Hague v Nam Tai Electronics Inc [2008] BCC 295 at paragraph 14.

22. This in itself is not in dispute.  What is disputed is whether there is a sufficient special relationship in this case. In a slightly different context, Mummery LJ said in a passage in his judgment in Peskin v Anderson, quoted by Jonathan Parker LJ in Kyrris v Oldham at paragraph 142:

“…There are, for example, instances of the directors of a company making direct approaches to, and dealing with, the shareholders in relation to a specific transaction and holding themselves out as agents for them in connection with the acquisition or disposal of shares; or making material representations to them; or failing to make material disclosure to them of insider information in the context of negotiations for a takeover of the company’s business; or supplying to them specific information and advice on which they have relied. These events are capable of constituting special circumstances and of generating fiduciary obligations, especially in those cases in which the directors, for their own benefit, seek to use their position and special inside knowledge acquired by them to take improper or unfair advantage of the shareholders.”

23. In the present case, there was, ex hypothesi, a relationship of proximity between the parties prior to the appointment of the 1^st defendant as provisional liquidator, sufficient to give rise to the common law duty of care in accordance with the authorities such as Caparo Industries v Dickman [1990] 2 AC 605; and Hedley Byrne v Heller [1964] AC 465.  The question arises as to whether the facts are sufficient to constitute a special relationship in a sense used in the authorities on liquidators’ duties, such as Kyrris v Oldham.  This seems to me to be a fact‑sensitive question, not suitable for resolution in a strike-out in this case: see Yue Xiu Finance Co Ltd v Dermot Agnew [1996] 1 HKLR 137.  I note that in Kyrris v Oldham at paragraph 141, Jonathan Parker LJ referred to the approach of the House of Lords in Caparo Industries Plc v Dickman and the “assumption of responsibility” approach in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, and said that on either approach the result is the same. 

24. I recognise, of course, that there may be cases where it is plain that no special relationship exists in which the court would not hesitate to strike out the claim: see for example Grand Gain Investment Ltd v Borrelli.  But, in my view, the facts of the present case are far removed from the facts of those cases. 

25. In any event, leaving aside the defendants’ post‑appointment conduct, the fact assumed to be true for present purposes is that the expenses now claimed as losses would not have been incurred but for the representations and advice given which were negligent and in breach of the duty of care owed to the plaintiff.  It does not seem to me to be plain and obvious that the scope of the accepted duty does not extend to protecting the plaintiff from expenses in devising its own restructure proposal when the defendants’ proposals had failed, which it would not have incurred but for the advice.  Putting it in causation terms, it is not plain and obvious to me that the loss pleaded was not caused by the defendants’ negligence and breach of duty in giving wrong advice in May 2011. 

26. The defendants’ summons must therefore be dismissed.

(Submissions on costs)

27. The summons will be dismissed with costs to the plaintiff with a certificate for two counsel.