MAGNITOGORSK INTEGRATED IRON AND STEEL WORKS v. VAREX & CO. GMBH AND OTHERS

HCA 17492/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 17492 OF 1999

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J U D G M E N T

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1.  There are two applications before me brought jointly by the 1^st and 2^nd defendants.  The first is for discharge of an interlocutory injunction restricting conduct and the second for striking out the plaintiffs’ statement of claim as amended.  At the heart of both applications is that the action issued in November 1999 and the injunction was ordered in January 2000.  Now nearly eight years on there has yet been no trial and no immediate prospect of a resolution of the issues.  The defendants put the blame for this delay squarely on to the shoulders of the plaintiffs.  It is said of them that having got their injunction they have no wish to advance their cause; their conduct in the proceedings, in turn of doing nothing or doing something that was inappropriate or unnecessary has been such that they should not be entitled to the protection afforded by the injunction.  Further, that this has amounted to an abuse of process, warranting not only the discharge but also the striking out.

2.  Both applications were opposed and after the hearing I reserved judgment, which I now give.

3.  First a brief background.

Background

4.  The 1^st plaintiff whom I shall call MMK is a joint stock company incorporated and based in Russia.  It makes and exports iron and steel; it is said of it that it is the largest producer of steel in the world.

5.  The 2^nd defendant (Peters) is of German Nationality.  From the 1980’s he had represented German interests in various trading opportunities with MMK.  The 1^st defendant (Varex) is nearly wholly owned by Peters and under his control. 

6.  For the purpose of expanding MMK’s business into the markets of South East Asia, the parties agreed to join forces in a joint venture, and the 4^th defendant MMK Metal HK Limited (MMK HK) came to be incorporated in Hong Kong.  At the outset the share capital of $50,000 was as to $49,500 (99%) held by or on behalf of MMK.  The remaining 500 shares (1%) were held by Varex and Peters.  No money was paid by them for that 1% interest.

7.  The following year the interest of Varex and Peters was increased to 51% of the capital, by an increase in capital to $105,555, and an allotment of 53,333 shares to them.  The remaining shares were allotted to an associate of MMK, giving it thus control over the remaining 49%.  Again, there was no money paid by Varex or Peters.

8.  At the heart of the dispute between the parties is as to the nature of Varex’s and Peters’ interest in MMK HK.  Unarguably, they became and are still the registered and legal holders of the shares.  It is their case that they paid for them in kind, and are thereby the beneficial owners as well.

9.  MMK’s case is that the consideration for the allotments was agreed to be that they would obtain for MMK HK credit facilities to the extent of not less than US$15 million.  If that did not happen they would be deemed to be holding the shares on trust for MMK, and if required to do so to transfer them to MMK. 

10.  The Board of Directors at the material time numbered five, comprising four Russians nominated by MMK, and Peters.

11.  The 2^nd plaintiff Pan-Asia Worldwide Holdings Limited (Pan-Asia), another associate of MMK, came into the picture in May 1998 when it acquired all of the shares in MMK HK held by MMK.

12.  By all accounts MMK HK traded significantly and profitably.  According to audited accounts, in 1995 and 1996 turnover was HK$1.7 billion for each year; in 1997 it was HK$966 million.  But by the end of 1997 it had become insolvent to the tune of $23 million and thereafter ceased to trade.

13.  By May 1999 MMK HK had failed to hold Annual General Meetings in the years 1996, 1997 and 1998.  Troubled by this, and by the failure in performance by MMK HK, Varex and Peters filed an originating summons, and sought and obtained orders to hold AGMs for the years 1996 to 1998, with directions on notice to the shareholders.

14.  The meetings including the AGM for 1999 were held on 2 August 1999.  Neither Pan-Asia as 49% shareholder nor MMK nor anyone representing their interests was present.

15.  It was resolved that all of the directors should be retired, and that Varex, Peters and their nominee the 3^rd defendant (Catfield Limited) should be appointed in their stead.

16.  Thereafter, in purported control as the Board of Directors of MMK HK, Varex, Peters and Catfield, as the new Board, began making enquiry, seeking to establish how and why MMK HK after early trading successes had become insolvent and was no longer trading and thus why the shares of Varex and Peters were no longer worth anything.  It was and remains Peters’ belief from what was uncovered that the former directors appointed by MMK had siphoned off huge amounts of money to the detriment of MMK HK and the interests of Varex and Peters, but such enquiries as instigated by the reconstituted Board were necessary to establish this.

17.  Meanwhile, it belatedly came to the attention of MMK, Pan-Asia and the former MMK appointed directors that control of MMK HK had transferred to the Varex, Peters camp.  Furthermore, that the new Board was researching questions of criminal liability, presumably targeting the members of the old Board, excluding Peters.

18.  Forthwith this action was filed.  By its terms the plaintiffs sought declarations that the 1999 AGMs were invalid for want of notice, thus to restore the original Board, and an injunction to restrain all three defendants from holding themselves out to bankers and others that they were a validly constituted Board with control over MMK HK in place of the former members of the Board.  Also prayed for was a transfer of the shares of Varex and Peters to MMK, upon the grounds that the promised credit of US$15 million had failed to materialize.

The Interim Injunction

19.  This was applied for almost immediately.

20.  After a defended hearing of 13 January 2000, Peter Cheung J (as he then was) granted the same in terms pending trial or further order.  These terms matched those prayed for in the action; additionally, to restrain Varex and Peters from exercising any voting rights without leave of MMK.

21.  It is an order which remains extant to this day.

22.  Peters in his affidavit in support of these applications deposes that MMK and the Russian former directors have no wish to move the action through to a timely conclusion.  Having ‘milked’ MMK HK of all its profits thus rendering it insolvent, they had effectively achieved their aim in denying him through MMK HK the opportunity of pursuing his enquiry to uncover illegal, prospectively criminal activity.  This indefinite state of affairs has enhanced the prejudice to Varex and Peters as time runs by, to the extent that any prospective claim to recover losses may become statute-barred or otherwise stale.

23.  And so to this application in two parts.

24.  First, a summary of the law.

Legal Principles

25.  Interim injunctions — when can they be discharged?  I adopt as my starting point the White Book at 29/1/46:

“Variation or discharge of injunction —  …

…

Where an interlocutory injunction has been granted following a full inter partes hearing, there is no jurisdictional bar to the court hearing an application by the enjoined party to discharge it.  Such application may be made where there is liberty to apply (e.g. Raindrop Data System Limited v Systemics Limited [1988] F.S.R. 354), or where the sole or main basis of the application for discharge is that there has been a material change of circumstances since the injunction was first granted (i.e. a crucial new factual development), or where it has become apparent that it is founded on an erroneous view of the law.”

26.  There being in this case no liberty to apply and no apparent erroneous view of the law, this application’s fate depends on whether there has been a material change of circumstances since the injunction was first granted.

27.  This is a burden, the application having been made by them, which falls to Varex and Peters to establish.

28.  In the case of Newsgroup Newspapers Ltd v Mirror Group [1991] FSR 487, Hoffmann J (as he then was) was asked to discharge an injunction because of the plaintiff’s delay in proceeding with the action since the grant of the injunction, which delay he found was both inordinate and inexcusable.  He said at p.489:

“An interlocutory injunction is an order which restricts a defendant’s liberty at a time when there has been no finding of wrongdoing by the court.  It is done in order to preserve the position, pending a determination of the merits, in cases when the court thinks that justice so requires.  In my judgment it is incumbent upon a plaintiff whose position has been protected in that way by an interlocutory injunction to proceed with the action with due diligence so as to limit as far as possible the period during which the defendant’s liberty is restricted without there having been any determination of the merits.”

He went on to say at p.490:

“Mr. Thorley, who appears for the plaintiffs, referred me to the general statement of principle by Buckley L.J. in Chanel Limited v. Woolworth & Co. [1981] W.L.R. 485 dealing with the circumstances in which application can be made for the variation or discharge of an interlocutory injunction.  Buckley L.J. said (at page 492):

‘Even in interlocutory matters a party cannot fight over again a battle which has already been fought unless there has been some significant change of circumstances, or the party has become aware of facts which he could not reasonably have known, or found out, in time for the first encounter.’

This is not a case in which the defendant is seeking to refight matters which could have been fought in 1988.  The question is whether the inordinate and inexcusable delay since 1988 constitutes a change of circumstances within the meaning of Buckley L.J.’s statement which would justify an application for discharge.  In my view, for the reasons which I have given, it does.”

He went on to conclude:

“It is in my view sufficient that the order has constituted a longstanding restriction on the defendants’ freedom to use the forms of advertisement which they wish.  These litigants are parties between whom quarter is neither given nor sought and in my view there would be no injustice in depriving the plaintiffs of the interlocutory protection which was intended to preserve their position until trial but which they have been content to treat as if it already represented a final victory.

The injunction will therefore be discharged.”

29.  The principle is dealt with in Steven Gee’s Commercial Injunctions, 5^th Edition under the head “Delay by the claimant in progressing the proceedings after obtaining an injunction or other interim remedy”.

At 23.029:

“(i)  The principles

The general principles are that:

(1)     A claimant who has obtained an injunction, search order or other interim remedy is bound to get on with his action as rapidly as he can.

(2)     He is not entitled to retain the relief except on the basis that the proceedings are progressed promptly and without unnecessary delay.

(3)     If there is delay, the relief may be discharged.

(4)     In deciding whether to discharge the relief and not to regrant it the court is exercising a wide discretion taking into account all the circumstances and bearing in mind the need to deter other litigants from delaying pursuit of proceedings in which an injunction has been granted. Therefore the exercise of the jurisdiction also has a disciplinary aspect.”

And at 23.030:

“(ii)  The application of the principles

…

However, the court will not always discharge the injunction where there has been delay, even though the delay has been substantial.  The court will take into account all the circumstances of the case, including the following:

(1)     whether the delay was the result of a deliberate decision on the part of the claimant;

(2)     the length of the delay, and any explanations put forward by the claimant (e.g. the pursuit of settlement negotiations, or difficulties in funding the pursuit of the proceedings);

(3)     the degree of prejudice liable to be caused to the claimant if the injunction is discharged;

(4)     whether the claimant sought to rectify the position and proceed with the action or whether the delay is still continuing at the time of the hearing;

(5)     the degree of prejudice caused to the defendant as a result of the delay.  This should be shown by evidence and not merely based on the assertions of counsel;

(6)     whether the defendant has through his conduct either caused the delay or contributed to it.”

30.  Sakhrani J in the Hong Kong case Sanwa Development Limited (in Liquidation) v Chan Kar Keung [1999] 1 HKC 847 quoted from and followed the ruling of Hoffmann J in Newsgroup Newspapers before finding that on the evidence the plaintiff’s delay to proceed to trial was “inexcusable and inordinate”.  He discharged the interim injunction.

31.  Striking out for abuse — In what circumstances? 

The headnote in the Hong Kong Court of Appeal case New China Hong Kong Group Limited (in Liquidation) v AIG Asian Infrastructure Fund LP & Ors [2005] 1 HKC 281 sums up the principles where delay is put up as a ground for striking out.  I reproduce it in part:

“  (1)      Before exercising the power to dismiss an action for want of prosecution, the court must be satisfied that either (a) the default had been intentional and contumelious; or (b) (i) there had been inordinate and inexcusable delay on the part of the plaintiff; and (ii) that such delay would give rise to a substantial risk that it was not possible to have a fair trial (per Lord Diplock in Birkett v James [1978] AC 297 (HL)).  However, courts were more ready to strike out actions for want of prosecution since Grovit v Doctor [1997] 1 WLR 640 (HL).  The modern rule in Grovit v Doctor was that it was an abuse of process in maintaining an action when there was no intention of carrying it to trial.  The requirement to prove likely prejudice suffered by the defendant under the second limb of Birkett v James had been rendered unnecessary.  In Arbuthnot v Trafalgar Holdings, it was said that mere delay, without more, would not amount to an abuse of process.  It was necessary to find that there was a complete, total or wholesale disregard of the court’s orders (Culbert v Stephen G Westwell) and there was full awareness of the consequences (Choraria v Sethia).  Ultimately, it was still necessary for the court to consider whether it was fair to strike out the action.  Birkett v James [1978] AC 297 (HL), Culbert v Stephen G Westwell & Co Ltd [1993] PIQR 54, Grovit v Doctor [1997] 1 WLR 640 (HL), Arbuthnot Latham Bank Ltd v Trafalgar Holdings Ltd [1998] 1 WLR 1426 (CA), Choraria v Sethia [1998] CLC 625 considered (at 287F-290E).

(2)      The delay of two years on the part of the plaintiffs since 2001, though substantial, did not amount to an abuse of process absent an intention not to bring the proceedings to a conclusion.  Indeed, the evidence was that in March 2001, the plaintiffs paid security for costs of $1m into court.  There were since two changes of solicitors and the passing of papers to take over the conduct of the litigation.  Further, there was an outbreak of SARS from March to May 2003 and the fact that Century City had become the dominus litis of the action on behalf of the plaintiffs provided a change of circumstances which adequately explained why there was a delay, and why the delay could not properly be used as proof of absence of an intention to proceed to trial.  The defendants had failed to demonstrate that the plaintiffs had no intention to bring the proceedings to a conclusion.  Grovit v Doctor [1997] 1 WLR 640 applied (at 291H-293F).

(3)      Mere non-compliance with the rules of the court could not amount to ‘wholesale disregard’ of the rules on the part of the plaintiffs.  On the facts, there was no evidence that the plaintiffs were contumelious in not following the court rules.  Nor was there any evidence to show that the plaintiffs’ disregard of the rules of the court was with full awareness of the consequences.”

32.  I do not see the need to expand on the summary, save to note that Mr Maurellet representing the applicants before me accepted that a striking out on the grounds of delay will be quite exceptional, and conceded that the test is a higher one than that needed for a discharge of an interim injunction.

The Grounds to Support the Applications

33.  Seven years plus is a long time in the lead up in an action no matter how involved and complex, particularly where as in this case the pleadings have just been settled, there has not yet been an exchange of witness statements and there is no sign of a trial date.

34.  Has there been conduct and in turn inactivity by MMK and or Pan-Asia giving rise to inordinate and inexcusable delay?

35.  Mr Maurellet argues “Yes, there has”.  There have been many occasions of what he describes as prolonged periods of inactivity during the seven years.  He cited examples of seven months, eight months, three months, two months and one month.  He also highlighted what he describes as seemingly never ending amendments to the statement of claim, in fact seven in all, to the extent that counsel referred to this as the rainbow pleading.

36.  He reiterated the apparent and obvious motive of drawing out the proceedings, prospectively so that they might peter out, or that Peters might run out of the will to continue, or money, or both. 

37.  He reiterated that MMK and the Russian directors do not want a resolution so that the delaying tactics are deliberate and enduring.

38.  He pointed to what he described as capricious further and better particulars required and then, in the end, not needed because a part of the case was abandoned.  He queried why it was that there had not been an exchange of witness statements, so that the evidence was out front, rather than that the grounds had to be particularised in such unnecessary detail.

39.  He concluded “The plaintiffs are playing a game of interlocutories and pleadings.  They do not want a trial”.

Analysis

40.  I do not propose to rehearse all of the instances of activity and periods of inactivity that comprise the history of this action.

41.  Both sides submitted chronologies; Mr Maurellet’s was 32 pages long, and that of MMK’s counsel, Ms Eu SC leading Mr Mok SC comprised 17.  Their very lengths indicate that far from inactivity a great deal of energy has been expanded.

42.  Of course Mr Maurellet’s complaint centres round pointless interlocutory activity.  But I find it hard to find fault with what MMK’s representatives have applied for.  The statement of claim has been amended many times.  But in all cases the applications to amend were either unopposed or ordered after submissions.  All but one was relatively inconsequential, not needing a response.

43.  In respect of other interlocutory applications as I understand it all went unopposed or were granted after argument.  It seems inappropriate to brand a successful application as time wasting or a deliberate tactic to delay.

44.  On the other hand, Peters and Varex have within the last year applied to amend their defence substantively.  And, ironically, it was their pleadings which until as recently as 20 November last, had not yet been settled.

45.  Their application to amend was filed on 21 November 2006, but not dealt with for nearly a year as the defendants sought, and failed, to have the same heard by a Judge rather than a Master. 

46.  In the event the matter came to be heard by a Master on 26 October 2007.  The Master granted the application save in respect of those amendments opposed.  The defence filed notice of appeal.  The appeal was set down for hearing on 30 November 2007.

47.  That was how the matter was left during the course of the hearing before me on 15 and 16 November; that is, with the appeal pending.  Then I was informed on 22 November, following my first draft of this judgment, that Peters and Varex had decided not to proceed with the appeal.  So, only days ago have the pleadings finally been settled.  And until they had been settled, it would seem to me to have been pointless for witness statements to have been prepared and exchanged.

48.  If as suggested MMK and/or Pan-Asia have been guilty of deliberate delay, one would have anticipated evidence of contumelious disobedience of court orders, the ignoring of time constraints and a willingness to let the action go to sleep if the next step in the process was to be taken by the other side.

49.  No example of such stalling tactics has been put before me.  It is true that Peters and Varex did on one occasion have cause to file for an unless order.  In the event the plaintiffs were given time.  On the other hand, MMK has twice applied for unless orders because of defence delays.  One of these did result in an unless order.  In respect of the other more time was given.

50.  This is a compelling feature that weighs against the allegation of inordinate and inexcusable delay.

51.  Though there is no burden on MMK to establish this, nevertheless on balance it seems to me that overall the defence has been dilatory and wasted time a great deal more than the plaintiffs.

Conclusion

52.  Varex and Peters have not made out a case whereby the injunction should be discharged because of a material change in circumstances.  Nor have they established that there has been on the part of MMK an abuse of process.

53.  The applications are dismissed.  Costs, nisi, are to the plaintiffs.