BEIJING TONG GANG DA SHENG TRADE CO LTD v. ALLEN & OVERY(a firm) AND ANOTHER

HCA 1491/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1491 OF 2011

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REASONS FOR DECISION

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1. Before the court were two summonses taken out by the defendants to strike out the writ and the statement of claim issued against them by Beijing Tong Gang Da Sheng Trade Co Ltd (“the plaintiff”). The plaintiff was the assignee under a Deed of Assignment (“the Assignment”) dated 18 January 2012 of a cause of action previously vested in the assignor Greater Beijing Region Expressways Ltd (“GBRE”). At the conclusion of the hearing, the plaintiff’s claim was struck out with written reasons to be handed down which I now do.

Background facts

2. The defendants are respectively a firm of solicitors and counsel who had rendered advice to GBRE in relation to GBRE’s claim against various entities referred to as “the COSCO defendants”.  The defendants are alleged to have rendered negligent advice accrued in relation to that claim in or about 2005 or 2006.

3. The evidence filed on behalf of the plaintiff disclosed the fact that on 5 July 2010 the plaintiff and GBRE had entered into a Litigation Funding Agreement (“the Funding Agreement”).  Its key provisions may be summarized as follows:

(a)  the plaintiff agreed to lend HK$3.4 million to GBRE at an interest rate of 25% for a term of two years from 10 July 2010 to 9 July 2012; the purpose of such loan was expressly stated to be for GBRE’s litigation against the defendants;

(b)  the guarantee of the loan was the proceeds that GBRE would recover from the litigation against the defendants;

(c)  GBRE agreed to accept the plaintiff’s supervision and upon the plaintiff’s request, GBRE would provide documents reflecting the actual use of the loan; and

(d)  the plaintiff was additionally entitled to 20% of any proceeds recovered in the litigation against the defendants.

4. Some 14 months after the Funding Agreement, on 1 September 2011, GBRE issued a writ (HCA 1491/2011) against the defendants claiming damages and/or equitable compensation for loss and damage suffered as a result of alleged negligent advice (“the action”).

5. Approximately four months later, on 18 January 2012, GBRE and the plaintiff executed the Assignment under which GBRE assigned to the plaintiff, inter alia, its rights, title, claims, entitlements, interests and benefits against the defendants arising out of or in respect of the claims in the action, the right to prosecute and carry on the action in the name of GBRE and the right to any proceeds arising from the action.  The consideration for the assignment was HK$100,000 and 10% of the net proceeds of the action (i.e. US$40 million), the plaintiff valuing the claim at US$400 million.

6. The Funding Agreement expired on 9 July 2012 and under its terms, the loan advanced became due and payable.

7. The plaintiff gave notice of the Assignment to the defendants on 16 August 2012.

8. On the following day, 17 August 2012, GBRE filed an amended writ removing GBRE from the action and substituting the plaintiff in its place.  GBRE ceased to be a party to the action thereafter.

9. The plaintiff continued the action and filed a statement of claim on 14 November 2012, valuing the claim at US$400 million plus GBRE’s wasted costs amounting to HK$6.7 million.

10. On 22 January 2013, the 2^nd defendant’s solicitors wrote to the plaintiff’s solicitors stating that “the Assignment, being an attempt to assign a bare cause of action, was champertous or otherwise invalid on public policy grounds” and intimated that unless the plaintiff was able to demonstrate otherwise, an application would be made to strike out the writ and the statement of claim.  The 1^st defendant’s solicitors also sent a letter to the plaintiff’s solicitors in similar vein.

11. The plaintiff solicitors replied on 30 January 2013 to the effect that the Assignment is not champertous for the following reasons:

(a)  The plaintiff is a major creditor of GBRE and so has a genuine commercial interest in the enforcement of the action.

(b)  The plaintiff is the controlling shareholder of GBRE and is in control of the board and therefore has a genuine commercial interest in the enforcement of the action.

(c)  GBRE has been relying on the plaintiff to finance the action and the Assignment is justified on the “access to justice” exclusion.

(d)  In any event the plaintiff is controlling shareholder of GBRE and can procure GBRE to continue the action. 

12. By letter dated 25 February 2013, the plaintiff’s solicitors refused the defendants’ requests made earlier that month to be provided with documentary evidence in support of the grounds put forward in the letter of 30 January 2013 and, instead, offered to cancel the Assignment on the basis that GBRE would continue with the action.

13. The defendants took out their summonses to strike out the action shortly thereafter.

14. By summons dated 24 January 2014, the plaintiff applied to join GBRE as a party with a supporting affidavit from Mr Leung (Mr Leung’s 3^rd affidavit). At the hearing, the court was informed that the plaintiff would defer arguing the joinder application until after judgment was available.

15. Very shortly before the hearing commenced, the court was presented with Mr Leung’s 4^th affidavit sworn on 27 January 2014 exhibiting a copy of a Deed of Amendment, Confirmation and Ratification executed by Mr Liu on behalf of GBRE and by Mr Liu on behalf of the plaintiff on 27 January 2014 (“the 2014 Deed”). The 2014 Deed altered the division of the spoils between the plaintiff and GBRE from 90:10 to 50:50.

The plaintiff’s evidence

16. The plaintiff is a company incorporated in the PRC in December 2004.  Its legal representative/person in charge is a Mr Liu Bao Chun. Neither Mr Liu nor any authorized officer of the plaintiff filed evidence on behalf of the plaintiff.  Rather, the plaintiff’s handling solicitor, Mr Leung Yan Wing filed two affidavits dated 3 June 2013 and 8 July 2013 respectively in opposition to the striking out summonses.

17. In a recent decision of Anthony Chan J in UES International (HK) Ltd (formerly known as Grand View Development (HK) Ltd) v Maritima Maruba SA (formerly known as Maruba SCA), and reported HCA 632/2011, 19 November 2013, practitioners were reminded of the annotation at 41/5/4 of HKCP that:

“An affidavit should where possible be sworn by the person with the most direct knowledge of the matters deposed to. This will usually be the party rather than his solicitor.”

18. The present case is yet another regrettable instance of the flouting of this practice.  It is the plaintiff (and not its solicitor Mr Leung) who is party to the Funding Agreement and the Assignment.  It is the plaintiff who would have first-hand knowledge of those matters.  Quite why Mr Liu or a director of the plaintiff or some other authorised officer could not have made the affidavit on behalf of the plaintiff is not explained.

19. Mr Leung’s 1^st affidavit dated 3 June 2013 deposed, inter alia, to the following matters: that the plaintiff is a major creditor of GBRE, that GBRE has no other substantial debts, that the plaintiff is the controlling shareholder in control of the board of GBRE, and that the plaintiff is able to provide legal expertise and services of the former directors of GBRE to the action.  It is not explained why it was proper for Mr Leung to make the affidavit on the plaintiff’s behalf in relation to those matters. 

20. In my view, Mr Leung had no business deposing to those matters when, as will become apparent, he did not support see fit to support his assertions with the necessary documentary evidence.

The issues

21. Mr Dawes, counsel for the defendants, submitted that both the Funding Agreement as well as the Assignment are champertous.

22. Before considering the validity of that submission, it should be mentioned that at the hearing Mr Anson Wong (who appeared for the plaintiff) complained that the defendants’ reply affirmations never questioned the genuineness or legality of the Funding Agreement and issue was only taken in Mr Dawes’ written submissions.  While apparently accepting that further explanations from the plaintiff might be required, Mr Wong submitted that it would be unfair for the court to come to a view on the validity of the Funding Agreement without giving the plaintiff a further opportunity to explain the Funding Agreement.

23. It is to be noted that the plaintiff was able to file two further summonses and affidavits (mentioned in §§ 14 and 15 above), yet no application was made for an adjournment nor was there any application for further evidence to be admitted.  Mr Dawes’ written submissions are dated 23 January 2014 and the hearing took place five days later.  There was ample opportunity for Mr Wong to have prepared any further evidence had that been necessary.  I do not consider that the defendants should be criticized for taking issue with the Funding Agreement.  Nor, I might add, are they precluded from doing so.

The Funding Agreement

24. Until Mr Leung’s affidavit of 3 June 2013, the defendants were wholly unaware of the existence of the Funding Agreement.  They had only been given notice of the Assignment (which they considered champertous) but that was all.

25. Chronologically, the Funding Agreement preceded the Assignment.  It would be convenient to highlight a number of features that call for comment:

(1) There is no mention in the recitals (or elsewhere) to the plaintiff being a shareholder of GBRE.  Rather the Funding Agreement was framed as a loan transaction between the plaintiff as lender and GBRE as borrower. 

(2) The evidence only shows that the plaintiff to be the controlling shareholder as at 5 July 2013, holding 51.05% of the issued shares of GBRE.  Conspicuously absent was any evidence of the date the plaintiff acquired shares in GBRE and this was notwithstanding the defendants’ request for such information.

(3) It makes no mention of GBRE being already indebted to the plaintiff at the time of the Funding Agreement in respect of other transactions between the parties that would have pointed to a preexisting commercial relationship. 

(4) The purpose of the loan was clearly stated: “for litigation against [the defendants]”.  Not only that, but the plaintiff was given the right to supervise how the monies are to be used. 

(5) The guarantee for the loan would be the proceeds from the action. 

(6) The loan period plainly contemplated that the action would take no more than two years to come to a conclusion.  On any view, that timeframe appears to be grossly inadequate since the action was not even on foot at the time of the Funding Agreement and, in fact, the writ was not even issued until some 14 months into the two year period.

(7) No documentary evidence was adduced that reflects GBRE’s financial position at the date of the Funding Agreement.

(8) The consideration for the loan, being the not inconsiderable interest rate of 25% coupled with the additional return of 20% of the future recovery (amounting to HK$625 million plus interest) can be seen to be massively out of whack with, and disproportionate to, the loan of HK$3.4 million or the total indebtedness with interest in the sum of HK$5.234 million as at 24 January 2013.

26. Mr Dawes who appeared for the defendants contended that the Funding Agreement is of itself champertous and therefore cannot give rise to any genuine pre-existing commercial interest to justify the Assignment.  He highlighted the fact that there is no evidence to show that the plaintiff had any genuine commercial interest in GBRE at the time of the Funding Agreement, i.e. 5 July 2010: the provisions of the Funding Agreement point to the absence of any pre-existing relationship between the plaintiff and GBRE as at that date and there is no evidence to show that the plaintiff was a shareholder of GBRE at that time.

27. It was further submitted that in the absence of documentary evidence reflecting the financial position of GBRE at the time of the Funding Agreement, Mr Leung’s bare assertion that GBRE “does not have the financial means to pursue the [a]ction by itself” cannot trigger any “access to justice” considerations.

28. From the raft of judgments of the High Court from the late 1990’s involving the web of companies (of which GBRE is one) controlled by its chief protagonist and mastermind, David Yuk Wah Ho, (who had previously been a partner at Baker and McKenzie and subsequently had his own firm, Mr David Y W Ho & Co), there was no way in which GBRE would not have known that the chances of a professional negligence claim involving such massive sums concluding within two years were nil, much less an action that was not even on foot at the time of the Funding Agreement. 

29. I find that feature to be particularly troubling.  It made no sense whatsoever for GBRE to incur the debt when, according to Mr Leung, it apparently had no other ‘substantial’ debts and to commit to repay the loan (with substantial interest) two years later when it was in no position to issue a writ until 14 months after the date of the loan. 

30. In addition, the eighth feature mentioned in §25 above shows a potential return so vastly disproportionate to the plaintiff’s entitlement as creditor of GBRE that those matters necessarily call into question the genuineness of the plaintiff’s alleged commercial interest in GBRE as at the date of the Funding Agreement: Advanced Technology Structures Ltd v Cray Valley Products Ltd, Pratt v Cray Valley Products Ltd  [1993] BCLC 720 as interpreted by Ribeiro PJ in Unruh v Seeberger (2007) 10 HKCFAR 31 at §116.

31. Given all the factors identified above, the plaintiff’s ‘reticence’ via its mouthpiece Mr Leung in providing relevant information coupled with the absence of any credible evidence of a pre-existing commercial relationship between the plaintiff and GBRE at the date of the Funding Agreement, the ineluctable conclusion is that the Funding Agreement was conceived as a means of converting the plaintiff into a creditor of GBRE.

The Assignment

32. As earlier noted, the consideration for the assignment was HK$100,000 plus 10% of the recovery proceeds estimated to be (US$40 million).  Under that arrangement, the plaintiff stood to retain 90% of the net proceeds, namely US$360 million.  Applying an exchange rate of 7.8, it would yield HK$2.8 billion. That would be the potential return for an initial outlay of only HK$100,000.  So analysed, it represents an even more egregious and extreme example of a vastly disproportionate potential return as to seriously call into question the genuineness of the interest asserted.

33. The grounds of justification advanced in Mr Leung’s affidavit are summarized at §11 above.  He asserted that the plaintiff is a major creditor of GBRE.  However, the only evidence adduced was the Funding Agreement.  Logically, that can only mean that the indebtedness of GBRE to the plaintiff arose from, and was confined to, its indebtedness under the Funding Agreement which, as at 24 January 2013, stood at no more than HK$5.234 million. 

34. Mr Leung further asserted that GBRE had “no other substantial outstanding debts” but no documentary evidence such as GBRE’s financial statements for the relevant period covering the date of the Assignment was adduced in support when the plaintiff, on its own case, is the controlling shareholder and could easily have caused the relevant financial statements to be exhibited. 

35. The financial statements for GBRE exhibited related only to the year ended 31 December 1998 and are wholly irrelevant for present purposes.  The fact that Mr Leung refused the defendants’ request for the relevant evidence makes it all the more inexplicable given that the plaintiff’s case: see §11 above. 

36. It was also asserted that the plaintiff “is” the majority shareholder of GBRE.  The supporting evidence merely shows that as at 26 April 2013, again well after the date of the Assignment, the plaintiff owned 51.05% of the issued shares of GBRE.  That fact cannot assist the plaintiff’s case because it does not show that the plaintiff was a majority shareholder of GBRE at the critical date which is the date of the Assignment.  The plaintiff’s apparent reticence in disclosing when it became a shareholder of GBRE serves to underline the point.

37. In my view, it is not necessary to consider Mr Dawes’ further submissions to the effect that a 51.05% shareholding at the time of the Assignment would not, in any event, assist the plaintiff because a substantial shareholding is required.

“Access to justice”

38. The major plank of Mr Wong’s submissions was that funding obtained via the Funding Agreement was necessary to give GBRE access to justice.  Mr Wong placed considerable reliance on the following passage from the judgment of Ribeiro PJ in the Unruh case:

“102. Secondly, the fact that an arrangement may be caught by the broad definitions of maintenance or champerty is not in itself sufficient to found liability. The totality of the facts must be examined asking whether they pose a genuine risk to the integrity of the court’s processes. In R (Factortame Ltd) v Transport Secretary (No 8) [[2003] QB 381 at § 36], Lord Phillips MR stated: ‘... one must today look at the facts of the particular case and consider whether those facts suggest that the agreement in question might tempt the allegedly champertous maintainer for his personal gain to inflame the damages, to suppress evidence, to suborn witnesses or otherwise to undermine the ends of justice.’ It is not enough simply to say that it is the type of agreement which ‘savours of’ champerty.

103. Thirdly, countervailing public policies must be taken into account, especially policies in favour of ensuring access to justice and of recognising, where appropriate, legitimate common interests of a social or commercial character in a piece of litigation.  The traditional public policies against intermeddling in litigation must be weighed against such competing values and if the balance is in favour of the latter, the conduct complained of should not be regarded as contrary to public policy.”

39. Mr Wong submitted that Unruh makes it clear that the court has to engage in a delicate weighing exercise.  He submitted that the court should not reach any conclusion in the absence of a full blown trial where disputed factual issues had to be resolved, citing the decision of Sakhrani J in Lam Hei Shing Joseph v North Tower Properties Ltd and Barnett Consultants Ltd, unreported, HCA 697/2007, 11 June 2008.

40. I agree with Mr Dawes that the Lam case is distinguishable in that the first defendant in that case had filed an affirmation that gave rise to factual disputes.  Those needed to be resolved at trial.  The present case is totally different and readily distinguishable.

41. I do not read Unruh as precluding a court in an appropriate case from striking out a claim on the basis of champerty except after a full trial.  If it is plain and obvious from the totality of evidence before the court that the transactions in question pose a genuine risk to the integrity of the court’s processes and the so-called disputed issues only arise because the party challenged failed and/or declined to adduce relevant evidence when it was well within his power to adduce such evidence, I do not consider that the court is required to resolve such “self-induced” disputed issues at trial before reaching a conclusion on the issue of champerty.

42. In this connection, it should be mentioned that I agree with Mr Dawes that the usual rule in a striking out -that, the court would normally take the opposing party’s affidavits to be true- does not apply if that party is not prepared to make good its factual assertions when plainly it is in a position to do so.

43. As earlier noted, a vastly disproportionate potential return to the amount of the indebtedness is highly relevant when evaluating the genuineness of the alleged commercial interest of the plaintiff.  In a proper case, where the totality of the facts make it plain and obvious that the transaction relied on makes no or little commercial sense and gaps in the challenged party’s evidence are intentionally unfilled, creating self‑induced disputed issues, it is open to the court to draw the appropriate inferences and conclude that it is champertous.

 The 2014 Deed

44. As earlier mentioned, just before the hearing commenced, the court received Mr Leung’s 4^th affidavit exhibiting the 2014 Deed, altering the division of the proceeds from 90:10 to 50:50.

45. This last-minute development might suggest that the original arrangement was thought to be problematic.  Be that as it may, whether the new arrangement can save the day for the plaintiff has to be considered.

46. Mr Wong accepts as correct the proposition that notice of assignment must be given before the commencement of an action so far as that action is brought in the name of the assignor but suggested that it was inapplicable because the current action is already on foot in the name of the plaintiff.

47. It was said that if the original assignment is struck down as being champertous, the cause of action would remain vested in GBRE who would be in a position to make an assignment which is what it has done by the 2014 Deed.  Mr Wong then suggested that the court could exercise its powers under O.15, r.7 (2) to join GBRE as a party.  I do not consider that O.15, r.7 (2) operates in the manner suggested by Mr Wong.  It deals with the situation where the person in whom the cause of action is vested (i.e. the assignor) is already a party.  But GBRE is not a party to the present action: it ceased to be a party on 17 August 2012.

Conclusion

48. On the facts of this case, I have little hesitation in concluding that both the Funding Agreement and the Assignment are champertous.  Accordingly, it is ordered that the writ and the statement of claim be struck out with an order of costs to the defendants with certificate for counsel, such costs to be taxed if not agreed. 

49. As the plaintiff wishes to be heard on the joinder application before the order is drawn up, the court will hear that application with one hour reserved on a date to be fixed after the Reasons for Judgment have been handed down.

50. In those circumstances, it is not necessary to consider whether the 50:50 split under new arrangement would make any difference on the issue of champerty.