JOE ZHIXIONG ZHOU v. SAIF PARTNERS II L.P. AND ANOTHER

HCCL 16/2016

[2019] HKCFI 159

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

(TRANSFERRED FROM HIGH COURT ACTION NO. 1551 OF 2010)

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R U L I N G

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1.  There is before the court a summons seeking a stay of the taking of an account that was directed by an order made on 26 June 2018. 

2.  The background to the application is this.  Following an 11‑day trial that concluded on 24 January 2017, the court gave judgment on Valentine’s Day, 14 February 2017, dealing with the plaintiff’s claim for sums alleged to be due under provisions in a limited partnership agreement and separation agreement and a counterclaim for restoration of a secret profit made in alleged breach of fiduciary duty. The plaintiff’s claim succeeded  but he was found to be in breach of fiduciary duty in respect of his involvement in developing a project whereby a company (Xinrui) which was separate from the company that had become a portfolio company for Fund II, would develop and monetise what was referred to as Diandao technology. He was accordingly ordered to disgorge any profit that he made personally from the investment agreement dated 24 August 2017 that he was involved in acting for a party thereto, KPCB China Fund LP Limited.  That agreement was referred to in the judgment as the “Xinrui investment agreement”. 

3.  The court ordered that all necessary enquiries and account should be taken to establish such secret profit made personally by the claimant, which would then have to be paid over to the 1st defendant who would receive the secret profit in trust for the investors in Fund II.  A relatively short time after judgment had been handed down, the plaintiff served an affirmation which he contended was in compliance with the order for an account of any secret profit made, in which he stated that no profit at all had been made under the Xinrui investment agreement.  On the contrary, KPCB China Fund LP had made a loss.  It had invested US$8 million and in the end it sold the investment to a third party for around $4 million.

4.  The defendants sought an order from the court directing that this evidence did not satisfy the requirements of the order for an account and specified the particulars of the account that the court ought to direct.  It was that approach to the court that led to the order which is sought to be stayed, the order made on 26 June 2018. The court recognised, when it made that order, that it was making an order that went beyond what conventionally would be directed.  It explained that that was in the light of the findings the court had made as to the falsity of part of the evidence that the plaintiff had given, and in the light of the very sparse discovery that he had given in the proceedings.

5.  On 13 July 2018, the plaintiff issued the summons that is now before the court.  That led to a consent order being made by Justice Mimmie Chan on 24 July 2018 which directed that the summons be adjourned to a date to be fixed in consultation with counsels’ diaries.  It is clear that by 24 August 2017, the date for the hearing of the summons had been fixed to be 11 January 2019 before myself.  As I mentioned in the course of oral submissions, I am very surprised indeed that this summons was adjourned for such a long period of time.  We are talking about 4½ months.

6.  The approach to be adopted by the court when determining an application for a stay of execution pending an appeal was helpfully stated by Ma J (as he then was) in Starplay Development v Bess Fashion Management Company Limited [2007] 5 HKC 84.  The principles enunciated in that case can be stated as follows:  (1) no stay will be ordered unless the applicant can demonstrate a good reason for a stay; (2) by itself, the existence of a merely arguable appeal would not constitute sufficient good reason for a stay; (3) the existence of a strong appeal or a strong likelihood of success of the appeal by itself could constitute a good reason for a stay; (4) a good reason for a stay may also be shown if, without a stay, the appeal would be rendered nugatory or was otherwise disproportionately prejudicial to the applicant for a stay, all this depending on the circumstances of the case; (5) in considering an application for a stay pending an appeal, it is impracticable and undesirable for a court to go deeply into the merits or strengths of the appeal, although the court must still form a preliminary view of the merits; (6) ultimately, the court will need to decide upon the balance of prejudice, being the balance between the prejudice to the respondent of being kept out of the fruits of his judgment, and the prejudice to the applicant or others if no stay is granted. 

7.  In Strix Limited v Otter Controls Ltd [1995] RPC 675, where a stay of an inquiry as to damages flowing from the breach of a patent was sought, Laddie J observed that there was a well-established practice that an applicant for a stay has to show “special circumstances”.  What the court must look at is all the circumstances for and against and decide whether, on balance, there are good reasons to depart from the plaintiff’s normal entitlement to seek assessment and payment of damages as quickly as the court’s procedure will allow. In all cases where a plaintiff wishes to push ahead with an inquiry, he does so at the risk of bearing the costs of the inquiry in case the judgment is overturned on appeal.  The mere existence of the irrecoverable costs and efforts is not by itself a justification for staying an inquiry.  If it were, all inquiries would be stayed.  This is not to say that costs cannot be taken into account. Lastly, commercial sensitivity and confidentiality is a factor, but it can be mitigated by measures such as a confidentiality club. 

8.  This approach of Laddie J was adopted by Chow J in Tang Ying Loi v Tang Ying Ip HCA 2487/2009, and also by Bharwaney J in Zhang Hong Li v DBS Bank (Hong Kong) Limited [2018] HKCFI 34. 

9.  The “good reason” advanced by Mr Barlow QC on  behalf of the plaintiff that justifies a stay is as follows.  All the parties to the judgment are appealing from it and the plaintiff has arguable grounds of appeal; if there is no stay, the plaintiff’s appeal may otherwise be rendered nugatory. The account‑taking exercise is likely to be a lengthy one, and any additional delay to the defendant can be compensated by the compound interest award that has already been imposed by the judgment. And finally, the balance of prejudice favours granting the application. 

10.  The argument that the appeal might be rendered nugatory if the account takes place notwithstanding the appeal is not founded on monetary considerations, but on an apprehension that documents containing information which is confidential and relating to non‑parties will have been made available in the course of the taking of an account to the potential prejudice of third parties which would not occur if the plaintiff’s appeal was successful.

11.  Mr Barlow contends that the balance of prejudice is in support of a stay.  The plaintiff stands to suffer significantly greater prejudice if the account is ordered to proceed, than are the defendants.  The account exercise is wide ranging, it is going to involve considerable industry on the part of the plaintiff and his solicitors and it is going to be costly, whereas any delay in the receipt of any secret profit found to be due on the taking of the account will be compensated by the order that compound interest should accrue on any such secret profit.  Mr Barlow pointed out that the appeals of the plaintiff and the defendants are due to be heard in about the middle of May of this year and the period of time from now to then is therefore, in the overall context, relatively short.  The delay in question should therefore be considered in that light.

12.  He also submitted that the court should take into account the fact that the court’s resources would be engaged in the account process in circumstances where that might never have needed to have happened if the plaintiff’s appeal was successful.  In my judgment, despite the attractive and clearly presented arguments put forward by Mr Barlow, the plaintiff, the burden being on him, has failed to demonstrate that there are special reasons for departing from the normal rule that a pending appeal is no basis or justification for a stay of the judgment being appealed.   

13.  I do not accept in particular the argument that if no stay is granted the appeal would be nugatory.  The issue of confidentiality is dealt with in the order sought to be stayed.  The account has only to be undertaken if the first and second defendants undertake that documents and information provided by the plaintiff in the course of the account will be held confidentially and the documents and information provided shall be used solely for the purposes of seeking to recover any secret profit made by virtue of the Xinrui investment agreement as ordered by the court. 

14.  It is also the case that if documents are found to be of a highly sensitive and confidential nature, an application can be made to the court for further measures designed to protect that confidentiality.  The court is invested with ample powers to order such measures.  These would go beyond the undertakings which have already been required and might lead to parts of any court hearing where such documents are to be referred to,  being held in-camera.  For these reasons, I do not accept the contention that the appeal would be nugatory if a stay is not granted. 

15.  As to Mr Barlow’s contentions on the balance of prejudice, it has to be remembered that at the centre of the court’s deliberations is the requirement that the party seeking a stay must show exceptional circumstances or good reasons for the normal rule that an appeal does not lead to a stay being departed from.  I accept that the accounting order made is wide ranging and it will involve considerable industry on the part of the plaintiff and his lawyers.  It will also lead to considerable expense, but as Laddie J observed in Strix, if no secret profit comes to be awardable following the taking of the account, the defendants will be liable in costs for the steps which the plaintiff has taken to be in compliance with the order.

16.  No costs order will fully compensate the plaintiff for the costs incurred and for the time invested, but as Laddie J pointed out, this is in the nature of the remedy of an account. 

17.  There has been very considerable delay in the taking of this account.  The order was made, as I have stated, in June of 2017, and since the issue of the summons for a stay in July, nothing has been done in compliance with the order.  We are now at the 11 January 2019.  In my judgment, following the hearing of the appeal in the middle of May 2019, judgment is likely not to be given until at least two to three months following the appeal.  That would take things through to around September, and only then the order would kick in giving the plaintiff 36 days in which to carry out the steps identified in the June order. 

18.  This delay does, in my judgment, prejudice the defendants.  As Mr Pow QC pointed out, the compound interest awarded is interest on any sum found to be due.  It will only be upon the establishment of what sum, if any, is due that interest will begin to apply.  The defendants had an entitlement under the judgment that was given almost a year ago to the taking of an account to vindicate their entitlement to such secret profit as the plaintiff made and in my judgment it has not been established that there is good reason that there should be further delay in the necessary account-taking process designed to identify such secret profit as is due to be paid to the defendants. 

19.  For these reasons, I refuse the relief sought in the summons. The account taking exercise must proceed down to the point when the parties will have to return to the court for a decision on the account provided by the plaintiff. Thereafter, the proceedings before the court will be stayed until judgment has been given on the plaintiff’s appeal.  

20.  Turning to the question of costs, it is true that the issue as to whether the undertaking first given by the first defendant was in conformity with the order came to be decided in these proceedings, and that is an issue that had to be decided, especially if the summons was dismissed.  However, in the exercise of the court’s discretion, I do not think it appropriate to proceed on an issue-style basis here regarding the order for costs.  There are a number of authorities where the court has concluded that although certain issues have not been successfully prosecuted by a plaintiff, overall, the plaintiff has succeeded and succeeded roundly and it is not appropriate to deny a defendant his costs. This is the view I take here and I bear in mind not only that consideration, but also I am not persuaded that the first draft of the undertaking involved any inappropriate intent to try and achieve some wriggle room in respect of the undertaking that the court required.  That said, it was an insufficient undertaking. It ought to have been in the wording that the court ordered. That, I am clear about.

21.  For these reasons, the undertaking issue taking up only a very small part of today’s proceedings, I do not propose to order any discount as to the costs that must be paid by the plaintiff on the dismissal of his summons.