CREDIT AGRICOLE INDOSUEZ SHANGHAI BRANCH v. CHINA TEXTILE MACHINERY CO LTD AND ANOTHER

HCA 651/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 651 OF 2003

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BETWEEN

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D E C I S I O N

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Introduction

1.  This decision deals with the following 3 summonses:-

(a)  the plaintiff’s summons dated 23 April 2008 (“p’s substitution application”), pursuant to RHC Ord. 15 r. 7(2), seeking the substitution of its name with the following:-

“CALYON (SHANGHAI BRANCH) (formerly known as Credit Lyonnais Shanghai Branch and the successor to Credit Agricole Indosuez Shanghai Branch formerly known as Banque Indosuez Shanghai Branch)” (“Calyon Shanghai”);

(b)  the summons of the 2^nd defendant (“D2”) dated 22 February 2010 (“D2’s substitution application”), also pursuant to Ord. 15 r. 7(2), seeking the same substitution but without prejudice to the defendants’ rights to contest Calyon Shanghai’s interest in this action (and other consequential relief);

(c)  D2’s summons also dated 22 February 2010 seeking the court’s leave to file and serve an affidavit exhibiting expert reports on French law and Mainland law respectively (“D2’s further evidence summons”).

2.  At the end of the hearing, the plaintiff proposed the court to approach the above summonses in the following manner:-

(1)  determine D2’s further evidence summons;

(2)  determine D2’s substitution application irrespective of the court’s decision regarding D2’s further evidence summons;

(3)  determine p’s substitution application only if the court has dismissed D2’s further evidence summons; otherwise, the court should adjourn p’s substitution application pending its restoration for hearing later.

As will be explained below, there are aspects over which p’s substitution application and D2’s substitution application overlap: see para. 30 below.  I therefore have reservations about approaching the matter as proposed above: see also para. 24 to 30 below.  However, all parties seem to be contented with the proposed course.  I shall therefore endeavour to so proceed.

3.  Ord. 15 r. 7(2) stipulates:-

“Where at any stage of the proceedings in any cause or matter the interest or liability of any party is assigned or transmitted to or devolves upon some other person, the Court may, if it thinks it necessary in order to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, order that other person to be made a party to the cause or matter and the proceedings to be carried on as if he had been substituted for the first mentioned party.

An application for an order under this paragraph may be made ex parte” (emphasis supplied).

Background

4.  The background leading to the above summonses can be summarized as follows.

5.  In February 2003, the plaintiff commenced this action seeking the payment of about US$3.13 million together with interest and costs. The 1^st defendant (“D1”) is sued as the principal debtor while D2 is sued as the guarantor.

6.  Both defendants deny the claim. The lines of defence, though not the same, are similar in that both allege the loan was tainted with illegality; the loan agreement was also contrary to the public policy of the Mainland and Hong Kong. Both defendants also claim that full payment has been made. D1 further claims that payments have been made under a mistake.

7.  For present purpose, it is undisputed the plaintiff ceased to exist in its present name since April 2004. Although the precise mode and nature of the merger and/or the change is in dispute, it is common ground:-

(a)  the plaintiff’s business has been carried on in the name of Calyon Shanghai since then (both being a branch office);

(b)  the above change followed a merger between Credit Lyonnais and Credit Agricole Indosuez in France.

Present Dispute

8.  In relation to the substitution applications, the plaintiff contends that, once the substitution is permitted by the court, the defendants cannot later raise issues with regard to Calyon Shanghai’s locus standi to sue. This is because the court must be conclusively satisfied:-

“the interest or liability of [the plaintiff] is assigned or transmitted to or devolves upon [Calyon Shanghai]”

before the jurisdiction under Ord. 15 r. 7(2) is engaged.

9.  On the other hand, the defendants argue that the manner in which court exercises its discretion pursuant to Ord. 15 r. 7(2) should be unfettered. While no doubt there are cases where it is abundantly clear the application should fall within the rule (or vice versa), the matter can be disposed of summarily. Likewise there will be cases falling between the two extremes, it will be up to the court to decide how to proceed, bearing in mind the underlying objectives set out in Ord. 1A and the case management powers set out in Ord. 1B.

10.  In the context of this action, the defendants submit that the discretion should be exercised in permitting the substitution, but without prejudice to them amending the defence to put in issue Calyon Shanghai’s locus standi to sue.

11.  Alternatively, they argue that, even if the court should agree with the plaintiff’s above contention that the matter must be determined within the confines of p’s substitution application, it should proceed in a manner similar to the trial of a preliminary issue (pursuant to Ord. 33), including requiring the experts to attend court to be cross-examined.

12.  In relation to D2’s further evidence summons, the plaintiff contends that D2 has been guilty of delay which has caused it prejudice. This is denied by D2.

D2’s Further Evidence Summons

13.  D2 applies to adduce expert evidence regarding French law as well as further expert evidence on Mainland law. The background giving rise to the application is in short this.

14.  In response to p’s substitution application, D1 adduced expert evidence on Mainland law in June 2008. In gist, it is D1’s case that the interest in the alleged loan has been transferred from the plaintiff to Calyon Shanghai (alternatively, assigned by the former in favour of the latter). Under Mainland law, the plaintiff must give notice of the transfer/assignment else it is invalid.

15.  The plaintiff denies any transfer or assignment. Its expert report in answer states that Mainland law prescribes that, upon the merger of companies, the rights and obligations of the parties to the merger are succeeded by the company which survives the merger (or by the new company following the merger). The plaintiff’s expert describes this as the “concept of universal succession”.

16.  D2’s expert disagrees and contends that Mainland law is only concerned with mergers among Mainland legal entities. Neither the plaintiff nor Calyon Shanghai is recognized as a legal entity: see also para. 39 below.

17.  The plaintiff’s primary complaint in this application is that D2 has been dilatory in adducing such evidence. The Registrar’s order prescribing a timetable for affidavits was made in March 2009. The plaintiff’s reply affirmation (exhibiting the expert reports on French law and Mainland law) was put forth in accordance with the timetable. In February 2010 (about 9 months later), D2 alleged that the said reports raised new points and took out this application.

18.  In this connection, the plaintiff relies on two matters:-

(1)  the Civil Justice Reform regime aims at higher efficiency and therefore discourages delay in civil litigation.  D2’s 9-month delay requires a satisfactory explanation;

(2)  Ord. 32 r. 11A(4) prescribes that exceptional circumstances must exist to justify the introduction of fresh evidence after an interlocutory application has been adjourned by a master: see also Fortune Asset Development Ltd. v. De Monsa Investments Ltd., HCA 167/2009 (21 August 2009), para. 10-11.

19.  D2’s explanation for the delay is that the matter is complicated and it took a long time to locate and engage an expert on French law and for him to prepare a written opinion.

20.  The plaintiff criticizes the lack of details in the explanation. But this criticism has to be judged in the light that D2’s solicitors have to obtain instruction from a Mainland company. Unlike the plaintiff and Calyon Shanghai, which have a parent company in France (which very probably has vast experience instructing French lawyers), D2 does not have any connection with France.

21.  It is also pertinent to bear in mind the timetable referred to in para. 17 above was for the plaintiff to reply to D2’s affirmation. But further to doing so, the plaintiff’s affidavit (filed in April 2009) exhibited an expert report on French law. The exhibited Mainland law expert report also contains new points relating to Art.173, Company Law. Any period of delay for D2’s further evidence should run from April 2009.

22.  At one stage it seems to be the plaintiff’s case D2’s further evidence adds nothing new: para. 12(2), plaintiff’s skeleton submissions. The plaintiff changed that stance during the hearing and submitted that new points had been raised therein.

23.  Having taken the matters above into account, it is appropriate to permit D2 to adduce the further evidence sought in this application.

The Substitution Applications

(a)  General

24.  As stated above, the plaintiff’s contention (or at least its primary contention) is that the court’s jurisdiction under Ord. 15 r. 7(2) has to be conclusively determined within an application brought pursuant to that rule.

25.  It is not entirely clear if the plaintiff has an alternative contention (and if so what precisely that contention is). I will assume that it has an alternative contention to the effect that, even if the court’s jurisdiction can be “flexibly” exercised (as summarized in para. 9 above), in the present factual context, the matter should still be summarily determined.

26.  It also appears (at least at one stage) the plaintiff argues that the totality of the expert evidence so far adduced justifies that issue to be summarily determined (on “paper” evidence) irrespective of which of the approaches set out above is considered appropriate. It has apparently changed its mind when it asks the court to deal with D2’s substitution application, but not to deal with its own: see para. 2 above (especially para. 2(3) above).

27.  The approach which the plaintiff advocates must have been based on the assumptions that:-

(a)  I decide against D2’s substitution application as regards the nature of the substitution order made pursuant to Ord. 15 r.7.  That is, I find that the jurisdiction must involve a conclusive determination of Calyon Shanghai’s locus standi;

(b)  however, I find at the same time whether the expert evidence is sufficiently “clear and certain” (so as to justify a summary determination of that issue) has to await the plaintiff’s further evidence.

28.  If, contrary to para. 27(a) above, I disagree with the plaintiff’s contention (or primary contention) set out in para. 8 (and 24) above, there is no logical reason why I should not deal with p’s substitution application by dismissing it.

29.  On the other hand, even though I disagree with the plaintiff’s said contention (or primary contention), but if I should find the expert evidence adduced so far justifies a summary determination of the dispute (contrary to para. 27(b) above), similarly there is no readily understandable reason why I should not now deal with both substitution applications.

30.  However, to the extent the defence accepts there are cases which must be suitable for the court’s summary determination, the parties should be on common ground with regard to those cases: see para. 8 to 9 above. I therefore do not understand why the plaintiff considers p’s substitution application must invariably be adjourned only because I allow D2 to adduce further evidence.

(b)  Merits of D2’s Substitution Application

31.  In short, I agree with the defence argument (see para. 9 above) and disagree with the plaintiff’s (see para. 8 (and 24) above).

32.  Nothing in the language of Ord. 15 r. 7(2) indicates the manner in which the court’s discretion should be exercised should be as rigid as the plaintiff contends. In fact, that the rule permits an ex parte mode of application indicates otherwise. Further, the rule is part of those related to “Causes of Action, Counterclaim and Parties” (which are therefore procedural in nature); flexibility will unlikely hamper the efficiency of civil litigation, but should enhance it rather. None of the authorities relied on by the plaintiff shows or supports a rigidity in the court’s approach.

33.  As regards how to exercise the discretion in this action, I am again in agreement with the defence. The reasons are as follows.

34.  The illegality/public policy defence (para. 6 above) is premised on Mainland law. In gist, the alleged loan agreement (including the choice of law provision) is said to be a device to get round the prohibitions against foreign exchange arbitrage contracts.

35.  The further defence raised in D2’s substitution applications is in essence that the so-called merger of the plaintiff with Calyon Shanghai is not recognized by Mainland law. Consequently, there must be a valid transfer or assignment of the plaintiff’s right to pursue this action. For this purpose, Calyon Shanghai must pray in aid Art. 80, Contract Law; but that code requires a notice of assignment to be given by the plaintiff first. Because the plaintiff already ceased to exist and no such notice has been given, Calyon Shanghai cannot continue this action under Mainland law.

36.  In response, the plaintiff’s expert opines that:-

(1)  approval has been given by the Mainland authorities regarding the merger between the plaintiff and Calyon Shanghai;

(2)  in any event, “the concept of universal succession” is recognised by Mainland law.  Art. 175, Company Law and Art. 90, Contract Law are examples of such recognition.

37.  Expert for the defence disagrees and asserts that the above opinion is incorrect.

38.  In relation to para. 36(1) above, D2’s expert asserts the approval was given under the banking law regime and was merely regulatory in nature.

39.  In relation to para. 36(2) above, D2’s expert asserts that Art. 175, Company Law is only applicable to legal entities recognized under Mainland law (for example, companies incorporated in the Mainland). The plaintiff and Calyon Shanghai are only a branch of a foreign company (cp. Art. 196, Company Law). Similarly, Art. 90, Contract Law does not apply again because they are not legal entities. There is no “concept of universal succession” independent of the codes.

40.  As has been stated in Full Wisdom Holdings Ltd. and Others v. Traffic Stream Infrastructure Co. Ltd. and Others [2004] 2 HKLRD 1016:-

“… In studying the validity of any opinion based on foreign law, the court does not simply accept any stated conclusions as being correct, even where there may be no legal opinion contradicting it.  The court is entitled to (and indeed must) look at the basis of the legal reasoning … in determining what weight, if any, should be attached to the Opinion … ” (para. 23 thereof).

41.  Experts for the respective camp have not given any sufficient reason(s) for the conclusions summarized above. I will mention two matters by way of example.

42.  Business mergers and acquisitions (including those among international businesses) are common these days. One can expect any legal system which encourages business and commercial activities to provide an easy mechanism for pre-merger transactions to be “taken over” by the “new” entity. In Hong Kong, for instance, bank mergers are often effected by way of ordinances (see, for example, the ordinances set out in Part IV (English Subject Index to Ordinances), Contents, Vol. 1, Laws of Hong Kong (under the heading “Banks”)). It is well-known China’s economic policy in the recent years has been to encourage business and commerce, including international business and commerce. With these matters in mind, the opinion of defence expert to the effect there is a legal vacuum in relation to foreign mergers appears to be in need of supporting reason(s).

43.  On the other hand, the plaintiff expert’s assertion that “the concept of universal succession” (which some of the plaintiff’s English judicial authorities mentioned was a continental law concept) is recognized by the Mainland also lacks supporting reason(s). Both the Contract Law and Company Law which he cited are statutory codes. As to how a legal concept (or principle) can exist independent of such codes has likewise not been explained.

44.  By reason of the matters aforesaid, and considering the original defence also raised issues based on Mainland law, I agree with the defence this is an appropriate case for an order to be made in terms of D2’s substitution application.

45.  I will leave it to the parties to attempt to agree on any consequential directions. There will be liberty to apply if they should fail to do so.

Costs Order Nisi

46.  There is no apparent reason to depart from the usual rule that costs should follow the event. There will accordingly be a costs order nisi pursuant to Ord 42 r 5B(6) that the costs of D2’s further evidence summons and D2’s substitution application be paid by the plaintiff to the defendants in any event. The costs order nisi includes a certificate for court attendance by 2 counsel.

47.  The costs of p’s substitution application are reserved.