XUE XIAOYUN v. WU SHANG YING

HCA 1823/2022

[2024] HKCFI 2860

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1823 OF 2022

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DECISION

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Background

1.  On 31 July 2024, I granted conditional leave for D1 to defend the action.

2.  Parties had since then filed evidence for the determination of appropriate conditions to be imposed on D1. Abbreviated terms in the 31 July 2024 judgment are adopted herein.

Principles

3.  The relevant principles are trite and are not disputed:

(1)  The Court enjoys very wide discretionary powers and is required to consider all the circumstances. When granting conditional leave to defend, the court is required to consider all circumstances, which include the financial circumstances of the defendant, and for practical purposes should not impose a condition which would make fulfilment of the condition impossible. It would be a wrong exercise of discretion to grant to the defendant leave to defend on condition that he should pay into court a sum which he would never be able to pay, for that would be tantamount to giving judgment for the plaintiff, notwithstanding the court’s opinion that there was an issue or question to be tried[1];

(2)  The discretionary powers given by Order 14, rule 4(3) of the Rules of the High Court are “very wide”, the more usual terms are to require the defendant to bring into court within a specified time a sum representing the whole or part of the claim[2].

(3)  The Court can impose a condition of payment of money into Court. The amount of money paid should (1) test the defendant’s bona fide; (2) discourages him from delaying the proceedings; and (3) provide some security to the plaintiff[3].

(4)  Where there is a dispute over property, an undertaking or condition not to deal with the disputed property may be sufficient[4].

(5)  In Lam Chi Kuen (also known as Frank Lam) v Cheng Wing Chung (also known as Edward Cheng) (unrep. HCA 349/2015, 24 June 2015) at §35 per DHCJ Manzoni SC, a case involving dispute over whether shares are held on trust or not, it was set out that:

“The intention behind [imposing] these conditions is so as to preserve the current status quo as between each of the plaintiff and the defendant pending the resolution of the actions, so that whosoever is ultimately entitled to the beneficial interest in the shares has not had that interest prejudiced as between now and the conclusion of the trial.”

(6)  Where a defendant seeks to argue his impecuniosity as a ground for an order for payment in not to be made against him, the burden is on the defendant to adduce sufficient and proper evidence as to his means; he must make full and frank disclosure[5].

D1’s Proposal

4.  D1 proposes the following conditions to be imposed:

(1)  D1 does not deal with the Shares (i.e. 2.14% in TS Lines) until final determination of the dispute (the “Shares Condition”);

(2)  D1 uses his best endeavours to procure TS Lines to make payment into Court of (1) the sum of US$ 8,585,377, being the previous dividends declared but withheld by TS Lines in relation to the Shares; and (2) any future dividends to be declared and paid by TS Lines in relation to the Shares (the “Unreceived Dividends Condition”);

(3)  In relation to the sum of US$ 8,292,000 (the “Received Dividends”), being the dividends paid by TS Lines and received by D1 in relation to the Shares (the “Received Dividends Condition”):

(a)  D1 makes payment of cash of US$ 3,300,000 into Court within 28 days;

(b)  D1, whether personally or through Kentship Holdings Limited (D1’s holding vehicle), will not deal with 1% of the TS Lines shares owned by D until final determination of the dispute (worth approximately US$ 17,715,580 on a net asset value basis).

P’s Proposals

5.  P agrees to the Shares Condition and the Unreceived Dividends Condition. However, Mr Jin Pao S.C. and Mr Byron Chiu, counsel for P, contended that they are insufficient as the Shares Condition which prohibits D1 from dealing with the Shares does not give P security as to his claim because if P prevails at trial and is found to be the owner of the Shares, P has no priority in enforcement if D1 becomes bankrupt before trial, and there may be competing claims over the Shares. P therefore proposes to additionally impose a charge over the Shares (the “Share Charge Condition”).

6.  It was also submitted that D1’s present proposal does not protect P from downturns in the value of the Shares before judgment is rendered. If the Shares become listed, P would have been entitled to freely dispose of them in the open market at market value should he wish to do so. As such, it was also originally contended (in P’s affirmations) that P is entitled to more than a mere restriction on dealings of the Shares, and a further condition should be imposed in the form of a mechanism in valuing the Shares to take into account this deprivation of P’s freedom to deal with the Shares. By the time written submissions were lodged by Mr Pao and Mr Chiu however, it was sensibly recognised that at this stage at least, it is premature to apply for such additional condition and such argument would be reserved to an appropriate time in future, if any.

7.  In relation to P’s claim over the Received Dividends of US$ 8.292 million, Mr Pao submitted that the entire sum should be paid into court (the “Full Payment Into Court Condition”) and D1’s proposal of: (i) payment of US$ 3.3 million into court and (ii) an order that D1 shall not deal with 1% of his TS Lines shares (not being the Shares) held via Kentship Holdings Limited is not “effective security”:

(1)  Where it has been held that a defence is shadowy, the court may order the entire disputed sum to be paid into court as a condition[6].

(2)  Where a defendant seeks to argue his impecuniosity in order to avoid a financial condition being imposed, the onus is on him to put sufficient and proper evidence before the court as to his means. He must make full and frank disclosure. Moreover, a defendant must show not that it is difficult for him to fulfill the condition sought to be imposed, but that it is impossible for him to fulfill it[7].

(3)  In the present case, D1 has failed to make full and frank disclosure of his financial means as required. He has not adduced any primary evidence of his bank or securities accounts. He did not disclose his assets, including his villa in Shanghai worth US$ 6.35 million nor shares in other companies.

(4)  D1 has not explained what has become of the dividends of at least US$ 63.4 million which he received on the Shares and his own 7% shares in TS Lines.

(5)  D1 only gave a bare assertion that his assets are tied up in investments, with no evidence or details to substantiate.

(6)  There is no sufficient evidence to show that it is impossible for D1 to meet a condition for payment into court for the entire HK$8,292,000, representing what D1 now accepts is the relevant sum of Received Dividends.

(7)  An undertaking that D1 shall not deal with 1% of his TS Lines shares (not being the Shares) held via Kentship Holdings Limited is not sufficient as they cannot be immediately realised if P is ultimately successful after trial and there may be competing claims over such shares held under Kentship Holdings Limited.

8.  It was also submitted by Mr Pao that the Court has jurisdiction to grant security for P’s costs as a condition to D1’s leave to defend[8] (the “Security for Costs Condition”) and should exercise its discretion in the present case for the following reasons:

(1)  D1 had breached his duty to make full and frank disclosure of his financial means when advancing his case that he should not be required to pay the full amount of the Received Dividends into Court. The breach of the unless order also demonstrates lack of good faith on his part.

(2)  D1 is not ordinarily resident in Hong Kong and lives in Taiwan. There is no evidence of D1 having any assets of a fixed and permanent nature within jurisdiction.

(3)  There is no evidence that an order for security for costs would stifle his defence.

(4)  The court has found D1’s defence to be shadowy.

9.  D1 opposed the Share Charge Condition, the Full Payment Into Court Condition and the Security for Costs Condition as additional conditions.

The Full Payment Into Court Condition

10.  I accept Mr Pao’s submissions and am of the view that the full amount of US$ 8.292 million should be paid into court as a condition in the present circumstances:

(1)  D1 does not dispute that he has received US$ 8.292 million by way of dividends for the Shares.

(2)  It is clear and undisputed that D1 is able to financially pay the entire sum into court.

(3)  I do not accept the submission by Mr Christopher Chain SC and Mr Xizhen Wang, counsel for D1, that the requirement to make full and frank disclosure is only limited to situations where a defendant is impecunious. In Kwong Key Construction & Engineering Ltd v Sinlink Ltd[9]., Ma JA (as he then was) had set out:

“A defendant must show not that it is difficult for him to fulfil the condition sought to be imposed, but that it is impossible for him to fulfil it. Here, the possibility of a defendant obtaining financial assistance from, say, friends, relatives, financial institutions or (in the case of a company) related or associated companies, must be satisfactorily dealt with by him.”

(4)  Here, although D1 is not saying that he is impecunious, he is likewise seeking to limit the financial condition to be imposed. In my view, if D1 seeks to convince the court that it is impossible or undesirable for him to liquidate his investments in order to make payment into court by cash, he ought to provide the court with sufficient details of his financial position such that the court would be at least in a position to consider the veracity and the merit of such a request. In the present case, D1 has chosen not to do so. The court is thus in no position to come to a conclusion that D1 is unable to, or should not be made to liquidate funds/assets that are tied up.

(5)  After all, D1, as a sophisticated businessman, would be expected to be able to arrange his finances to meet any of his financial obligations. The court or P would not be under any obligation to assist in minimising the effect of the conditions imposed on D1[10].

(6)  Despite the fact that D1 had received substantial dividends between 2019 and 2023 from his shareholding in TS Lines, there was no information given as to what had happened to the substantial amount of dividends (some US$ 49 million) nor any explanation on the difficulty that exists in utilising such dividends.

(7)  The value of D1’s 7% shareholding in TS Lines in itself is about US$124 million. D1 also is a shareholder of 2 Taiwanese companies and such shares are worth at least NTD 32 million. There can be no dispute that D1 is asset rich. There is no explanation on why such assets cannot be used to obtain liquidity to satisfy the conditions to be imposed by the court.

(8)  P, if successful in his claim, would be entitled to a return of the Received Dividends. Given that D1 is a businessman who would utilise assets available to him at any given time for investments or business opportunities, it is highly likely that the Received Dividends would be invested, yet there can be no guarantee that no loss would be incurred in the process. If there is a loss, P’s interest might be prejudiced if he proves to be the ultimate beneficial owner of the Shares. I am thus of the view that the entire sum of the Received Dividends, as opposed to only a part of it, ought to be paid into court in order to preserve the status quo as between P and D1.

(9)  In such circumstances, there is no reason why the court should accept an undertaking from D1 not to dispose of the shareholding through Kentship Holdings Limited in place of payment into court.

The Share Charge Condition

11.  In relation to P’s request for a charge over the Shares, P has not yet succeeded in its claim for the Shares after trial. In view of the fact that D1 has already offered an undertaking on D1’s part not to dispose of the Shares, I do not see any basis to order a charge over the Shares as a condition just to allow P to have priority over the Shares “in case D1 becomes bankrupt”.

The Security for Costs Condition

12.  In view of my decision on the Full Payment Into Court Condition above, I am of the view that together with the Shares Condition and the Unreceived Dividends Condition, such conditions are sufficient to demonstrate the bona fides of D1 in pursing his defence and to provide sufficient security for P. As such, there is no basis to further order an additional condition in the form of security for costs[11].

The Conditions To be Imposed

13.  As a result, I order the following conditions to be imposed as conditions for D1 to defend the present claim:

(1)  The 1^st defendant, whether by his servants, agents, employees or otherwise, be restrained from dealing with, encumbering and/or disposing of the Shares until Judgment is handed down after trial or further order;

(2)  As regards the dividends of the Shares previously declared but withheld by TS Lines, the 1^st defendant do use his best endeavours to procure TS Lines to pay them (in the amount of US$ 8,585,377) into Court within 42 days hereof.

(3)  As regards the dividends which may be declared by TS Lines in the future, the 1^st defendant do use his best endeavours to procure TS Lines to pay any future dividends on the Shares into Court within 42 days of scheduled date of payment by TS Lines.

(4)  As regards the dividends in respect of the Shares previously declared and paid out to the 1^st defendant, the 1^st defendant do make payment of US$ 8,292,000 into Court in the following manner:

(a)  US$3.3 million within 28 days hereof;

(b)  US$4.992 million within 63 days hereof.

(5)  If the 1^st defendant fails to comply with any of the above conditions, the plaintiff do have liberty to apply for judgment to be entered against the 1^st defendant together with costs of the action and costs of the summary judgment application with certificate for 2 counsel.

(6)  Liberty to apply.

Costs

14.  Costs of the summary judgment application (excluding the hearing for the imposition of conditions) had been reserved. I am of the view that such costs should be in the cause.

15.  As to the costs of and incurred by the hearing for the imposition of conditions (the “Conditions Hearing”), Mr Chain proposed that costs of the Conditions Hearing should be P’s costs in the action, whilst Mr Pao contended that costs should be to P in any event.

16.  When determining the appropriate costs order for the Conditions Hearing, I take into account the following:

(1)  In the affidavits, P originally took the position that additional conditions ought to be imposed to take into account the loss of freedom for P to dispose of the Shares. D1 had attempted to respond to such conditions by affidavits. Such position was however not insisted upon for the purposes of this application and only became apparent when Mr Pao and Mr Chiu lodged their skeleton submissions. The costs incurred by D1 in this aspect had been wasted.

(2)  It is accepted that the filing of D1’s affidavits were technically late. P originally took issue with the lateness of the filing of D1’s affidavits and tried to argue that such evidence ought not be admitted. However, whether such evidence should be admitted does not affect the determination of this application as D1 had in any event not disclosed his financial position in any of the affidavits. I take the view that this is a neutral factor when considering costs.

(3)  D1’s proposal of the Shares Condition and the Unreceived Dividends Condition had been accepted by P. His proposal not to pay in the full amount of US$ 8.292 million has been rejected by this court.

(4)  P has proposed for additional conditions to be imposed, only one of which (the Full Payment Into Court Condition) has been accepted. His proposals for the Share Charge Condition and Security for Costs Condition have been rejected.

(5)  It can thus be seen that the Conditions Hearing would have been necessary in any event as neither of P nor D1’s proposal had been fully accepted.

(6)  Both P and D1 were only partially successful in the arguments put forward. Parties spent about 60% of time on the Full Payment Into Court Condition.

(7)  Taking matters in the round therefore, I am of the view that the appropriate costs order should be D1 should pay 50% of the costs of and incurred by the Conditions Hearing, with certificate for 2 counsel, to be summarily assessed.

17.  The above costs orders are made on a nisi basis and will become absolute if there is no application to vary it within 14 days hereof.

18.  I thank Mr Pao and Mr Chain for their assistance.