China Agri-products Exchange Ltd v. Wang Xiu Qun and Another

CACV 205/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 205 OF 2014

(ON APPEAL FROM HCA 1807 OF 2011)

________________________

BETWEEN

______________________

_________________________

JUDGMENT
_________________________

Hon Yuen JA:

1.I agree with the judgment of Chu JA.

Hon Chu JA:

Introduction

2.This is the 1^st and 2^nd defendant’s appeal against the decision (“the Decision”) of Deputy High Court Judge (as she then was) B Chu (“the Judge”) made on 11 September 2014 striking out paragraphs 24 and 25 of the Defence, and the Judge’s order made on 10 July 2015 ordering the defendants to pay the plaintiff 50% of the costs of the striking out application to be summarily assessed. 

3.There were also three interlocutory applications listed to be heard together with the appeal, namely, the respective application of the plaintiff and the defendants for leave to adduce new evidence and the defendants’ application to re-amend the notice of appeal[1]. The applications were not contested and orders had been made in terms of the three summonses at the hearing. 

The relevant facts

4.The background and facts relevant to this action have been set out in detail in the Judge’s Decision at paragraphs 3 to 72.

5.In brief, the plaintiff is a Bermuda company listed in Hong Kong.  The 1^st defendant is a PRC national and married to Mr Zhou Jiu Ming (周九明, “Zhou”).  The 2^nd defendant is a PRC company incorporated in May 2005.  At all material times, the 2^nd defendant was controlled by the 1^st defendant and Zhou.

6.On 27 April 2007, the 1^st and 2^nd defendants respectively owned 70% and 20% of the shares in a PRC company incorporated in 2003 called Wuhan Baishazhou Agricultural By-Product Grand Market Co Ltd (武漢白沙洲農副產品大市場有限公司, “the Company”).  The principal business of the Company has been the operation of a market in Wuhan (“the Market”).  

7.The dispute between the parties concerns two sale and purchase agreements both dated 2 May 2007, each of which had been amended on 10 May 2007 and supplemented by 5 supplemental agreements (the two agreements and their respective supplemental agreements are referred to as “1^st SPA” and “2^nd SPA” respectively and collectively as “SPAs”).  Under the SPAs, the defendants agreed to transfer the 90% shareholding they held in the Company to the plaintiff at a total consideration of HK$1,156 million, payable as to $420 million by cash, $360 million by convertible notes in the plaintiff’s shares, and the balance by two promissory notes[2] respectively in favour of the 1^st defendant for the sum of $120 million and the 2^nd defendant for the sum of $256 million. The agreed completion date[3] was 5 December 2007.

8.For the purpose of this appeal, the following provisions in clause 4 of the SPAs (which bears the heading “Conditions Precedent”)[4] are relevant:

(1)  Clause 4.1(g) of 1^st SPA and clause 4.1(e) of 2^nd SPA

“All the necessary consents required for the execution of this Agreement, implementation and completion of the transaction or performance of their respective obligations under this Agreement by the Buyer, the Seller and the Target Company (including from any government, official organization or regulatory authority (including but not limited to the Ministry of Commerce of the People’s Republic of China)) have been obtained, and no decrees, statutes, regulations or decisions to prevent or limit the transfer of the Target Equity has been put forward, promulgated or adopted by any government, official organization or regulatory authority.”

(2)  Clause 4.3 of 1^st SPA and 2^nd SPA

“On or before the Completion, the Seller shall use its best endeavours to procure the satisfaction of the conditions precedent as set out in Clause 4.1(g), (i) and (k), and the Buyer shall use its reasonable endeavours to procure that the conditions precedent as set out in Clause 4.1(a) to (h) and (j) be satisfied at the time when all the other conditions precedent as set out in Clause 4.1 are satisfied.”

(3)  Clause 4.4 of 1^st SPA and 2^nd SPA

“Before the Long Stop Date or a later date as agreed in writing by both parties, if any condition precedent as set out in Clause 4.1 is not satisfied (or is waived in accordance with Clause 4.2), or the conditions precedent as set out in Clause 4.1(b) to (g) are not satisfied when all the other conditions precedent are satisfied or waived, this Agreement will cease to have any effect, except that Clauses 1, 4.5, 10, 11, 12, 13, 14, 15 and 16 and any claims arising from any prior contravention of this Agreement will survive.”

9.It is not in dispute that under 商務部第六部委令2006年第10號公佈 《關於外國投資者併購境內企業的規定》 (“No.10 Document”), the transfer of the shares in the Company from the defendants to the plaintiff, being an acquisition of shares in a PRC company by a foreign investor, required the approval of the Ministry of Commerce of the PRC (“MOFCOM”).

10.There is also no dispute that the SPAs had not been submitted to MOFCOM for approval.  Instead, another agreement dated 2 May 2007 for sale and purchase of the defendants’ 90% shareholding in the Company for a consideration of RMB 89,817,930 (“89.8m Agreement”) was submitted to MOFOCM for approval.  This agreement differs from the SPAs in a number of respects, namely, the amount of the consideration, the manner of payment of the consideration, the governing law and the forum for dispute resolution.

11.On the basis of the 89.8m Agreement, MOFCOM gave its approval to the transfer of the defendants’ shareholding in the Company on 26 November 2007.  The plaintiff duly became a shareholder of 90% of the shares in the Company.

12.It is the plaintiff’s case that completion of the sale took place on 5 December 2007. On the same day, the plaintiff through the Hong Kong Stock Exchange issued a public announcement on the transfer of the shares in the Company.

13.It is also the plaintiff’s case that the consideration for the transfer of shares had been duly satisfied.  There is no dispute that two promissory notes and a convertible note were delivered to the defendants, and that on 8 January 2008 the 1^st defendant converted the convertible note into 180,000 shares of HK$2 each.  Consequently, the 1^st defendant became the second largest shareholder of the plaintiff. 

14.It is common ground that on 10 December 2007, Mr Yang Zong Lin (楊宗霖, “Yang”) was appointed as an additional director to the Company. Yang became the executive director of the plaintiff on 26 April 2007 and was the plaintiff’s chief executive officer from 29 June 2007 to 3 November 2008, and was thereafter re-designated as an executive director until 8 June 2009. The parties dispute whether Yang was truly the plaintiff’s representative or was in fact controlled by and acted at all material times on the instructions of Zhou. 

15.According to the plaintiff, after completion, it encountered difficulties in obtaining control of the Company and the Market, and it was at the intervention of the relevant PRC government authorities that the plaintiff managed to gain control of the Company in August and September 2010 and of the Market in November 2010.  Upon a review of the books and accounts and further investigations by the plaintiff’s experts and investigators, it was discovered that there were various irregularities, including fraudulent manipulation of the management accounts of the Company that are annexed to the SPAs, and that the defendants had breached the warranties given under the SPAs.  

16.The defendants, on the other hand, contend that the SPAs and the share transfer transaction were part of a scheme for reverse takeover of the plaintiff, and that after injecting the Company and the Market into the plaintiff, the 1^st defendant and Zhou would acquire the interests in the plaintiff.

17.The dispute between the parties led to several litigations in the PRC and the action below.  Additionally, the defendants had made an administrative complaint to MOFCOM in September 2011 on the ground that the 89.8m Agreement submitted to MOFCOM for approval was a forgery and that the SPAs were genuine agreements.

The Judgment of the Higher People’s Court of Hubei Province

18.Among the several PRC litigations is an action commenced on 4 January 2011 by the defendants against the plaintiff in the Higher People’s Court of Hubei Province, in which the Company was joined as a third party ((2011) 鄂民四初字第1號).  In the action, the defendants claimed, inter alia, that the 89.8m Agreement was void and should be rescinded, and the MOFCOM approval, which was obtained on the strength of the 89.8m Agreement, should be cancelled. 

19.By its judgment dated 30 May 2014 (“Hubei Judgment”), the Hubei Court dismissed the defendants’ claim. It held that the 89.8m Agreement was created for the purpose of obtaining approval from MOFCOM and the SPAs were intended by the parties to govern the share transfer.  It rejected the 1^st defendant’s case that she had no knowledge of the 89.8m Agreement, noting that the 2^nd defendant had admitted having knowledge of the preparation of the 89.8m Agreement and its submission to MOFCOM for approval, and held that the 1^st defendant must also have knowledge of the same.  The Hubei Court further refused to declare the 89.8m Agreement void, having regard to the fact that it was the parties’ common intention to carry out the share transfer in accordance with the SPAs, which remained binding on the parties. The Hubei Court did not deal with the validity of the MOFCOM approval, noting that this was an administrative matter for MOFCOM.

20.The defendants appealed against the Hubei Judgment.  I shall return to deal with the outcome of the appeal in the latter part of this judgment.

HCA 1807/2011

21.In the action below, which was commenced on 24 October 2011, the plaintiff claims against the 1^st and/or 2^nd defendants for breach of various provisions in the SPAs, including the obligation to assist the plaintiff and the Company to obtain Land Use and Property Certificates, the non-competition obligation, the warranties relating to the properties and assets of the Company and the truth and accuracy of the management accounts attached to the SPAs, the profit guarantee under the 1^st SPA, as well as for fraudulent misrepresentations. In addition to claiming for damages, the plaintiff also claims for indemnity under the SPAs and an order restraining the 1^st defendant from enforcing payment under the two promissory notes.

22.The defendants’ case is that as MOFCOM’s approval was made on the basis of the 89.8m Agreement, it had never approved the SPAs.  It follows that the condition precedent under clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA has not been satisfied. Consequently, the SPAs had been terminated in accordance with clause 4.4 and the plaintiff has no right to claim against the defendants, and the transfer of shares and payment of consideration should be reversed.  It is also the defendants’ case that the transfer of shares could not be carried out legally in accordance with PRC laws, and the SPAs are void and unenforceable as being contrary to public policy.

23.These defences are encapsulated in paragraphs 24 and 25 of the Defence, which read:

“24. By reason of the matters pleaded above, the condition precedent specified in Clause 4.1(g) of the 1st SPA and Clause 4.1(e) of the 2nd SPA had never been satisfied. The SPA terminated in accordance with Clause 4.4. In the premises, the Plaintiff has no right under the SPA to any claims in damages as alleged or at all. The transaction under the SPA should be reversed in accordance to [sic] the terms of the SPA, including reversing the transfer of the shares and the repayment of the consideration.

25. Further and in the alternative, the transfer of shares could not be carried out legally and in accordance with PRC law and in the premises, the SPA is void and unenforceable as being contrary to public policy.”

24.By summons filed on 28 March 2014, the plaintiff applied to strike out paragraphs 24 and 25 and paragraphs 50 to 55 of the Defence[5]. The Judge acceded to the application in relation to paragraphs 24 and 25, but refused the application in relation to paragraphs 50 to 55.  With leave from the Judge, the defendants appeal to us against the striking out order. 

PRC litigations since the Judge’s decision

25.For the purpose of considering the defendants’ appeal, it is necessary to set out some developments in the litigations between the parties in the PRC that have taken place since the Decision, which the parties have agreed to be adduced as fresh evidence in the appeal.

26.Firstly, in relation to the defendants’ appeal against the Hubei Judgment, the Supreme People’s Court gave judgment on 31 December 2014 (“SPC Judgment”).  It upheld the Hubei Court’s finding on the 1^st defendant’s knowledge of the 89.8m Agreement, but reversed the Hubei Court’s decision on the validity of the 89.8m Agreement.  It held that since the parties to the share transfer had conspired together to use the 89.8m Agreement to get round the requirements for obtaining approval from MOFCOM, the 89.8m Agreement should be declared to have no legal effect in accordance with Article 52(2) and (3) of the PRC Law of Contract.

27.On 23 June 2015, the plaintiff lodged an application to the Supreme People’s Court seeking a retrial and requesting to set aside the SPC Judgment. The Supreme People’s Court has accepted the making of the application. The determination of the application is however pending.

28.The parties are in dispute over whether the SPC Judgment is a final judgment and have adduced expert opinions on the issue.  As the analysis below will show, the point has no material bearing on the appeal.

29.Secondly, subsequent to the SPC Judgment, the defendants had on 4 May 2015 instituted administrative proceedings against MOFCOM (“MOFCOM Proceedings”) seeking revocation of the approval given by MOFCOM on 26 November 2007.  MOFCOM has filed a defence in which it stated that the proceedings should be dismissed in that the defendants, being privy to the scheme of obtaining MOFCOM approval by means of the 89.8m Agreement, are not entitled to bring the proceedings, and that MOFCOM should be allowed to work out the procedure for dealing with the approval that had been granted. 

30.Thirdly, on 26 May 2015, the plaintiff commenced proceedings in the Hubei Court against the defendants claiming that the defendants should assist the Company to discharge the contractual duties under the SPAs to make the necessary filings with MOFCOM.  The plaintiff says the proceedings were a protective measure done out of abundance of caution and on PRC lawyer’s advice.   

Paragraph 24 of the Defence

31.The Judge struck out paragraph 24 of the Defence as disclosing no reasonable cause of defence and tending to prejudice, embarrass or delay the fair trial of the action.  She adopted the “4 Steps” analysis submitted by Mr Ho SC (who together with Miss Cheng appeared for the plaintiff both here and below) and broke down the defendants’ case under paragraph 24 as follows:

(1) The conditions precedent in clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA had never been satisfied;

(2) The SPAs had terminated in accordance with Clause 4.4;

(3) The plaintiff would, in the premises, have no right under the SPAs to any claims in damages or at all; and

(4) The transactions under the SPAs should be reversed in accordance with the terms of the SPAs, including reversing the transfer of the shares and the repayment of the consideration.

32.Under (1), the Judge considered that on the strength of the Hubei Judgment, MOFCOM had given its approval for the purchase of the 90% shareholding in the Company before the completion date, thus the condition precedent under clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA had been satisfied.  The Judge was further of the view that, even if the condition precedent had not been satisfied, the “prevention principle”[6] would operate to preclude the defendants from taking advantage of their own wrong, since they had failed to comply with their obligations under clause 4.3 to use their best endeavours to achieve the condition precedent. 

33.As to (2), the Judge noted that the consideration had been received on the completion date and the transfer of shares had taken place, and the defendants did not suggest on the completion date that the condition precedent in clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA had not been satisfied.  The Judge also had regard to the fact that the Hubei Court did not cancel the MOFCOM approval or order any reversal; nor had it declared the 89.8m Agreement invalid.  The Judge further took the view that even if the MOFCOM approval is now cancelled, since it was almost seven years after completion, clause 4.4 should not be applicable.

34.In relation to (3), the Judge accepted the plaintiff’s submission that even if clause 4.4 was applicable, it would not mean that the plaintiff has no rights under the SPAs.

35.Finally on (4), the Judge considered there was no provision in the SPAs dealing with reversal and the defendants have not specified which provision in the SPAs that they rely on.  The Judge further pointed out that there was no provision in No.10 Document dealing with the consequence of cancellation of MOFCOM approval for the transaction, such as providing for reversal of the share transfer or repayment of consideration paid. 

36.Mr Chan SC (who appeared with Mr Lin for the defendants) argues that the Judge was wrong to strike out paragraph 24 as disclosing no reasonable defence because it is not plain and obvious that the issues of whether MOFCOM had given approval for the SPAs and the effect of the lack of MOFCOM approval are unarguable.  It is pointed out that the Hubei Judgment, relied upon by the Judge, has been superseded by the SPC Judgment which held the 89.8m Agreement to be void and of no effect.  Mr Chan also refers to the new proceedings commenced by the plaintiff in the Hubei Court (see paragraph 29 above) as reinforcing the plea in paragraph 24 that the condition precedent has not been satisfied.  It is further submitted that, in the absence of evidence, the Judge was not entitled to anticipate what would happen to the MOFCOM approval and was further wrong to have undertaken an interpretation of No.10 Document as to its meaning and practical application.  As to whether the defendants are bound by the “prevention principle” and whether clause 4.4 should be applied after a lapse of some seven years, they involve disputes of fact that should not be resolved at a striking out application. It is also Mr Chan’s submission that the Judge was wrong to strike out paragraph 24 as tending to prejudice, embarrass or delay the fair trial of the action in that the plaintiff has not demonstrated that paragraph 24 offends the rules of pleading and expense, trouble or delay would be incurred if it is allowed to stand. 

37.For the reasons set out below, I am of the view that the appeal against the striking out of paragraph 24 should be allowed. 

38.Firstly, it is not plain and obvious and beyond dispute that the approval given by MOFCOM on 26 November 2007 has satisfied the condition precedent in clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA.  It is not in dispute that the MOFCOM approval was obtained on the strength of the 89.8m Agreement, and the SPAs had not been considered by MOFCOM.  It is not disputed that the provisions in the SPAs relating to governing law and the manner of satisfying the consideration, to say the least, may not be compatible with the requirements in No.10 Document. While it is the plaintiff’s contention that clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA only require MOFCOM approval to be obtained in respect of the share transfer transaction, the defendants’ argument that approval for the SPAs is part of the condition precedent cannot be dismissed out of hand having regard to the wording in the clause.  It is also relevant to note that under Article 21(4) of No.10 Document, the agreement by which a foreign investor purchases the shares of a PRC company is required to be submitted to the approving government authority.  Without deciding the point, it would appear that the SPAs are arguably documents that have to be submitted to MOFCOM. 

39.Secondly, it is also not plain and obvious that the MOFCOM approval would not be, or is not, liable to be annulled or revoked, having regard to the fact that the Supreme People’s Court has held that the 89.8m Agreement is void and of no effect, and MOFCOM has indicated in the defence filed in the MOFCOM Proceedings that it is in the process of examining and working out the procedure for revocation of the approval given.

40.Thirdly, whether the “prevention principle” applies to prevent the defendants from raising the defence in paragraph 24 is a mixed question of law and fact.  The disputed issues of fact as to whether the plaintiff was a knowing party to the submission of the 89.8m Agreement to MOFCOM (and in turn whether Yang acted on behalf of the plaintiff or was in fact controlled by the defendants), and whether the plaintiff’s lawyers had knowledge of the MOFCOM approval being obtained by false pretences are relevant to whether the defendants had complied with the obligation under clause 4.3 and whether the “prevention principle” should apply.  Similarly, the issue of whether the defendants can invoke clause 4.4 some seven years after the completion will have to be considered against the factual matrix of the case, and should be reserved for the trial.

41.Fourthly, as to the consequences if the condition precedent was indeed not satisfied, I note Mr Ho’s submission that the wording in clause 4.4, namely, “this Agreement will cease to have any effect” (本協議不再有任何效力) is forward looking and prospective in nature, and that clause 4.4 has expressly preserved rights that have accrued and claims arising from prior contravention of the agreement.  I also note Mr Ho’s further submission that clause 4.5, which provides for the situation where there was no completion, has made no provision for reversing the transaction under the SPAs, and that there is no provision in the SPAs dealing with reversal of things that had taken place under the SPAs, such as payment of consideration and the exercise of the convertible note.  I can see the force of the submissions.  However, what it means is that paragraph 24 may not afford the defendants with a complete defence to all of the plaintiff’s claims. The plaintiff is well entitled to raise these points in the Reply, but it is not a case for striking out.  

Paragraph 25 of Defence

42.In relation to paragraph 25 of the Defence, the Judge was of the view that it should be struck out for disclosing no reasonable cause of action in that there were no particulars to support the averment that the transfer of shares could not be carried out legally and/or that the SPAs were void or unenforceable as being contrary to public policy.  The Judge further pointed out that there was no indication in the PRC judgment that the transfer of shares could not be carried out legally, and the defendants did not dispute that the SPAs were genuine agreements.

43.Mr Chan argues on appeal that paragraph 25 should be read together with the preceding paragraphs in the Defence, notably paragraphs 12 and 15.  It is also argued that in light of the SPC Judgment setting aside the Hubei Judgment and holding the 89.8m Agreement to be void and of no legal effect, and that MOFCOM is due to commence the process to revoke its earlier approval, the defence pleaded in paragraph 25 must be arguable.  Mr Chan further makes the submission that it is arguably contrary to public policy for the Hong Kong court to enforce the SPAs in that by giving effect to the SPAs, which had not received the genuine approval of MOFCOM, the implication is that investors will be permitted to acquire shares in the PRC contrary to restrictions laid down by the relevant authorities by simply creating another agreement that complies with the restrictions for the sole purpose of obtaining the necessary relevant approvals.

44.In my view, even reading paragraph 25 together with the paragraphs preceding, it does not address the problem of lack of particulars to support the illegality defence.  What was pleaded in paragraphs 12 to 23 of the Defence is that:

(1) The transactions under the SPAs were subject to approval by MOFCOM and had to comply with the requirements stipulated in No.10 Document. The SPAs did not meet the requirements of No.10 Document with regard to the manner of payment of the consideration and the governing law provisions (Defence §§12 to 15(d)).

(2) At the instruction of Yang, who acted on behalf of the plaintiff, the 89.8m Agreement was prepared and submitted to MOFCOM for approval (Defence §§19 and 20).

(3) The plaintiff’s directors were aware of (1) and (2) above. The plaintiff’s lawyers also became aware of (1) above after the SPAs were signed and the public announcement was issued (Defence §§15(f) to 19).

(4) MOFCOM never gave its approval for the SPAs since its approval was given on the basis of the 89.8m Agreement. MOFCOM approval for the transfer of shares from the defendants to the plaintiff was obtained by false pretence (Defence §§22 and 23). 

45.These paragraphs do not give any indication as to the basis for contending that the transfer of shares from the defendants to the plaintiff could not be carried out legally and/or which PRC law or public policy is relied on to support the averments in paragraph 25. 

46.As to the SPC Judgment, I agree with Mr Ho’s submission that it does not advance the defendants’ contention that the transfer of shares could not be carried out legally.  Although the SPC Judgment held that the 89.8m Agreement was void and of no legal effect, it said nothing about what effect this would have on the share transfer.  It did not indicate at all that the transfer of shares could not be carried out legally.

47.The Defence also does not provide a foundation for the submission that it is against public policy for the Hong Kong court to give effect to the SPAs, which the defendants accept are genuine agreements.

48.The Judge was therefore correct to strike out paragraph 25 as disclosing no reasonable cause of defence.  

49.In the course of his submission, Mr Chan sought to salvage paragraph 25 and offered to provide particulars. Subsequently after the hearing, we were provided with a set of Voluntary Particulars of paragraph 25.  In summary, the particulars state:

(1) Under No.10 Document, the SPAs and the transfer of shares required the approval of MOFCOM and were subject to a very stringent approval process by MOFCOM before they could become effective under the PRC law (Voluntary Particulars §§ a and b).

(2) The SPAs did not comply with Article 22 of No.10 Document which concerns the governing law of the agreement, and Article 27 which relates to foreign investor using equities as a mode of payment for the acquisition of domestic companies/ enterprises. (Particulars §§ c to e).

(3) To get round the requirements of No.10 Document, the 89.8m Agreement was submitted to MOFCOM for approval on the instructions of Yang on behalf of the plaintiff. MOFCOM gave its approval solely on the basis of the 89.8m Agreement (Particulars §§ f to h).

(4) The plaintiff was in breach of Article 31 of the Law of the PRC on Administrative Permission (“LAP”) which required an applicant applying for administrative permission to submit to the relevant authority all relevant materials reflecting the true state of affairs.  By reason of Article 69 of LAP, which provided that administrative permission obtained through cheating, bribery or other illegal means should be annulled, the approval of MOFCOM, which was obtained on the basis of the 89.8m Agreement, should therefore be annulled (Particulars §§ j and k).

(5) Under Article 52(2) and (3) of the PRC Contract Law, a contract is null, void and of no effect if there is malicious conspiracy causing damage to the State, collective or third party interests, or a lawful form is used to conceal or cover an illegal goal.  The SPAs and their performance are also void and unenforceable as against public policy for being in breach of Article 52(2) and (3) in that the 89.8m Agreement was used to evade the requirements of No.10 Document.  This constituted a deception practised on MOFCOM and an act of conspiracy among those who produced and tendered it to MOFCOM for approval (Particulars §§ l and m).

(6) Article 58 of the PRC Contract Law provided that where a contract becomes void or is rescinded, any property obtained under the contract shall be returned. The transfer of shares effected through the 89.8m Agreement and/or MOFCOM approval should therefore be returned (Particular § n).

50.It can be readily seen that paragraphs a to h of the Voluntary Particulars and the reference to No.10 Document are effectively repetitions of paragraphs 12 to 23 of the Defence (see paragraph 44 above).  They still have not identified any provision in No.10 Document which provides that the transfer of shares in question could not be carried out legally. 

51.With regard to paragraphs l to k of the Voluntary Particulars and the reliance on Articles 31 and 69 of LAP, the effect of Article 69 as pleaded in paragraph k is that the approval of MOFCOM should be (or is liable to be) annulled.  It is, however, to be noted that MOFCOM approval has thus far not been annulled or revoked.  It also appears from MOFCOM’s defence filed in the MOFCOM Proceedings that neither the LAP nor the legislations and regulations governing foreign investors have provided for a procedure for revoking approvals.  More importantly, annulment or revocation of MOFCOM approval is not the same as rendering the transfer of shares void or unenforceable.

52.As for the remaining paragraphs of the Voluntary Particulars and the reliance on the PRC Contract Law, the particulars do not show in what way the SPAs and/or their performance was against public policy and how they constituted a conspiracy to damage the State, collective or third party interests, or a disguise of an illegal objective, hence a breach of Article 52(2) and (3).  The Judge had observed that the defendants have accepted that the SPAs are genuine agreements. The thrust of the defendants’ case and defence is centred on the creation of the 89.8m Agreement and its submission to MOFCOM for approval, but not the creation of the SPAs and the share transfer transaction represented by the SPAs.  The SPC Judgment illustrates the point.  It held that the 89.8m Agreement amounted to a wilful conspiracy between the parties to get round the requirements in No.10 Document that injured the State’s interest, and also an adoption of a lawful form to disguise illegal objective.  Accordingly, it held that the 89.8m Agreement has no legal effect pursuant to Article 52(2) and (3) of the PRC Law of Contract. Not only did the SPC Judgment not declare the SPAs and the transfer of shares invalid or void, but it also pointed out that the defendants’ case related only to the validity of the 89.8m Agreement, and they had not sought to impugn the validity of the share transfer transaction.[7]

53.As to Article 58, it is irrelevant to, and does not provide a basis for, the illegality plea in paragraph 25. 

54.In short, the Voluntary Particulars do not assist to salvage paragraph 25. The defendants’ appeal against the striking out of paragraph 25 should be dismissed.

Costs below

55.Having regard to the fact that the plaintiff was only partially successful with the striking out application and taking a broad brush approach, the Judge ordered the defendants to pay the plaintiff 50% of the costs of the striking out application.  The Judge did not accept the defendants’ submission that there should be no order as to costs.

56.In the light of the outcome of this appeal, the plaintiff’s entitlement to costs on the striking out application should be further adjusted downward.  It is, however, to be noted that the bulk of the factual background and arguments on paragraph 24 of the Defence are relevant to paragraph 25 as well.  I am of the view that the plaintiff should be entitled to 40% of the costs of the striking out application.

57.The Judge’s costs order on the applications to vary the costs order nisi should remain unaffected by the outcome of the appeal.  

Costs of the appeal

58.Applying the normal rule of costs follow event, the defendants should be entitled to the costs of the appeal.  However, as the defendants have not been wholly successful in the appeal, I would make an order nisi that the plaintiff pays the defendants 50% of the costs of the appeal.

Disposition

59.For the above reasons, I would make the following orders:

(1) The defendant’s appeal is allowed to the extent that:

(a) The part of the order dated 11 September 2014 striking out paragraph 24 of the Defence is set aside; and

(b) The part of the costs order dated 10 July 2015 concerning the costs of the plaintiff’s striking out application is substituted by an order that the defendants pay the plaintiff 40% of the costs of the striking out application in the court below.

(2) On a nisi basis, the plaintiff pays the defendants 50% of the costs of the appeal, to be taxed if not agreed.

Mr Ambrose Ho SC and Miss Bonnie Cheng, instructed by DLA Piper Hong Kong, for the plaintiff

Mr Edward Chan SC and Mr Kenny Lin, instructed by David Lo & Partners, for the 1^st and 2^nd defendants