Tremendous Success Holdings Ltd and Another v. Sinosoft Technology Group Ltd and Others

HCA 2345/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2345 of 2013

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(Heard together by order of Hon Au Yeung J dated 2 September 2015)

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JUDGMENT

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A.   BACKGROUND

A.1   The seven summonses

1.There are in total seven summonses arising out of three actions before this court.

2.The three actions are: HCA 2345/2013 (“HCA 2345”), HCA 1613/2013 (“HCA 1613”) and HCA 2423/2013 (“HCA 2423”).  They are related.

3.Out of the seven summonses, there are three summonses to set aside the leave granted on an ex parte basis to the plaintiffs to serve the concurrent Writ out of the jurisdiction in each of the three actions.  The other four summonses are all concerned with HCA 2423 only.

4.By the order of Her Ladyship Madam Justice Au-yeung dated 2 September 2015, all seven summonses in the three actions came before this court.  The two summonses to set aside the (ex parte) leave to serve out in HCA 2345 and HCA 1613 were heard on 15 to 17 and 21 September 2015.  All the five summonses in HCA 2423 were heard on 26, 27, 29 October 2015 and 4 November 2015.  They will be dealt with altogether in this judgment.

A.2   The parties

5.It is necessary to first set out all the parties in the three actions:

6.The key entities in these actions are:

(1) Janful: It is a limited company incorporated in Hong Kong and indirectly wholly owned by South China.  It was used as an investment corporate vehicle by South China.

(2) South China: It is a company incorporated in the Cayman Islands, with its shares listed on the HKSE. South China’s claims in HCA 2345 and HCA 1613 were assigned to TS, pursuant to the orders of Master Chow dated 18 September 2014.

(3) Sinosoft: It is also a company incorporated in the Cayman Islands, with its shares listed on the HKSE.  It was named as the 1^st defendant in both HCA 2345 and HCA 1613.  HCA 2423 is a derivative action commenced by minority shareholders of Sinosoft on its behalf and thus Sinosoft was named as a technical defendant (the 6^th defendant) therein.

(4) Nanjing Skytech: It is a company incorporated in Mainland China.  On 31 January 2000, Janful and Nanjing Skytech entered into a joint venture agreement (“JV Agreement”) for the incorporation of Nanjing South China Skytech Technology(“JV Company” or “JVC”) to run a business of software design and development.  Two different versions of JV Agreement are revealed in these proceedings.  There is a serious dispute on whether the JV Agreement registered with the PRC authorities represented the genuine agreement between Janful and the JVC.  It is common ground that Janful held 66.7% equity in the JVC and Nanjing Skytech held 33.3% equity therein.

(5) Xin: She has been a director of Nanjing Skytech since about November 1998.  From about March 2000 to March 2003, she was the vice-president and director of the JVC.  She is a common defendant in all three actions.  She is the wife of Wang, who was also named as a defendant in HCA 2345 and HCA 2423.

(6) Ding: The only unrepresented defendant in HCA 2345 and HCA 2423, and absent from the hearings.  According to the plaintiffs in both actions, Ding was an employee of a subsidiary of South China in Mainland China since 1993.  He was then appointed by Janful to the board of the JVC.

(7) Other defendants: The other defendants in these three actions, namely, Wang, Ma, Zhang, Liu, together with Xin, were referred to as the “NS Principals” in the Statement of Claim in all three actions.  They were directors or senior officials of the JVC.  Wang was a director and the General Manager.  Ma was the Deputy General Manager.  Zhang was a director, the Chief Engineer and the Deputy General Manager.  Liu was the Manager of Finance Department.

A.3   The three actions

7.HCA 2345 was commenced by South China and Janful against Sinosoft, Nanjing Skytech and the NS Principals.  In gist, the plaintiffs allege that since the establishment of the JVC, Nanjing Skytech and the NS Principals engaged in fraudulent activities to deprive Janful and South China of commercial benefits of the JVC and benefits arising from the development and exploitation of the software developed by the JVC.  Two causes of action were raised: (i) breach of fiduciary duties, and (ii) tort of conspiracy to injure with unlawful means.

8.HCA 1613 is a claim for libel and malicious falsehood, also brought by South China and Janful against Sinosoft.  The subject matter is certain defamatory and false statements published in the listing prospectus of Sinosoft for the initial public offer of its shares on Hong Kong Stock Exchange on 27 June 2014 (“Prospectus”).  The Prospectus was published on the authority of the board of directors of Sinosoft (as the 1^st defendant therein) and Xin (as the 2^nd defendant therein).

9.HCA 2423 is a derivative action, taken out by the minority shareholders of Sinosoft, against the NS Principals (except Liu) and Sinosoft itself.  The causes of action are the same as those in HCA 2345, namely (i) breach of fiduciary duties, and (ii) conspiracy to injure.  The plaintiffs in this action placed heavy reliance on the alleged misappropriation made to Sinosoft in relation to certain software programmes developed by the JVC.

10.In all three actions, Janful and South China are represented by Mr Benjamin Yu SC together with Ms Sarah Tong and the same firm of solicitors.  The NS Principals (as defendants in relevant actions) are represented by the same solicitors in all three actions, with Mr MC Law appearing in HCA 2345 and HCA 1613 only and Mr Edward Chan SC, together with Mr Damian Wong and Mr Alexander Wong, appearing in HCA 2423.

11.Sinosoft was represented by another team of legal representatives in HCA 2345 and HCA 1613.  They have filed defence in both actions and did not take out any summons to set aside the leave for service out of the concurrent Writs.  Thus, they did not appear before me.

12.I shall now deal with each summons in each action below.

B. HCA 2345

B.1 2^nd to 7^th defendants’ summons to set aside the ex parte leave to serve the concurrent Writ out of jurisdiction

B.1.1   2^nd to 7^th defendants’ summons

13.In HCA 2345, the summons dated 18 August 2015 before me was taken out by the 2^nd to 7^th defendants to set aside the order of Master Leong dated 26 February 2014 granting leave to the plaintiffs (on ex parte basis) to serve the concurrent writ outside the jurisdiction and to stay the action in favour of the Courts in Nanjing, PRC.

B.1.2   Legal principles on Order 11, rule 1 of the RHC

14.There is little dispute that in order to obtain leave under Order 11, rule 1 of the Rules of the High Court (“RHC”), the plaintiffs must satisfy the court of the following:

(1) there is a serious issue to be tried on the merits of the case;

(2) Hong Kong is the appropriate forum under the principle governing forum non conveniens; and

(3) there is a good arguable case that the case comes within one or more of the Order 11, rule 1 gateways.

15.Mr Yu, on behalf of the plaintiffs, submits that:

(1) As regards the underlying merits of the case, the plaintiffs need only show a “serious issue to be tried”.  The issue is whether the affidavit/affirmation evidence before the court discloses a case against the defendants which merits consideration at trial: Inchape JDH Ltd v Baltrans Exhibition & Removal Ltd[1997] 3 HKC 314, per Stone J at 325C–E.  The test in question can also be equated with whether the claim would survive an application to strike out: Dong Shin F&T Co Ltd v Hanmec Co Ltd[2010] 5 HKLRD 261 per Fok J at §42.

(2) The plaintiff also has to satisfy the court that in all the circumstances, Hong Kong is clearly or distinctively the appropriate forum for the trial of the dispute, and that the court ought to exercise its discretion to permit service of the proceedings out of the jurisdiction.  This reflects the requirement in Order 11, rule 4(2) of the RHC that it has to be “made sufficiently to appear to the Court that the case is a proper one for service out of the jurisdiction under this Order”.

(3) In order to establish a “good arguable case”, it is sufficient for the plaintiff to show a “strong case for argument”, and it is not necessary for the Court to be able to reach even a tentative conclusion that the plaintiff is “probably right”: Graeme Johnston: The Conflict of Laws in Hong Kong, §3.057.  The standard is less onerous than the balance of probabilities required in a civil trial:Konkola Copper Mines Plc v Coromin & Ors[2006] EWCA Civ 5 at §75.

(a) There should not be too radical a pre-judgment on issues that might arise elsewhere: ABCI v Banque Franco-Tunisienne and Others[2003] EWCA Civ 205 per Lord Justice Mance at §25.

(b) Where there are disputes of fact, the question whether the plaintiff has shown a good arguable case is to be decided primarily by reference to the plaintiff’s evidence, rather than attempt to resolve such dispute on affidavit, although the court will weigh the arguments on both sides: GDH Ltd v Creditor Co Ltd & Ors [2008] 5 HKLRD 895 per DHCJ To, at §18.

(c) Where there are disputes of law, only where the dispute is a “succinct” one of law would it be appropriate to resolve the same at the Order 11 stage.  As was held in Noble Power Investments Limited & Anor v Nissei Stomach Tokyo Co Ltd[2008] 5 HKLRD 631 (CA), per Ma CJHC (as he then was) at §18, where complex issues of law are involved, it may not be appropriate for the court to deal with the same at the Order 11 stage.

16.Mr Law, on behalf of the 2^nd to 7^th defendants, submits that:

(1) Insofar as the serious issue to be tried is concerned, a defendant is entitled to keep his powder dry: he can simply put the plaintiff to proof of its case.  The onus is on the claimant to satisfy the court that there is a serious issue to be tried on the merits of the claim, and not on the defendant to satisfy the court that there is a real prospect of successfully defending it: VTB Capital Plc v. Nutritek International Corp & Ors [2013] 2 AC 337 at §90, Lord Neuberger SC.

(2) The plaintiff bears the burden of showing Hong Kong is clearly and distinctively the natural forum to try the disputes, under Order 1, rule 4(2).

(3) The plaintiff also bears the burden to show a good arguable case that the claim falls within one or more classes of case in which permission to serve out may be given, which in this connotes that one side has “much the better of the argument” than the other on that point: 中國山水投資有限公司股份相關員工v張才奎 (unreported) HCA 1661/2014, 13 May 2015, G Lam J.

17.I respectfully agree with and adopt both parties’ submissions above.

B.1.3   2^nd to 7^th defendants’ grounds to set aside the leave

18.In gist, the defendants argue that the leave granted should be set aside because:

(1) no serious issue to be tried has been shown as:

(a) the plaintiffs have failed to plead the applicable PRC law: See Section B.2;

(b) the damages claimed by the plaintiffs are reflective losses, which are irrecoverable: See Section B.3;

(2) Hong Kong is not the appropriate forum for trial of this case and thus this action should be stayed on the ground of forum non conveniens: See Section B.4;

(3) the plaintiffs have failed to bring themselves within any of the Order 11 gateways: See Section B.5; and

(4) there was material non-disclosure on the part of the plaintiffs at the ex parte stage: See Section B.6.

B.2   Absence of pleading of foreign law

B.2.1   Submissions

19.On behalf of the 2^nd to 7^th defendants, Mr Law submitted that there is no serious issue to be tried under HCA 2345.

20.He said it is clear from paragraphs 44 and 45 of the Statement of Claim that the plaintiffs’ case is that as a result of the JV Agreement, the 2^nd to 7^th defendants owed the plaintiffs fiduciary duties, even though South China (1^st plaintiff) was not a party to the JV Agreement.  The fiduciary duties, which arose out of the JV Agreement with a purpose of establishing a joint venture company in the PRC, were plainly governed by PRC law.  In fact, clause 22.1 of the JV Agreement said that the governing law was PRC law.

21.However, the plaintiffs have not pleaded PRC law, contrary to the authorities which said foreign law must be pleaded.  Thus, the Statement of Claim is defective and raises no serious issue to be tried. Mr Law relied on Global Multimedia International Ltd v ARA Media Services [2007] 1 All ER (Comm) 1160 at §§37 – 39 and Hong Kong Civil Procedure 2015 Vol 1, at §11/4/3A.

22.Furthermore, it is Mr Law’s case that it is now too late for the plaintiffs to adduce PRC law, relying on Kayden v SFC (2010) 13 HKCFAR 696, at §§36 – 40.

23.Similarly, for the tortious action, Mr Law submitted that all the acts complained of took place in the PRC.  Accordingly, it is necessary for the plaintiffs to demonstrate that the case is doubly actionable in Hong Kong (ie the lex fori) and in the PRC (the lex loci delicti), ie the double actionability rule applies.

24.He submitted that for multinational tort, it is necessary to determine the law of the place where the tort was committed.  The court should look at the sequence of events constituting the tort and ask where in substance the cause of action arises.

25.Applying the principles, it is the 2^nd to 7^th defendants’ case that the governing law is PRC law.  Similar to the allegation of breach of fiduciary duty, the plaintiffs rely on the same set of facts to found their case on the tort of conspiracy, and similarly, PRC law has not been pleaded.  Thus, for the same reason, the failure to plead foreign law renders the Statement of Claim defective and raises no serious issue to be tried.

26.Mr Yu, on the other hand, submitted that serious issue to be tried is a low threshold to cross.  He said the non-pleading of foreign law is not the same thing as raising no serious issue to be tried. More importantly, it is his submission that the plaintiffs are not relying on PRC law.  The general rule is that the court will proceed on the basis that foreign law is the same as Hong Kong law unless otherwise stated.  It is a rule of domestic law of evidence that absent evidence to the contrary, the presumption is that foreign law is the same as the local law.  It is generally for the defendant to raise and prove issues of foreign law and the plaintiff can then deal with the issue of foreign law in reply.

27.He further contended that in any event, the plaintiffs have clearly produced evidence to show that HCA 2345 is both actionable in PRC and in Hong Kong for both causes of action.

B.2.2   Discussion

28.Mr Law relied heavily on Global Multimedia International v ARA Media Services [2006] EWHC 3612 (Ch).  In that case, the claimants issued proceedings in England seeking damages for wrongful repudiation of an agreement which contained an English law and non-exclusive jurisdiction clause.  It also started proceedings in Saudi Arabia in respect of the termination of another agreement which was governed by Saudi law and contained a non-exclusive Saudi Arabian jurisdiction clause.  In the English action, the defendants issued proceedings against the employees and directors who were alleged to have acted in breach of their fiduciary and contractual duties.  Permission was applied to serve a defendant out of the jurisdiction.  The defendant applied to set aside the time limit for challenging the jurisdiction.  An issue arose as to whether England or Saudi Arabia was the more appropriate forum.  Issue also arose in relation to the pleading, in particular in relation to the absence of any reference to Saudi or Sharia law.

29.The defendants’ submissions in that case rested on the following paragraphs which had been read in full by both Mr Yu and Mr Law:

“ [37] For all these reasons it seems to me that the forum conveniens, as it is conventionally called, is in England. In these circumstances the third issue to which I have referred does not arise. Accordingly, it is unnecessary to deal with the submissions made to me and with one exception I shall not do so. The exception relates to the pleading of the Pt 20 claim, specifically a complete absence of any reference to Sharia or Saudi law. Counsel for AMS sought to justify this by reference to Dicey and Morris on the Conflict of Laws (13^th edn, 2000) vol 1, p 221 (para 9–003). In that paragraph it is stated:

‘ The general rule is that if a party wishes to rely on foreign law he must plead it in the same way as any other fact. Unless this is done the court will decide a case containing foreign elements as though it were a purely domestic English case.’

Later at p 232 (para 9–025) appears this passage:

‘ The burden of proving foreign law lies on the party who bases his claim or defence on it. If that party adduces no evidence, or insufficient evidence of the foreign law the court applies English law. This principle is sometimes expressed in the form of foreign law is presumed to be the same as English law until the contrary is proved, but this mode of expression has given rise to uneasiness in certain cases. Thus in one case the court refused to apply the presumption of similarity where the foreign law was not based on the common law and in others it has been doubted whether the court was entitled to presume that the foreign law was the same as the statute law of the forum. In view of these difficulties it is better to abandon the terminology of presumption and simply to say that where foreign law is not proved the court applies English law.’

[38] Counsel for AMS stressed the word ‘if’ in the first passage to which I have referred. He suggested that it was sufficient in the first instance to rely on the so-called presumption referred to in the second passage and leave it to the defendant to ascertain and rely on any aspect of the foreign law he considered to be different and material. If the defendant did so then the claimant would have to deal with the issue in his reply or amend his particulars of claim. He sought to give this submission added force by relying on his own pleading in Arab Monetary Fund v Hashim which came before the court on many occasions in the 1980s and 1990s. This submission does not reflect my experience either at the Bar or on the Bench. Under the old system of pleading it was necessary to plead foreign law (see Ascherberg, Hopwood and Crew v Casa Musicale Sonzogno Di Piero Ostali, Societa in Nome Collettivo [1971] 3 All ER 38, [1971] 1 WLR 1128). That requirement arose from the terms of RSC Ord 18, r 8(1)(b) because in the absence of such pleading foreign law was a matter which might take the opposite party by surprise. The Civil Procedure Rules do not contain any similar express requirement but it would be inconsistent with the provisions of CPR 16.4(1)(a) and the overriding objective deliberately to omit an allegation of some material facts, namely relevant principles of foreign law. As the passage I have quoted from Dicey and Morris points out it is inaccurate to refer to a presumption that foreign law is the same as English law. The true proposition, I believe, is that as foreign law is in most cases a question of fact to be proved by evidence, in the absence of such evidence the court has no option but to apply English law. But if the facts alleged demonstrate that, for example, the proper law of a contract is not the law of England then as the law of England includes the principles of private international law those principles may demonstrate that some other system of law is applicable to the claim and if the relevant principles of that system of law is applicable to the claim and if the relevant principles of that system of law are not sufficiently proved the claim may fail for that reason.

[39] The Pt 20 claim in this case is a good example. In paras 10 – 15 AMS avers the existence of certain duties to be implied in the various contracts of employment entered into by AMS and each of Mr Abu Aljadail, Mr Abougabal and Mr Al Serafi. Paragraph 14 avers that obligations of fidelity ‘were implied by law’. Given the allegations in relation to the parties to and formation of the employment contracts the law there referred to must be the law of Saudi Arabia, yet there is no attempt to say what it is or, in the sense of legal source, where it is to be found. In my view such a pleading is deficient. It is not a mere pleading point but one of justice. If, as in this case, the true claim is based on propositions of foreign law then the party who advances it should make it good by reference to the system of law on which he relies. This is an a fortiori case because the defence of AMS in the proceedings brought by Global in Saudi Arabia does precisely that. It is true that that defence was advanced on 4 March 2006 as opposed to the Pt 20 claim which was brought forward by AMS on 14 September 2005. But if AMS can provide the requisite details in the one it should be required to do so in the other. Quite apart from giving fair notice to the opposing party of the claim he has to meet, it merely increases costs if both parties have to carry out the same initial research into the relevant system of law.” (emphases supplied)

30.With respect, and without even considering the authorities cited by Mr Yu, I do not see how the above dicta support Mr Law’s proposition that the failure to plead foreign law in the Statement of Claim at this stage raises no serious issue to be tried.

31.It is plain from reading Global Multimedia itself that Sir Andrew Morritt was merely saying that the non-pleading of the relevant foreign law was unfair, might lead to a waste of costs and time, was deficient and might doom the case.  This is a far cry from raising no serious issue to be tried or revealing no cause of action. Sir Morritt did not even say that the plea of foreign law must contain in the Statement of Claim.  It cannot be put as high as Mr Law’s submission that the failure to plead foreign law in the Statement of Claim shows no triable issue.

32.Indeed, Order 18, rule 8(1)specifically states that:

“ A party must in any pleading subsequent to a statement of claim plead specifically any matter, for example, ...

(a) which he alleges makes any claim or defence of the opposite party not maintainable; or

(b) which, if not specifically pleaded, might take the opposite party by surprise; or

(c) which raises issues of fact not arising out of the preceding pleading.” [2] (emphasis supplied)

33.The Global Multimedia dicta was raised and not adopted in Erste Group Bank AG, London Branch v JSC, Red October and others [2015] EWCA Civ 379 [3].  This was an appeal by some of the defendants against orders dismissing applications which challenged the English jurisdiction and for setting aside service outside the jurisdiction in Russia.

“ Triable issue: Absence of any pleading of Russian law

109. D3 and D5 pursued on this appeal a submission rejected by the judge, namely that if ... Russian law was plainly the applicable law for the purposes of the tort claim, then the Bank had failed to demonstrate a serious issue to be tried on the merits, because no Russian law had been pleaded.

110. The judge rejected that submission on two grounds. First ... because it was arguable that English law was the applicable law. In that respect we have already concluded above that he was wrong about this. But his second reason (based in particular on Kuwait Oil Tanker Co SAK v Al-Bader [2000] 2 All ER (Comm) 271 at paragraphs 178 and 180, and VTB Capital v Nutritek International [2012] EWCA Civ 808), was that where the facts alleged disclosed a serious issue to be tried as a matter of English law, it was for a party alleging that some foreign law both applied, and was fatal to the claim, to plead and prove it. Against that, the judge noted that there were dicta which appeared to be to the contrary in the decision of Sir Andrew Morritt C. in Global Multimedia International v Ara Media Services [2006] EWHC 1307 [sic], at paragraphs 38 and 39, but he regarded those as distinguishable because that case depended upon the implication of terms into a contract expressly governed by Saudi law.

111. In our view the analysis which the judge derived from the Kuwait and VTB cases is clearly to be preferred, at least in the present case. ...

112. In this claim the primary case of the Bank is that the applicable law of the alleged tort is English law.  It is the defendants D3 and D5 who would wish to assert that the applicable law of the alleged tort is Russian law.  In those circumstances there is no obligation on the claimant to plead the foreign law as an alternative to its primary case at the stage of Particulars of Claim.  We accept that if there is a case that a foreign law might be applicable to the tort claim and that, if so, there would be a defence to the claim under that law, the claimant seeking permission to serve out of the jurisdiction under paragraph 3.1(9) of PD6B would be wise to give full and frank disclosure of this fact in the evidence that leads to the without-notice application for permission for leave to serve out.  If permission is given and the defence based on foreign law is then pleaded, the claimant will respond in a reply in the normal way.  But the claimant is not obliged to cross that bridge before it is reached.  So, like the judge, we reject this argument based on the pleadings.”

34.The Kuwaitanalysis mentioned in the Erste’s case came from Kuwait Oil Tanker Co SAK and another v Al-Bader and others [2000] 2 All ER (Comm) 271.  The claimants were oil companies owned ultimately by the state of Kuwait.  The defendants were senior management people of the first claimant.  The claimants alleged that the defendants had conspired to defraud them of substantial sums of money.  The claimants pleaded their case primarily on the tort of conspiracy under English law.  The defendants pleaded that the acts complained of as giving rise to liability took place in Kuwait.  Thus, it became necessary to show, on the basis of the “double actionability” rule, that the facts which gave rise to tortious liability under English law would also render the defendants civilly liable under the law of the lex loci delicti [4].  One of the arguments of the defendants at the appeal was described as a pleading point:

“ 178. Mr. Brodie’s first argument is essentially a pleading point. He submitted that Kuwait being the lex loci delicti, the claimants should have begun by identifying the causes of action open to them under the law of Kuwait. He submitted that, had they done so, they would have seen under the Articles previously quoted that the acts of wrongdoing on which they relied provided them prima facie with individual causes of action in respect of each of the misappropriations alleged against one or more of the defendants jointly and severally. Had those causes of action been pleaded it would have been seen that essentially similar claims for deceit, conversion and restitution lay against the defendants as several and joint tortfeasors under the laws of England, which claims could and ... should have been pleaded without resort to the tort of conspiracy. He conceded that, had that been done, the double actionability rule would have been satisfied. However, he submitted that, the claimants having decided to pin their colours to the conspiracy mast in order to gain what they regarded as a more advantageous cause of action, it was appropriate that the question of double actionability should depend upon whether or not a cause of action for conspiracy to injure or defraud is known to the law of Kuwait.

...

180. Mr. Brodie’s first argument is neither founded upon authority nor hallowed by practice. The claimants case, as originally pleaded, was a straightforward case in conspiracy in respect of which the claimants placed no reliance upon foreign law, it being their case that the lex loci delicti was English. Once the defendants had pleaded that the law governing any claim by the claimants arising out of any alleged breach of duty owed by the defendants was Kuwaiti law and it was expressly denied that the tort of conspiracy was actionable under the law of Kuwait, the claimants amended their claim to plead that each of the unlawful means by which the conspiracy was put into effect, and upon which the claimants would rely as a self-standing cause of action, was unlawful under the law of Kuwait as a breach of each of the defendants’ duties of good faith and honesty owed as directors .... That was a perfectly proper way to proceed and, save that the claimants later added to the Articles of the Kuwaiti Civil Code on which they relied, that was the way matters proceeded.

...

184. Since English courts proceed on the basis of a presumption that foreign law is the same as English law unless the contrary is proved as a fact, it seems clear that, whether or not the claimant incorporates in his pleading an averment that the matters relied on are civilly actionable under the lex loci delicti, the burden in practice lies upon the defendant to plead and prove that his conduct was not actionable under the lex loci delicti. That being so, the debate appears to be a somewhat arid one.  The context in which it is likely to give rise to controversy is at the interlocutory stages of an action involving a foreign element when the court is concerned to consider and give directions in relation to any issue of foreign law arising on the face of the pleadings and as to the form and extent of any expert evidence of foreign law sought to be adduced by the parties.  It seems to us that questions of where the burden lies and its practical consequences for the progress of the action are best dealt with on a case by case basis rather than by the application of an inflexible rule.  So far as the instant case is concerned, by the time of trial, the issues of law were unambiguously pleaded on both sides, directions having been given in respect of the expert evidence to be called, and the judge was entirely right to deal with the matter as he did.”

35.Kuwait Oil Tanker was applied in Hong Kong in the case of GDH Ltd v Creditor Co Ltd[2008] 5 HKLRD 895, where DHCJ To (as he then was) had to consider whether the Order 11 service out should be set aside.  The defendant argued that leave should be discharged as the plaintiff bore the burden of adducing evidence on foreign law and could not rely on the presumption that foreign law was the same as local law: at §34.  His Lordship dismissed this submission as “neither founded upon authority nor hallowed by practice”: §35 (tracking the words at §180 of Kuwait Oil Tanker). His Lordship added his observation that it would be absurd a party could rely on the presumption at trial but not at pre-trial or interlocutory proceedings. He further said:

“ 35. ... This rule and practice of pleading must apply equally in an application for leave under Order 11. To hold otherwise would render the presumption, which undoubtedly applies in substantive trial, inapplicable during pre-trial proceedings. That would render the presumption nugatory and cannot be right. Hence, in my view, the burden is on the French Banks to prove by expert evidence that the conspiracy counterclaim is not actionable under the lex loci delicti or how French law differs, if at all, from Hong Kong law. ...”

36.The defendants in reply prayed in aid the Hong Kong Civil Procedure 2015 Vol 1, §11/4/3A which contains rather scathing criticism of GDH.  It says:

“ ... An important case is para.(f) which applies to tort claims. The applicant for leave is required to make out its case to the ‘serious issue to be tried’ standard and to file an affidavit wherein the deponent states his belief that the applicant has a good cause of action. Where the claim is based on a tort committed abroad, the double actionability rule will usually require that the events be actionable both under Hong Kong law and under the law of the relevant foreign place. In GDH Ltd v. Creditor Co. Ltd [2008] 5 H.K.L.R.D. 895 appeal dismissed (unrep., CACV 353/2008, [2010] H.K.E.C. 818) the defendants submitted that an ex parte applicant is required to adduce evidence of the foreign law and may not rely on the well-established rule that the court presumes that the foreign law is the same as Hong Kong law in the absence of evidence (see para.11/1/10O). The court rejected this submission, stating it is not ‘hallowed by practice’ (which is probably true) and it was absurd that a party could rely on such a presumption at trial but not at an interlocutory stage. The court held that it is for the defendant to plead and prove that its conduct is not actionable under the lex loci delicti; in other words it is for the defendant to raise the matter on a discharge application. It is submitted that it is difficult to square with principle and the rules. First, the ex parte scenario is conceptually different from the trial scenario where a defendant can raise the foreign law issue or not as it pleases. At the ex parte stage there will be a lack of evidence of foreign law (so as to bring in the presumption) only if the applicant, perhaps cynically, omits to adduce any and it is difficult to see why an ex parte applicant should be allowed to benefit by the application of the presumption from its own failure to inform the court fully of the actionability of its claim. Certainly, if the applicant happens to have intended evidence that the defendant’s conduct is not actionable in the foreign place, the duty of disclosure would require that evidence to be produced, dooming the application to failure. Second, it is difficult to see how one could make the required oath to the effect that one believes one has a good cause of action when one has no idea whether one has such a cause of action in the eyes of the foreign law and thus under the Hong Kong double actionability rule and one is simply relying on a Hong Kong law presumption. It was held in East Asia Satellite Television (Holdings) Ltd v. New Cotai, LLC (unrep., HCA 2189/2009, [2010] H.K.E.C. 1132) at para.176 that where the intended Hong Kong action does depend on the existence of some state of affairs under foreign law (there whether Macao company law permitted the double-derivative action) the ex parte applicant should provide the Hong Kong court with evidence of the foreign law.”

37.It occurs to me that at the heart of Mr Law’s contention is that the plaintiffs have failed to plead a completed cause of action because it is plain and obvious that the governing law is PRC law for both breach of fiduciary duty and the tort of conspiracy.  Although he did not say in these exact words, I cannot see how he can argue no serious issue to be tried if that was not what he meant.

38.Even assuming the governing law is PRC law for the two causes of action, the failure to plead PRC law is not fatal.  The authorities (quoted hereinabove) demonstrate that in the absence of any evidence on foreign law, the court will act and proceed on the basis that the governing law is Hong Kong law.  There is no suggestion at all, nor is it supported by authority, that the failure to specifically plead the choice of law at any stage of the pleadings, will prevent the application of the presumption, which is a rule of evidence of the lex fori.  Mr Law did not seem to be advancing this argument.

39.I think there is a good example in this case which illustrates that Mr Law’s argument is unsustainable.  Sinosoft (ie the 1^st defendant) has filed his defence.  No PRC law has been raised.  Assuming the plaintiffs and Sinosoft (being 1^st defendant) proceed to trial on the basis of the pleading and no evidence of PRC is adduced, if Sinosoft (being 1^st defendant) challenges the plaintiffs at the trial that they have failed to plead and prove PRC, the plaintiffs would still be entitled to say that the presumption applies and the court will proceed on the basis of Hong Kong law.

40.That being the case, the 2^nd to 7^th defendants’ argument that the plaintiffs’ Statement of Claim raises no triable issue or cause of action is empty.  The plaintiffs have plainly pleaded a complete cause of action for breach of fiduciary duty and conspiracy to injure with no alternative case relying upon PRC law, it being the plaintiffs’ case that the lex loci delicti is Hong Kong.  This is the plaintiffs’ overt and unshaken stance. The court proceeds to examine if their case is complete on the basis of Hong Kong law.  Whether or not plaintiffs’ cases without relying upon PRC law can succeed in the end is another matter.  I do not think the absence of reference to PRC law will doom the Statement of Claim.  No authority has been cited to suggest that for breach of fiduciary duty involving multinational elements, that the foreign law mustbe pleaded to complete the cause of action, although I would have thought the choice of law would have to be raised at some stage if not in defence.  But the authorities are clear that the plaintiff’s case on foreign law can be pleaded in reply.  In Global Multimedia, the contract was expressly governed by Saudi law and the claimant itself alleged that the terms were to be implied into that particular contract as a matter of law.  This was the reason why Sir Morritt took the view that Saudi law should be pleaded in the Particulars of Claim.  This is not the plaintiffs’ case here.  But even in Global MultimediaSir Morritt did not consider the absence of pleading of Saudi law was fatal.  He merely said the case might fail.

41.For the tort of conspiracy, whilst it is true that the double actionability rule appears to require evidence on foreign law. But again, there does not seem to be an authority which comes even near to stating that the non-pleading of foreign law in the Statement of Claim does not complete a cause of action of tort of conspiracy.  In VTB Capital v Nutritek International [2012] EWCA Civ 808 the claims in deceit and conspiracy were pleaded on the basis of English law and the claimants had not pleaded an alternative case as to the position under Russian law.  Although Arnold J and the Court of Appeal concluded that the applicable law was Russian law, they evidently did not consider that the failure by the claimants to plead their case on Russian law was fatal in terms of there being no serious issue to be tried.  And although the Supreme Court held that the Court of Appeal had been wrong to conclude that the applicable law was Russian law, the Supreme Court did not disapprove this part of the reasoning of the Court of Appeal.

42.In Erste, the court took the view that the governing law was Russian law.  The court did not find the absence of pleading of Russian law raised no triable issue.  Although Erstewas decided in 2015, the court relied on Kuwait Oil Tanker in which double actionability was still applicable under English law.

43.Thus the views of Kuwait Oil Tanker and GDHcogently support Mr Yu’s argument.  In fact, despite the many cases cited by Mr Yu, his submission is, in simple terms, that he has pleaded sufficient facts to found a case for breach of fiduciary duty and conspiracy to injure against the defendants.  The plaintiffs rely on Hong Kong law.  The question of PRC law simply does not arise.  No issue of double actionability under their tort claim arises either.  Even if, which is denied, PRC law were established to be the governing law, the non-plea of PRC law remains a non-point as the presumption will apply.  If the defendants challenge the choice of law, the plaintiffs will plead PRC law and will deal with the averment in the reply.

44.In Lady Christine Brownlie v Four Seasons Holdings Incorporated [2015] EWCA Civ 665, Arden LJ said:

“ 88. The remaining question is whether this court can, under Rome II, in the absence of proof as to Egyptian law, apply the presumption that Egyptian law is the same as English law. I would reject Mr Palmer’s argument on this. In OPO v (1) MLA (2) SLT [2014] EWCA Civ 1277, this court decided that Article 4(1) of Rome II did not exclude the presumption. Giving the judgment of the court, I held:

111. There is no discussion in the judgment of Simon J, or the Law Commissions’ report, of the important restriction on the presumption which would result if that were the effect of (in the case of the former) the Regulation or (in the case of the latter) what is now the 1995 Act. Nor is there any indication in the 1995 Act or the Regulation themselves as to what the court must do if there is no evidence as to foreign law. In my judgment, it is clearly a matter which has been left to be resolved in accordance with the rules of the forum. I note that the leading work on the subject, Dicey, Morris and Collins, The Conflict of Laws, (15^th ed. 2012) previously took the contrary view, but no longer does so (see paragraph 35–122 of the main work and see paragraph 35–122 of the First Supplement published in January 2014 which merely notes the views of Simon J in Belhaj without expressing a view on this question). Accordingly I do not consider that the observations of Simon J should be taken as supporting the proposition for which Mr Dean has cited them.

89. This case went to the Supreme Court, who reversed the decision of the Court of Appeal on the question whether there was a properly constituted tort under English law (James Rhodes v OPO [2015] UKSC 32). Accordingly the Supreme Court did not have to deal with the question whether the mandatory nature of Article 4(1) of Rome II excluded the presumption that foreign law is the same as English law in the absence of proof to the contrary. However at [121], Lord Neuberger (with whom Lord Wilson agreed) specifically accepted the presumption could be applicable, although he did not give his reasons for that conclusion. I accept Mr Palmer’s submission that the ruling on the presumption in OPO is no longer binding under the doctrine of precedent, though it would constitute strong persuasive authority .... However, Mr Palmer did not seek to address the point made in paragraph 111 of my judgment in OPO that there is no indication in Rome II as to what the court must do if there is no evidence as to foreign law. In a common law system, such as that in England and Wales, the court does not have any inquisitorial function and cannot therefore conduct an inquiry itself as to foreign law. Even if it did so it might not come to the right conclusion. If Mr Palmer’s argument is right, it would moreover follow that the court could not act on any agreement of the parties as to what the foreign law was or any agreement by the parties not to plead foreign law. These seem to me to be startling conclusions. Accordingly, for these reasons, in addition to those which I gave in OPO, I reject Mr Palmer’s submissions that the presumption as to foreign law being the same as English law does not apply and his overarching submission that Lady Brownlie has failed to show a completed cause of action in tort because she has not adduced evidence as to Egyptian law.” (emphasis supplied)

45.I respectfully adopt the views of Lady Justice Arden underlined above.  In other words, unless Mr Law can argue that on the basis of Hong Kong law, the plaintiffs raised no cause of action or no triable issue for both actions, ie breach of fiduciary duty and conspiracy, his argument of the plaintiffs’ failure to plead foreign law cannot succeed.  In fairness, I do not think Mr Law’s submission went that far.  He was not arguing that on Hong Kong law, the plaintiffs raised no issue to be tried or revealed no cause of action.  He was simply arguing that the failure to plead foreign law would lead to such consequence.  As said, the argument has to be rejected in light of the authorities.

46.As for the comments contained in the White Book, cited and relied upon by Mr Law, I think the comments apply appositely when the question of material non-disclosure comes to be considered.  Paragraph 176 of East Asiaconcerns material non-disclosure. The comments support the view that failure to plead foreign law when it is plain and obvious that foreign law should apply constitutes material non-disclosure justifying a discharge of the ex parte leave, but not the view, as advocated by Mr Law, that a failure to plead warrants setting aside.  For reasons and authorities stated above, they do not support Mr Law’s proposition that the pleading is so defective that no cause of action is disclosed.

47.Without disrespect, it is unnecessary to deal with each and every case cited by Mr Yu which basically said the same thing as Kuwait Oil Tanker.  Furthermore, for the purpose of resolving the pleading point raised by Mr Law, by reason of the aforesaid, it is clear that the court does not even have to form a view on whether Hong Kong law or PRC law is the governing law.  Accordingly, I will propose to deal with this governing law issue when the court visits the issue of forum conveniens.

B.3   Reflective loss

B.3.1   Submissions

48.It is Mr Law’s submission that the plaintiffs fail to show serious issue to be tried as the Statement of Claim is defective in that the plaintiffs are claiming damages for reflective loss, which is impermissible under the law.

49.Mr Law described this argument as “one stone two birds” because it “kills” not just the claims for account of profits and loss and damages under breach of fiduciary duty but the same claims under the tort of conspiracy as well.  Breach of fiduciary duty and conspiracy are the only two causes of action relied upon by the plaintiffs.

50.In the present case, Janful (ie the 2^nd plaintiff in HCA 2345) was a shareholder of the JVC.  It is well established that a shareholder cannot claim the loss and damage of the JVC: Johnson v Gore Wood [2002] AC 1 (HL) [5], p 35E to 36B.

51.Mr Yu advances five arguments in reply:

(1) It is not open to the defendants to raise this argument in their skeleton submission.  If they had raised it earlier, the plaintiffs could have filed evidence on the issue.

(2) The 1^st plaintiff of HCA 2345 (ie South China) is not a shareholder and the principle has no application to it.

(3) The plaintiffs have suffered loss and damage separate and distinct from that suffered by the JVC, relying on the third rule identified in Johnson v Gore Wood.  They instanced the losses suffered by the shareholders by reason of the monetary contributions such as capital injections and funding into the JVC, etc.

(4) The “no reflective loss” principle is a common law concept.  It has no application under PRC law, where directors owe duties not only to the company but to its shareholders as well and may incur liability for breach of those duties.

(5) The JVC is now being liquidated and a committee has been appointed.  It is unclear whether the JVC can sue to recover its loss and damages against the defendants.

52.About one month after the hearing of HCA 2345 and HCA 1316, on 13 October 2015, the plaintiffs of HCA 2345 provided voluntary particulars on the alleged non-reflective loss and damage said to have been suffered by the plaintiffs.  No supporting affirmation was filed in support.

53.This attracted much criticism from the defendants. They submitted that the plaintiffs were guilty of delay, had failed to comply with Order 11, rule 4 which mandated the filing of the supporting affirmation.  In any event, the defendants said the voluntary particulars were vague.  There were no supporting documents to show they were non-reflective losses; some were obviously reflective losses.

B.3.2   Discussion

54.The reflective loss principle is well settled. It means that if a claimant claims for a loss which is reflective of the wrong done to another, the claim falls to be dismissed.  In Johnson v Gore Wood, supra, Lord Bingham summarised the principles as follows:

“ ... (1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for that loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. ... (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. ... (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct form that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other.”

55.The Court of Appeal in Global Bridge Assets Ltd v Sun Hung Kai Financial Ltd [2012] 4 HKLRD 474 applied the principle in Johnson v Gore Wood.  In Global Bridge Assets, supra, the third plaintiff was a 20% shareholder of a joint venture company formed between the defendant and a PRC partner for the operation of a power plant.  At paragraphs 31 to 33, Kwan JA said:

“ 31. We are here concerned with a claim for the 3^rd plaintiff for damages against the defendant. It is alleged that the 3^rd plaintiff is entitled on its own right to enforce the obligation of the defendant to contribute the outstanding US$3 million to the capital of the JVC, ...

32. ... The losses allegedly suffered by the 3^rd plaintiff as a shareholder of the JVC are merely reflective of the losses allegedly suffered by the JVC and are accordingly not recoverable by the 3^rd plaintiff (Johnson v Gore Wood & Co [2002] 2 AC 1; Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370). This must be correct.

33.   ... The principle of reflective loss applies even where the loss is caused by a wrong actionable at the suit of the shareholder personally.  What matters is whether the loss suffered by the shareholder was the diminution in the value of his shareholding, which reflected the depreciation or depletion of the assets of the company.  In that situation, the shareholder’s loss would be fully remedied by the restitution to the company of the value of the depleted assets and he is not allowed to bring a claim for the reflective loss of the company.”

56.The claim brought by the third plaintiff was accordingly dismissed as unarguable.

57.In support of his contention that the plaintiffs’ losses were merely reflective of those suffered by the JVC, Mr Law has produced a table itemising the loss and damages suffered by the plaintiffs in section G of their Statement of Claim:

	Para No.	Plaintiffs’ Complaints	Whose loss?
G1	59 to 62	To register a false JV Agreement with the PRC authorities [A1/28]	JV Company
G2	63 to 66	Failure to transfer certain software to the JV Company and misappropriation of the software products [A1/31]	JV Company
G3	67 to 69	Fraudulent misusing / misappropriating the JV Company’s qualifications and accreditations [A1/32]	JV Company
G4	70 to 73	Setting up a rival business in PRC in direct competition with the JV Company [A1/34]	JV Company
G5	74 to 75	Procuring losses to the JV Company and depletion of its assets [A1/36]	JV Company
G6	76 to 79	Procuring the liquidation of the JV Company [A1/36]	JV Company
G7	80 to 82	Wrongful acts to cause the JV Company to lose its business licence in the PRC [A1/37]	JV Company
G8	83 to 87	Bringing legal proceedings in the PRC in 2013 for the compulsory liquidation of the JV Company [A1/38]	JV Company
G9	88 to 99	Restructuring of the NS Group and exploitation of the software products through listing in UK and in Hong Kong [A1/39]	Software products being assets of the JV Company

58.As can be seen, it is quite clear that the losses were the losses of the JVC and not the plaintiffs’, as submitted by Mr Law.

59.Moreover, in my view, the loss and damage claimed were in fact losses in the form of depreciation in the value of the JVC.  For example, the procuring of losses to the JVC and depletion of its assets (see G5 above); similarly, the plaintiffs’ claim for damages arising as a result of the failure to transfer the software products to the JVC and misappropriation by the defendants of the software products for their own use (see G2 and G3 above) were reflective losses.  In effect, the plaintiffs were simply saying that had there not been such failure to transfer and the misappropriation, the software products would still belong to the JVC who would have made profits and increased in value.  This must, in essence, be a claim for the loss in value of shareholdings.  I cannot see what other form of loss this could be.

60.Not only that the plaintiffs are suing for losses suffered by the JVC, but in my view, are clearly seeking to make good the diminution in the value of their shareholdings.

61.The submission that the JVC may have difficulty pursuing its own losses because it was being wound up is plainly unsubstantiated.  The JVC has instituted the following proceedings in the PRC:

(1) In September 2012 in the Nanjing Intermediate People’s Court against the 2^nd to 6^th defendants (of HCA 2345), claiming RMB86 million for unlawful competition.  The trial took place on 16 December 2014, 10 April 2015 and 28 July 2015.

(2) In January 2013 in Nanjing against the 2^nd to 6^th defendants (of HCA 2345) claiming that the intellectual property rights in the software products belong to the JVC [6].  The trial relating to the ownership of the software products took place on 10 March 2013, 24 March 2014 and 21 October 2014 in the Jiangsu Higher People’s Court.

62.Even if the JVC was being wound up, the liquidation committee could start or carry on with the claims.  At any rate, this must be irrelevant as the purported inability of the company to pursue its own loss itself does not dispose of the argument that the claim for reflective loss is impermissible.

63.In his oral argument, Mr Yu developed an ancillary but separate point.  It is this: where the company and the shareholders have suffered loss and both can sue but under different causes of action, whether or not the no reflective loss principle applies.  He relied on Ross River Ltd v Waveley Commercial Ltd [2013] EWCA Civ 910 as an example to illustrate his point.  In that case, the claimant Ross River entered into a joint venture agreement with the first defendant (WCL), a joint venture vehicle, which was owned by the second and third defendants in that case as directors and shareholders.  The third defendant never actively took part in the litigation.  It was held that the second defendant as director of the joint venture company owed fiduciary duties to the claimants.  It was argued that remedies should be paid by the second defendant to WCL but the Court of Appeal held that WCL was subject to claims by other creditors with which the claimants had to compete and ordered the defendant to make payment directly to Ross River.

64.I understand Mr Yu to be submitting that Ross River v Waveley Commercial Ltd, supra, is an exception to the general rule of no reflective loss in Johnson v Gore Woodand the present case falls within the Ross River exception.  Mr Law in reply distinguished Ross River’s case on its facts, saying that the peculiar feature of the case founding the fiduciary duty was the finding that WCL’s assets had to be kept intact without depletion by unauthorised payments so as to enable Ross River to be paid its due share of the net profit under the joint venture agreement.

65.In my view, Ross River is not an example of the Johnson v Gore Wood exception.  It is simply not a case on reflective loss at all.  There was not even discussion on what different causes of actions each company and the shareholder had, or how that would be excepted from the no reflective loss rule.  Ross River is a case on fiduciary duties owed by the directors of a joint venture vehicle to the joint venture partners, apart from the joint venture agreement.  As such, I do not see how this supports Mr Yu’s point.  Indeed, it is noted that Mr Yu has similarly not said what cause of action the JVC in the present case might have that was different from its shareholder Janful (ie the 2^nd plaintiff) and which entitles Janful to be remedied of the pleaded loss.

66.At any rate, whilst these are intellectually challenging and interesting points, it must be right that this is an Order 11 application, and it is incumbent upon the plaintiffs to plead clearly and precisely their loss and damage which is an essential element of their claim. None of these points now raised have been pleaded: see East Asia cited below.

67.Neither do I find the non-application of the no reflective loss principle to the 1^st plaintiff (ie South China) convincing.  As Mr Law has submitted, the plaintiffs have produced no authority to support their proposition.  Fundamentally, as Mr Law appositely puts it, South China (or TS, which later substituted South China), although named as the 1^st plaintiff, is a “nobody”.  The pleaded loss and damage do not lie at the door of South China.  The loss and damage are alleged to be suffered by the 2^nd plaintiff (ie Janful). In any event, TS which replaces South China, which indirectly wholly-owns Janful is, in my view, for all intents and purposes, a technical plaintiff only.  Its presence adds nothing to Janful’s claims for remedies.  In other words, if Janful’s remedy is impermissibly reflective, I cannot see why the same is not true of South China/TS’ claim.

68.Mr Yu’s further argument that the no reflective loss principle is a common law concept and has no place under PRC law misses the point that it is consistently the plaintiffs’ own case that they do not rely on PRC law and the matter is governed by Hong Kong law.

69.The plaintiffs also complained that the defendants should not be allowed to raise no reflective loss argument in their skeleton submission.

70.I disagree.  This is an Order 11 service out scenario.  The approach is strict and the plaintiff is not entitled to rely on new matters not relied upon at the ex parte stage: Kayden v SFC (2010) 13 HKCFAR 696, at §§36 – 38.  See also Mattel Inc v Tonka Corp [1991] 2 HKC 411 at 431C.

71.Similar to the present case, East Asia Satellite Television (Holdings) Ltd v New Cotai LLC and others HCA 2189/2009 and HCMP 2218/2009 (heard together) is a case which involves a joint venture business with the Macao defendants who had been served pursuant to Order 11 of the RHC.  There were multiple causes of action both personal and derivative by the plaintiff against the defendants.  One of them was the claim for damages and equitable compensation by the plaintiff on behalf of one of the joint venture companies (ie the second defendant therein) as a result of the breach of fiduciary duties by the directors of the joint venture partner.  In defence, the plaintiff relied on the 2^nd proposition identified in Johnson v Gore Wood.

72.The following paragraphs of Reyes J bear repetition:

“ 141. The facts and matters said to give rise to a claim for reflective loss under Lord Bingham’s 2^nd proposition are material averments that need to be set out, with precision and rigour, in one’s pleading and in one’s affidavit evidence in support of service out of the jurisdiction. This has to be done to assure the Court at an early stage that one has a good arguable case and the claim for reflective loss should be allowed to proceed. Without such assurance, the Court may well strike out the claim for reflective loss at an early stage as an abuse of process and unwarranted waste of time and expense.

142. Unfortunately, that has not been done.  It seems to me far too late for Mr. Manzoni to spring his case on the supposed potential obstacle posed by negative resolution out of the blue in the course of oral submission.”

73.In his oral submission, Mr Yu seeks to suggest that the plaintiffs are excepted from the rigours of the no reflective loss rule because they have suffered separate and distinct losses in the form of capital injections into the JVC.  There cannot be any dispute, as Mr Law correctly pointed out, that this was never pleaded.  Mr Yu further argues that the plaintiffs never said their loss was the diminution in the shares value and there could be other heads of losses.  Effectively, Mr Yu was saying that he does not have to plead specifically and could always expand his pleading to include other heads of loss and damage at a later stage.

74.But in East Asia, it was said as follows:

“ 149. Vagueness is not acceptable when it falls squarely upon EAST [plaintiff] to spell out in its pleading and affidavit evidence precisely why it asserts that:-

(1) contrary to its case that Macao Co has a cause of action, it may still be that Macao Co has no cause of action, so that Cyber Neighbour should be allowed to claim reflective loss; and,

(2) contrary to its case that Cyber Neighbour has a cause of action, it may still be that Cyber Neighbour has no cause of action, so that Cyber One should be allowed to claim reflective loss.

150. EAST’s pleading and affidavit evidence do not now spell out unambiguously how its claims for reflective loss on behalf of Cyber One and Cyber Neighbour are supposed to fall within the exception to Lord Bingham’s 2^nd proposition.  EAST has to be frank.  It has to explain just why Macao Co and Cyber Neighbour do not (or may not) have causes of action against the New Cotai Directors.”

75.It is clear that the burden is on the plaintiffs to articulate his case on loss and damage, and if reliance is placed on any exception to no reflective loss, spell out precisely what it is.  At paragraph 153, His Lordship concluded:

“ 153. In my view, for the reasons discussed above, EAST has not shown an arguable or serious case to be tried on any of the derivative claims for reflective loss sought to be brought against the New Cotai Directors on behalf of Cyber One, Cyber Neighbour and Macao Co.”

76.It is also worth noting what Reyes J said at paragraphs 180 and 181:

“`180. I add that a frank disclosure by EAST would also have entailed pointing out that EAST was seeking to make claims for reflective loss. EAST ought to have then explained in its affidavit in support of service out why such reflective loss claims were arguably permissible under Johnson v. Gore-Wood.

181. Consequently, as a matter of discretion, even if I had found otherwise than as summarised in Section III.A.4 of this Judgment, I would have set aside service outside of the jurisdiction in relation to Mr. Moross, Mr. Baker and Mr. Vora for material non-disclosure.”

77.East Asia went on appeal [7].  The Court of Appeal further held that the duty to disclose encompassed significant factual, legal and procedural aspects of the case: paragraph 82 of Court of Appeal judgment.  Mr Yu has never submitted that the first instance decision of Reyes J of East Asia was wrongly decided.

78.Mr Law also made good his submission that an account of profits as a head of loss and damage likewise contravenes the no reflective loss rule and hence impermissible.

79.In Pico North Asia Holdings Ltd v Cheung Yuk Ting Linda and another, HCA 1371/2009, Fok JA (sitting as an additional judge of the CFI) was dealing with the defendants’ summons to strike out the Statement of Claim on the basis that it disclosed no reasonable cause of action and an order for the action to be dismissed.  The issue arising on the strike out application was whether the plaintiff’s claim contravenes the no reflective loss principles.  The plaintiff and the first defendant entered into a joint venture agreement and a supplemental joint venture agreement to form joint venture companies.  The plaintiff alleged that the first defendant had breached clauses under the joint venture agreements and claimed for damages for breach of the agreements, damages for breach of fiduciary duties and an account of profits by reason of the breach.

80.Fok JA said as follows about the claim for account of profits:

“ 32. ... First, he submitted that the principle only applies in respect of claims for damages and has no application to a claim for an account of profits or to other relief sought by the plaintiff in this action. ...

33. I do not consider that the first point advanced on behalf of the plaintiff is correct. In my opinion, the principle can apply to other types of remedies including an account of profits and is not limited to claims for damages. The test is not the form of relief but, whether as a matter of substance, the claim is for monies that the company may claim for itself. By way of example, see Shaker v Al-Bedrawi [2003] 1 BCLC 157 at §80, where Peter Gibson LJ said:

‘... We agree ... that if the claim by Mr Shaker for an account is in substance a claim to moneys to which ANA Inc has a claim against Mr Bedrawi, then consistently with the reasoning in Johnson v Gore Wood & Co (a firm) the Prudential principle would bar Mr Shaker’s claim for what in effect reflects part of the loss suffered by ANA Inc, and it matters not that the causes of action of Mr Shaker and ANA Inc are different. ...’

See also, Gardner v Parker at §49 and Minority Shareholders: Law, Practice and Procedure by Victor Joffe QC et al. (3^rd Ed.) at §1.151.”

81.Of significance to also note is that at paragraph 37, His Lordship said:

“ 37. ... Similarly, the reliance by the plaintiff on breaches of contractual duties or duties in tort on the part of the defendants does not affect its application. Ultimately, the question is whether the loss allegedly suffered by the plaintiff by reason of the breaches asserted in the action is merely reflective of the companies’ loss.”

82.I should also mention that unlike the failure to plead foreign law which could be remedied by pleading in reply, a Statement of Claim which offends the principle of no reflective loss can only be saved by amending the pleading or offering voluntary particulars as loss and damage forms an essential part of the case.  Thus, the defective Statement of Claim raises no serious issue to be tried.

83.Then do the voluntary particulars offered by Mr Yu help the plaintiffs?  I am inclined to say no.  The voluntary particulars are:

(1) incorporation and operational costs of Janful, being the corporate vehicle established by South China to hold its interests in the JVC;

(2) monies invested by South China / Janful in the JVC in the form of capital contributions, RMB4 million;

(3) interest payments on the loans obtained by Janful for the purpose of financing the capital contributions made to the JVC;

(4) promotional expenses in connection with the JVC;

(5) entertainment expenses incurred by representatives of South China / Janful in connection with the JV business;

(6) travelling expenses similarly incurred;

(7) costs of manpower incurred by South China / Janful in connection with the JV business;

(8) legal expenses incurred by Janful in the PRC arising out of the JVC and the joint venture business;

(9) business opportunities and profits which Janful could have generated; and

(10) loss and damage suffered by way of diminution in the value of the shares in the JVC.

84.There is no dispute that when Ms Cheung (for the plaintiffs) filed her supporting affirmation for leave, the voluntary particulars were not included in the Statement of Claim.  Neither could it be disputed that these voluntary particulars were only verified by a statement of truth but no supporting affirmation accompanied the particulars.

85.The failure to comply with the requirement of Order 11, rule 4 to file the supporting affirmation is fatal to the plaintiffs.  I repeat what Reyes J said in East Asia: see above, in particular paragraph 141.  The supporting affirmation is needed to assure the court that there was a good arguable case.

86.I bear in mind that Mr Yu was arguing that the plaintiffs had shown a serious issue to be tried, which is a very low threshold, by supplying the particulars of loss and damage.  I agree the burden may not be a very high one, but it remains the plaintiffs’ responsibility to show that the loss alleged in the voluntary particulars are not reflective of the losses suffered by the JVC.

87.In response to Mr Law’s criticism that the defendants had no way of verifying whether the loss and damage were or were not reflective as no evidence or supporting documents had been adduced, Mr Yu submitted that the plaintiffs had no obligation to file any evidence at this stage.  He said, any doubts must be resolved in favour of the plaintiffs, relying on the last sentence at letter E, p 36 of Johnson v Gore Wood.   I cannot agree.  In fact, around one month before filing the voluntary particulars, the plaintiffs submitted at paragraph 101(1) of their written submission dated 11 September 2015 that “It cannot be open to Ds to put forward this [reflective loss] argument only Ds’ Skeleton ....  Had the point been raised at the outset, Ps would have filed relevant factual evidence on the issue (as the applicability of the reflective loss principle depends on the facts).”  [emphasis supplied]

88.The mandatory requirement to have a supporting affirmation serves a purpose.  I note that at p 184 of Hong Kong Civil Procedure 2015, Vol 1 at §11/4/1B, it says:

“ ... Compliance with (b) requires more than a ‘ritual incantation’ of the wording of the rule, Century Yachts Ltd v. Xiamen Celestial Yacht Ltd [1994] 1 H.K.L.R. 385. A basis of the claim must be made out by evidence. It is not sufficient merely to outline the nature of the claim and then assert belief in the existence of a good cause of action without supporting evidence, and merely doing so will not raise a serious issue to be tried: Cranway Ltd v. Playtech Ltd [2007] R.P.C. 22. If a statement of claim has been prepared it is not necessary to reproduce it in the affidavit and a reference to it together with the supporting evidence will do, ...”

89.This is in line with the remarks of Reyes J in East Asia.  In Veron Intl Ltd v RGG Holdings Limited & RGG China Holdings Ltd, HCMP 3210/2013, Ng J had to consider an application for leave under section 168BC of the Companies Ordinance to bring a statutory derivation action.  To obtain leave, the plaintiff had to satisfy (a) a prima facie case that leave should be granted and (b) a serious question to be tried.  One of the objections raised by the defendants was that the loss allegedly suffered by the plaintiff was reflective and hence not recoverable in law.  Ng J said at paragraphs 50 and 51 as follows:

“ 50. It follows from the discussion above that Holdings’ claim for the HK$920 million lost is barred by the ‘no reflective loss principle’. While the Applicant, in its skeleton submissions, hints at the possibility of adding to the draft Statement of Claim Holdings’ claims for loss of use of capital and financial costs, the truth is, on the materials available, it is unclear what these losses are or how they allegedly arose. If Holdings had indeed suffered such losses over and above the HK$920 million, there is no explanation why they were left out of the draft Statement of Claim and the evidence in support of the originating summons in the first place. As Mr Joffe submitted, one simply cannot see the shape of the claims or reach an informed decision about their viability.

51. In these circumstances, this court is of the view that there is no serious question to be tried in the Intended Action to be brought in the name of Holdings — no leave should be given to Veron to pursue the claim in Holdings’ name.”

90.It appears to me that except the loss set out in paragraph 83(10) hereinabove which is objectionably reflective, the best one can say about the rest of the voluntary particulars (as set out in paragraphs 83(1) to 83(9) hereinabove) supplied by the plaintiffs one month after the hearing is that they may (or may not) be reflective losses.  For some of the alleged losses, such as entertainment and travelling expenses said to be incurred by representatives of South China or Janful in connection with the JV business, I am of the view that it really depends on the way these expenses were booked.  They could well be booked as expenses incurred by the said representatives for an on behalf of South China, in which case, these would be reflective losses.  The plaintiffs could have easily produced documents or evidence to show the loss and damage fall within the exception to Johnson v Gore Wood.  No evidence has been produced.  The burden is on them to show this is a proper case for service out.  This is a failure to comply with the compulsory requirement under Order 11, rule 4.

91.The last sentence quoted from p 36 of Johnson v Gore Wood does not help the plaintiffs.  Johnson was a case on striking-out and thus the burden is on the defendant to show the case should be struck out.  The present is an Order 11 situation where the burden is strictly on the plaintiff to show a serious issue to be tried.

B.3.3   Conclusion

92.Thus, it seems clear that:

(1) On the facts and as pleaded in the Statement of Claim, the losses alleged to have been suffered by the plaintiffs are losses of the JVC.

(2) As can be seen, most of the pleaded losses are in essence, losses in the nature of depletion / diminution in the value of the shares of the JVC.

(3) It was uncertain whether the voluntary particulars of loss and damage, although alleged to be non-reflective, were permissible under the law as the plaintiffs had not filed any evidence in support thereof, contrary to the mandatory requirements of Order 11, rule 4 of the RHC.

(4) There is no indication that the JVC cannot sue to recover its own losses.  On the contrary, the JVC has started two proceedings in Nanjing which are still pending.  In any event, the fact that the JVC cannot sue is irrelevant to the no reflective loss principle.

(5) The no reflective loss principle is trite: see Johnson v Gore Wood.

(6) None of the plaintiffs’ complaints are sound or valid.

93.In summary:

(1) It is not pleaded that the 1^st plaintiff has suffered any loss and damage at all.  The 1^st plaintiff is a mere technical plaintiff and the argument that it is not subject to the no reflective loss rule is unsound.

(2) It is not open to the plaintiffs to argue that the Johnson v Gore Wood no reflective loss principle has no application under PRC law as it is consistently not the plaintiffs’ own case that PRC law governs.  It is their case that Hong Kong law governs.

(3) The plaintiffs cannot complain to have been unfairly treated by the defendants.  Order 11 service out adopts a strict approach.  It is entirely the responsibility of the plaintiffs to plead clearly their loss and damage.  It is not correct to suggest that they can supply evidence or at a later stage.  They must do it when they apply for service out, relying on their own Statement of Claim: East Asia.

(4) Moreover, failure to state their losses are reflective losses constitute material non-disclosure and warrants setting aside the service out: East Asia, Court of Appeal, at §82.

(5) A claim for an account of profits likewise offends the no reflective loss principle: Pico North.

94.For these reasons, I will set aside the plaintiffs’ leave to service out of the jurisdiction as the Statement of Claim raises no serious issued to be tried.  Alternatively, I would exercise my discretion to set aside the ex parte leave on the ground of material non-disclosure.

B.4   Forum non conveniens

B.4.1   The law

95.The legal principles are well settled and should not be seriously disputed.

96.Order 11, rule 4(2) which specifies that:

“ No such leave shall be granted unless it shall be made sufficiently to appear to the Court that the case is a proper one for service out of the jurisdiction under this Order.”

97.As said by Lam J in張才奎所託管中國山水投資有限公司股份相關員工,李延民所託管中國山水投資有限公司股份相關員工v 張才奎and李延民, HCA 1661/2014, HCA 1766/2014 and HCA 2194/2014 (heard together) where the defendants applied to set aside the Order 11 application granting the plaintiffs leave to serve the writ out of Hong Kong:

“ 46. The principles governing the exercise of the power to grant leave to serve a writ out of the jurisdiction are not in dispute. They have been settled by authorities such as Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460; Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438, 453–457 and applied in Hong Kong in numerous decisions, such as Stone J’s decision in Hargreaves v Taian Insurance Co Ltd [2006] 3 HKLRD 70 at §50. They have also been recently restated by Lord Collins in the Privy Council in AK Investment CJSC v Kyrgyz Mobil Tel Ltd [2012] 1 WLR 1804 at §§71, 88.

47. ... Thirdly, the plaintiffs must satisfy the court that in all the circumstances Hong Kong is clearly or distinctly the appropriate forum for the trial of the dispute, and that in all the circumstances the court ought to exercise its discretion to permit service of the proceedings out of the jurisdiction. ...”

98.Stone J in Hargreaves v Taian Insurance Co Ltd [2006] 3 HKLRD 70:

“ 42. ... in contradistinction to the position in an fnc stay application, wherein jurisdiction, established as of right, is sought to be disturbed by the defendant, in the Order 11 context it is the plaintiff applicant who bears the burden of establishing that, in the words of Order 11, rule 4(2), ‘the case is a proper one for service out of the jurisdiction under this Order.’

...

50. ... the requirement within Order 11, rule 4(2) involves demonstrating that Hong Kong ‘clearly’ is appropriate for the trial of this action; the question is not whether the Hong Kong courts can deal with the issues, but whether Hong Kong is ‘clearly and distinctly’ the appropriate forum.”

99.In 張才奎, Lam J further observed as follows:

“ 48. While the principles are well established, there are two aspects to which I should draw attention here. First, although the legal burden lies on a plaintiff who seeks leave to serve out of the jurisdiction to show that Hong Kong is clearly or distinctly the appropriate forum for the trial of the dispute, it has been said that it is incumbent on the defendant to identify the issues concerned and how they arise or may arise in the proceedings. ...

50. What I think is clear from the authorities is that despite the burden is on the plaintiff, a defendant is expected to inform the court in outline what his case on the merits is so that the court can form a view of what the issues may be that arise for trial. Often not every element of a plaintiff’s case requires trial; only the disputed matters have to be tried. At the stage when a jurisdictional challenge is raised, which is almost invariably before the defendant has filed a defence, neither the plaintiff nor the court will know from any pleading what will be in dispute. If the defendant does not reveal any positive case then the court assumes there is none and proceeds on the basis that the trial will involve no more and no less than the plaintiff trying to make out his case.

51. The second aspect arises out of Mr Jat’s description of the jurisdiction under Order 11 as being ‘exorbitant’. ...

52. ... As Lord Goff made clear in Spiliada at 481D– E, the ‘exorbitant’ nature of the jurisdiction is recognised by placing the burden on the plaintiff to show not only that Hong Kong is the appropriate forum for the trial of the action, but that it is clearly so.”

100.I should also mention a legal point made by Mr Yu.  Mr Yu said that the single question which the court considers in every Order 11 case concerning the forum non conveniens is the Spiliada Maritime Corporation v Cansulex Ltd[1987] AC 460question, ie whether the court is satisfied that there is an alternative forum in which the case can be tried more suitably for the interests of the parties and for the ends of justice: at 467C Spiliada, supra.

101.On the other hand, Mr Law relied on the well-known three-stage test developed by the Hong Kong Court of Appeal:

“ (I) Is it shown that Hong Kong is not only not the natural and appropriate forum for the trial, but that there is another available forum which is clearly or distinctly more appropriate than Hong Kong (p. 986H). The evidential burden is here upon the applicant. The emphasis is upon ‘appropriate’ rather than ‘convenient’ because this is not simply a matter of practical convenience. The purpose is to identify the forum ‘with which the action has the most real and substantial connection’ per Lord Keith in the Abidin Daver [1984] AC 398. The principal factors are enumerated at p. 987D. Failure by the applicant at this stage is normally fatal.

(II) If the answer to (I) is yes, will at trial at the other forum deprive the plaintiff of any ‘legitimate personal or juridical advantages’? (pp. 987F, 991–3). The evidential burden here lies upon the plaintiff (pp. 986A and 987G).

(III) If the answer to (II) is yes, a court has to balance the advantages of (I) against the disadvantages of (II) .... Deprivation of one or more personal or juridical advantages will not necessarily be fatal to the applicant provided that the court is satisfied that notwithstanding such loss ‘substantial justice will be done in the available appropriate forum’ .... Proof of this, which can fairly be called the ultimate burden of persuasion, rests upon the applicant for the stay. By these means he establishes that on balance the other forum is more suitable ‘for the interests of all the parties and ends of justice’. This may be another way of saying that the plaintiffs’ choice of forum has been shown to be so inappropriate as to deserve the pejorative description of ‘forum-shopping’ and to be restrained accordingly ...’

See The Adhiguna Meranti [1987] HKLR 904 at 907F–908B, Court of Appeal; Rambas Marketing Co LLC v Chow Kam Fai David [2001] 3 HKC 250; Shenzhen Futaihong Precision Industry Co Ltd & others v BYD Co Ltd and others, HCA 2114/2007, unreported.

102.It was Mr Law’s submission that the plaintiffs failed to cross stage I and that was fatal to their service out application. Mr Yu, on the other hand, made the point during his oral submission that to achieve “the ends of justice”, the court must go on to consider and can never ignore juridical advantage.  He submitted that the correct understanding of the law is that juridical advantage has to be considered as it is ultimately one single question of whether the ends of justice would be served.

103.With respect, I disagree.  Mr Yu’s proposition is not even supported by Spiliadaitself. At p 482B, Lord Goff said:

“ Clearly, the mere fact that the plaintiff has such an advantage in proceedings in England cannot be decisive. As Lord Sumner said of the parties in the Société du Gaz case, 1926 S.C.(H.L.) 13, 22:

‘ I do not see how one can guide oneself profitably by endeavouring to conciliate and promote the interests of both these antagonists, except in that ironical sense, in which one says that it is in the interests of both that the case should be tried in the best way and in the best tribunal, and that the best man should win.’

Indeed, as Oliver L.J. [1985] 2 Lloyd’s Rep. 116, 135, pointed out in his judgment in the present case, an advantage to the plaintiff will ordinarily give rise to a comparable disadvantage to the defendant; and simply to give the plaintiff his advantage at the expense of the defendant is not consistent with the objective approach inherent in Lord Kinnear’s statement of principle in Sim v. Robinow, 19 R. 665, 668.”

104.In any event, the three-stage test formulated by the Court of Appeal is binding on me.

105.To summarise the legal principles:

(1) In an Order 11 service out application, the burden is on the plaintiff to satisfy the proceeding is a proper one to serve out of the jurisdiction.

(2) The burden is on the plaintiff to establish that Hong Kong is clearly or distinctly the appropriate forum in which the case could most suitably be tried for the interests of all the parties and for the ends of justice: the Spiliadaquestion.

(3) The Hong Kong Court of Appeal has developed the three-stage test in applying/answering the Spiliadaquestion.

(4) Although a defendant is yet to file his defence, the court will expect the defendant to at least outline his case so that the court can form its views on what issues may arise for determination at the trial.

B.4.2   Submissions

Defendants’ submissions

106.Mr Law said the plaintiffs could not satisfy the court that in all the circumstances Hong Kong is clearly or distinctly the appropriate forum for the trial of the dispute.

107.He pointed out that the mere fact that the plaintiffs had started 18 sets of proceedings in the PRC clearly suggested the PRC was the most appropriate forum to try the matter.

108.Significantly, this was a joint venture business established for the purpose of carrying on software business in the PRC.  The JVC was a PRC entity.  All the NS Principals in whom the plaintiffs had entrusted the management and operation of the JVC were PRC residents.  The JV Agreement was executed in the PRC and the agreement expressly provides that the governing law is to be the law of the PRC.  All the acts complained of in section G of the Statement of Claim took place in the PRC, except for the listing of Sinosoft.

109.In short, Mr Law submitted that except the listing of Sinosoft in Hong Kong and Janful, being a Hong Kong limited company, there was no other Hong Kong connection at all.  On these facts, Mr Law criticised the plaintiffs of indulging in forum shopping, only coming to start litigations in Hong Kong after having exhausted numerous attempts of litigating in the PRC.  Indeed, it is clear that litigation relating to the same subject matter is still going on in the PRC.

110.Mr Law further submitted that HCA 1613 and HCA 2425 were plainly created by the plaintiffs to make it appear Hong Kong was the appropriate forum.  Although he did not mention the word “abuse” in his written submission, Mr Law did argue in his oral submission that this was sheer abuse.

111.On the applicable law, Mr Law went through the plaintiffs’ claims in the Statement of Claim and submitted that the issues involved were clearly governed by PRC law.

Plaintiffs’ submissions

112.Mr Yu countered the argument by submitting that the governing law was Hong Kong law.  Even if PRC law were to apply, the Hong Kong court is experienced and has the expertise to deal with issues of PRC law.  He said the 1^st defendant in HCA 2345 (ie Sinosoft) has filed its defence and the 8^th defendant (ie Ding) has done nothing.  There would be a trial against the said 1^st defendant and 8^th defendant anyway.  Moreover, there was no serious dispute by the defendants that HCA 1613, ie the defamation action, involving substantially the same parties and underlying complaints, would proceed in Hong Kong in any event.  Collectively, as I understand it, this was what Mr Yu called the “Sinosoft factor”, a catch phrase which sourced from the “Cambridgeshire factor” in Spiliada.  In gist, I understand Mr Yu to be saying that, similar to the views in Spiliada, there would be bulk saving of costs and time if HCA 2345 was tried in Hong Kong, given that HCA 1613 would definitely have to proceed in Hong Kong.

113.As for the location of witnesses, the plaintiffs said the distance between Hong Kong and Nanjing is not great.  There is no indication of any difficulty at all for the witnesses to travel to Hong Kong.

114.He emphasized, however, that the plaintiffs would be deprived of a great juridical advantage if the trial were to proceed in the PRC in that the plaintiffs would lose the benefit of the Hong Kong system of compulsory discovery.  He said that in the PRC, a party is only obliged to disclose documents in his/her favour and the PRC court would only consider evidence disclosed to the court by the parties.  The plaintiffs’ case of fraud relied heavily on discovery of documents relating to the management and operation of the JV business which documents / evidence should be in the possession of the defendants.

115.Thus, it appears the parties’ main contention focuses on the following areas:

(1) what is the governing law in HCA 2345 — Hong Kong or PRC;

(2) is there a “Sinosoft factor” and if yes, does it tip the balance in favour of Hong Kong as the more appropriate forum; and

(3) would there be deprivation of a juridical advantage to the plaintiffs in the form of losing the benefit of compulsory discovery if the case were to be tried in the PRC.

B.4.3   Discussion

Stage I

116.To begin with, I must point out that this is clearly a case where the PRC is the forum “with which the action has the most real and substantial connection”.  The PRC connection is strong and readily discernable.

117.Essentially, this was a case where South China incorporated Janful for the purpose of entering into a joint venture business in the PRC with a PRC partner, to explore the development of software programmes [8] which targeted the PRC government as the customer.  The principal document which governed the JV partners’ relationship was the JV Agreement, prepared by South China, but executed in the PRC and which provided the governing law to be the law of the PRC.  It is not even seriously disputed that except the software injection to Sinosoft and listing of Sinosoft in Hong Kong, the wrongful acts which are alleged to have given rise to the plaintiffs’ claims were all committed in the PRC, including, the misappropriation of the software products, the fraudulent use of the JVC’s accreditation, the setting up of a rival business in the PRC in direct competition with the JVC in the PRC, etc.

118.In a nutshell:

(1) the joint venture was in the PRC;

(2) although one of the partners of the joint venture was a Hong Kong resident, the circumstances of the case clearly suggested the Hong Kong partner identified the relevant PRC entity to be their joint venture partner;

(3) the business was in the PRC;

(4) the customer(s) were in the PRC;

(5) thus, the investment was in the PRC: the products were developed and for sale in the PRC;

(6) the key personnel who ran the JV business were all PRC residents;

(7) the JV Agreement which governed the relationship of the JV partners was drafted by the Hong Kong partner but executed in the PRC, expressed to be governed by the law of the PRC; and

(8) almost all the acts which led to the present claims occurred in the PRC.

119.There was little connection with Hong Kong, not to mention real or substantial connection.  I agree with the defendants’ submission that the mere fact that there were numerous proceedings in the PRC prior to the commencement of the present actions (HCA 2345, 1613 and 2324) is indicative of the fact that the PRC was the appropriate forum with which the present case had the most real and substantial connection.  The PRC proceedings are set out below in the defendant’s submissions:

	Date	Plaintiffs	Defendants	Description of proceedings
1.	30.4.04	Janful	NS (ie D2 here)	Janful commenced arbitration against NS for the wrongful competition with the JV Co (the “2004 Arbitration Proceedings”): Yu 1st §4.3 [A1/154]. The Tribunal dismissed Janful’s claim for compensation, but made an award that NS’s engagement in business in software development was a breach of the anti-competition clause contained in the JV Agreement: Award dated 18.1.05 (No. (2005) 中国貿仲裁字第0028号) in the 2004 Arbitration Proceedings [B1/623-651].
2.	20.10.14	NS	Janful	NS commenced arbitration to terminate the JV Agreement.
3.	26.4.05 11.7.05	JV Co	Wang and Ding (ie D4 and D7 here)	The JV Co sued Wang and Ding in the Nanjing Baixia District People’s Court (南京市白下區人民法院), alleging that Wang and Ding had injured the JV Company’s interests (侵害公司權益): Yu 1st §4.5(1) [A1/155]. Claims dismissed in Judgment dated 11.7.05 (Action No. (2005) 白民二初字第513号) [B2/773].
4.	31.5.15	Janful		Janful applied to set aside the 2005 Arbitration Award based on procedural irregularities. The application was dismissed on 28.10.05.
5.	9.8.05 2.11.05 23.12.05	JV Co	NS (ie D2 here)	JV Co sued NS for 不正當競爭糾紛 in the Nanjing Intermediate People’s Court (南京市中級人民法院): Yu 1st §4.5(2) [A1/155]. JV Co’s claims dismissed: Judgment dated 2.11.05 (2005) 宁民三初字第298号): YY–33 [B3/1022]; JV’s Co’s appeal was dismissed by the Nanjing Higher People’s Court: judgment dated 23.12.05 (Action No. (2005) 蘇民三終字第0120号) [B3/1026].
6.	7.11.05	JV Co	Zhang (ie D5 here)	JV Co sued Zhang in Nanjing Gulou District People’s Court (南京市鼓樓區人民法院) for injuring the interests of the JV Co (i.e. 侵害公司權益): Yu 1st §4.5(4) [A1/156]. Claims dismissed: Judgment dated 7.11.05 (Action No. (2005) 鼓民二初字第522号) [B3/1038]. JV Company’s appeal dismissed by Nanjing Intermediate People’s Court: the judgment dated 8.2.06 (Action No. (2006) 宁民二終字第66号) [B3/1042].
7.	4.11.05 and 16.12.05	JV Co	Madam Xin (ie D3 here)	JV Co sued Madam Xin in Nanjing Baixia District People’s Court (南京市白下區人民法院) for injuring the interests of the JV Co (i.e. 侵害公司權益): Yu 1st §4.5(3) [A1/156]. Action dismissed: Judgment (2005) (下民二初字第239号) dated 4.11.05 [B3/1028-1031]. JV Co’s appeal dismissed by Nanjing Intermediate People’s Court: Judgment dated 16.12.05 (宁民二終字第671号): YY– 36 [B3/1032].
8.	9.8.05 27.12.05	JV Co	Ding (ie D7)	JV Co sued Ding again in Nanjing City Qixia District People’s Court (南京市栖霞區人民法院) for injuring the JV Co’s interests (i.e. 侵害公司權益).  Yu 1st §4.5(6) [A1/156]. Action dismissed: Judgment dated 27.12.05 No. (2005) 栖民一初字第1147号) [B3/1049].
9.	13.10.05 21.12.05	JV Co	Wang (ie D4)	The JV Co brought another action against Wang in Nanjing Xuanwu District People’s Court (南京市玄武區人民法院) for injuring the interests of the JV Co (i.e. 侵害公司權益): Yu 1st §4.5(5) [A1/156]. Action dismissed: Judgment dated 21.12.05 (2005) (玄民二初字第1130号) [B3/1044].
10.	12.05 2.11.06 19.9.08	Janful	D2-D6 and Infotech	Janful sued D2 to D6 in the Jiangsu Higher People’s Court as well as Infotech Holdings Pte Ltd, a wholly-owned subsidiary of Sinosoft, alleging that, they were in wrongful competition with the JV Co, and demanded the cessation of all breaches and for damages of RMB 30 million (the “2005 PRC Proceedings”): Yu 1st §4.6 [A1/157]. Janful’s claims dismissed: Judgment of the Jiangsu Higher People’s Court dated 2.11.06 (Action No. (2006) 蘇民三初字第0001-3号) [B3/1053-1064]. Janful lodged an appeal to the Supreme People’s Court (“SPC”) (最高人民法院), but later withdrew it: SPC’s Decision dd 19.9.08 (No. (2007) 民三終字第9号)[B3/1066].
11.	27.1.06	Janful	NS (ie D2)	Janful commenced another arbitration against NS (the “2006 Arbitration”) for:– (1) a declaration that NS was in breach of the non- competition clause, and a ruling that NS and its associate co. should ceased their businesses that were in competition with that of the JV Company; (2) an award that all IP rights in NS and its related companies’ software products belong to JV Co; and (3) an award that NS should account to the JV Company for profits made in breach of the non-competition clause in the JV Agreement: Yu 1st §4.7 [A1/158].
	20.8.2008	Janful	NS (ie D2)	CIETAC tribunal made an award (No. [2008] 中國貿仲京裁字第0379号).  [B3/1070] (1) at page 32 and 33, the tribunal referred to the decisions in the 2007 Administrative Proceedings (see below) and held that the Registered JV Agreement (as opposed to the Unregistered JV Agreement) is valid and binding upon the parties. (2) NS should pay RMB20,764,704.59 to the JV Co as profits derived from br. of the non-competition clause. (3) Janful’s all other claims dismissed, including the claims regarding ownership of IP Rights.
12.	2.07	Janful	Gulou Trade & Comm.  Bureau NS joined as third party.	Janful commenced the 2007 Administrative Proceedings against Gulou Trade and Commercial Bureau, with NS being joined as third party. Nanjing Intermediate People’s Court handed down Judgment (行政裁定書) dated 29.4.07 (i.e. (2007)宁行初字第12號) [C1/1723-1731]. In particular, at page 8 of the said judgment, it was held that Janful was involved in handling the registration of the Registered JV Agreement and was aware of the contents of the Registered JV Agreement and the Registered Articles.
13.	19.6. 2007 10.9. 2007	Janful	Gulou Trade & Comm.  Bureau NS	Janful appeal’s dismissed by the Jiangsu Higher People’s Court in judgment dated 10.9.07: Yu 1st §4.11 [A1/159]; (2007)蘇行終字第0061號) [C1/1732-1737]. In particular, at page 4 to 5 of the judgment, the Jiangsu Higher People’s Court confirmed the facts found by the Nanjing Intermediate People’s Court and held that Janful should have known the contents of the Registered JV Agreement and the Registered Articles.
14.	12.11	JV Co	D2 to D6	Janful caused the JV Company to sue D2 to D6 in Nanjing Intermediate People’s Court, alleging, inter alia, that all software copyrights owned by NS belong to the JV Company, claiming for a return of all such software copyrights and for damages of approximately RMB 39 million (the “2011 PRC Proceedings”): Yu 1st §4.12 [A1/160]. The JV Company later withdrew the action: Nanjing Intermediate People’s Court dated 4.12.12 (No. (2012) 宁知民初字第004號) [B3/1119–1127].
15.	9.2012	JV Co	D2 to D6	Janful caused the JV Co to bring another action in Nanjing Intermediate People’s Court against D2 to D6, claiming damages of RMB 86 million for wrongful competition (the “2012 PRC Proceedings”): Yu 1st §4.13 [A1/160]. The trial took place on 16.12.14, 10.4.15 and 28.7.15 in Nanjing Intermediate People’s Court: Yu 3rd §2.1(2) [A1/262].
16.	1.13	JV Co	D2 to D6	Janful caused the JV Company to commence the 2013 PRC Proceedings in Nanjing against D2 to D6, claiming, inter alia, that all the software product’s intellectual property rights belong to the JV Company (“2013 PRC Proceedings”): Yu 1st §4.14 [A1/161]. The trial of part of the claim (i.e. ownership of 31 softwares registered in NS’ name) took place on 10.3.13, 24.3.14 and 21.10.14 in Jiangsu Higher People’s Court: Yu 3rd §2.1 [A1/262].
17.	21.1. 2013	NS	JV Co	NS filed an application before Jiangsu Nanjing Intermediate People’s Court for the compulsory winding up of the JV Co.
18.	15.1. 2014	Janful	NS (ie D2 here)	Shortly before Cheung’s 1st Aff, Janful commenced arbitration against NS (“2014 Arbitration”), seeking orders for NS to comply with the JV Agreement to inject the relevant software into the JV Company: Yu 1st §4.15 [A1/162]; YY-50 [B3/1139- 1142]. The arbitration was heard on 22.1.15 and 5.8.15.  According to a notice, an award would be made on 3.9.15: Yu 3rd §2.1(3) [A1/262].
19.	19.2. 2014	Janful South China	D2 to D7	HCA 2345 — Cheung’s 1st Affirmation for leave to serve out of jurisdiction [A1/104] Notwithstanding that the 2014 Arbitration was commenced only less than a month before Cheung’s 1st Affirmation; and that the trial of 2013 PRC Proceedings was due to take place on 24.3.14, Ps still choose not to make any disclosure of these proceedings.  In “Forum non conveniens” section in Cheung’s 1st, no reference was made to these PRC Litigation / proceedings.

120.As can be seen, most of the issues (see paragraphs 127 and 128 hereinbelow) identified by the plaintiffs and defendants which require adjudication in Hong Kong were similarly litigated [9] in the PRC.  For example, item 1 was in relation to the setting up of a rival business in the PRC in direct competition against the JV Company.  Items 3, 6, 7, 8, and 9 above were different actions against individual NS Principals for harming the interest of the JV Company.  These were similar to the allegations of breach of fiduciary duties and the tort of conspiracy claims in HCA 2345.  Items 14 and 15 were actions against the NS Principals for misappropriation of the intellectual property rights and damages.

121.I am not convinced that the plaintiffs have discharged the burden of establishing Hong Kong is clearly or distinctly the more appropriate forum for the trial of the action when their claims had such flimsy connection with Hong Kong.

122.As the Supreme Court said in VTB Capital plc v Nutritek International Corpn [2013] 2 AC 337, at holding no (2):

“ ... the fundamental focus was on Russia and the Russian witnesses; that since the transaction had been introduced, pursued and approved predominantly in Moscow, and since the bulk of the evidence on both sides would come from Russian witnesses, the Russian connection was of such strength that the claimant could not discharge the onus of establishing that England was clearly the appropriate forum for trial; and that, accordingly, permission to serve out of the jurisdiction had correctly been set aside ...” [emphasis supplied]

123.There can be no doubt that the fundamental focus of the present case was on the PRC.  The bulk of the evidence would have to come from the PRC witnesses with the PRC documents written in Chinese.

124.In VTB, Lord Neuberger made the following comments concerning a forum non conveniens application:

“ 81 When a court is called upon to decide whether an action should proceed in this, as opposed to another, jurisdiction, it is being asked to decide a procedural issue at a very early stage. Where, as is now the position in this case, it is common ground that the parties would have a fair trial in the competing jurisdiction, the exercise will normally involve the court weighing up a number of different factors, and deciding where the balance lies. ... [emphasis supplied]

82   ... hearings concerning the issue of appropriate forum should not involve masses of documents, long witness statements, detailed analysis of the issues, and long argument.  It is self-defeating if, in order to determine whether an action should proceed to trial in this jurisdiction, the parties prepare for and conduct a hearing which approaches the putative trial itself, in terms of effort time and cost. ...”

125.Similarly, Lord Clarke said at paragraph 193:

“ 193 I adhere to the view I expressed in that case, now supported by Dicey. As Eder J put it in Mujur Bakat Sdn Bhd v Uni.Asia General Insurance Bhd [2011] Lloyd’s Rep IR 465, para 9:

‘in considering whether or not England is the most appropriate forum, it is necessary to have in mind the overall shape of any trial and, in particular what are, or what are at least likely to be, the issues between the parties and which will ultimately be required to be determined at any trial. ...’ ” [emphasis supplied]

Balancing exercise

126.I will now go on to consider parties’ arguments bearing in mind the fundamental focus of the case and the likely issues which may arise for determination at the trial in the exercise of weighing the different factors to find the balance.

127.The list of issues which give rise to the underlying claims (breach of fiduciary duty and tort of conspiracy) have been helpfully summarised by the parties.  Mr Yu summarised them as follows:

(1) whether the registered JV Agreement was false;

(2) whether plaintiffs and defendants had an understanding and mutual agreement that the management and operation of the joint venture business should be undertaken by the defendants [10];

(3) whether the defendants, instead of injecting the software which they were required to develop under the JV Agreement into the joint venture business, into their own and for their own advantage including using the accreditation of the plaintiffs;

(4) whether the defendants had made false representations to the Hong Kong Stock Exchange and the SFC to get listing in Hong Kong; and

(5) whether the 1^st defendant (Sinosoft) had by reason of the knowledge imputed to it by the 2^nd defendant (Nanjing Skytech), knowingly assisted the defendants’ breach of fiduciary duties.

128.The plaintiffs’ list of issues largely overlaps with items contained in the table at paragraph 2.14 of Mr Law’s written submissions wherein Mr Law set out the main issues / complaints of the plaintiffs under section G of the Statement of Claim:

	Para No of Statement of Claim	Plaintiffs’ Complaints
G1	59 to 62	To register a false JV Agreement with the PRC authorities [A1/28]
G2	63 to 66	Failure to transfer certain software to the JV Company and misappropriation of the software products [A1/31]
G3	67 to 69	Fraudulent misusing / misappropriating the JV Company’s qualifications and accreditations [A1/32]
G4	70 to 73	Setting up a rival business in PRC in direct competition with the JV Company [A1/34]
G5	74 to 75	Procuring losses to the JV Company and depletion of its assets [A1/36]
G6	76 to 79	Procuring the liquidation of the JV Company [A1/36]
G7	80 to 82	Wrongful acts to cause the JV Company to lose its business licence in the PRC [A1/37]
G8	83 to 87	Bringing legal proceedings in the PRC in 2013 for the compulsory liquidation of the JV Company [A1/38]
G9	88 to 99	Restructuring of the NS Group and exploitation of the software products through listing in UK and in Hong Kong [A1/39]

129.Save that the second issue on the plaintiffs’ list did not appear in the defendants’ list, the rest of the issues are the same although put differently by the parties.  Both lists strike as heavily PRC-related, including the second issue on the plaintiffs’ list.

130.Mr Law submitted that on these issues, whether or not the defendants had committed breach of fiduciary duty would be governed by PRC law.  He relied on §34–087 of Dicey, Morris and Collins on The Conflict of Law, 15^th Edn, which said:

“ ... Many, but by no means all, equitable obligations of a fiduciary character arise in the context of a contractual relationship. ... there is a very strong argument for classifying fiduciary and other equitable duties which attach to the relationship to which the contract gives rise in the same as other legal duties imposed on the parties to give effect to the expressed or implied terms of their agreement. Treating all of these incidents of the contract as ‘contractual obligations’ for this purpose seems likely to promote a uniform approach to the application of these instruments across the European Union. Even outside the framework of the Regulation and the Convention, the principled argument for charactering such fiduciary duties as contractual in nature is a strong one. On this view, if accepted, the law applicable to the parties’ contractual relationship would determine whether a fiduciary relationship exists, the nature of the duties imposed and (within the limits of the court’s procedural powers) the consequences of breach, including the nature of the remedy available. ...”

131.Moreover, at §8.150, Graeme Johnston: The Conflict of Laws in Hong Kong, 2^nd Edn, it was said:

“ ... a director’s duties to his company are inextricably bound up with the company’s internal constitution and administration and ‘must therefore be governed by the place of the company’s incorporation’. This rule applies irrespective of whether the claim is framed as a statutory one, a common law one (e.g. tort) or an equitable one (e.g. breach of fiduciary duty). Contractual claims are a partial exception in the sense that the company and its director may, if permitted by the law of the place of incorporation, have freedom to make an express contractual choice of law; however, where there is no such choice of law it is difficult to think of a case in which applying the principle of closest and most real connection will lead to any conclusion other than that the matter is governed by the law of the place of incorporation. ...”

132.Mr Yu submitted that he was not relying on contract nor was his client alleging breach of fiduciary duty in the sense of breach of a director’s duties.  He said his case concerns the relationship between two joint venture partners and the breach of fiduciary duty arose in the context of the plaintiffs reposing trust and confidence on the defendants. Mr Yu almost said that I did not have to study the JV Agreement.

133.I do not think the issues can be tried without studying closely the terms of JV Agreement.  After all, this was the principal document which governed the parties’ relationship.  It was prepared by Janful but Janful agreed that the governing law of the contract was PRC law.  Most importantly, I only need to refer to the plaintiffs’ own Statement of Claim to see how they themselves relied on the contract.  Paragraph 45 of their Statement of Claim pleads:

“`45. The Fiduciary Duties arise as a matter of law by reason, inter alia, that:

(1) NS / the NS Principals had, pursuant to the parties’ mutual agreement and understanding in relation to the management and operation of the Joint Venture Business andpursuant to the terms of the JV Agreement, undertaken to act in the interests of South China / Janful and/or in their joint interests in circumstances which give rise to a relationship of trust and confidence;

(2) NS/ the NS Principals had, pursuant to the parties’ mutual agreement and understanding in relation to the management and operation of the joint Venture Business and pursuant to the terms of the JV Agreement, a power or discretion in relation to the Joint Venture Business capable of being used to affect the interests of NS / the NS Principals in a legal or practical senses;

...” (emphasis added)

134.Clearly, even their own pleading about reposing trust and confidence was expressly said to be pursuant to, inter alia, the terms of the JV Agreement.  Furthermore, I cannot ignore the fact that the parties had the choice to incorporate a joint venture company in Hong Kong, but they chose the PRC.  It is difficult to see that the applicable law of the place of incorporation of the JVC (ie the PRC), which influenced the administration, operation and management of the JVC, will not play a significant part in determining the issue of fiduciary duty owed by the main players of the joint venture business.

135.As regards the other cause of action, ie tort of conspiracy, there seems no dispute that “double actionability” has to be established.  Mr Law said the law should be that enunciated in Distillers Co Ltd v Thompson [1971] AC 458 at 468E, where Lord Pearson said:

“ ... It is not the right approach to say that, because there was no complete tort until the damage occurred, therefore the cause of action arose wherever the damage happened to occur. The right approach is, when the tort is complete, to look back over the series of events constituting it and ask the question, where in substance did this cause of action arise?”

136.Mr Yu referred to the various legal opinions and said that the plaintiffs have shown sufficiently that the tort was actionable in the PRC.

137.But of significance to note is that the plaintiffs did not seem to seriously dispute that the acts which gave rise to the tortious claims were committed outside Hong Kong but in the PRC.  The plaintiffs were merely saying that the injection and the listing were equally (if not more) substantial tortious committed in Hong Kong.

138.In the circumstances, and considering the matter in the round, although it is unnecessary to do no more than forming a preliminary view on the governing law, I would have thought that the issue of PRC law looms large and will undoubtedly be discussed and debated at great length if the trial took place.  If necessary, I am prepared to conclude that the governing law of the issues which give rise to the claims for breach of fiduciary duty and conspiracy is likely to be the law of the PRC.

139.Mr Yu asked me to consider and place great weight on the Sinosoft factor.  He said the Sinosoft factor was analogous to the Cambridgeshire factor in Spiliada.

140.In Spiliada, Staughton J was already hearing the action in relation to Cambridgeshire, which was a similar claim for damages involving the same shippers, at the hearing of the Order 11 application.  Although involving different plaintiff ship owners, the defendant shippers were the same and both plaintiffs were supported by the same insurers.  Staughton J refused to set aside the Order 11 leave after considering the availability of witnesses, potential multiplicity of proceedings and the accumulated experience of solicitors and counsel which would lead to substantial saving of costs and time.

141.Mr Yu specifically invited me to consider the fact that a trial against the 1^st defendant and the 8^th defendant, as well as HCA 1613 will take place in Hong Kong.

142.However, in the present case, I note that the 1^st defendant (Sinosoft), who has filed a defence and who was represented by different solicitors and counsel, has not pleaded any PRC law issue in its defence.

143.As I have said above, I have formed the preliminary view that the governing law is likely to be the law of the PRC. Although the 2^nd to 7^th defendants have not filed a defence, they have strenuously argued before this court that the applicable law is PRC law.  One would expect one of the major disputes between plaintiffs and the 2^nd to 7^th defendants would be on the issue of governing law.

144.Accordingly, insofar as the case against the 1^st defendant (ie Sinosoft) is concerned, there will be no overlap at all on a substantial part of the argument relating to the governing law.

145.The trial against the 8^th defendant (ie Ding) may have to proceed.  But since the 8^th defendant has not even entered appearance nor filed a defence more than one year has elapsed since the issue of the writ since 2 December 2013, the plaintiffs need only prove the case against him.  As Mr Chan SC, acting on behalf of the defendants in HCA 2423 (the derivative action), submitted, the plaintiffs only need do a straight-forward motion for justice.  It is unnecessary to have a contested trial.  I agree.  In fact, I doubt if much needs to be done apart from the plaintiffs confirming their case against the 8^th defendant. The hearing, which may go ahead in any event, cannot be a full-blown hearing in the usual way.

146.As regards HCA 1613, it is essentially a defamation case.  No issues of breach of fiduciary duties or conspiracy arise. The elements necessary for establishing the cause of action and the possible line of defence may not be the same as one would expect in HCA 2345.

147.Thus, I fail to see any substantial saving of costs and time.  Besides, I am carrying out a balancing exercise.  In light of the strong PRC connection, the profit to gain by the saving of costs and time by trying the issues in the PRC would outweigh trying the matter in Hong Kong. It also appears to be quite obvious that HCA 2345 is the main “battlefield” and HCA 1613 is simply a different form of expressing the plaintiffs’ grievances against some if not all of the Defendants.  I do not think the presence of HCA 1613 bears much similarity to the existence of the Cambridgeshire factor in Spiliada.

148.This deals with the Sinosoft factor which Mr Yu urged upon the court as an influential factor in considering the appropriate forum.  Suffice it to say that even taking the Sinosoft factor at its highest, it falls far short of showing Hong Kong as the clearly or distinctly more appropriate forum for the trial of the action.

149.The other point Mr Yu stressed as important in weighing the balance in favour of Hong Kong being the forum for the trial was the contention that the plaintiffs would be deprived of the advantage of compulsory discovery if HCA 2345 were to be tried in the PRC.  He said this would defeat the “ends of justice”.

150.I hasten to suggest, first, that the plaintiffs have failed to cross stage I of the three-stage test.  They bear the burden of establishing Hong Kong as the distinctly more appropriate forum.  I do not see any factor which indicates the plaintiffs’ case is divergent from the norm.  This is fatal to their application.

151.I do not have to go on to consider juridical advantage.  Nevertheless, I will, for completeness sake and in deference to Mr Yu’s assiduous arguments.

152.I repeat the quote from Spiliada at paragraph 103 hereinabove.  Furthermore, whilst considering legitimate juridical advantage, Lord Goff went on to say:

“ ... Let me consider the application of that principle in relation to advantages which the plaintiff may derive from invoking the English jurisdiction. Typical examples are: damages awarded on a higher scale; a more complete procedure of discovery; a power to award interest; a more generous limitation period. Now, as a general rule, I do not think that the court should be deterred from granting a stay of proceedings, or from exercising its discretion against granting leave under R.S.C. Ord. 11, simply because the plaintiff will be deprived of such an advantage, provided that the court is satisfied that substantial justice will be done in the available appropriate forum. Take, for example, discovery. We know that there is a spectrum of systems of discovery applicable in various jurisdictions, ranging from the limited discovery available in civil law countries on the continent of Europe to the very generous pre-trial oral discovery procedure applicable in the United States of America. Our procedure lies somewhere in the middle of this spectrum. No doubt each of these systems has its virtues and vices; but, generally speaking, I cannot see that, objectively, injustice can be said to have been done if a party is, in effect, compelled to accept one of these well-recognised systems applicable in the appropriate forum overseas. ...

... if there is another clearly more appropriate forum for the trial of the action, a stay should generally be granted even though the plaintiff’s action would be time barred there. ...”

153.This is completely in line with our three-stage test.  I also wish to point out that reams of documents have been filed in these proceedings.  This is of course, far from concluding that discovery has completed and no more discovery is needed.  My point is simply that having litigated many times in the PRC, it is very likely that the plaintiffs would have already obtained much documents which they need.  The benefit which they will derive from the compulsory discovery procedure in Hong Kong may have been exaggerated.

154.Besides, the plaintiffs’ complaint about the disadvantage which they would suffer as a result of the lack of discovery is vague.  They said since their claims include allegations of fraud and forgery, discovery of documents is pivotal, especially given that the defendants controlled the JV Company.  It is a very serious matter to suggest that a party suffers juridical disadvantages which would tip the balance in favour of one forum.  Such general allegations of the plaintiffs do not offer much help.  I would expect to be shown, if not a very long or exhaustive list, at the very least, a list of the specific classes of documents which the defendants would have in their possession and which would be crucial to the adjudication of which specific issues at the trial.  In its absence, as is the case here, I am unable to hold that the plaintiffs have satisfied stage II of the test, that is, assuming I need to travel to stage II.

155.Before leaving this topic, I need to say a few words about the plaintiffs’ submission that the Hong Kong court has the expertise to deal with difficult issues of foreign law; and witnesses can easily travel to Hong Kong.  As Stone J said in Hargreaves, the question is not really whether Hong Kong can deal with this and that.  The issue is whether Hong Kong is clearly the appropriate forum to hear the matter.

156.This is not to say that I have not taken into consideration these two factors.  The fact is that I have already considered them in the overall consideration of the shape of the trial and the fundamental focus of case.

B.4.4   Conclusion

157.It is obvious to me that Hong Kong is far from being the distinctly more appropriate forum for the trial of the matter.

B.5   Order 11 gateways

B.5.1   The law

158.The relevant sub-paragraphs of Order 11 relied upon by the plaintiffs are set out below:

(1) Sub-paragraph (c) provides that:

“ the claim is brought against a person duly served within or out of the jurisdiction and a person out of the jurisdiction is a necessary or proper party thereto;”

(2) Sub-paragraph (f) reads:

“ the claim is founded on a tort and the damage was sustained, or resulted from an act committed, within the jurisdiction;”

(3) Finally, sub-paragraph (p) reads:

“ the claim is brought for money had and received or for an account or other relief against the defendant as constructive trustee, and the defendant’s alleged liability arises out of acts committed, whether by him or otherwise, within the jurisdiction.”

B.5.2   Submissions

159.The defendants submit that the plaintiffs fail to show a good arguable case under sub-paragraphs (c), (f) or (p) of Order 11 respectively, since:

(1) In order to fall within sub-paragraph (c), the pleaded case must reveal a cause of action.  The Statement of Claim does not reveal “serious question to be tried” on the breach of fiduciary duty claim and the tort of conspiracy claim.  In this regard, Mr Law repeats his submissions above on no serious issue to be tried.

(2) Sub-paragraph (f) is relevant to the tort of conspiracy claim only.  In this case, there is no question of the plaintiffs sustaining any damage, let alone “damage sustained within the jurisdiction”.

(3) Sub-paragraph (p) is relevant to the breach of fiduciary duty claim only.  The plaintiffs fail to show a good arguable case that the liability arose from “substantial and efficacious acts committed within the jurisdiction”.  Instead, these acts took place in the PRC.

160.The plaintiffs submit that they are only required to show a good arguable case and the court should avoid pre-judgment on issues at this interlocutory stage.  In reply to the defendant’s arguments, the plaintiffs say:

(1) In respect of sub-paragraph (c):

(a) the defendants have conflated the two requirements of there being serious issues to be tried in respect of the plaintiffs’ claims and the case falling within Order 11 gateways.

(b) In any event, the plaintiffs have already shown serious issues to be tried for breach of fiduciary duties and tort of conspiracy.  Mr Yu repeats his arguments above in this regard.

(c) Further, Sinosoft (ie 1^st defendant) has not contested jurisdiction and filed a Defence, thus this clearly acknowledged that there are at least serious issues to be tried in respect of the claims against it for dishonest assistance.

(2) As to sub-paragraph (f):

(a) The requirement is that damage “resulted from” an act committed within the jurisdiction merely requires that the act in question was “substantial and efficacious” and it need not have been the sole or predominant cause of the damage: Graeme Johnston: Conflict of Laws§§5.094–5.096;

(b) The plaintiffs’ loss and damage can be said to have been sustained in Hong Kong as they (ie South China and Janful) are Hong Kong entities.

(c) The plaintiffs’ claim has passed the gateway since the loss and damage caused to the plaintiffs can be said to have resulted from certain acts committed in Hong Kong, eg listing of Sinosoft.

(3) In relation to sub-paragraph (p):

(a) The defendants have conflated the requirements of the existence of serious issues to be tried and the case falling within Order 11 gateways again.

(b) The liability arising from the breach of fiduciary duties as pleaded in Section G of the Statement of Claim, which include inter alia, the listing of Sinosoft in Hong Kong, which was committed in Hong Kong.

B.5.3   Discussion

161.This part can actually be dealt with relatively quickly as the result is made quite clear from the judgment above.

Conflating the requirements on “serious issue to be tried” and “good arguable case”

162.Mr Yu submitted that the defendants have conflated the serious issue to be tried requirement with the Order 11 gateway requirement.  My understanding of the defendants’ submission is that if the plaintiffs were not even able to raise a serious issue to be tried, eg as a result of their failure to plead a complete cause of action, there can be no good arguable case.

163.I agree.  In short, my view (and it seems implicit in Mr Law’s submission) is that raising a serious issue to be tried is a lower threshold than having a good arguable case.  If there is not even a serious issue which needs to go to trial or the case is liable to be struck out, there is no case at all, let alone a good arguable case.

Sub-paragraph (c):

164.This is relevant to both the fiduciary and the conspiracy claims.

165.The court has already held that the Statement of Claim discloses no serious issue to be tried as it offends the no-reflective loss principle.  Thus, the plaintiffs have not even pleaded a complete cause of action.

166.It follows that there cannot be any arguable case, not to mention a good arguable case.

Sub-paragraph (f):

167.This is relevant to the conspiracy claim.

168.As said, in this case, the plaintiffs suffered no damage.  Damage and loss, if any, would be suffered by the JVC.

169.Simply stated, there is no question of the plaintiffs having suffered any loss or damage, let alone damage sustained within the jurisdiction.

170.Likewise, the plaintiffs have failed to cross the sub-paragraph (f) gateway.

Sub-paragraph (p):

171.This is relevant to the fiduciary claim.

172.For the same reason as stated above, the plaintiffs have not established a complete cause of action for their fiduciary claim, the plaintiffs having suffered no loss, and have failed to cross gateway (p).

173.For the sake of completeness, the court will go on to say that the act which gave rise to the liability had to be substantial and efficacious.

174.As seen, almost all the acts which were effectively causative of the liability took place in the PRC.  I am aware the plaintiffs placed a great deal of emphasis on the injection of the software products (and the IP rights) into Sinosoft which was listed in Hong Kong, and the listing in Hong Kong itself.  I do not think these were substantial acts or acts which could be said to be the effective cause capable of giving rise to the liability. I will approach it by asking the question whether without the acts which were indisputably committed in the PRC, would there be liability.  The answer is no.  Tested this way, it is quite plain that the plaintiffs cannot cross this gateway.

B.6   Material non-disclosure

B.6.1   Legal principles

175.I do not think the law is in dispute.  Both parties refer me to Brink’s Mat Ltd v Elcombe(CA) [1988] 1 WLR 1350 which said as follows:

“ In considering whether there has been relevant non-disclosure and what consequence the court should attach to any failure to comply with the duty to make full and frank disclosure, the principles relevant to the issues in these appeals appear to me to include the following. (1) The duty of the applicant is to make ‘a full and fair disclosure of all the material facts:’ ...

(2) The material facts are those which it is material for the judge to know in dealing with the application as made: materiality is to be decided by the court and not by the assessment of the applicant or his legal advisers: ...

(3) The applicant must make proper inquiries before making the application: .... The duty of disclosure therefore applies not only to material facts known to the applicant but also to any additional facts which he would have known if he had made such inquiries.

(4) The extent of the inquiries which will be held to be proper, and therefore necessary, must depend on all the circumstances of the case including (a) the nature of the case which the applicant is making when he makes the application; and (b) the order for which application is made and the probable effect of the order on the defendant: ...; and (c) the degree of legitimate urgency and the time available for the making of inquiries: ...

(5) If material non-disclosure is established the court will be ‘astute to ensure that a plaintiff who obtains [an ex parte injunction] without full disclosure . . . is deprived of any advantage he may have derived by that breach of duty:’ ...

(6) Whether the fact not disclosed is of sufficient materiality to justify or require immediate discharge of the order without examination of the merits depends on the importance of the fact to the issues which were to be decided by the judge on the application. The answer to the question whether the non-disclosure was innocent, in the sense that the fact was not known to the applicant or that its relevance was not perceived, is an important consideration but not decisive by reason of the duty on the applicant to make all proper inquiries and to give careful consideration to the case being presented.

(7) Finally, it ‘is not for every omission that the injunction will be automatically discharged. ....’ ... The court has a discretion, notwithstanding proof of material non-disclosure which justifies or requires the immediate discharge of the ex parte order, nevertheless to continue the order, or to make a new order on terms.

‘when the whole of the facts, including that of the original non-disclosure, are before [the court, it] may well grant . . . a second injunction if the original non-disclosure was innocent and if an injunction could properly be granted even had the facts been disclosed:’ ... ”

per Ralph Gibson LJ at 1356F – 1357G.

B.6.2   Defendants’ alleged material non-disclosures

176.It is the defendants’ case that the plaintiffs made no disclosure of matters which are relevant to the court’s consideration of (i) whether or not there are serious issues to be tried; and (ii) the question of forum non conveniens.  In particular, the matters of non-disclosure are:

(1) that the NS Principals did not owe any fiduciary duties under the PRC law;

(2) the legal defences available to the defendants, such as non-recovery of reflective loss by the plaintiffs under HCA 2345; and

(3) that the plaintiffs have commenced arbitration and various actions / proceedings in the PRC and the fact that the matters could be pursued by the liquidators of the JV Company in the PRC.

B.6.3   Discussion

Non-disclosure of applicable PRC law

177.Mr Law submits that the duty to make complete and frank disclosure extends to matters of law, citing the Court of Appeal decision in East Asia Satellite Television (Holdings) v New Cotai LLC [2011] 3 HKLRD 734.

178.My view is that it is quite clear that the complaint of non-disclosure made by the defendants is established.

179.I said it is clear because although the parties have disputes as to which version of JV Agreement was the genuine one, there could be no dispute that Clause 22.1 of the JV Agreement (on both versions) was the governing law provisions — both stated the governing law to be the PRC law (“本合同應受正式公布的中國法律管轄。”).  Mr Yu tenaciously argued that the plaintiffs were not suing for breach of contract. However, it cannot be gainsaid that the JV Agreement form the basis upon which the parties’ relationship was governed.

180.It is only necessary to repeat the plaintiffs’ own pleadings at paragraphs 44 and 45 of their Statement of Claim to bring home the importance of the JV Agreement.  Paragraph 44 pleads the relationship between South China / Janful and NS / NS Principals as JV partners which gave rise to the fiduciary duties.  Paragraph 45 expressly pleads that the fiduciary duties arise as a matter of law, inter alia, “... pursuant to the terms of the JV Agreement” (emphasis added).

181.Evidently, even on the plaintiffs’ own case, the fiduciary duties arise, amongst other things, under the terms of the JV Agreement.  At §82 of East Asia (Court of Appeal, per Tang Acting CJHC (as he then was) ) the following was said:

“ 82. As Mr Strachan submitted the duty of disclosure extends to matters of law. In Memory Corp Plc v Sidhu (No 2) [2000] 1 WLR 1443, 1460, Mummery LJ said the duty to disclose encompassed ‘significant factual, legal and procedural aspects of the case’.” [emphasis supplied]

182.The fact that the fiduciary duties alleged to be owed by the NS Principals to the plaintiffs arose out of the JV Agreement which was governed by PRC law must be a significant factual and legal aspect of the case, which in my view, ought to be drawn to the court’s attention when the plaintiffs obtained leave.

183.I am aware that only the 2^nd defendant (ie Nanjing Skytech) was a party to the JV Agreement, the NS Principals were not.  However, the plaintiffs must know that all the NS Principals are PRC residents and the relevance of PRC law on fiduciary duties cannot be remote. After all, as I have said when discussing the question of forum non conveniens, this case is heavily PRC-related.  There seems little reason the plaintiffs would fail to miss this point.  At any rate, the fact that the rest of the defendants were not party to the JV Agreement does not absolve the plaintiffs’ duty to make disclosure of PRC law at least insofar as it relates to Nanjing Skytech as the 2^nd defendant.

184.I also bear in mind what the CFA said in Kayden v SFC (2010) 3 HKCFAR 696, in particular the following:

“ 36. The need for a strict approach is dictated by at least three related considerations. First, it is grounded on recognition of the need for special care given the extraordinary nature of the long-arm jurisdiction asserted under Order 11. As Lord Mustill pointed out, it involves seeking to compel a foreign defendant to submit to the adjudication by the court or suffer judgment and execution in default.

37. Secondly, as indicated in the passage from Parker v Schuller cited above, the court acts on the faith of the plaintiff’s representations made to it ex parte when granting leave for service of process abroad. Given the extraordinary nature of the jurisdiction which the court would thereby be asserting, it insists on special care on the plaintiff’s part and full disclosure of the basis upon which that jurisdiction is invoked.

38. Thirdly, as Neill LJ pointed out in Excess Insurance Co Ltd v Astra SA Insurance and Reinsurance Co:

‘... it is not only the court which must be apprised of the cause of action alleged.  The defendant must know the basis of the claim which he has to meet so that, if so advised, he can challenge the order which asserts the court’s jurisdiction over him.’ ”  [emphases supplied]

185.It is indisputable that the plaintiffs have never drawn Master Leong’s attention to any or any aspect of PRC law, especially the part of PRC law in relation to fiduciary duties: see the Affirmation of Cheung Choi Ngor dated 19 February 2014.  All the expert evidence on PRC law was filed after the ex parte hearing.

186.In fact, I find it rather alarming that the plaintiffs did not even disclose the argument that the governing law of the JV Agreement could be the PRC law when it is their own case that at least one of the defendants had breached fiduciary duties founded upon, inter alia, the terms of the JV Agreement.

187.Surely, the question of whether under PRC law the defendants owed fiduciary duties is highly relevant and material to whether there is a serious issue to be tried.  If the defendants owed no fiduciary duties under PRC law, the plaintiffs would not even be able to establish serious issue to be tried.  Given the extraordinary nature of this long-arm jurisdiction, the plaintiffs should have disclosed and disclosed fully the legal basis of his causes of action, including pertinent matters, legal or factual, which may destroy or seriously affect their causes of action.  The applicable law is undoubtedly a significant legal aspect of the case which affects leave to service out.

188.I also agree that the disclosure of the relevant PRC legal provisions is material to the court’s consideration of the question of forum non conveniens, which will also be discussed below.

189.Mr Yu relied on a decision of DHCJ Saunders, Hong Jing Co Ltd v Zhuhai Kwok Yuen Co Ltd, HCA 156/2006, 14 September 2006 unreported.  At §17 of the judgment, it was said,

“ 17. In my view it is abundantly plain ... that the question as to whether or not a defence is available to a defendant is, unless it is one which will show that the plaintiff’s claim is perfectly groundless, quite irrelevant when considering leave to serve out of the jurisdiction, either ex parte under O 11, or inter parties, under O 12 r 8(1)(c). In neither case is the court concerned with available arguable defences.”

190.The plaintiffs denied the relevance of PRC law. Mr Yu contended that there was no non-disclosure of the allegation that the defendants did not owe fiduciary duties under PRC law as the defence was baseless.  They said PRC law does not apply, and in any event, it is the plaintiffs’ case that the NS Principals do owe duties to South China / Janful akin to fiduciary duties which are actionable under PRC law.  Importantly, Mr Yu submitted that it is simply not for the plaintiffs to speculate what defences may be raised by the defendants unless the defences would render their claims totally groundless.  I do not agree.

191.Obviously, it is the applicant’s duty under an Order 11 application to show serious issue to be tried.  A defence which is or may be fatal to the applicant’s case or which may go to demolish the applicant’s cause of action and hence no serious issue to be tried, is almost certainly material matter which influences the court’s discretion on granting or refusing leave, and therefore must be disclosed and drawn to the court’s attention.  The Court of Final Appeal in Kaydenhas said that the court and the defendant must be appraised of the cause of action alleged.

192.I think Hong Jing’s case is not expressing a different view from that of Kayden. If the defence shows the claim to be groundless, it follows that there is no serious issue to be tried.  The Order 11 applicant must disclose the defence.

193.In essence, the plaintiffs’ argument boils down to whether the defence that the defendants did not owe fiduciary duties under PRC would show their claims to be groundless.  They said no and so there was no duty to disclose.

194.However, it is trite that materiality refers to significant matters which the court should know when dealing with the application.  Materiality is to be determined by the court, not the applicant or its legal team.  The test is exactly not what the plaintiffs think of the defence.  It is what the court thinks.

195.Brink’s Matsaid that the applicant is under a duty to make a “full and fair” disclosure.  Full means complete and encompasses all relevant aspects.  Fair requires a fair assessment of the materiality when the applicant makes disclosure.  In the context of anticipating a defence which may affect the question of serious issue to be tried, it is not necessary, indeed inappropriate, for the applicant to come to his own conclusion on the merits of the defence.  The test is if on a fair assessment of the case, the defence is very likely to affect the claim to the extent that there may be no serious issue to be tried, he should make the disclosure.

196.In the present case, I think there can be little doubt that the fact that the defendants would or would not be impressed with fiduciary duties under PRC law is highly important and material not only to the question of serious issue to be tried, it is also important to the question of forum non conveniens. The mere fact that heavy materials containing PRC expert legal opinions on this issue self-evidently demonstrates its materiality and the fact that this is not just some fanciful or arguable defence.

197.The least the plaintiffs should do was to inform the court that the defendants have a very respectable case to argue no fiduciary duties under PRC law.  The plaintiffs have not even done that.

198.The plaintiffs’ failure to mention this pertinent aspect constitutes material non-disclosure.

Non-disclosure of reflective loss

199.Similarly, it is the defendants’ case that the plaintiffs’ omission to mention the non-recovery of reflective loss constitutes material non-disclosure justifying the discharge of the permission to service out.

200.Likewise, I find the plaintiffs guilty of material non-disclosure.

201.Here, the defendants are not merely cavilling about non-disclosure of some available arguable defences.  As can be seen above under section B.3 hereinabove, I held that the plaintiffs’ loss is reflective loss which is impermissible in law and not recoverable.  The issue is directly relevant and material to whether the plaintiffs could cross the hurdle of showing serious issue to be tried.

202.Moreover, the issue of reflective loss is not just a legal defence.  It goes to the fundamental question whether the plaintiffs have a complete cause of action.  To make good their case or to show that there is a serious issue to be tried, the plaintiffs were obliged to disclose evidence of the loss and explain why the loss was or was not reflective loss. No evidence relating to this aspect of their case could be seen in Madam Cheung’s 1^st Affirmation.  The absence of evidence to support the kind of loss suffered by the plaintiffs is material to the question of whether the plaintiffs have a complete or good cause of action.  Its disclosure would have a material impact on Master Leong’s discretion.

203.The belated voluntary particulars of losses supplied by the plaintiffs only add strength to the materiality of the reflective loss issue.  The provision of the voluntary particulars does not help the plaintiffs’ case.  No evidence of the losses was ever filed.

204.I am satisfied that the plaintiffs’ failure to disclose the legal and factual matters relating to the issue of reflective loss constitutes material non-disclosure.

Non-disclosure of 18 sets of proceedings in the PRC

205.I now come to consider whether the plaintiffs’ failure to disclose the 18 sets of proceedings in the PRC.

206.The authorities are quite clear that disclosure of foreign proceedings in an Order 11 application is necessary.  In some cases, it was regarded as a must.

207.In Capetronic Computer Sales Ltd v Viewsonic Corp[2003] 3 HKLRD 841 at §9, Burrell J (as he then was) quoted with approval the dictum in Knauf UK GmbH v British Gypsum Ltd (No 1) [2002] 1 WLR 907 at 925, per Henry LJ that where the court was “being asked to make an exceptional order, designed to affect ... foreign parties”, it was “absolutely necessary” to bring to the court’s attention the possibility of a foreign jurisdiction prevailing over the dispute in question.

208.At §11/1/11 of Hong Kong Civil Procedure 2015 Vol 1, the learned authors had this to say:

“ Failure to disclose the existence of related proceedings abroad at the ex parte stage will usually amount to serious material non-disclosure, Pacific Aerosupplies Ltd v. Dakota Air Parts Intl, Inc. (unrep., HCA 1233/2010 ...).”

209.In Dallah Albaraka (Ireland) Ltd v Symphony Gems NV & Others [2005] 3 HKLRD 703 [11], Stone J said as follows:

“ 30. ... the further consideration arises as to whether, pursuant to O.11 r.4(2), that it has been made ‘sufficiently to appear to the court that the case is a proper one for service out of the jurisdiction under this Order’. This general provision permits the court to exercise its discretion in all the circumstances of the case, so that, for example, special considerations apply where proceedings are on foot in another jurisdiction, a fact which must be disclosed to the court since it is clearly highly germane to the decision as to whether this ‘long arm’ jurisdictional rule should be exercise.

31. Had this case come to this Court de novo, then, other things being equal it is unlikely that the new application as now made would have been affected by the ambit of r.4(2). However, this is not the position in this instance. I agree with Mr Scott that the exercise of its discretion in this application the Court is entitled to take into account the history of events, and in particular that which occurred (or, more precisely, did not occur) in the first ex parte application before Pang J on 9 July 2003. When the learned Judge was dealing with that application — in the context of a case which at that time remained solely as a suit upon the guarantees — he was asked to grant leave to the plaintiff to serve the sixth and the seventh defendants in Belgium, but he was not told a number of significant matters, all of which were relevant to the forum conveniens considerations which are inherent in the exercise of discretion under O.11.

32. The Judge was not told of the fact that the proper law of the guarantees — which was the sole cause of action asserted at that stage — was English, and that none of the parties had any connection with Hong Kong. More particularly, however, he was not told that proceedings under the guarantees had been brought, and were continuing, against the sixth and seventh defendants in Belgium for the same debt, although Mr Dinshaw refers to the fact that ‘demand’ on the guarantees has issued in Belgium, and at one stage Mr Lane makes passing reference to litigation in Belgium and the UK.

33. It is difficult to understand why such economy of reference should have been regarded as necessary.  There could have been little more material, in the context of an application to serve out, than the fact that there were existing foreign proceedings relating to precisely the same debt and involving precisely the like cause of action; as Burton J observed in the recent decision in Network Telecom (Europe) Ltd v Telephone Systems International Inc [2004] 1 All ER (Comm) 418 (wherein ‘mirror image’ proceedings had been served in the United States against the plaintiff) it is a serious matter for a foreigner to be put to the expense and inconvenience of being brought before the courts of England, and failure to make full and fair disclosure as to relevant foreign proceedings would, as in all without notice applications, justify the court in discharging the order.”

210.I again refer to the table of the PRC proceedings prepared by Mr Law as re-produced in paragraph 119 hereinabove, this time, together with comments on whether or not they were disclosed.

211.Mr Yu did not seem to seriously dispute the law.  Indeed, he said in his written submission that the test is whether the applicant had disclosed to the court all the facts that are relevant to the court’s exercise of discretion at the ex parte application.

212.Mr Yu’s broad submission was that there was no material non-disclosure as the PRC proceedings were different in nature, involving different parties and issues, and thus no disclosure had to be made.

213.At the hearing, Mr Yu went through the list of proceedings and identified the nature of the proceedings or the parties and issues involved but essentially the submission remained the same.

214.It is unnecessary to consider the PRC proceedings one by one.  Suffice it to say that I do not agree that they are irrelevant.  For example, it was Mr Yu’s submission that items 3, 5, 6, 7, 8 and 9 above were all dismissed on one ground only, namely, that the JVC was in liquidation.  With respect, why does that make the disclosure unnecessary or irrelevant?

215.A point was made that the parties were different.  But I can see that the issue involved or the cause of action was very similar.  In all these actions, the JV Company was alleging that each of the defendants individually, as opposed to all of them as in HCA 2345, had injured the interests of the JV Company.  Indeed, it is plain for all to see that the JV Company was simply pursuing against almost all the individual defendants in these present proceedings on the same ground: item 5 against the 2^nd defendant, item 7 against the 3^rd defendant, item 9 against the 4^th defendant, item 6 against the 5^th defendant, item 8 against the 7^th defendant, and item 3 against the 4^th defendant and the 7^th defendant.

216.In short, there were six dismissals of the same JV Company’s proceedings against the individual defendants in the present case over the same issue.  How can this be irrelevant, bearing in mind that in these current proceedings, the plaintiffs were alleging that Nanjing Skytech (ie the 2^nd defendant) and the NS principals (the 3^rd to 7^th defendants) were in breach of the trust and confidence reposed in them by the plaintiffs? This must strike as very similar to the complaint that these defendants (NS Principals) had injured the interests of the JVC.

217.For this reason alone, the possibility of the PRC court prevailing over the dispute in question looms large.  Even though the PRC proceedings were dismissed, they should have been disclosed.

218.Furthermore, I agree with Mr Law that even putting aside these proceedings which could be said to have been dismissed on a technical ground, one cannot ignore the proceedings under itemized as 10 to 16 and 18 in the table above.

219.For example, I would have thought item 10 was highly relevant and ought to be disclosed.  This was an action started by Janful, one of the plaintiffs herein, against, inter alia, 2^nd to 6^th defendants for wrongful competition.  One of the grounds relied upon by the plaintiffs in HCA 2345 to allege that Nanjing Skytech (2^nd defendant) and the NS Principals (3^rd to 7^th defendants) were in breach of their fiduciary duties was the fact that they had set up business in competition against the plaintiffs in the PRC.

220.Similarly, items 12 and 13 were “judicial review” or administrative proceedings initiated by Janful (1^st plaintiff) against the local Trade and Commercial Bureau, joining Nanjing Skytech (2^nd defendant) as the third party.  Of significance was that both decisions had made reference to Janful’s knowledge of the registered JV Agreement.  I said reference because I am aware that there were disputes between Mr Yu and Mr Law as to whether or not there were findings of facts in this respect.  It is unnecessary for me to conclude one way or the other.  It suffices that for the purpose of satisfying their duty of making full and fair disclosure, in my view, the plaintiffs should obviously make disclosure of these foreign proceedings as they concerned one significant factual dispute in the current proceedings, namely, whether the registered JV Agreement was a false agreement: see section G1 of the Statement of Claim.

221.Item 11 concerns arbitration proceedings against the 2^nd defendant.  I agree with Mr Law that only passing reference was made of the arbitration proceedings in exhibit 17 of Madam Cheung’s 1^st Affirmation and the passing reference was in relation to the breach of fiduciary duties.  Mr Yu submitted that there was no material non-disclosure as the arbitral award was pleaded: see p 33 section G8 of the Statement of Claim.  He said that unlike a Mareva injunction situation, the Master would have time to read the Statement of Claim and would be aware of the CIETAC arbitration in China.

222.I do not agree.  It is well settled that the duty of disclosure is not fulfilled simply by putting before the ex parte judge / master voluminous exhibits of documents covering the point to the supporting affidavit without making any distinct reference to the point in the body of the affidavit itself or when addressing the judge at the hearing.  This is because the court may not have the time to read them and to digest them in detail.  It is the duty of the legal advisors and counsel to draw the judge’s attention to everything that he must see for the purpose of the application: Siporex Trade SA v Comdel Commodities Ltd [1986] 2 Lloyd’s Rep 428, per Bingham J (as he then was); Standard Chartered Securities Ltd v Arthur Lai [1993] 1 HKC 375, per Woo J.

223.Another salient aspect of material non-disclosure lies in the suppression in Madam Cheung’s Affirmation of the fact that the JV Company, which was in liquidation, was and is carrying on litigations against the defendants.  For example, items 14 to 16.  In all three proceedings, the trial had taken place.  As at the time of the hearing in September and October 2015, I was told that judgment remained outstanding.  If the JV Company or the liquidator could pursue against some or all of the defendants in the PRC, it must be highly pertinent to the court’s consideration of whether the Hong Kong court should prevail over the dispute.

224.In conclusion, to obtain leave to serve outside Hong Kong, the plaintiffs bear the burden of satisfying, inter alia, that in all the circumstances of the case, Hong Kong is clearly or distinctly the more appropriate forum for the trial of the issues in dispute.  The fact that there were 18 sets of proceedings, of which some are still alive, some were started not long before the commencement of the current proceedings (eg item 18 was only started one month prior to HCA 2345), involving either the current defendants individually or jointly, over very similar issues, would definitely have a huge impact on the question of forum. The failure to make disclosure of these foreign proceedings itself constitutes material non-material and warrants the setting aside of the leave to serve out.

B.6.4   Re-grant of fresh leave

225.Finding material non-disclosures is not the end of the matter.  Mr Yu submitted that I can always grant new leave if I see it appropriate to do so.

226.Again, the law is not seriously disputed.

227.Brink’s Mat makes clear that a breach of the duty does not automatically discharge the leave granted, but Deputy High Court Judge A Li QC (as he then was) did emphasise that the court’s discretion not to discharge in a case where the misstatement made was not deliberate should be “exercised with great caution”.

228.In A J Lucas (Hong Kong) Ltd v. Drilltec Gut GmbH (unreported) HCCT 36/2005, 14 February 2006, Burrell J (as he then was) held at §14 that such discretion should only be exercised in a “very rare” case.

229.The question whether the non-disclosure was deliberate is relevant.  As stated in Hong Kong Civil Procedure 2015 Vol 1, at §11/4/4A, p 183, non-disclosure may be inadvertent, deliberate, a matter of poor judgment or deliberate and in bad faith for the purpose of concealment.  Where there is no intention to deceive and any re-application would be bound to succeed, ie the result with full disclosure would be the same, the court will not discharge leave: Siy Ramon v BPI International Finance Ltd[1987] HKC 317 at p 330, applyingRen Yun Liang v China Merchants Bank Co Ltd, unreported, HCA 1456/2005, 29 January 2007 at §26.

230.There is certainly no absolute bar to a renewed application for service of a writ outside the jurisdiction in cases where there has been non-disclosure of a material fact.  The court must protect its own process by preventing a party that has been at fault from obtaining an advantage: §16 of Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd & Ors [2007] 4 HKC 372 citing Wo Fung Paper Making Factory Ltd v Sappi Kraft (Pty) Ltd [1988] 2 HKLR 346.

231.Having stated the law, I will immediately say that the question of granting fresh leave needs not be considered at this inter partes hearing for the simple reason that I have set aside leave on the basis that (a) Hong Kong is not the appropriate forum for the trial of the dispute; and (b) the Statement of Claim raises no serious issue to be tried as the claim was for incurably reflective losses.  There is simply no point in granting fresh leave.

C.   HCA 1613

C.1   2^nd defendant’s summons to set aside the ex parte leave to serve the concurrent Writ out of jurisdiction

232.In HCA 1613, the only summons before me is taken out by the 2^nd defendant, Madam Xin, dated 18 August 2015 to set aside the order by Master Leong dated 26 February 2014 granting leave to the plaintiffs (on ex parte basis) to serve the concurrent writ outside the jurisdiction and to stay the action in favour of the courts in Nanjing, PRC.

233.I shall not repeat myself on the legal principles governing setting aside such leave, upon which the parties have no dispute.

234.To advance her application to set aside, the 2^nd defendant argues that the plaintiffs have raised no serious issue, on the following grounds:

(1) no personal liability of Madam Xin (2^nd defendant) who is only a director of Sinosoft (1^st defendant): see Section C.2.1;

(2) non-assignability of the libel claim by South China (2^nd plaintiff) to TS:see Section C.2.2; and

(3) failure of the plaintiffs to plead particulars of the nature of the probable damage under section 24 of the Defamation Ordinance (Cap 21): see Section C.2.3.

235.In addition, the 2^nd defendant also accused the plaintiffs for material non-disclosure on law: see Section C.3.

236.It is noted that in the same summons, the 2^nd defendant also raised the arguments of:

(1) forum non conveniens;

(2) failure to demonstrate the case falls within Order 11, rule 1(1)(b), (c) or (f) gateways; and

(3) that “the Plaintiffs’ claims in this Action are brought with a collateral motive and/or constitute an abuse of the process of the Court and/or would prejudice, embarrass the fair trial of this action”.

237.However, when the summons was before me for substantive arguments, no argument on the above three grounds was ventilated whether in writing or orally.  As such, I would not deal with these grounds in my judgment and shall treat the 2^nd defendant as having abandoned these three grounds.

C.2   No serious issue to be tried

C.2.1   No personal liability of Madam Xin as a director only

238.It is Mr Law’s submission that the Prospectus containing the offending words relied upon by the plaintiffs as founding the causes of action on libel, alternatively, the tort of malicious falsehood, was published on the authority of Sinosoft’s (1^st defendant) board of directors of which Madam Xin (2^nd defendant) was a director.

239.Mr Law said that the publication, which was an essential element constituting libel or malicious falsehood must be done by the defendant: Gatley on Libel and Slander (12^th Ed) at §6.1.

240.Here, the publication was done by Sinosoft.  No personal tort was pleaded against Xin.  Xin’s participation on the board of Sinosoft did not render her personally liable for the libel or tort of Sinosoft.

241.I think this point can be dealt with relatively quickly.

242.Mr Law relied heavily on Merit Consultants Intl Ltd v Chandler (unreported) 2014 BCCA 121, British Columbia Court of Appeal paragraph 23 which says:

“ 23. ... No ‘independent’ or ‘personal’ tort was pleaded and no allegation was made that the Directors had acted other than bona fide in the best interests of Redfern and Redcorp. ..., it cannot be said on the evidence before the Court that the conduct of the directors exhibited a ‘separate identity or interest’ from that of the companies; that there was some activity that took the Directors ‘out of the role of directing minds of the corporation’, as referred to in Scotia McLeod at 720; nor that the conduct complained of consisted of physical injury, property damage or nuisance as referred to in ADGA at para. 26, or fraud or dishonesty, ....

24. I see the case at bar as an example of a claim made against the directors of a corporation ‘in circumstances which give the appearance of the desire for ... leverage in the litigation process.’ ... the Directors were sued because Merit’s actions against Redfern and Redcorp were the subject of a stay under the CCAA.  I see no principled basis on which, if defamation were proved, liability should be shifted to the Directors.  ... and in any event, those directors whose role was limited to voting in favour of the resolution authorizing the impugned publication were found not to have ‘published’ the letter in issue.”

243.It seems clear enough that here the 2^nd defendant cannot even fully avail herself of the authority she cited.  The paragraph relied upon by the 2^nd defendant said that noallegations were made against the directors to have acted other than “bona fide in the best interest of the company”, or with a “separate interest” from the company, and involving “fraud or dishonesty”.   Clearly the plaintiffs’ allegations against Xin as director are precisely the opposite of the allegations against the directors in Merit Consultants.

244.The plaintiffs have actually pleaded malice against the defendants including Madam Xin and it suffices to quote from paragraph 26 of the Amended Statement of Claim to show that Merit Consultantsdoes not help the defendants:

“ Further or alternatively, the offending words constitute malicious falsehood wrongfully published or caused to be published by the 1st and/or 2nd Defendants.

...

Particulars of Malice

The 1st and 2nd Defendants well knew that the Offending Words were false and that the true cause of the losses sustained by Nanhua was fraudulent acts and wrongdoings as pleaded in Section E above, but chose instead to shift the responsibilities as regards the losses sustained by Nanhua to the 1st Plaintiff and the 2nd Plaintiff (as represented by its nominee the 1st Plaintiff) by means of the Offending Words with a view to injuring reputation of the 1st and 2^nd Plaintiff and concealing the true facts pointing to Nanjing Skytech, the Senior Management (designated and controlled by Nanjing Skytech and the NS Principals) and the NS Principals (under the leadership of the 2nd Defendant) as being the truly responsible parties for Nanhua's losses.  As to the knowledge of the 1st and 2nd Defendants, the matters pleaded in Section F above are repeated.”

245.Section E refers to the fraudulent acts by Nanjing Skytech and the NS Principals in relation to Nanhua and Section F pleads the knowledge of the two defendants on the matters stated in sections B, C, D and E of the Amended Statement of Claim.

246.Mr Yu was correct to point out that the pleading has gone beyond the fact that Xin was just a director sitting on the board voting in favour of publication of the Prospectus, but rather she had full knowledge of the falsity of the offending words complained of but nonetheless procured and authorised its publication.

247.I express my agreement with Mr Yu’s submission that it is trite that any person who procures or participates in the publication of a libel will be jointly and severally liable for the damage suffered by the claimant: Gatley on Libel and Slander 12^th Edn §6.11, §6.23; and any person who has authorised or participated in the publication of a libel is treated as publishing the libel and liable on his own: Gatley §8.30.

248.Here, the plaintiffs’ case has gone beyond mere authorisation or participation.  Their case is that Xin has authorised and participated with full knowledge that the offending words were untrue.

249.As a matter of fact, paragraph 6.1 of Gatleycited by the 2^nd defendant which said that “the matter must be published by the defendant” referred to a footnote 3 which said:

“ ³ In Lysko v Braley (2006) 79 O.R. (3d) 721 Ont. CA it was held that publication must be by an identified defendant.

‘Proving that one or more of a group of four people, not alleged to be acting in concert and not alleged to otherwise be responsible for each other’s actions, defamed the plaintiff, does not make out a case against any of them.  Absent proof of vicarious liability or actions in concert, we do not make individuals liable for the anonymous acts of others’: at [94].”

250.What that means is that the publisher of the libellous statements or words must be identified and the basis of the publisher’s responsibility articulated.  In the present case, the plaintiffs have clearly identified both defendants, including Xin (2^nd defendant), who procured publication of the offending words and allegedly had full knowledge of the falsity of those words.  It is not the case, as 2^nd defendant now suggested, that the plaintiffs had made no allegation against Xin’s participation or involvement other than merely as a director who carried out her duty by sitting on the board and voting in a bona fide manner in the interest of the company.  On the contrary, the plaintiffs were pleading that she exactly was not.

251.I also note that the 2^nd defendant did not seem to dispute that a participant in the publication may be liable — and the plaintiffs need no more than showing that at this stage to raise a serious issue to be tried.  Even where a director may be absolved from liability absent mala fides, fraud or dishonesty as suggested in Merit Consultants, the plaintiffs’ pleading of malice has clearly taken the case outside the application of Merits Consultants.  I am also satisfied that Merits Consultantsis very much a case of its own as the British Columbia Court of Appeal noted the allegations against the directors as a “desire for ... leverage in the litigation process”.

252.For the same reason that malice has been pleaded against the defendants, I do not think it is necessary to go into detail Mr Yu’s argument on the unavailability of the Said v Butt exception [12] to the 2^nd defendant.  Moreover, it was said in Said v Butt that a director who actually participated or authorised the commission of the tort may be personally liable as a joint tortfeasor.  In any event, Mr Law did not rely on the Said v Butt exception.

253.This disposes of the first point raised by Mr Law.

C.2.2   Non-assignability of libel claim

254.Mr Law, on behalf of the 2^nd defendant (ie Madam Xin), submitted that there is no serious issue to be tried insofar as TS is concerned as the libel claim is personal to South China. Accordingly South China could not assign the cause of action to TS.  However, the 2^nd defendant did not dispute and is prepared to assume that the claim for malicious falsehood could be assigned to TS.

255.South China was the original plaintiff in both HCA 2345 and HCA 1613.  By a series of transactions involving, inter alia, the transfer of the entire beneficial ownership of Janful (which previously vested in South China) to TS, South China had assigned its right and benefit of its causes of action in both proceedings to TS in September 2014.

256.An ex parte application was made and order granted on 18 September 2014 substituting TS for South China as the plaintiff pursuant to Order 15, rule 7 of the RHC.  The defendants did not apply to discharge the order for substitution within the time prescribed by the rules.  I agree with Mr Yu that it is thus not open to the defendants to effectively challenge the validity of the ex parte order by challenging the validity of the assignment.  The proper time and place to do it was to seek to discharge the ex parte order.

257.This disposes of the defendants’ argument.  I shall consider the legal arguments purely for the sake of completeness and in deference to counsel’s submissions.

258.Mr Yu cited Vaidya v General Medical Council [2010] EWHC 984, which held that a claim in malicious falsehood was not personal and can pass to the claimant’s trustee in bankruptcy.

259.The defendants relied on Beckham v Drake (1849) 2 HLC 579; Wilson v United Counties Bank Ltd[1920] AC 102 which were applied in our Court of Appeal in Chung Kau v Hong Kong Housing Authority [2004] 2 HKLRD 650, the relevant parts of which said:

“ 8. ... A bankrupt retains the right, without any interference from the Official Receiver as trustee in bankruptcy, to bring or continue any proceedings (including appeals) relating to claims which are personal to him: see Heath v Tang [1993] 1 WLR 1421 at p.1423. By ‘personal’ are meant claims which relate to the bankrupt’s body, mind or character without immediate reference to his rights of property: see Beckham v Drake (1849) 2 HL Cases 579 at p.604; Wilson v United Counties Bank Ltd [1920] AC 102 at p.130; Heath v Tang at p.1423A–B. Thus, personal claims include claims for damages for personal injuries and defamation. The rationale here is that compensation awarded for personal injuries or defamation will represent, in monetary terms, that part of a person (for example, his limbs or the use of them) or his reputation that has been lost or harmed. These types of claim do not involve his property. And where a bankrupt seeks, for example, to appeal against an injunction against him to curtail a nuisance said to have been committed by him, he can do so: this would be a claim against him personally in contradiction to one that involved his property (such as, for example, an injunction to prevent a breach of contract).”

260.On behalf of the plaintiffs, Mr Yu submitted that the Defendants have not correctly and fully stated the current state of the law.  Mr Yu said the preferred view is that the right to receive compensation on account of a tort is itself a chose in action and is assignable:

“ It has traditionally been said that a right of action in tort is not assignable. This is understandable on historical grounds, for it is in the nature of such causes of action that they arise independently of agreement: it is thus harder to see what additional interest the assignee could have in taking an assignment of a tortious cause of action.

That said, a broad prohibition on the assignment of tortious rights of action is today obviously unsustainable. ...

More generally, it is difficult to see why, in the context of ‘parallel’ causes of action, an assignment of the cause of action sounding in contract can be valid, when the assignment of the cause of action sounding in tort is not. ... There are now a number of cases where it has been held that a tortious cause of action is capable of being assigned.

It has also often been considered that claims for personal injury and defamation are not assignable.  However, following the recent decision of Simpson v Norwich University Hospital, it now appears that the better view is that the right to receive compensation on account of such torts is itself a chose in action which, as it bears the hallmarks of property, should be capable of assignment.  Nonetheless, in the same decision it was emphasized that such assignments will often give rise to considerable practical difficulties, and that they are in any case likely to be void as savouring of champerty.”

See The Law of Assignment, 2^nd edn, §§23.54 – 23.57.

261.It is necessary to see what was said in Simpson v Norfolk[2012] QB 640:

“ 7 ... the judge was right in my view to identify as the first question for decision whether the assignor’s claim against the hospital was capable of assignment at all. At one time it might have been doubtful whether a claim of this kind was properly to be regarded as a ‘legal thing in action’ within the meaning of section 136 of the Law of Property Act 1925, since the expression ‘chose in action’ was used principally to denote property of a kind that could be obtained only by legal proceedings. A right to receive maintenance under an order of the court is not, for example, a legal thing in action and for that reason is incapable of assignment: see Taylor (formerly Kraupl) v National Assistance Board [1956] P 470. Whether a right to recover compensation for personal injury caused by negligence can properly be regarded as a form of property might at one time have been open to argument, but in my view the expression ‘legal thing in action’ is wide enough to encompass such a claim and support for that conclusion can be found in the decision in Ord v Upton [2000] Ch 352, to which I shall return in a moment. It is difficult to see why a claim for damage to property caused by negligence should not be regarded as a chose in action and capable of assignment and if that is so, I can see no reason in principle why a claim for damages for personal injury should not be regarded in the same way. Indeed, the reasons given in the authorities for not permitting the assignment of a bare cause of action, namely, that to do so would undermine the law on maintenance and champerty, tends to support the conclusion that a claim of that kind is to be regarded as a chose in action and inherently capable of assignment.

8 Section 136 of the 1925 Act re-enacted with minor changes section 25 (6) of the Judicature Act 1873 (36 & 37 Vict c 66). Despite the unrestricted terms of the earlier legislation, the Divisional Court (Lord Alverstone CJ, Darling and Channell JJ) held in Torkington v Magee [1902] 2 KB 427 that the effect of the legislation was essentially procedural and that it did not render choses in action that had not previously been assignable in equity capable of assignment: see Chitty on Contracts, 30^th ed (2008), vol 1, ch 19 and Halsbury’s Laws of England, 5^th ed, vol 13 (2009), paras 92 and following. These include choses in action that are considered to be essentially personal in nature: see Chitty, para 19–054 and Halsbury, para 100. The judge considered that a claim for damages for personal injury falls into that class and given the nature of such a claim I can well understand why he should have reached that conclusion. However, I am not persuaded that he was right to do so. The critical question for these purposes is whether the identity of the person to whom the obligation is owed is an essential aspect of it: see Tolhurst v Assocaited Portland Cement Manufacturers (1900) Ltd [1902] 2 KB 660, 676–677. Thus, in Peters v General Accident Fire & Life Assurance Corpn Ltd [1938] 2 All ER 267 a policy of motor insurance was held, not surprisingly, to be personal to the original policyholder and incapable of being assigned to a purchaser of the vehicle in respect of which it had been issued, since the identity of the insured was material to the risk undertaken by the insurer.

9 Although the right to recover damages for personal injury depends on proof of a wrongful act or omission causing harm to the person of the claimant, the obligation to pay compensation, which arises by operation of law, is not one that is personal in the sense that it depends upon the identity of the claimant. It is difficult to see, therefore, that the nature of the obligation itself can be affected by an assignment to a third party. It is true that various practical consequences and even inconveniences of the kind identified by the judge may result from the claims being pursued by an assignee, but they are consequences of a kind that are inherent in any procedure under which an assignee can sue in his own name without joining the assignor. Complications relating to the provision of statements of truth, disclosure, set-off and counterclaim and other procedural matters to which the judge referred may arise whenever an assignee takes advantage of section 136 of the 1925 Act to sue in his own name and do not of themselves provide grounds for holding that a chose in action of this kind is incapable of being assigned.

10 In Ord v Upton [2000] Ch 352 the court had to consider whether a claim for damages for personal injury caused by negligence was transferred by operation of law to the claimant’s trustee in bankruptcy. ...

...

12 As I indicated earlier, the decision supports the conclusion that a right to recover damages for personal injury, even where no compensation for loss of earnings is claimed, is a legal thing in action and a species of property, but it does not support the conclusion that it is property of a kind that is inherently incapable of assignment.  The court held that for the purposes of the law relating to bankruptcy a right to compensation for pain and suffering and loss of amenity is not property of a kind that vests in the trustee.  It leaves open the question whether it is property of a kind that is inherently capable of being assigned by the bankrupt himself.  For the reasons I have given I think it is.  Moreover, the claim in the present case is also of a hybrid nature and the right to compensation is not purely of a personal nature.  For that reason also I do not think that the judge was right to strike out the claim by the claimant on the grounds that the claim was personal and therefore incapable of being assigned to her.”

262.This is an interesting question which (fortunately for me), does not require resolution at this stage.  The reason is simply that this is an Order 11 application and all that the plaintiffs need to show is a serious issue to be tried.  On the existing materials, obviously, the plaintiffs have shown a serious to be tried.  The law on the issue of assignability of the libel claim is not settled and it does appear there are arguments on both sides.  Applying the test for serious issue to be tried and ask the question whether the claim would survive a strike-out application:Dong Shing F & T Co Ltd v Hanmec Co Ltd[2010] 5 HKLRD 261 per Fok J (as he then was) at §42, the answer must be yes.  Further, as said by Ma CJHC (as he then was), it may not be appropriate for the court to resolve disputes of law at the Order 11 stage: Noble Power Investments Ltd v Nissei Stomach Tokyo Co Ltd [2008] 5 HKLRD 631 at §18.

263.That having said, in deference to submissions made by counsel, I offer my humble view that I am inclined to associate myself with the reasoning given by Moore-Bick LJ in Simpson. If necessary, I would be prepared to hold that the libel claim is capable of being assigned by South China to TS.

264.Although Simpsonwas about the assignment of a personal injury claim, the reasoning equally applies to a libel claim.  In a personal injury claim, the right to recover damages depends on proof of a wrongful act or omission causing harm to the body of the claimant; in a libel claim, the right to recover damages depends on proof of a wrongful act causing harm to the name / character of the claimant.  I see no reason why if the right to receive compensation, which was held in Simpsonas a “legal thing in action”, is assignable in a personal claim, is incapable of being assigned in a libel claim.

265.Mr Law relied on the CA decision in Chung Kau.  In that case, the plaintiff was a bankrupt [13].  He argued that he should be permitted to pursue a defamation action against the Housing Authority.  The Official Receiver objected.  The Court of Appeal held that under the Bankruptcy Ordinance, once a person was adjudicated bankrupt, the Official Receiver took charge of his property and determined whether a right of action vested in the bankrupt within the meaning of “property” under section 2 of the Ordinance.  But the bankrupt retained the right to bring proceedings which were personal to him which included a claim for damages for defamation.

266.Chung Kau was decided in 2004 and the Court of Appeal did not have the benefit of reading Simpson,a 2012 case. More importantly, Chung Kau was a case relating to what property vests in the Official Receiver upon bankruptcy.  It was not a case on whether the defamation claim was a chose in action capable of being assigned.  It was not about assignability at all.  The fact that upon bankruptcy an action did not vest in the Official Receiver within the meaning of section 2 of the Bankruptcy Ordinance does not necessarily mean that the bankrupt was incapable of assigning the right of action.

267.For these reasons, I reject Mr Law’s submission that the plaintiffs have raised no serious issue on the question of assignability.

C.2.3   Failure of the plaintiffs to plead particulars of the nature of probable damage under section 24 of the Defamation Ordinance

268.On behalf of the 2^nd defendant, Mr Law submitted that as regards the tort of malicious falsehood, the plaintiffs have only pleaded section 24 of the Defamation Ordinance, but have failed to plead the particulars and nature of the probable damage under section 24 which they said was more likely than not to have been caused by the publication of the Prospectus.

269.The section says:

“ (1) In an action for slander of title, slander of goods or other malicious falsehood, it shall not be necessary to allege or prove special damage–

(a) if the words upon which the action is founded are calculated to cause pecuniary damage to the plaintiff and are published in writing or other permanent form; or

(b) if the said words are calculated to cause pecuniary damage to the plaintiff in respect of any office, profession, calling, trade or business held or carried on by him at the time of the publication.

(2)   ...”

270.Paragraph 28 of the Amended Statement of Claim reads:

“ 28. The Offending Words were calculated by the 1^st and/or 2^nd Defendants to cause pecuniary damage to the 1^st and/or 2^nd Plaintiff in respect of their trade or business. The Plaintiffs shall rely upon section 24 of the Defamation Ordinance (Cap. 21) insofar as it may be necessary to do so at trial.”

271.There is not much dispute that loss and damage forms an essential element of the malicious falsehood claim.  It is accepted that the general principle is that actual damage must be alleged and proved. But there is an exception to this general principle: where section 24 is invoked, it is not necessary to plead and prove actual damage.

272.In the present case, Mr Law (on behalf of the 2^nd defendant) submitted that the plaintiffs are unable to raise a serious issue to be tried as the plaintiffs have failed to articulate the particulars relating to the nature of the “probable damage” under section 24. §21.14 of Gatley, 12^th Edn, said as follows:

“ Under the provisions of s. 3 (1) of the Defamation Act 1952 [14], it is not necessary to allege or prove special damage:

(a) if the words upon which the action is founded are calculated to cause pecuniary damage to the plaintiff and are published in writing or other permanent form; or

(b) if the said words are calculated to cause pecuniary damage to the plaintiff in respect of any office, profession, calling, trade or business held or carried on by him at the time of the publication.

Broadcasting is publication in permanent form, and so is publication of words in the course of a performance of a play.  ‘Calculated to’ in this context has been accepted as meaning ‘more likely than not’.  The claimant must plead and prove with sufficient particularity that it was more likely than not that the damage referred to in s. 3 was caused by ‘the words upon which the action is founded’.  This requires him to give particulars of the nature of the allegedly probable damage and the grounds relied on for saying that it is more likely than not.  However, since the claim is one for general damages it is unnecessary for the claimant to identify the amount of pecuniary loss that it is said the falsehoods were calculated to cause.  All that is required in order to make the nature of the case clear is identification of the nature of the loss and the mechanism by which it is likely to be sustained.”  [emphasis supplied]

273.Gatleyrelied on paragraph 66 of Tesla Motors Ltd v BBC [2011] EWHC 2760 (QB) for the above propositions.  This paragraph in Tesla, which was also heavily relied on by Mr Law, said:

“ 66. In my judgment if a trader, such as each of the Claimants in this case, makes a claim for malicious falsehood and, as he is entitled to do, he relies not on any actual damage, but on probable damage such as is referred to in the 1952 Act section 3, the Claimant must nevertheless give particulars of the nature of the allegedly probable damage and the grounds relied on for saying that it is more likely than not. For example, if what is relied on is the probability of such a trader having to incur expenses in advertising and other forms or publicity in order to counter the effects of the alleged falsehoods, then the Particulars of Claim should identify that probable damage. On the other hand, the damage which, it is said, is more likely than not to be a consequence of the alleged falsehood, may be delay in sales of a given number of vehicles, or loss of sales of a given number of vehicles, or the difference between the price at which vehicles will be saleable following publication of the falsehood complained of and the higher price at which it is said they would probably have been saleable but for the publication of the falsehood complained of. In such cases, then the Particulars of Claim should likewise identify that probable damage.” [15]

274.In Tesla, the plea of damage was almost the same as the plaintiffs’ plea in the present case: paragraph 27 of Tesla [16], and it was the defendant’s complaint in Tesla that the plea was wholly inadequate.  I note that paragraph 36 of Teslais also relevant:

“ 36 ... this is necessary to enable a judge to investigate at an early stage in the proceedings whether the allegation is one of a real and substantial tort. It is also necessary to enable the defendant to assess its potential liability (with a view to making an appropriate proposal in accordance with the modern practice of encouraging early settlement, or a part 36 offer) and to allow a defendant to plead its case and define the scope of the disclosure required and to determine what witness evidence should be sought. He refers to the Pre-Action Protocol For Defamation para 3.2, which requires that a letter of claim should include details of any particular damage caused by the words complained of. It is particularly important where, as here, the relevant damage is subject to the principle of remoteness, that is to say it must (as stated by Glidewell LJ) follow ‘as the direct and natural result of [the] publication [complained] of’.”

275.Moreover, at paragraph 26.42 of Gatley, it was further pointed out that:

“ Where the claimant pursues a claim for slander of good, slander of title or other malicious (or injurious) falsehood, there are different requirements of pleading. The claimant must plead the issue of publication with equal particularity as in libel or slander, and although he is not required by the rules of court to plead the meaning or meanings of the published words, it will usually be appropriate to do so. The claimant must also specifically allege that the words were false and that they were published maliciously. He should set out the factual respects in which the words complained of are alleged to be untrue and he should give particulars of the facts and matters on which he relies to support the allegation of malice. Before settling any document containing an allegation of malicious falsehood, a pleader should satisfy himself not only that he has clear instructions to make the allegation but also that the material on which it is based is of such a character as to lead a responsible lawyer exercising an objective professional judgment to conclude that serious allegations could properly be based upon it. Finally, the claimant must allege either that the words were calculated to cause pecuniary damage and must give particulars of the nature of the alleged probable damage and the grounds relied on for saying that damage is more likely than not or that they did in fact cause such damage and again particularise that loss. In the latter case, the claimant should give particulars of the damage and show sufficient nexus between the publication of the words and the damage. In an appropriate case a claimant suing for malicious falsehood may make a claim for aggravated damages in respect of injury to feelings.” [emphasis supplied]

276.Thus, I think it is clear that the 2^nd defendant is submitting that the plaintiffs have not pleaded any special damage, but seek to invoke section 24.  As such, it is not enough just to plead the section but it is incumbent upon the plaintiffs to articulate that the nature of the probable damage contemplated under section 24 was more likely than not caused by the words complained of.

277.On the other hand, Mr Yu relied on Joyce v Sengupta [1993] 1 WLR 337 on striking out of pleadings on a claim based on the tort of malicious falsehood.  The plaintiff in Joycerelied on both special and general damages.  Nicholls VC gave judgment and said that the plaintiff had to give particulars of the financial loss she claimed to have suffered.  At p 346H:

“ ... Suffice it to say, on the first claim, the plaintiff will need to give particulars of the financial loss she claims to have suffered sufficient to ensure that the defendants will not be taken by surprise by any evidence she may adduce on the amount of her loss. As to the second claim, this is an allegation of general damage. In support of this claim the plaintiff cannot adduce evidence of actual loss: see Calvet v Tomkies [1963] 1 W.L.R. 1397, 1400, per Lord Denning M.R. I do not accept, however, that in consequence the award under this head must necessarily be nominal only. In Fielding v Variety Incorporated [1967] 2 Q.B. 841 the malicious falsehood lay in falsely describing the ‘Charlie Girl’ show in London as a disastrous flop. Only nominal damages of £100 were awarded in that case because there was no likelihood of the words damaging the success of the show in London or prejudicing the chances of a production in the United States. That case is not authority for the proposition that, in the absence of evidence of actual loss, a plaintiff who relies on section 3 can recover only nominal damages. The whole purpose of section 3 was to give the plaintiff a remedy in malicious falsehood despite the difficulty of proving actual loss. A plaintiff is seldom able to call witnesses to say they ceased to deal with him because of some slander that had come to their ears. In consequence actions for malicious falsehood had become extremely rare: .... Section 3 was enacted to right this injustice. The section would fail in its purpose if, whenever relied on, it could lead only to an award of nominal damages.”

278.Relying on the above, the plaintiffs said Joyce supported that no particulars need to be given in respect of the probable damage which was said to be caused by the falsehood. With respect, I really do not see this paragraph ofJoyce was making this point.  The paragraph was suggesting that the plaintiff must give particulars of the financial loss.  Reliance on section 3 of the 1952 Act (equivalent of section 24 of the Ordinance) cured the defect of a plaintiff’s difficulty/inability to prove actual loss; and it would therefore be ridiculous to limit the award to nominal damages only.  With respect, it does not support the plaintiffs’ argument that no particulars of the probable damage under this section were required.

279.Next, Mr Yu cited Calvet v Tomkies [1963] 1 WLR 1397 which said at p 1400 that:

“ ... All I would say is that as I read this new section, section 3 of the Defamation Act, 1952, it gives a benefit to a plaintiff in that it is not necessary to plead or prove special damage if the words are calculated to cause pecuniary damage. The plaintiff in this case has taken advantage of this new Act so as to avoid pleading or proving special damage. Having taken advantage of the Act in that way, it seems to me that she is saddled also with the consequences of it. She must be confined to the allegation that the words are calculated to cause pecuniary damage. She can ask the jury to say that the words are calculated to cause pecuniary damage but she cannot introduce by a side-wind evidence of special damage without pleading it. ...”

280.Calvetwas cited in Joyceto support the proposition that reliance on section 3 disentitled the plaintiff to adduce evidence of actual loss.  This is clear from the paragraph quoted above.  Insofar as the plaintiffs were trying to rely on Calvet to say it was unnecessary to plead special damage, I do not think it is disputed at all.  The point made by the 2^nd defendant, as I understand it, is that particulars of the nature of the pecuniary damage likely to be caused by the words upon which the action is founded must be pleaded.  Obviously, Calvetdoes not help the plaintiffs at all.  Calvetwas about no evidence on actual loss can be adduced if section 3 of the Act is invoked (or section 24 of the Ordinance).

281.Indeed, the necessity to plead particulars of the facts relied upon to support the plead of probable damage within the statute is supported by the plaintiffs’ own authority: see §38–07 of Bullen & Leake & Jacob’s Precedents of Pleadings, 7^th Edn, Vol 1 which reads:

“ Malice and special damage. The claimant must also plead in the particulars of claim the facts on which he relies to prove actual malice and, if s. 3 of the Defamation Act 1952 is relied on, an appropriate paragraph to bring the claim within the statute (see Tesla Motors Ltd v BBC [2011] EWHC 2760 (QB) for discussion about pleading particulars to a s. 3 plea). If special damage is alleged, full particulars of the loss should be given and sufficient causal nexus between the publication of the words and the damage. ...”

282.Mr Yu seeks to distinguish Tesla, submitting that the need to give full particulars of the probable damage in that case was due to the fact that causation was a huge problem for the plaintiff, Tesla.  In Tesla, the programme containing the offending words was broadcast in 2008 but proceedings were not issued until 2011, over two years later, and therefore subject to the one-year limitation which limited the claims for malicious falsehood to re-publications that took place within 12 months immediately prior to the commencement of the proceedings.  Mr Yu said Teslais an exceptional case which ought to be confined to its own facts.

283.With respect, I disagree.  First, the plaintiffs have not produced any authority which supports their proposition that loss and damage which is more likely than not to have been caused by the offending words complained of upon which the action is based need not be particularized.  I have set out at great length above all the authorities cited by the plaintiffs. None of them in fact help the plaintiffs or support their contention.  Gatley, cited by both the plaintiffs and defendants, actually relied onTesla to make the point that probable damage must be particularized.

284.In Tesla, at paragraph 36, which I find useful, reinforces the point that particulars of the nature of the loss and damage are essential to facilitate investigation by the judge and enable the defendant to know the case they are facing.

285.I also bear in mind that this is an Order 11 application, the burden is on the plaintiffs to plead a completed case before leave to serve out should be granted.  Loss and damage is an essential element of the plaintiffs’ case.  Failure to plead particulars of the loss and damage in order to show the causal nexus between the publication of the words and the damage is fatal to the plaintiffs.

286.This leads to the conclusion that the plaintiffs have not raised a serious issue to be tried.

C.3   Material non-disclosure

287.It is the defendants’ case that the plaintiffs have committed material non-disclosure as they have failed to disclose the two significant matters of law to the Master when obtaining leave, namely:

(1) that a director (ie Xin) would not be personally responsible for the libel published by the company (ie Sinosoft); and

(2) the non-assignability of the personal cause of action of libel to TS.

288.I have already held above that I do not think the plaintiffs had raised no serious issue to be tried because Xin was not personally liable or the libel action was non-assignable to TS.  Further than that, on Xin’s liability, I consider the defence unarguable.  As said above, Mr Law’s proposition was not even supported by Merits Consultant, his own authority.  It cannot be the plaintiffs’ duty of disclosure to anticipate all defences which might or might not be available to the defendants. Such unarguable defence certainly cannot be said to be within the plaintiff’s anticipation.

289.As regards the question of non-assignability, equally, I find no material non-disclosure.  South China was the original plaintiff in both HCA 2345 and HCA 1613.  By a series of transactions involving, inter alia, the transfer of the entire beneficial ownership of Janful (which previously vested in South China) to TS, South China had assigned its right and benefit of its causes of action in both proceedings to TS in September 2014.  An ex parte application was made and order granted on 18 September 2014 substituting TS for South China as the plaintiff pursuant to Order 15, rule 7 of the RHC.  The defendants did not apply to discharge the order for substitution within the time prescribed by the rules.  I agree with Mr Yu that it is thus not open to the defendants to effectively challenge the validity of the ex parte order by challenging the validity of the assignment.  The proper time and place to do it was to seek to dissolve the ex parte order.  In short, this is not a question of material non-disclosure.  The defendants are now estopped from disputing the validity of the assignment.

290.In short, there is no material non-disclosure as alleged by Mr Law.

C.4   Conclusion

291.On the single ground that the plaintiffs failed to show a serious issue to be tried by failure in pleading particulars and probable damage under section 24 of Defamation Ordinance, I shall set aside the leave to serve out of the jurisdiction.   Again, I cannot re-grant the leave in this circumstance.

D.   HCA 2423

D.1   Parties’ summonses

292.In HCA 2423, Sinosoft’s minority shareholders commenced a derivative action against some of the NS Principals.  Five summonses were argued before me:

(1) the 1^st to 4^th defendants’ summons dated 23 December 2014 to (a) set aside and/or discharge the leave granted to the plaintiffs to serve the concurrent writ out of jurisdiction and (b) stay of proceedings on the grounds of forum non conveniens under Order 12, rule 8 of the RHC (the “Stay Summons”);

(2) the plaintiffs’ summons dated 6 January 2015 for judgment to be entered against 1^st to 4^th defendants in default of filing of the Defence (the “Judgment Summons”);

(3) the 1^st to 4^th defendants’ summons dated 7 January 2015 for extension of time to file their Defence (the “Time Summons”);

(4) the plaintiffs’ summons dated 8 January 2015 to strike out the Stay Summons (the “Strike Out Summons”); and

(5) the 1^st to 4^th defendants’ summons dated 2 July 2015 to amend the Time Summons (the “Amendment Summons”).

293.Before dealing with each summons, I would allow the Amendment Summons with costs to the plaintiffs.  The Amendment Summons is purely technical and only seeks to add Order 2, rule 4 as margin notes of the Time Summons.  The plaintiffs have sensibly indicated they are not going to oppose the Amendment Summons provided they are paid the costs of the amendment.  In any event, it is trite that a party is not bound to state which rule or order he proposes to move, and the failure to do so is not a bar to relief: Premier Fashion Wears Ltd v Chow Cheuk Man[1994] 1 HKLR 377, 383 (line 25–35) per Godfrey JA.  Accordingly, when I refer to the Time Summons in my judgment below, it means the Time Summons after the amendment.

294.As regards the other summonses, I shall deal with the plaintiffs’ Strike Out Summons first.  If I find the Strike Out Summons successful, that would leave me with the Judgment Summons and the Time Summons only.  If I find the Strike Out Summons fails, I will then consider the merits of the Stay Summons.

D.2   Strike Out Summons

D.2.1   Background

295.As said above, the defendants filed the Stay Summons on 23 December 2014 whereas the plaintiffs’ Strike Out Summons to strike out this Stay Summons was filed on 8 January 2015.

296.I shall first set out the relevant chronology as follows:

(1) The plaintiffs commenced the present action HCA 2423 on behalf of Sinosoft on 12 December 2013.

(2) The 1^st to 4^th defendants took out a summons to stay the present proceedings on 16 June 2014 (“1^st Summons”) on, inter alia, the grounds that (i) the present action was initiated by ulterior motives on the part of the plaintiffs as they were connected with the 1^st plaintiff (TS / South China) in HCA 2345 and only became registered shareholders of Sinosoft one week before starting these proceedings; and (ii) it was in the best interest of Sinosoft to hold an EGM to consider the views of the other independent shareholders.

(3) On 7 November 2014, before the hearing of the 1^st Summons, the 1^st to 4^th defendants took out a second summons to stay the present proceedings (“2^nd Summons”) on the grounds, inter alia, that (i) the plaintiffs had no locus standi, (ii) the views of the independent shareholders had to be obtained; and (iii) the plaintiffs had alternative options for remedies.

(4) At the hearing on 18 November 2014, the Master dismissed the 2^nd Summons with costs to the plaintiffs to be paid forthwith [17].

(5) At the hearing of the 1^st Summons before Master Lo on 24 November 2014, the 1^st to 4^th defendants withdrew the 1^st Summons.  Master Lo made an unless order for the 1^st to 4^th defendants to file their Defence on or before 4 pm on 29 December 2014 failing which the plaintiffs shall be at liberty to apply for judgment (“Unless Order”). The defendants were also ordered to pay the plaintiffs’ costs on an indemnity basis.

(6) The 1^st to 4^th defendants filed the Stay Summons on 23 December 2014 under Order 12, rule 8, six days before the expiry of the Unless Order.  Although it is called a Stay Summons, paragraphs 1 and 2 of the summons seek to set aside the ex parte order dated 26 February 2014 granting the plaintiffs leave to service out of Hong Kong upon the 1^st to 4^th defendants and the discharge of the concurrent writ served upon the same four defendants.  Paragraph 3 seeks to stay HCA 2423 in favour of the courts in Nanjing.

(7) No Defence was filed before 4 pm on 29 December 2014.

(8) On 6 January 2015, the plaintiffs took out the Judgment Summons.

(9) On 7 January 2015, the 1^st to 4^th defendants took out the Time Summons seeking an extension of time for filing their Defence pursuant to Order 3, rule 2 and Order 2, rule 5.

(10) On 8 January 2015, the plaintiffs took out the Strike Out Summons seeking to strike out the Stay Summons on the grounds of (i) issue estoppel and (ii) abuse of process.

(11) Finally, on 2 July 2015, the 1^st to 4^th defendants took out the Amendment Summons to amend the Time Summons to add the reference to Order 2, rule 4 at the margin.

D.2.2   Plaintiffs’ arguments

297.The plaintiffs asked me to strike out the Stay Summons by reason:

(1) of the operation of the doctrine of issue estoppel; or alternatively,

(2) that the Stay Summons was an abuse of the process of the court.

298.I shall summarise the plaintiffs’ arguments in broad terms as follows.  They argue that the Stay Summons was plainly an abuse of process:

(1) The defendants had made two previous attempts to stay the proceedings.  One of the grounds raised in the 1^st Summons alleging ulterior motive on the part of the plaintiffs in commencing the action was raised again in the Stay Summons which alleged that the action was brought for collateral purpose, an abuse of process and not for the genuine benefit of Sinosoft.

(2) Although in the Stay Summons, the defendants sought to rely on wider grounds including “no serious issue to be tried”, forum conveniens, Order 11, rule 1 non-compliance and material non-disclosure, these were grounds which could have been raised by the defendants in the 1^st and/or 2^nd Summons.

(3) There had been no material change in circumstances which would justify the issue of the Stay Summons.

(4) The defendants had concealed the intention to issue the Stay Summons before Master Lo when the 1^st Summons was withdrawn and the Unless Order made.  The plaintiffs contended that this led Master Lo into the false impression that the defendants would file the defence within time as stipulated under the Unless Order.

(5) Master Ho who dealt with the 2^nd Summons did consider the evidence filed by the defendants in support of the 2^nd Summons before dismissing it.  The plaintiffs further submitted that the hearing before Master Ho, albeit set down for three minutes, actually lasted over an hour during which Master Ho considered the submissions of both parties.

(6) Any irregularity or bad handling within the defendants’ own team such as unavailability of counsel, were irrelevant to the court’s consideration on striking-out, especially given the defendants’ lack of explanation of why the irregularity / mishandling had occurred.

(7) Significant delay had been caused by the defendants’ repeated applications.  If the Stay Summons had not been taken out, the present action could have proceeded before the determination of the jurisdictional challenges in HCA 2345 and HCA 1613, eg in terms of filing of pleadings and discovery.

D.2.3   Defendants’ arguments

299.The defendants argue that the plaintiffs could not succeed on issue estoppel as it is obvious that the 1^st Summons was withdrawn and the 2^nd Summons was not dismissed on the merits.  Master Ho dismissed the 2^nd Summons at a 3-minute hearing on the basis that it was convoluted, repetitive of the 1^st Summons and was badly drafted.  There was no consideration of the facts and merits of the application.

300.Moreover, the issues involved in the 2^nd Summons were different from the Stay Summons.  The 2^nd Summons concerned locus standi; the Stay Summons concerned jurisdiction.

301.The defendants further submitted that there was no abuse of process.  There was no delay.  They contended it was unrealistic to suggest the present action could have proceeded before the determination of the jurisdiction challenges in HCA 2345 and HCA 1613.  There were much common evidence and issues and the related proceedings had to be heard together, as they now are, by the order of Au-Yeung J.

302.Moreover, the defendants were prepared to argue the Stay Summons as soon as possible.  The delay was largely caused by the unavailability of the plaintiffs’ leading counsel.  In any event, HCA 2423 had been advanced to be heard in October 2015 as opposed to the original dates which were fixed for March 2016.

303.The defendants further contended that as the present case was a derivative action, the issue of locus standi was uniquely important, the success of which would have taken the derivative action out of the picture.  They had also fully borne the consequence of withdrawal by paying the costs on an indemnity basis.

304.It was submitted that the court should also attach importance to the issue of jurisdiction which underpins the power of the court.  The court is not doing justice if the court proceeds when it should have declined jurisdiction.  It would be wrong to strike out the Stay Summons on the ground of abuse of process in the circumstances of the present case. The Stay Summons is not only an application for the Hong Kong court to decline the jurisdiction, ie Hong Kong as the forum non conveniens, more fundamentally it concerns whether jurisdiction was established in the first place, ie whether the concurrent writ should be set aside.

305.During his oral submission, Mr Chan placed emphasis on the modern approach/interpretation of abuse of process, or res judicata in the wider sense, as enunciated in Johnson v Gore Wood.

306.As to the arguments on issue estoppel, Mr Chan’s submissions, in short, are that, for the issues prayed to be determined under Stay Summons, there were no earlier judgments on the merit on thesame issue.

307.I noted that the plaintiffs did not press hard on the argument relating to issue estoppel.

D.2.4   Discussion

Issue estoppel

308.I shall quickly deal with issue estoppel first as it is obvious that the bulk of the submissions at the hearing was devoted to the issue of Hendersonabuse or res judicata in the wider sense.

309.A decision of the court will only give rise to an issue estoppel if the judgment in the earlier action was made by a court of competent jurisdiction, was final and conclusive and on the merit: The Sennar (No 2) [1985] 1 WLR 490, 499B–C.

310.Whilst they are all called stay applications, it would be necessary to see what exactly were prayed for in each of the defendants’ three summonses:

(1) The 1^st Summons issued on 16 June 2014 seeks to stay the present proceedings on, inter alia, the grounds that (i) the present action was initiated by ulterior motives on the part of the plaintiffs as they were connected with 1^st plaintiff (TS / South China) in HCA 2345 and only became registered shareholders of Sinosoft one week before starting these proceedings; and (ii) it was for the best interest of Sinosoft to hold an EGM to consider the views of the other independent shareholders.

(2) The 2^nd Summons taken out on 7 November 2014 asks to stay the present proceedings on the grounds, inter alia, that (i) the plaintiffs had no locus standi, (ii) the views of the independent shareholders had to be obtained; (iii) the plaintiffs had alternative options for remedies; and (iv) a determination of the aforesaid as preliminary issues.

(3) The Stay Summons issued on 23 December 2014 prays for a number of things.  Paragraphs 1 and 2 of the summons seek to set aside the ex parte order dated 26 February 2014 granting the plaintiffs leave to service out of Hong Kong upon the 1^st to 4^th defendants and the discharge of the concurrent writ served upon the same four defendants.  The defendants contended that the ex parte order for service out should be discharged as the plaintiffs had commenced these proceedings, driven by ulterior motives with no proper locus.  Paragraph 3 seeks to stay HCA 2423 in favour of the courts in Nanjing.

311.The 1^st Summons was withdrawn and thus it could not be seriously disputed that issue estoppel does not apply to the issues thereunder.  As the hearing proceeded, it became clear that the defendants are now focusing on the ulterior motives of the plaintiffs under the 1^st Summons. So as regards the issue of the plaintiffs’ ulterior motives, there was no embargo on the defendants at all based on issue estoppel, which was an absolute bar.

312.The 2^nd Summons was dismissed with costs to be paid forthwith.

313.As regards the Stay Summons, even assuming the dismissal of the 2^nd Summons was made after hearing the merits and would have the effect of estopping the defendants, the defendants would be absolutely debarred from raising matters under the 2^nd Summons only.

314.This means that the defendants were not entitled to re-open the issue concerning the plaintiffs’ locus, which had already been dismissed under the 2^nd Summons.

315.I cannot see why the defendants would be estopped from arguing the plaintiffs’ ulterior motives and from seeking to stay these proceedings on the basis that the proper forum should be the Nanjing court, which are matters raised in the Stay Summons.

316.But was the 2^nd Summons dismissed after consideration of the merits?

317.There is a serious dispute of facts here.  It is the plaintiffs’ argument that the hearing of the 2^nd Summons before Master Ho on 18 November 2014 was not just a 3-minute hearing.  The plaintiffs submitted that it is inconceivable for Master Ho to have dismissed an application without considering the evidence and the merits.  They said the Master did consider the evidence before dismissing the 2^nd Summons. The plaintiffs even said the hearing took over an hour.

318.On the other hand, the defendants said it was a 3-mintue hearing and Master Ho dismissed the 2^nd Summons as he took the view that the 2^nd Summons was badly drafted / convoluted and could have be dealt with under the 1^st Summons.

319.No judgment had been delivered by Master Ho. I asked at the hearing whether the transcripts of the hearing before the Master were available and the answer was no.

320.In the absence of a written judgment or transcripts, it is impossible for me to ascertain whether there was actually any determination on the merits.  There is a dispute of facts on the different versions of the parties’ affidavit evidence.

321.The burden is on the plaintiffs to make good their allegation that the issues raised in the 2^nd Summons had already been decided by the Master on merits.  In the absence of evidence, I simply cannot accept the plaintiffs’ submission that the 2^nd Summons was dismissed on merits.

322.Thus, the defendants are not prevented by the absolute bar of issue estoppel to stage the Stay Summons.

Henderson abuse

323.Understandably, at the hearing, Mr Yu relied heavily and principally on the Hendersonprinciples for obviously, it is res judicatain the wide sense which means that, if the argument is successful, the defendants would be disentitled to raise those issues which were not banned by the strict application of issue estoppel, such as the issue relating to the plaintiff’s ulterior motives.

324.Thus, on behalf of the plaintiffs, Mr Yu cited a number of authorities in support of his contention that the defendants should be debarred from raising in the Stay Summons matters which they could have raised in the earlier summonses.

325.The cases include the following, for instance: parties are not permitted to bring fresh litigations because of new views of the law or new versions of the case: Hoystead v Commissioner of Taxation [1926] AC 155 (PC); two successive striking out applications with no real differences and all matters in the second application could have been argued on the first: Chan Pak Wai v Thomas Young, unreported CACV 18/1982, 30 July 1982; the principle is not limited only to cases where the previous order had been made after a consideration of the merits: Leung Kwok Hing v Sanyo Electric Trading Co Ltd[1992] 2 HKC 509; the doctrine of res judicata is not precluded even if the dismissal is on technical ground: M & R Marking Systems Inc v Wilson Tse & Ors, unreported, HCA 1598/2001, 20 December 2001; a rehearing on evidence which could have been adduced on the earlier occasion is a principle which is equally application in interlocutory matters: Re Prudential Enterprise Limited, unreported, HCCW 594/1999, 24 October 2003, etc.

326.Without disrespect to the industrious efforts of Mr Yu and his junior, I do not think it is necessary to go through each and every one of the cases cited.  There should be little dispute that the principles, whether it guides the approach advocated by Mr Chan or Mr Yu, are contained in the decision of the highest echelon, the CFA, in Ko Hon Yue v Chiu Pik Yuk(2012) 15 HKCFAR 72, (quoting Johnson v Gore Wood) where Ma CJ said:

“ 82. The abuse that is known as the Henderson v Henderson abuse (or res judicata in the wider sense — the nomenclature is not important) is derived from the case of that name. It has been developed and explained by the House of Lords in Johnson v Gore Wood & Co [2002] 2 AC 1, by the Judicial Committee of the Privy Council in Yat Tung Investment Co Ltd v Dao Heng Bank Ltd and Brisbane City Council v Attorney General for Queensland [1979] A411, by the English Court of Appeal in Bradford and Bingley Building Society v Seddon [1991] 1 WLR 1482 and by our Court of Appeal in Ngai Few Fung v Cheung Kwai Heung [2008] 2 HKC 111 and Chiang Lily v Secretary for Justice [2009] 6 HKC 234. The essence of the doctrine is that a party ought generally not to be permitted to raise in subsequent proceedings matters which that party could and should have raised in subsequent proceedings matters which that party could and should have raised in earlier proceedings.

83. For reasons that will become evidence presently, it is unnecessary in order to resolve this part of the appeal to go into the precise ambit of the principles regarding this form of abuse, although for my part, I would say that the present state of the law is reflected by the decision of the House of Lords in Johnson v Gore Wood & Co and the Court of Appeal in Chiang Lily v Secretary for Justice. For present purposes, it is sufficient just to refer to the following facets of the doctrine:

(1) The starting point is to recognize that the doctrine is founded on an abuse of process. As Lord Wilberforce said in Brisbane City Council v A-G for Queensland, ‘it ought only to be applied when the facts are such as to amount to an abuse: otherwise, there is a danger of a party being shut out from bringing forward a genuine subject of litigation’: (p.425).

(2) This concern (that a party ought not lightly to be deprived of the right to have serious matters litigated) was echoed by Lord Millett in Johnson v Gord Wood & Co: (p.59D–G).

(3) It must therefore be essential when striking out a claim on this basis (and thus preventing a litigation of that claim) that an abuse is found to exist in seeking to raise in subsequent proceedings claims or issues which could and should have been raised in earlier proceedings. This abuse will usually take the form of the other party being ‘vexed’ (or in some cases, the terms ‘oppressed’, ‘unjustly harassed’ or ‘unjustly hounded’ are used) by the subsequent set of proceedings: Johnson v Gore Wood & Co, 31A–B.

(4) The abuse can also take the form of the administration of justice being brought into disrepute: see Chiang Lily, 256D–G ([58]) referring to Hunter v Chief Constable of the West Midlands Police [1982] AC 529. With the procedural reforms introduced by the Civil Justice Reform in 2009, the courts in Hong Kong must now, when exercising their procedural powers, increasingly bear in mind not just the parties before them in any particular litigation but also the position of other litigants in the court process. RSC O.1A r.1(f) states as one of the underlying objectives of the court’s procedural powers under the Rules to be ‘to ensure that the resources of the court are distributed fairly’.

(5) In examining aspects such as abuse, the court is concerned with balancing interests: not just those of the litigants before it, but also taking into account the other interests involved in the administration of justice. It is important therefore here to emphasise that when the court is dealing with the Henderson v Herderson type of abuse, it is not looking at an absolute bar to litigation such as issue estoppel or cause of action estoppel. On the contrary, in considering this type of abuse, the court is required to assess a number of factors and balance competing interests. See here, Bradford and Bingley Building Society, 1490F–H. It is also worth making the following observations at this juncture:

(a) There is conceptually an important distinction between absolute bars such as issue estoppel and the type of abuse with which we are concerned. In the former situation, the party who seeks to re-litigate an issue or cause of action has already had his day in court, whereas in the latter situation, that party has not: cf Johnson v Gore Wood, 59D (‘It is one thing to refuse to allow a party to re-litigate a question which already has been decided; it is quite another to deny him the opportunity of litigating for the first time a question which is not previously being adjudicated upon’ (Lord Millett) ).

(b) The assessment of different factors and balancing competing interests can be said to be an exercise of a discretion.  A number of decisions of the English Court of Appeal have cast doubt on whether the court does indeed exercise a discretion as such: see Aldi Stores Ltd v WSP Group Plc [2008] 1 WLR 748, 762C–D ([16]) and Stuart v Goldberg Linde [2008] 1 WLR 823, 845E–846C ([81]).  It is unnecessary for present purposes to decide whether or not a discretion is actually being exercised.  The more important point to bear in mind is that an appellate court is obliged to pay sufficient regard to the decision of the court below and should be reluctant to interfere where the decision is based on the assessment or balancing of a number of factors. Nothing in the two said cases suggests otherwise; in fact, quite the contrary.”

327.The plaintiffs complained that the defendants ought to have informed Master Lo at the hearing of the 1^st Summons on 24 November 2014 that they were going to issue the Stay Summons.  Had they done so, they would have pressed for a dismissal of the 1^st Summons.

328.The defendants cited Rogers JA in東莞市東莞東祥裝飾有限公司 v Universal Right Ltd, unreported, CACV 42/1999[18], who said, “Simply the Defendant did not make its position clear but I do not see how the Plaintiff has walked into any trap, as it were, by reason of that.”

329.Further, the defendants submitted that at the time of the hearing, the defendants may or may not have formed the intention to make the stay application under Order 12, rule 8.  So long as the defendants are in time to make the application, there is no reason why the defendants must notify Master Lo or the plaintiffs of their intention to make (or not to make) the application.

330.I agree although I do not think the quote from Rogers JA help the defendants as it was plainly a factual observation based on the facts of that case.  In the present case, I do not think the plaintiffs’ complaint is valid.  On the evidence, it is impossible for me to hold that the defendants must have already formed the intention to issue the Order 12, rule 8 application when they appeared before Master Lo.

331.Neither do I find the defendants’ lack of explanation or adequate explanation on why they did not bring their claims in the earlier summonses so abusive as to justify striking out the present Stay Summons. It was conduct which the court would definitely consider when it comes to the question of costs and in my view, payment of some costs would sufficiently reflect the court’s dissatisfaction of the defendants’ failure to give a satisfactory explanation.

332.Furthermore, I do not think it is right to isolate or name incidents of conduct which smack of abuse as forming the basis of rejecting a party’s legitimate pursuit of a claim.  As Lord Bingham said in Johnson v Gore Woodat p 31F:

“ ... While the result may often be the same, it is in my view preferable to ask whether in all the circumstances a party’s conduct is an abuse than to ask whether the conduct is an abuse and then, if it is, to ask whether the abuse is excused or justified by special circumstances.”

333.Notwithstanding the plaintiffs’ extensive submission, I think their major complaint is that the defendants had failed to bring all their claims in one summons, which had delayed the filing of the Defence.  This constitutes an abuse of the process of the court or harassment of the plaintiffs, justifying the Stay Summons to be struck out.

334.In my judgment, whether or not the delay in the filing of the defence constitutes an abuse of the process of the court or an unjust harassment to the plaintiffs would be evidenced by whether or not there are merits to the Stay Summons.  In other words, if the stay application is totally unmeritorious, evidently, the defendants would be abusing the court’s process by making one stay application after the other, thereby procrastinating the filing of the defence.  On the other hand, if there are merits in their stay application, I cannot see how the plaintiffs should profit by shutting the defendants out on grounds which have not been previously determined and merely as a result of the defendants’ failure to bring them within one summons, provided that the delay had not caused serious prejudice to the plaintiffs.

335.I have considered the merits of the Stay Summons and am of the view that it is a meritorious application.  The reasons will be set out in the next section below.

336.It must be borne in mind that the mere fact that the defendants had failed to bring all their claims in one go was not necessarily an abuse of the court’s process in itself, nor did it automatically constitute unjust harassment to the plaintiffs.  In Johnson v Gore Wood, Lord Bingham said:

“ ... The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before. ...”

337.I also take account of the length of the delay which I believe is also relevant.  I note that the 1^st Summons was issued on 16 June 2014 and the Stay Summons was issued on 23 December 2014.  It was not a substantial delay.

338.A 6-month delay in the circumstances of this case, which had taken years of litigation in the PRC next followed by litigations in Hong Kong, cannot be said to be excessive or unduly harassing to the plaintiffs.  After all, the same plaintiffs have started three actions against (all or some of) the defendants.

339.There is no indication that the plaintiffs could have progressed the case any further during the 6-month period.  I bear in mind that even the plaintiffs accepted that due to the common issues and facts of HCA 2423 with HCA2345 and HCA 1613, that the summonses in this action should be heard together with the setting aside applications of the defendants under HCA 2345 and HCA 1613.  In other words, regardless of whether the defendants have taken out the Stay Summons, the parties in the present case will have to wait for the outcome of the hearing for HCA 2345 and HCA 1613 in any event.

340.My view is reinforced when it is also observed that the pleadings especially the plaintiffs’ Statement of Claim of all the three actions are substantially the same.  This means that the material facts to be established by the plaintiffs in all the proceedings are the same.  If the cases proceed further, it is likely that at some stage, the three actions will be consolidated and heard together.  In the context of this case, delay should not be considered on itself, it has to be considered together with the progress in HCA 2345 and HCA 1613 as well, and vice versa.

341.Further, it is indisputable that the defendants had paid the plaintiffs indemnity costs under the 1^st Summons the costs had been paid forthwith under the 2^nd Summons.

342.The delay has caused little prejudice to the plaintiffs if at all.

343.Importantly, I also take the view that:

“ It is one thing to refuse to allow a party to re-litigate a question which already has been decided; it is quite another to deny him the opportunity of litigating for the first time a question which is not previously being adjudicated upon” (Lord Millett))”: per Ma CJ, Kon Hon Yue.

344.The 1^st Summons was withdrawn. The 2^nd Summons was dismissed without a written determination on the merits.

345.Looking at all the circumstances and considering the facts of the case, I am satisfied that the defendants should not be debarred from pursuing the Stay Summons.

346.I shall now go on to consider the Stay Summons.

D.3   Stay Summons

D.3.1   The summons

347.Although named as “Stay” Summons, this Summons in fact seeks to:

(1) set aside of the Writ served out of jurisdiction; and

(2) stay the proceedings in favour of Nanjing court on the basis of forum non conveniens.

348.In gist, the defendants argue that:

(1) there is no serious issue to be tried, as:

(a) the plaintiffs failed to plead “control” or “stifling” on the part of the 1^st to 4^th defendants over Sinosoft, which renders the entire derivation action improperly constituted: see Section D.3.2;

(b) the plaintiffs brought this derivative action with ulterior motive: see Section D.3.3;

(c) the plaintiffs fail to show loss to Sinosoft: see Section D.3.4;

(2) the plaintiffs have failed to bring themselves within any of the Order 11 gateways: See Section D.3.5;

(3) Hong Kong is not the appropriate forum for trial of this derivative action and thus the proceedings should be stayed in favour of Nanjing court: See Section D.3.6; and

(4) there was material non-disclosure on the part of the plaintiffs at the ex parte stage: See Section D.3.7.

D.3.2   No serious issue to be tried: improperly instituted claim

Defendants’ submissions

349.On behalf of the defendants, Mr Chan argued that a derivative action would only be properly constituted if it could be demonstrated that the wrongdoers are in control of the company which prevented the company from bringing the action in its own name.

350.The defendants said the element of control must be pleaded in the Statement of Claim, relying on World One Investments Ltd v Chow Cheuk Lap [2013] 3 HKLRD 701.  However, the plaintiffs had failed to plead in their Statement of Claim why Sinosoft could not bring the action in its own name.  There was also no evidence that the plaintiffs had tried to move the Board or the general meeting of Sinosoft to take action against the defendants in respect of the matters complained of.

351.It is the defendants’ submission that the evidence was that the 1^st and 2^nd defendants had only a shareholding of 43.6% as at 31 December 2013, ie at about the time of the issue of the writ (which was 13 December 2013).  There was no evidence that the 1^st to 4^th defendants held a majority control over Sinosoft when the writ was issued and when leave to serve out (26 February 2014) was obtained.

352.Thus, the inability of the plaintiffs to show that the 1^st to 4^th defendants could stifle the Board of Sinosoft to bring the action in its own name supports that the present derivative action was improperly constituted and liable to be struck out.  Thus, the plaintiffs fail to show serious issues to be tried.

Plaintiffs’ submissions

353.For the plaintiffs, Mr Yu first submitted that the defendants were precluded by theHenderson principle form raising this argument.

354.He questioned the defendants’ reliance on World One, ie the necessity to plead control of the company by the wrongdoers to enable commencement of the derivative action.  Mr Yu relies on Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 at paragraphs 11 – 13, and submitted that no requirement of pleading control of the company by the wrongdoers was stipulated.  It merely held that the plaintiff had to show a prima facie case of fraud on the minority and control of the company by the alleged wrongdoers such as to enable them to stifle the proposed action.

355.The plaintiffs also refute the defendants’ allegation that there is no evidence to show that Sinosoft could not bring the action in its own name.  When considering the issue of control, it was not just the shares in Sinosoft held by the 1^st to 4^th defendants that could be considered, but also those held by Liu, who, albeit not an officer of Sinosoft, was a defendant in HCA 2345, and one of the alleged wrongdoers acting together with the 1^st to 4^th defendants in this derivative action.  The 1^st to 4^th defendants and Liu together control the majority shareholding of Sinosoft through their respective corporate vehicles.

356.It was pleaded in paragraph 7 of the Statement of Claim that they held approximately 55.21% of the issued share capital of Sinosoft as at 2 December 2013, ie shortly prior to the issue of the writ.

357.It was the plaintiffs’ submission that in light of their majority shareholding, it matters not that they do not control the Board.

Discussion

358.I shall immediately proceed to consider World One and Waddington as I have already held that the defendants were not precluded by the Henderson principle.

359.In World One Investments Ltd v Chow Cheuk Lap, supra, the plaintiff held about 16% of the shares in a listed company and brought an action on behalf of the listed company seeking an interlocutory injunction to restrain some share placement, after a board resolution was passed for the same.

360.One of the major issues was whether the derivative action was properly constituted.  Anthony Chan J said:

“ 30. Under common law, a ‘plaintiff whose standing to bring a derivative action is challenged must establish a prima facie case that the company is entitled to the relief claimed and that the action falls within an applicable exception to the rule in Foss v Harbottle (usually the fraud on minority exception.)’ (Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370, [20]).

...

34. In addition to fraud on minority, the plaintiff has to plead and show that the wrongdoers are themselves in control of the company such as to enable them to stifle any proposed action against themselves (Waddington Ltd v Chan Chun Hoo, [11]–[13]).”

361.It can be seen that in World One, when Anthony Chan J referred to the pleading requirement (in addition to the fraud on minority requirement) at paragraph 34, he was actually relying on paragraphs 11 to 13 of Waddington, which said:

“ 11. It is a fundamental principle of company law, expressed as part of the rule in Foss v Harbottle, that where a wrong has been done to a company, it is the company itself which is the proper plaintiff. That principle does, of course, admit of exceptions, the exception generally relevant to derivative actions being the ‘fraud on the minority’ exception. Jenkins LJ explained the position in Edwards v Halliwell, as follows:

... where what has been done amounts to what is generally called in these cases a fraud on the minority and the wrongdoers are themselves in control of the company, the rule is relaxed in faovur of the aggrieved minority who are allowed to bring what is known as a minority shareholders’ action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue.

12. It follows that where a wrong is alleged to have been done to a company and a minority shareholder purports to bring a derivative action on the company’s behalf, it is incumbent on the shareholder to show that the general ‘proper plaintiff’ rule is displaced and that the case falls within the relevant exception.

13. The derivative action is a procedural device invented by the courts to afford protection to the minority.  Procedurally, there is no requirement at common law for a person seeking to sue derivatively first to obtain the leave of the court.  But it does not follow from this that there is no threshold requirement to be met by the plaintiff.  Substantively, such an action is only permitted where it can prima facie be shown that there exists a viable cause of action or equitable claim vested in the company which, if made good, would establish a fraud on the minority, as well as control of the company by the alleged wrongdoers such as to enable them to stifle any proposed action against themselves.”

362.Mr Yu submitted that Waddington was talking about the establishment of a prima facie case and no pleading of control by the wrongdoers was stipulated.

363.This does not help the plaintiffs’ case.  It is obvious the gist of the defendants’ complaint is that the plaintiffs have not established a serious issue to be tried, as an essential element in their claim is missing.  Indeed, I cannot see how there can be serious issue to be tried if not even a prima facie case has been established.

364.It has been accepted by the plaintiffs (in their submission under HCA 2345) that one way of testing if there is a serious issue to be tried is to see whether the claim would survive an application to strike out: Dong Shing F & T Co Ltd v Hanmec Co Ltd [2010] 5 HKLRD 261 at paragraph 42.

365.Put simply, if the claim is not properly constituted by an omission to plead the necessary elements of the claim, no prima facie is shown.  The claim is liable to be struck out.  There can be no serious issue to be tried.  I think it should also be borne in mind that unlike a strict Order 18 strike-out situation, where the burden is on the defendant to show the case should be struck out, the present concerns setting aside the leave for service out and the burden is on the plaintiffs to satisfy it is a proper case for service out.

366.What constitutes a prima facie case in the context of striking out a derivative action has also been considered in Melvin Waxman v Li Fei Yu & Ors, unreported, HCA 1973/2012, 23 August 2013 at paragraphs 25 and 26:

“ 25. ... The term prima facie case or prima facie evidence just means sufficient evidence to pass the judge so as to make the issue fit for determination by the tribunal of fact. To achieve that standard, the party which bears the burden of proof has to adduce sufficient evidence to satisfy the court, sitting as the tribunal of law, that there are reasonable grounds for believing that his case or the issue in question is well founded so that the issue becomes one which is fit for the tribunal of fact to adjudicate on. It should never be equated with proof beyond reasonable doubt or proof on a balance of probability.

26. ... In my opinion, how this burden is discharged depends on the circumstances of the case.  If the issues in question are adequately pleaded and not contradicted by evidence filed by the parties, then the pleading alone would be sufficient proof of the prima facie case.  But even if contrary evidence has been filed by the defendant, the courts are not required to conduct a trial by affidavit nor in all cases necessarily required to call the makers of the affidavit for cross-examination.  The courts are capable of and well experienced in making provisional finding of facts on affidavit evidence in such interlocutory proceedings by testing the plaintiff’s case against documentary evidence, incontrovertible evidence, or evidence which is not in dispute.  The court can determine against the backdrop of such contrary evidence whether the plaintiff’s evidence has passed the judge so as to make the issue or the case fit for determination by the tribunal of fact.  In an appropriate case, the court may be satisfied on the basis of the pleaded case that the prima facie test is met, irrespective whether contrary evidence has been filed by the defendant.  This may well explain why Barma J held at first instance in Waddington Ltd that on the facts assumed a prima facie case had been established.  That was a decision on its facts which is far from laying down any principle of law that the plaintiff is relieved of its burden of having to prove a prima facie case in resisting a striking out application in a locus challenge.”

367.In Birch v Sullivan [1957] 1 WLR 1247, Harman J said the following when he struck out the plaintiff’s derivative claim, at 1249–50:

“ ... it is said that the statement of claim is demurrable because it does not contain the necessary allegations. The nature of the case is that the individual defendant, in fraud of the rights of the defendant company, either terminated or did not renew a very advantageous contract .... That is said to have been a misfeasance as against the defendant company. Whether any such case can be proved, of course, I need not consider at this stage, but if all those facts could be proved then there would have been misfeasance by Michael John Sullivan. The person to complain of that undoubtedly is Michael Sullivan Ltd., but Michael John Sullivan is the only member of the board of that company. It is said that, by reason of his position and because he holds or controls half the shares of that company, he is in a position to prevent the company taking any action against him. If that were true, an action might lie at the suit of a minority or a frustrated shareholder suing on behalf of himself and all other members of the company other than the individual defendant himself. But the statement of claim does not, in my judgment, make any allegation necessary to found such an action. It would be necessary to allege, as well as thereafter to prove, that the plaintiff could not, by reason of the first defendant’s opposition, obtain the name of the company to issue proceedings: that he was in the position in which the minority shareholders are in the comparatively rare cases where such actions have been allowed.

There has been a recent case on this subject, a decision of Danckwerts J., called Pavlides v. Jensen.  There Danckwerts J. went carefully into the question: did the law permit such an action?  He concluded that as only negligence and not fraud was alleged in that particular case, the action was not within the rule in Foss v. Harbottle, and could not be maintained.  But it is clearly enough from such extracts from the pleadings as there are in the report that those facts must not only be proved at the trial but must be alleged in the pleadings.  The present pleading is defective in several respects.”

Harman J then struck out the statement of claim without prejudice to the right of the new plaintiff when added to deliver a fresh statement of claim.

368.I will consider both the pleadings and the evidence.

369.The relevant part of the plaintiffs’ pleading is paragraph 7 of the Statement of Claim which says:

“ 7. NS Corporate Vehicles were at all material times the controlling shareholders of Sinosoft together holding 56.06% of its shares immediately prior to the Listing and 55.21% of its shares as at 2 December 2013 (assuming there has been no change of the shareholdings of Joint Allied, Team United and China Pride since the Listing). The 1st to 4th Defendants (via these corporate vehicles) exercise effective control over Sinosoft.” [emphasis supplied]

370.There can be no dispute that there was no pleading / allegation that the control was such as to enable the wrongdoers to frustrate Sinosoft from bringing the action to sue them in its own name.

371.Also, the alleged control is exercised by the 1^st to 4^th defendants, but not together with Liu (who is not named as a defendant).

372.This pleading is insufficient on the basis of Birth v Sullivan.

373.Furthermore, it is quite clear from paragraphs 11 to 13 of Waddingtonthat the CFA endorsed the view that suing derivatively by the minority shareholders on behalf of the company is an exception to the proper plaintiff rule.  To establish the right to sue, the minority shareholders must cross the threshold requirement of showing a fraud on the minority as well as control of the company by the wrongdoers such that the latter could stifle the company to pursue an action against themselves.

374.The requirement for permission to launch the action is “control ... such as to enable [the alleged wrongdoers] to stifle any action ...”.  This explains why Anthony Chan J, when following Waddington, said at paragraph 34 “In addition ..., the plaintiff has to plead ... the wrongdoers are themselves in control of the company such as to enable them to stifle any proposed action against themselves ...”.  This is also consistent with the Birch v Sullivanapproach.

375.Thus, it is clear their own pleadings have not raised a prima facie case.

376.Apart from the pleadings, I should also consider the evidence as the plaintiffs may raise a serious issue to be tried if the evidence discloses a case against the overseas defendants which warrants consideration at trial: Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1994] 1 AC 437 at O, 453–457 at 452D–E; Inchape v JDH Ltd v Baltrans Exhibition & Removal Ltd [1997] 3 HKC 314 at 325C-E; see also Melvin Waxman, supra.

377.On the evidence, I have difficulty holding or even assuming that the 1^st to 4^th defendants were in control of the Board at the time shortly prior to the issue of the writ.  Only the 1^st defendant was on the board of Sinosoft consisting of five directors.  Two of the directors were non-executive directors.  I am aware the plaintiffs suggested Yu Yifa, one of the directors, had made an affirmation on behalf of the defendants and so he should be counted as a member of the defendants’ camp on the board.

378.But even assuming Yu Yifa was under the control of the 1^st defendant, in the absence of evidence showing that the INEDs were not acting independently in carrying out their duties as directors of Sinosoft, she can at most secure two votes.  I simply see no basis to suggest that the 1^st defendant alone could control the board.  There were at least two directors with no evidence to suggest that the 1^st defendant could control.  In short, the control of Yu Yifa by the 1^st defendant did not enable her to control the board.

379.The plaintiffs said the 1^st to 4^th defendants were majority shareholders on 2 December 2013, and so it matters not they did not control the board.  The plaintiffs’ case on majority shareholding is pleaded as follows:

“ 4. Since 11 June 2013, Xin, Wang, Zhang, and Ma, together with a Liu Biao (‘Liu’), via their respective alter egos and wholly-owned nominee corporate vehicles, became substantial shareholders of Sinosoft following its listing (‘Listing’). According to the information provided in the prospectus for the Global Offering of Sinosoft (the ‘Sinosoft Prospectus’) dated 27 June 2013, immediately after the Listing:

(1) Long Capital, Xin’s corporate vehicle, became the holder of 427,207,500 shares (constituting 42.72% of Sinosoft’s issued share capital).

(2) Telewise Group, Wang’s corporate vehicle, became the holder of 67,447,500 shares (constituting 6.74% of Sinosoft’s issued share capital).

(3) Joint Allied, Zhang’s corporate vehicle, became the holder of 2.34% of Sinosoft’s issued share capital.

(4) Team United Investments Ltd (‘Team United’), Liu’s corporate vehicle, became the holder of 2.81% of Sinosoft’s issued share capital.

(5) China Pride, Ma’s corporate vehicle, became the holder of 1.45% of Sinosoft’s issued share capital.

5. As at 2 December 2013, Long Capital and Telewise Group held 42.08% and 6.53% of Sinosoft’s issued share capital respectively. Apart from the aforesaid, the Plaintiffs are not aware of any change of shareholdings of the above-named corporate vehicles (the ‘NS Corporate Vehicles’). The NS Corporate Vehicles are and were at all material times limited companies incorporated under the laws of the British Virgin Islands.

6. Xin and Wang are husband and wife. Immediately after the Listing, they held between them (via Long Capital and Telewise Group) a total of 49.46% of Sinosoft’s issued share capital, being the largest single block of shareholding in Sinosoft following the Listing.  As at 2 December 2013 Xin and Wang together held 48.61% of Sinosoft’s issued share capital.”

380.The defendants, however, said that the only evidence is that as at 31 December 2013, the 1^st and 2^nd defendants through their corporate vehicles were only holding 43.6% of the company’s shares.  There is no evidence on the shareholdings of the other two defendants at the time of the issue of the writ and the burden is on the plaintiffs to establish every essential evidential element of this case.  The plaintiffs had not been able to show majority shareholding by the alleged wrongdoers at all.  Indeed, at paragraph 17 of Ho Cheung’s Affirmation, it was said that “at all material times, the defendants did not comprise majority in terms of shareholdings and directorship of the company”.

381.Even taking the plaintiffs’ case at its highest, it was a simple majority of 55.21% as at 2 December 2013 only.  I do not think the plaintiffs had shown that the alleged wrongdoers could stifle any action by the company to obtain its own name to start the proceedings.

382.I asked at the hearing for the constitution of the company, but was told that the evidence was unavailable.  As such, the court was simply not in a position to measure what this simple majority could achieve.  Does it require a simple majority or a special majority to pass the resolution for starting proceedings?  Does it require a simple or special majority to change the board?  As a matter of fact, I would have thought it is rare that a simple majority in a private company, not to mention a listed company, can do whatever they like, let alone control the board or to stifle actions of the company.  The situation is compounded by the fact that there is not even evidence on the kind of shares held by the alleged wrongdoers.  Are they majority shares carrying votes?

383.Moreover, I actually have reservations that the court should look at the alleged wrongdoers’ shareholdings as at 2 December 2013, as the plaintiffs suggest.  The evidence reveals that there were changes in the shareholdings of the company after 2 December 2013.  The shareholdings list as at 31 January 2014 shows that Victor Law (1^st plaintiff herein) acquired 2,000 shares on 5 December 2013; Ng Wing Tai acquired 2,000 shares on 3 December 2013; South China Finance and Management Limited (3^rd plaintiff) acquired 4,000 shares on 5 December 2013; Southost Investments Limited acquired 4,000 shares on 5 December 2013; Anthony Teoh (2^nd plaintiff) acquired 2,000 shares on 3 December 2013; Wang Yi Ping acquired 2,000 shares on 4 December 2013.

384.In other words, the plaintiffs had not even shown that immediately prior to the issue of the writ, which was 12 December 2013, the 1^st and 2^nd defendants through their corporate vehicles together held 48.61% of the shares of Sinosoft.  In fact, the evidence is that as at 31 December 2013, the two of them together held 43.6% only.

385.As regards Liu’s shareholdings, in light of what was said, ie no evidence showing a simple majority in Sinosoft was capable of frustrating Sinosoft from pursuing an action against the alleged wrongdoers, it is unnecessary to consider whether Liu’s shareholdings need to be included.

386.In sum, I find that the plaintiffs have failed to establish a prima facie both on the pleadings and on the evidence.  The claim is liable to be struck out.  As such, there is no serious issue to be tried in the substantive claim.

D.3.3   No serious issue to be tried: ulterior motive

Defendants’ submissions

387.It is the defendants’ case that a derivative action could not be brought as of right.  The court retains the discretion to disallow a derivative action to be brought or proceed.  A derivative action which is not brought for the interest of the company but to serve an ulterior purpose of the plaintiff would not be allowed to continue.

388.The defendants submitted that the plaintiffs acquired the shares in Sinosoft only recently for the purpose of commencing the present proceedings.  They are related to Janful and South China.  Janful and South China have a pending claim against NS and the NS Principals in the PRC and has also brought HCA 2345 against Sinosoft and the NS Principals.  The same plaintiffs also have a claim against Sinosoft and its directors for libel and malicious falsehood in HCA 1613.

389.They submitted the plaintiffs have known of the dispute between Janful and the NS Principals including the defendants, dating as far back as 2004 when proceedings started in the PRC. Thus, it is clear that the plaintiffs had acquired the shares in Sinosoft with a view to bringing the derivative action for the benefit of Janful.  This is clearly demonstrated by the negligible interest the plaintiffs would gain from the outcome of the derivative action.

390.The defendants further drew the court’s attention to the fact that the plaintiffs in this derivative action set out to prove Janful’s case in HCA 2345 as against Sinosoft and the NS Principals. But the interest of Sinosoft for the time being is best served by successfully defending the case against them by Janful.  The plaintiffs’ position however is in effect to prove Sinosoft’s liability which clearly is for the benefit of Janful.  The same team of legal advisors are mounting a claim against Sinosoft (in HCA 2345), and at the same time purporting to defend its interest (in HCA 2423).

391.Thus, the defendants argued that the derivative action is highly problematic and artificial and ought to discontinue.

Plaintiffs’ submissions

392.On the other hand, the plaintiffs submitted that any allegation that these proceedings are brought with a view to furthering any ulterior motive or collateral purpose are factually unfounded and at any rate, is irrelevant to the plaintiffs’ right to start this action.

393.It is the plaintiffs’ case that all that is required is for them to meet the common law threshold requirement to start the derivative action.  Waddington has stated clearly that the plaintiff needs only to establish a prima facie case.

394.The plaintiffs contended that they have obviously shown a prima facie case on the pleadings and on the evidence.  They said the 1^st to 4^th defendants and Liu together hold 55.2% shares in Sinosoft as at 2 December 2013.  It was pleaded in the Statement of Claim that the defendants have engaged in a fraudulent scheme in breach of their fiduciary duties and duties of fidelity, whereby they procured software products misappropriated from the JVC to be injected into Sinosoft for listing, and made false representations to the SFC / HKSE and in the Prospectus.

395.This would be sufficient for the purpose of crossing the threshold requirement for bringing the derivative claim.

Discussion

396.I agree with the defendants’ submission the court does retain a discretion to disallow a derivative action in appropriate circumstances, the complaint in question, viz the plaintiffs have brought this action with an ulterior motive, being one of such circumstance.

397.In Nurcombe v Nurcombe [1985] 1 WLR 370, the plaintiff and 1^st defendant were formerly wife and husband.  The husband was the major shareholder of the company which was the 2^nd defendant.  In matrimonial proceedings by the plaintiff she came to know that the husband had diverted considerable benefit of a land purchase contract from the company to himself.  The judge in the matrimonial proceedings took into account the husband’s substantial profits arising out of the contract when awarding the wife the lump sum.  Subsequently, the wife brought an action as a minority shareholder on behalf of the company seeking payment by the husband to the company for the profit which he had made out of the land purchase transaction, in breach of his fiduciary duty as a director.

398.In dismissing the wife’s appeal against the judge’s decision dismissal of her claim, the Court of Appeal said:

“ It is pertinent to remember, however, that a minority shareholder’s action in form is nothing more than a procedural device for enabling the court to do justice to a company controlled by miscreant directors or shareholders. Since the procedural device has evolved so that justice can be done for the benefit of the company, whoever comes forward to start the proceedings must be doing so for the benefit of the company and not for some other purpose. It follows that the court has to satisfy itself that the person coming forward is a proper person to do so. In Gower, Modern Company Law, 4^th ed. (1979), the law is stated, in my opinion correctly, in these terms, at p. 652:

‘The right to bring a derivative action is afforded the individual member as a matter of grace. Hence the conduct of a shareholder may be regarded by a court of equity as disqualifying him from appearing as plaintiff on the company’s behalf. This will be the case, for example, if he participated in the wrong of which he complains.’

...

My understanding of these judgments is that the court is entitled to look at the conduct of a plaintiff in a minority shareholder’s action in order to satisfy itself that he is a proper person to bring the action on behalf of the company and that the company itself will benefit. A particular plaintiff may not be a proper person because his conduct is tainted in some way which under the rules of equity may bar relief. He may not have come with ‘clean hands’ or he may have been guilty of delay.

... In this action [the plaintiff] is in effect saying: although I have shared with the first defendant his ill-gotten gains, I want the court to order that he should pay over to [the company] his share of them plus my share so that I can have a chance of getting some more because of my status as a shareholder.  In my judgment, the court should not countenance such conduct.  I would dismiss the appeal ...”

399.I disagree with the plaintiffs’ submission that once the locus to sue as shareholders is established and a prima facie case has been shown, it is irrelevant to consider the alleged ulterior motive, the timing of the acquisition of the shares and the relationship with Sinosoft and Janful etc.

400.This is taking too restrictive an approach which is not supported by the authorities.  To begin with, I do not think the establishment of the locus by acquiring shares in the listed company advances the plaintiffs’ case at all.  It would be easy enough for the plaintiffs to acquire shares in Sinosoft, which is a public company.  In fact, the evidence is clear that the 1^st plaintiff obtained 2,000 shares out of 1,032,258,000 shares (or 0.000000019%) eight days prior to the issue of the writ; the 2^nd plaintiff acquired 2000 shares ten days prior; and the 3^rd plaintiff acquired 4,000 shares (or 0.000000038%) also eight days prior to the issue of the writ.

401.Secondly, it is my view that to show a prima facie case that they are entitled to bring the derivative action is the least and not the most that the plaintiffs should achieve.  I do not understand the CFA in Waddingtonto be laying down the principle that once the threshold requirement is met, the plaintiffs are entitled to sue derivatively on behalf of the company and other shareholders as of right.  At paragraph 16 of Waddington, His Lordship Ribeiro PJ quoted from Prudential Assurance Co Ltd v Newman Industries (No 2) [1982] Ch 204 and said:

“ 16. The Court concluded that the answer was for a prima facie case test to be adopted, ...:

[quoting Prudential Assurance:]

In our view, whatever may be the properly defined boundaries of the exception to the rule, the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that ...”  [emphasis added]

402.The defendants have cited to me at least three authorities which show that the courts either struck out a derivative writ on the basis of ulterior motive or considered the derivative writ should not continue by reason of the plaintiff’s ulterior motive.  As a matter of fact, all three authorities were referred to by the CFA in Waddingtonand none of them was reprobated by the court.

403.Barrett v Duckett [1995] 1 BCLC 243 was a case where the Court of Appeal, inter alia, struck out the derivative action.  In the case, the wife’s mother and the husband were shareholders of a company.  The mother brought an action on behalf of the company when her daughter was divorcing her husband.  The husband petitioned for winding up of the company on just and equitable ground, and sought to strike out the derivative action brought by the mother.  The judge held that the practical course was to list the action for hearing with the petition.  The appeal was allowed but the derivative action was struck out. The Court of Appeal said as follows of the derivative claim:

“ The general principles governing actions in respect of wrongs done to a company or irregularities in the conduct of its affairs are not in dispute:

(1) The proper plaintiff is prima facie the company.

(2) ...

(3) There are however recognised exceptions, one of which is where the wrongdoer has control which is or would be exercised to prevent a proper action being brought against the wrongdoer: ...

(4) When a challenge is made to the right claimed by a shareholder to bring a derivative action on behalf of the company, it is the duty of the court to decide as a preliminary issue the question whether or not the plaintiff should be allowed to sue in that capacity.

(5) In taking that decision it is not enough for the court to say that there is no plain and obvious case for striking out; it is for the shareholder to establish to the satisfaction of the court that he should be allowed to sue on behalf of the company.

(6) The shareholder will be allowed to sue on behalf of the company if he is bringing the action bona fide for the benefit of the company for wrongs to the company for which no other remedy is available. Conversely if the action is brought for an ulterior purpose or if another adequate remedy is available, the court will not allow the derivative action to proceed.

...

... Mr Mann and Mr Cayford submit that this action should not be allowed to proceed, namely that Mrs Barrett has an ulterior motive which makes her an inappropriate person to bring these proceedings. On this the judge commented ...:

‘No doubt there is ill feeling between Mrs Barrett and Mr Duckett but that in itself cannot debar Mrs Barrett — were it to do so, most derivative actions would be frustrated.’

I see the force of that, but I am not persuaded that it is a sufficient answer to the point put against her in the light of the particular circumstances. Here I repeat what I have referred to as the salient features of this case. Personal rather than financial considerations would appear to be impelling her to pursue an action, in the outcome of which she would have no financial interest ...

I can well understand that Mrs Barrett is upset at what has occurred between Christopher and Carol and that she is indignant at the supplanting of Carol by Janet.  But her partiality shows through all her evidence, and it is by her behaviour in relation to the claims against Carol, in contrast to the claims against Christopher and Janet, that I have become convinced that she is not pursuing this action bona fide on behalf of the company.  If she had been, she would have had to sue Carol no less than Christopher in respect of diverted moneys.  ... I am afraid that I simply do not believe that Mrs Barrett would pursue any claim against her daughter to the point of enforcing judgment: ....  This is not a satisfactory basis for an action on behalf of the company.”

404.I note in particular the reference to the court’s duty to try and decide as a preliminary issue the plaintiff’s capacity to sue derivatively where his right to bring the claim is challenged.  This underscores the need to be vigilant and not to allow furtherance of claims by plaintiffs whose right to bring the action was questionable, such as where he was alleged to be driven by motives which are not for the benefit of the company from whom he derives the right to sue.

405.In Konamaneni & Ors v Rolls Royce Industrial Power (India) Ltd [2002] 1 WLR 1269, the court considered the ulterior motive of the pursuers.  Although the court ultimately decided to stay the action on the ground that India was the appropriate forum to try the issue, I find the obiter discussion on ulterior motive as displacing the plaintiffs’ right to continue with the derivative action convincing.  In particular, similar to the present, it was a case where the defendants applied to set aside the master’s order granting leave to serve the derivative proceedings on the Indian company out of the jurisdiction.

406.Lawrence Collins J set aside the service out permission mainly on the ground that India was the appropriate forum to try the issues but the following on what His Lordship said about derivative action is worth noting:

“ 25 The usual rule is that a company is the proper claimant in an action to redress a harm done to the company or enforce a cause of action vested in the company (the so-called ‘rule in Foss v Harbottle’ 2 Hare 461). There are, however, a number of exceptions to the rule. ... The remedy was ‘introduced on the ground of necessity alone in order to prevent a wrong going without redress’: Smith v Croft (No 2) [1988] Ch 114, 185. ...

26 A fraud on the minority involves two elements. The first is a cause of action in the company that can be characterised as an equitable fraud. ... The second element is control of the company by the wrongdoers.

27 Wrongdoer control may be established by proof that the wrongdoers own a majority of the shares carrying votes, but the essential question is whether the claimant (or perhaps, more accurately, the company) is being prevented from pursuing a claim which the company legitimately has: see Smith v Croft (No 2) [1988] Ch 114, 185, per Knox J, who said:

‘Ultimately the question which has to be answered in order to determine whether the rule in Foss v Harbottle applies to prevent a minority shareholder seeking relief as plaintiff for the benefit of the company is ‘Is the plaintiff being improperly prevented from bringing these proceedings on behalf of the company?’ ... The appropriate independent organ will vary according to the constitution of the company concerned and the identity of the defendants who will in most cases be disqualified from participating by voting in expressing the corporate will.’ ”

407.On ulterior motive, the court considered as follows:

“ 135 The principal issues which ... are likely to arise are these. (a) Is the derivative action brought bona fide for the benefit of the company by shareholders, ...

136 The defendants’ position is this: the current English action is part of the wider factional battle between the two main camps of joint venturers in SPGL. The action has been brought by [the Reddy’s] camp to seek to pressurize the Rolls Royce defendants into becoming involved in settling the overall disputes between the two camps. ...

...

138 ... Even if the proceedings were to succeed and SPGL were to be paid the full amounts claimed, the individual claimants’ proportionate interest would be about £5 each. It would be wholly unrealistic on the material before me to suppose that this is not a claim in reality being pursued by Mohan Rao and Ravi Reddy for their own purposes. The claimants are being funded by Ravi Reddy and get their information from Mohan Rao.

139 ... I have no doubt that this was purely tactical, and designed to support the case for English jurisdiction ...

...

189 I should add this: an order for service out of the jurisdiction can be set aside if the claimant fails to show that there is a serious issue to be tried.  ... I have already expressed the view that it would be unrealistic to view these proceedings as anything other than as being pursued by Mohan Rao and Ravi Reddy for their own purposes.  If that view is right, then the claimants would not have succeeded at the stage of the application under CPR r 19.9 in obtaining permission to continue with the claim, and therefore there would be no serious issue to be tried on the derivative claim.  That, however, will now be a question for the judge in India.”

408.I respectfully agree with paragraph 189 of Konamaneni quoted above and will adopt the same approach here, ie to see if the plaintiffs’ claim would survive a strike-out, if not, then there is no serious to be tried.

409.Likewise, in Forrest v The Manchester, Sheffield and Lincolnshire Railway Co (1861) 45 ER 1131, the court dismissed the claim as the plaintiff admitted he was receiving instructions from the enemy camp against the company for whom he allegedly represented.

410.The plaintiff filed a bill on behalf of himself and all other shareholders in a railway company, and sought an injunction to restrain the company from doing something ultra vires.  The plaintiff admitted on cross-examination that he was a shareholder in a rival company, and instituted the suit by the direction of the latter company, who indemnified against costs.  The Lord Chancellor said:

“ ... the ground upon which I proceed is entirely that of personal exception to the character of the Plaintiff, .... He says in that examination ‘The directors of the packet company directed the institution of this suit and indemnify me against costs.’ It is, not that they persuaded him to institute the suit, not that they instigated the suit, but that the directors of the other company have ‘directed the suit,’ and are to indemnify the Plaintiff against the costs of it. To use a familiar expression, the Plaintiff is the puppet of that company. It has been a very wholesome doctrine of this Court that one shareholder having in view the legitimate purposes of the company may be permitted in this Court to maintain a suit on behalf of himself and the other shareholders of the company, but the principle upon which that constructive representation of the shareholders is permitted indisputably requires that the suit shall be a bonâ fide one, faithfully, truthfully, sincerely directed to the benefit and the interests of those shareholders whom the Plaintiff claims a right to represent. But can I permit a man who is the puppet of another company to represent the shareholders of the company against whom he desires to establish the interests and benefits of a rival scheme? That would be entirely contrary to the principle upon which this constructive representation has been permitted to be founded. When the Plaintiff sues in that capacity any personal exception to the Plaintiff remains, and it would be in direct contradiction of every principle of truth and justice if I permitted a man to come here clothed in the garb of a shareholder of company A., but who is in reality a shareholder in company B., and has no sympathy whatever with, no real purpose of promoting the interests of the other company. Such a thing would be so much at variance with the principles of a Court of Equity that it would be impossible for it to entertain a suit of that description which is a mere mockery, a mere illusory proceeding.

... I desire, however, to point out again the wide difference which exists between a suit ‘directed’ to be instituted by the directors of another company, and a suit which is bonâ fide instituted by the Plaintiff, persuaded only to the institution of it by the arguments of another company. In the one case the suit is the suit of the Plaintiff, and is for aught that appears instituted at the peril of the Plaintiff. In the other case, the whole origin of the suit and the direction and conduct of it emanate altogether form the other company, and the suit would have no existence whatever but for the other company, and the suit would have no existence whatever but for the order of the other company. ...

I have nothing to do with the motives of Plaintiffs suing in this Court.  If they come here in a bonâ fide character, the reason for their coming here is a matter beyond the province of a Court of Justice to inquire into.  But if a man comes here representing to me that he is a bonâ fide shareholder in a company, and that it is the bonâ fide suit of that company, and it turns out not to be the suit of that company, but in reality to be in its origin and its very birth and creation the suit of another company, then I repeat that this is an illusory proceeding, and ought not to be attended to by the Court.  ... the suit is not the expression of his own will, nor is it the legitimate prosecution of his own interests or his own objects, but it is the prosecution of the interests and objects of persons who have no right whatever to invoke the interference of this Court.”

411.I have considered the plaintiffs’ objections to these authorities and find the distinction, mostly on the facts, not helpful. Those objections do not undermine the fundamental principle that the court may refuse / strike out a derivative action where ulterior motive on the part of the plaintiffs is established.

412.The plaintiffs submitted that the facts in the present case bears resemblance to Seaton v Grant(1866–67) LR 2 Ch App 459, where acquisition of shares for the purpose of taking out a derivative action was not regarded as an ulterior motive.  In that case, the plaintiff lost money by speculating in the shares of the company. For the purpose of qualifying himself as a shareholder so as to bring an action on behalf of the company and other persons, he acquired five shares in the company.  The court said:

“ But the strongest argument which has been used in support of the motion is what may be called the personal exception to the Plaintiff. Now I by no means approve of the Plaintiff’s conduct; but the question is, whether his conduct has been such as to deprive him of all right whatever in this suit? ... I cannot venture to say that for this reason the Court ought to interfere upon motion to deprive a Plaintiff of his rights, if, upon the hearing, he should appear to be entitled to anything.

Another objection ... is the insignificance of the Plaintiff’s interest in the subject matter of the suit.  ... I am not prepared to say that the ordinary rule as to suits for a subject matter of less value than £10 to a case of this kind.  ... I might be inclined to go even farther ... and to say, that even if a sufficient answer had been put in, a motion of this kind could not be acceded to.  It is sufficient, however, to rest the refusal of the motion upon the ground that no answer has been put in.  I must add, however, that questions of fraud are proper to be tried at the hearing of the cause, and not on such an application as this. ...”

413.No doubt, the plaintiffs rely heavily on Seaton’s case.  But I do not think this case take the plaintiffs’ case very far.  As can be seen, the decision mainly premised on the absence of an answer denying the charges of fraud having been filed.  As Lord Cairns said, “Suppose an answer were put in admitting all the allegations contained in the bill, it would be difficult to say at this stage of the suit that the Plaintiff’s conduct would altogether disentitle him to relief.”

414.The same is not prevalent here.  Although no defence has been filed, the defendants have advanced strong and convincing arguments which in my view, support the conclusion that the plaintiffs were driven by ulterior motives other than for the benefit of Sinosoft in instituting the derivative claim.

415.Moreover, I fully appreciate that this is a discretionary territory and each case varies widely depending on the facts. Indeed, the first sentence of the decision runs as follows, “In every case of this description, we must consider what is the nature of the case made by the bill.”

416.As I have said above, the plaintiffs have only acquired a small amount of shares very shortly prior to the issue of the writ. Although Seaton v Granthas said that the little or negligible financial interest of the plaintiff would not disentitle him from bringing the claim, I am certainly entitled to take into account this fact together with other relevant circumstances, such as the facts that the plaintiffs are related to Janful and South China.

417.The most striking feature is the absolutely inexplicable conflict of interests which exists between HCA 2345 (and HCA 1613 as well) and the present case.  No one disputes that all three actions arise out of the same set of facts and everyone anticipates all three actions to be tried and heard, as indeed, what is happening now before this court.

418.Janful and South China are plaintiffs in both HCA 2345 and 1613, using the same facts as HCA 2423 (ie the present action), and the same team of lawyers, to pursue against Sinosoft as well as some or all of the NS Principals.  Although Sinosoft is named as the 6^th defendant in this derivative action as a matter of technicality, all the plaintiffs in HCA 2324 are suing on behalf of themselves and all other shareholders in the interests of Sinosoft.  Logic follows, that in HCA 2423, it must be in the interest of Sinosoft to prove all the allegations in the Statement of Claim.  Oddly enough, it must also be in the interest of Sinosoft to disprove the allegations of fraud and successfully defending HCA 2345 and 1613, on a very similar Statement of Claim based on the same set of facts.

419.What evidence would the plaintiffs give when the actions are tried together?  Should they testify against the NS Principals — which they should do in these proceedings; or should they not testify against the NS Principals, which they should be doing when defending Sinosoft vis-à-vis Janful and South China in HCA 2345 and HCA 1613?  Obviously, if the plaintiffs seek to prove their case on fraud against the NS Principals, they are simply establishing Sinosoft’s liability in HCA 2345 and HCA 1613.  That is clearly for the benefit of Janful and South China and not in the interest of Sinosoft.

420.The plaintiffs do not even pretend to make known this fact.  A common team of lawyers are employed in all three actions.  Indeed, the Statement of Claims in all three actions are almost identical.  Mr Chan even drew me to the same typos in the Statement of Claim in HCA 2345 and the one in HCA 2423.  The alleged victims who are now claiming against Sinosoft in HCA 2423, are at the same time purporting to defend its interest in HCA 2345 and HCA 1613.  The lawyers will receive instructions from the alleged victims in HCA 2423 to establish their case against Sinosoft in HCA 2345.

421.By reason of the aforesaid, I am driven to the irresistible conclusion that the plaintiffs pursue the present derivative action out of mala fides and for purposes other than benefitting Sinosoft, but rather for assisting Janful and South China to prove their case against Sinosoft.

422.In the exercise of discretion, the court should disallow the derivative action to proceed.

D.3.4   No serious issue to be tried: no loss to Sinosoft

Defendants’ submissions

423.The defendants’ submission is that this is a derivative action, ie an action brought on behalf of the company.  The plaintiffs must establish loss to Sinosoft, which but for the wrongdoer’s control, is recoverable by Sinosoft.

424.However, there is no loss to Sinosoft until Janful is successful in HCA 2345 as against Sinosoft.  As at the time of the Writ and up to now, Sinosoft has suffered no loss.

425.Most important of all, it is the defendants’ main submission that in any event, Sinosoft would suffer no loss.  The argument goes like this.  Infotech was the company which held the shares in the JV Company, which held in turn the software products and the intellectual property rights in the products.  Sinosoft acquired the software programmes and other assets from Infotech for SGD1.  The defendants submitted that the total net value of Infotech’s assets as at January 2011 (which was the time of its transfer to Sinosoft) was about RMB164.25 million.  In other words, Sinosoft had bought assets worth of RMB164 million for SGD1 only.  How could Sinosoft suffer any loss?  They said the total equity of Sinosoft as at 31 December 2014 was over RMB740 million.

Plaintiffs’ submissions

426.On the other hand, the plaintiffs argued that the defendants’ allegation that Sinosoft has suffered no loss until they are successful as against Sinsoft in HCA 2345 is misplaced as Sinosoft’s liability under HCA 2345 is only one of the eight items of loss pleaded in paragraph 111 of the Statement of Claim in this derivative action.

427.They submitted that in January 2011, Sinosoft UK transferred the entire issued share capital of Infotech to Sinosoft for SGD1.  The transfer of Infotech to Sinosoft effected the injection of the software programmes and the intellectual property rights into Sinosoft prior to its listing in Hong Kong.

428.The plaintiffs then submitted that in return for such transfer, the NS Principals including the 1^st to 4^th defendants (through their respective corporate vehicles) were allotted shares in Sinosoft, by crediting HK$7,490,000 from the share premium account of Sinosoft.  Thus, the allegation that Sinosoft acquired all the Infotech shares for SGD1 and even if the software programmes were valueless, Sinosoft would not have suffered any loss is plainly unsupportable.

Discussion

429.In the Statement of Claim, the plaintiffs’ claimed mainly, damages for breach of fiduciary duties, damages for conspiracy, and account for profits for breach of fiduciary duties.  It is incumbent upon the plaintiffs to establish they have suffered loss and damage in this Order 11 application.

430.At paragraph 26 of Yu’s Affirmation, the defendants alleged that “... for the sum of Singapore Dollar (SGD) 1, Sinosoft acquired the assets and business of Infotech having a net value of RMB233.4 million”.  At paragraph 38 of their written submission, it was said that “[t]here is no dispute that Sinosoft had acquired software programmes ... together with other substantial assets from Infotech for the consideration of $1 Singaporean Dollar.  The total net value of assets was in the region of RMB164.25 million as at January 2011 when they were acquired.”

431.In support, the defendants referred to the extract from the Consolidated Statements of Financial Position/Statements of Financial Position to elaborate their no-loss argument by Sinosoft.

432.I see in the extract that the “total equity” of Sinosoft and its subsidiaries was RMB164.25 million as at 31 December 2010 and RMB233.4 million as at 31 December 2012.

433.It appears to me that the defendants’ allegation that Sinosoft acquired Infotech’s assets and business worth of RMB164.25 million (as in paragraph 38 of their written submission) or RMB233.4 million (as in Yu’s Affirmation) for SGD1 only, is factually wrong.  RMB164.25 million was the net value of Sinosoft and its subsidiaries as at 31 December 2010 or January 2011; and RMB233.4 million was the net value of Sinosoft and its subsidiaries as at 31 December 2012.

434.The figures quoted by the defendants were not the values of Infotech (which held the software products and the IP rights) but only represented the net values of Sinosoft and its subsidiaries as at those dates.

435.In other words, there is simply no direct evidence of the net values of Infotech in January 2011 or as at the end of December 2012. No doubt, the values of Infotech must have been included within RMB164.25 million and RMB233.4 million for the respective periods.  But there is no evidence as to exactly how much was attributable to the net value of Infotech alone.

436.On the other hand, neither is the plaintiff’s submission on the evidence satisfactory.  In short, their submission is that Sinosoft did suffer loss as the company had paid HK$7,490,000 for the shares allotted to the alleged wrongdoers including the 1^st to 4^th defendants.

437.The plaintiffs’ written submission said:

“ 117. In return for such transfer [viz, the transfer of Infotech to Sinsoft], the NS Principals (including the 1^st to 4^th Defendants) were allotted shares in Sinosoft (held by their respective corporate vehicles (see §§100, 107, 108 SOC .... In particular, as part of the Global Offering, the NS Principals (through their corporate vehicles) were allotted shares from the premium account of Sinosoft pursuant to the Capitalisation Issue. The Prospectus ... described the allotment in the following terms:–

‘ Capitalisation Issue

Conditional upon the crediting of our Company’s share premium account as a result of the issue of the Offer Shares pursuant to the global Offering, our Directors are authorised to capitalize an amount of HK$7,490,000 standing to the credit of the share premium account of our Company by applying such sum towards the paying up in full at par a total of 749,000,000 Shares for allotment and issue to our Shareholders as of 11 June 2013, on a pro rata basis.’

118. Therefore, Ds’ allegation that Sinosoft acquired all the shares of Infotech for SGD1 and that even if the Software are valueless Sinosoft would not have suffered any loss is plainly unsupportable.  ...”  [emphasis supplied]

438.I have underlined the words “[i]n return for such transfer” as it appears to me the plaintiffs meant that the alleged wrongdoers including the 1^st to 4^th defendants were allotted shares in return for the transfer of Infotech.  Since Sinosoft had paid HK$7,490,000 for the shares, Sinosoft had suffered a loss apart from the alleged valueless software programmes.

439.However, when reference was made to §§100, 107, 108 of the Statement of Claim, a different picture exists.

440.§100 of the SOC says:

“ 100. On 17 January 2011, the following Sinosoft shares were allotted at par value of HK$25, credited at fully-paid. ...”

then followed by the shares allotted to, inter alia, the corporate vehicles of the 1^st to 4^th defendants.

441.What is clear is that §100 was referring to the allotment of shares in January 2011.  Although the transfer of Infotech to Sinosoft took place in January 2011, the pleading itself did not draw any connection between the allotment of shares and the transfer.  In fact, it was not related to the transfer.  That much is clear from the preceding paragraph which says:

“ 99. Sinosoft, the intended listing vehicle, was incorporated by the NS Principals in the Cayman Islands on 6 January 2011 with initial authorized share capital of HK$380,000 divided into 3,800,000 shares of HK$0.1 each. ...”

442.The pleading went on to describe the transfer of Infotech to Sinosoft for SGD1.  §107 and §108 say:

“ 107. As part of the Global Offering, the NS Principals were allotted shares from the premium account of Sinosoft with the result that they became the controlling shareholders of Sinosoft. ...

Capitalisation Issue

...

108. The NS Principals (through the NS Corporate Vehicles) were allotted shares pursuant to the aforesaid capitalization issue (the ‘Capitalisation Issue’). ...”

443.With respect, I cannot see how the pleading can be interpreted in the way the plaintiffs did, ie the allotment of shares was in return for the SGD1 Infotech transfer, such that Sinosoft suffered loss of about HK$7,490,000 by paying for the allotment from the share premium account.

444.In fact, the initial allotment in January 2011, although one that was just made at about the same time of the SGD1 transfer, was not the allotment under which Sinosoft had credited HK$7,490,000 as consideration.   The latter allotment took place only in about June 2013 as part of the Global Offering, which was already 2½ years after the initial allotment.  Not even the pleading itself articulated the fact that the latter allotment was done in return for the SGD1 transfer.

445.It is difficult to see how the plaintiffs’ submission at paragraph 117 (of the written submission) could be made.

446.Thus, it is clear that neither the plaintiffs nor the defendants had been very helpful on this no-loss issue, which I stress was the exception rather than the norm.

447.That having said, I venture my own view that I am inclined to agree that Sinosoft would suffer no loss in any event.  The plaintiffs allege that loss was suffered by Sinosoft since some of the software products in the Sinosoft Group were rendered doubtful, uncertain or valueless by reasons of the alleged fraud on the part of the 1^st to 4^th defendants. I do not quite understand what this exactly means.  There was no elaboration in the written submission.  It seems the plaintiffs were suggesting that the fraudulent acts were instrumental in rendering the software valueless: §111(1)(a) of the Statement of Claim.

448.But as a matter of fact, there cannot be any dispute that the software programmes and the IP rights are very valuable.  The crux of the plaintiffs’ complaint is that the wrongdoers had fraudulently obtained the software programmes and their rights which should belong to the JV Company.  That is the plank of the claims under HCA 2345.  It would be silly and contrary to all sense to assume that the software programmes would cost less than SGD1 or HK$6.  It is almost impossible that Sinosoft would suffer any loss by paying SGD1 only (which is common ground between the parties) for the transfer of Infotech which held those valuable products.  Such stance that the software and the IPRs would become valueless is totally inconsistent with the stance taken by the plaintiffs in HCA 2345.  The relief prayed therein, inter alia, is for:

“ (1) An order that each of the Defendants do provide:

(i) an account of the Software Products and the IPRs and their status and whereabouts;

(ii) an account of their dealings with the Software Products and the IPRs since January 2000 to date;

(iii) an account of all profits and benefits obtained by each of them (whether directly or indirectly through their nominees, associates, agents and/or other companies in which they have an interest) from the Software Prodcuts and the IPRs since January 2000;”

449.It must be the case that the software programmes are valuable, otherwise, the plaintiffs would have no claim under HCA 2345. But if the programmes are valuable or cost more than SGD1, the plaintiffs have no claim under HCA 2423.  In other words, there would be no loss to Sinosoft in any event at the time of when the Writ was issued in HCA 2423.

450.This is a derivative action brought by the plaintiffs on behalf of the company and other shareholders.  If they have not established loss to the company, the action cannot even take off the ground.

451.I am aware the plaintiffs had pleaded other losses: see §111(3) to (8) of the Statement of Claim.  They include losses such as likely actions to be taken by the authorities (including the SFC, the HKSC and the Police) and thereby affecting Sinosoft’s earnings / profits — sub (3); difficulties in raising funds, securing new contracts — sub (4); exposure to claims by shareholders of Sinosoft — sub (5); exposure to claims by South China and Janful under HCA 2345 — sub (6); jeopardizing the substantial funds invested by Sinosoft — sub (7) and Sinosoft needing to expend considerable sums by way of legal costs to deal with SFC, HKSC and police investigation — sub (8).

452.They are speculative and unsupported by evidence.  The loss pleaded at sub (6) strikes as particularly odd.  The loss is entirely dependent on the outcome of HCA 2345 which Sinosoft will resist.  Until Sinosoft has failed in HCA 2345, no loss will accrue in HCA 2423.

453.Absent loss and damages, the plaintiffs have not pleaded a complete cause of action.  Thus, there can be no serious issue to be tried.

Other matters

454.Without disrespect to Mr Yu and Mr Chan, I do not think it is necessary to go into detail the other submissions made as plainly, the finding that Sinosoft has suffered no loss as at the time of the Writ has disposed of the matter under this section.

455.For the sake of completeness and in deference to their able submissions, I shall just deal with them briefly.

456.I do not accept Mr Chan’s submission that this derivative action should not be allowed unless and until Janful is successful as against Sinosoft in HCA 2345 as only then would Sinosoft suffer a loss.

457.The liability of Sinosoft can equally be determined in this derivative action which is an independent action.  All the allegations of fraud vis-à-vis the alleged wrongdoers form the underlying facts in the Statement of Claim and can be determined in this proceeding.  However, bearing in mind the resemblance of the allegations in this action and HCA 2345, it is likely they will be heard together if the case were to proceed but this is a matter of case management to be dealt with at a later stage.

458.Similarly, I do not see the relevance of the defendants’ objection about the plaintiffs’ provision of voluntary particulars.  Those voluntary particulars were provided in relation to HCA 2345 (which I have already dealt with).  The plaintiffs are not, and do not have to rely on this set of voluntary particulars here.

459.As regards the defendants’ allegation that the derivative action constitutes a collateral attack on the PRC judgment.  The defendants’ case is that as there was a finding in the Administrative Proceedings in the PRC that Janful knew about the content of the registered JV Agreement, the plaintiffs are estopped from reopening this factual issue to allege that they do not have knowledge of the content of the fraudulent agreement at the time of registration.

460.As already debated in HCA 2345, there is a serious dispute of fact here.  It is impossible for me to resolve this factual dispute, nor is it necessary at this stage.  Suffice it to say that I do not find this point relevant or necessary to resolve the no-loss issue in this section.

D.3.5   Order 11 gateways

Defendants’ submissions

461.It is the defendants’ case that the plaintiffs’ claim falls outside the confines of Order 11, rule 1(1)(c), (f) and (p), which were relied upon by plaintiffs when they made their ex-parte service out application.

462.This part can be dealt with relatively quickly.

Discussion

Sub-paragraph (c):

463.Its application is relevant to both the conspiracy and fiduciary claims and provides that:

“ the claim is brought against a person duly served within or out of the jurisdiction and a person out of the jurisdiction is a necessary or proper party thereto;”

464.This requires an action was properly brought by a plaintiff against a defendant within the jurisdiction and the persons sought to be served outside the jurisdiction are proper and necessary parties to such action.

465.The plaintiffs say they have served Sinosoft, being the 6^th defendant (although the technical defendant) within the jurisdiction, and the 1^st to 5^th defendants are necessary parties.  Thus the case falls within Order 11, rule 1(1)(c).

466.In light of what the court has said above, that the intended action against Sinosoft who is within the jurisdiction has shown no serious issue to be tried, it follows that the plaintiffs have not successfully brought themselves within Order 11, rule 1(1)(c).

467.This concludes the matter and it is unnecessary to go into the other submission advanced by the defendants.  I shall just write briefly, in deference to the submissions made.

468.Regarding the defendants’ submission that Sinosoft is only a technical defendant and it is not permitted by Order 11, rule 1(1)(c) to use a technical defendant as a springboard to bring in overseas defendants.

469.I tend to agree with Mr Yu that there is no prohibition to use this sub-paragraph to derivative actions.  In this case, it happens that the technical defendant is within the jurisdiction.  There is no reason why the plaintiffs cannot invoke sub-paragraph (c) just because it was a technical defendant.

Sub-paragraph (f):

470.This sub-paragraph is only relevant to the plaintiffs’ conspiracy claim.  It says:

“ the claim is founded on a tort and the damage was sustained, or resulted from an act committed, within the jurisdiction;”

471.The court has concluded that Sinosoft has suffered no loss at the time the Writ was issued.  This gateway is not open to the plaintiffs as the sub-paragraph plainly requires that damage has already been sustained.

Sub-paragraph (p):

472.This sub-paragraph is only relevant to the plaintiffs’ fiduciary claim.  It says:

“ the claim is brought ... for an account or other relief against the defendant as constructive trustee, and the defendant’s alleged liability arises out of acts committed, whether by him or otherwise, within the jurisdiction.”

473.The underlying facts of this derivative action and HCA 2345 are the same.  I have already held in HCA 2345 that the acts which gave rise to the plaintiffs’ claims took place in the PRC.  It follows that I am not satisfied that the acts complained of here were committed within the jurisdiction.

474.Mr Yu submitted that it is unnecessary for the plaintiffs to show that all the wrongful acts were committed in Hong Kong, as long as acts alleged to have been committed in Hong Kong were “substantial and efficacious”.  He relies on paragraph 21 of the Statement of Claim.

475.It is interesting to note that there was no pleading under the particulars that the fraudulent acts actually took place in Hong Kong.  But even if they were, they do not seem to be “substantial and efficacious” acts.  Put simply, without those acts which were committed in the PRC, there would not be liability; and accordingly, the 1^st to 4^th defendants’ acts in Hong Kong alone would not give rise to liability.

476.I am not satisfied that the plaintiffs have brought themselves within sub-paragraph (p).

D.3.6   Forum non conveniens

477.I shall not repeat the applicable legal principles as they have already been stated above under HCA 2345.

478.Here, in fact, the parties largely repeat their submissions under HCA 2345.  This is hardly surprising as they involve the same set of underlying facts.

479.It follows that the reasons and conclusion for staying HCA 2345 in favour of the courts in Nanjing are equally applicable to the derivative action under consideration.

480.I will limit the discussion only to matters which solely concern the question of forum non conveniens under HCA 2423.

481.Mr Yu pointed out that the following facts are important and should be taken into account in deciding the proper forum for the resolution of the disputes in favour of Hong Kong:

(1) Sinosoft is a company listed on the HKSE;

(2) Sinosoft has its principal place of business in Hong Kong: p 58 of the Prospectus;

(3) the plaintiffs are shareholders of the company resident in Hong Kong and hold shares in Hong Kong; and

(4) the defendants occupy senior managerial positions within Sinosoft and are bound to observe rules and regulations imposed by the SFC and HKSE.

482.Except for paragraph 481.2 which Mr Chan seemed to dispute [19], all the rest are not even disputed.  They are not issues which need to be tried and are thus irrelevant when considering whether the Hong Kong or Nanjing court is the more appropriate forum.

483.I do not find the dispute over the principal place of business to bear any significance on the issue of forum non conveniens, if the plaintiffs have plainly failed to show any loss being suffered by Sinosoft at the time when the Writ was issued, or indeed, anytime thereafter.

484.Similarly, it was urged upon me that the acts of injecting the software products (together with the IP rights) into the Hong Kong listed company and the false representations to Sinosoft are central to the fiduciary and conspiracy claims.

485.Likewise, I do not think these are facts which the defendants can deny — of course, they will deny the representations made about the software or the ownership of the software are false; but what I am saying is the fact that representations were made about the software programmes and the fact of injection cannot be disputed.  It is the ownership of the software that is in dispute.

486.The issue about the ownership dispute relates to and depends on the findings on the alleged fraudulent acts, most of which indisputably took place in the PRC.  Thus, this point does not help the plaintiffs either.

487.Before leaving this section, I shall comment on one point raised by the parties in the course of their oral submissions.

488.In this case, it is incumbent upon the defendants, who apply to stay the plaintiffs’ action in favour of the Nanjing court, to establish in the first place that the Nanjing court is a competent jurisdiction to hear this matter, which is a derivative action.

489.However, I am not aware, or I have not been shown any evidence that the Nanjing court will assume jurisdiction to hear a derivative action, which is a common law procedural device to afford protection to minority shareholders.

490.The case has proceeded upon the basis that the Nanjing court does have jurisdiction to deal with a derivative action as the point has not been argued by the parties in their skeletons and it appears to me that both are content to proceed on this basis.

491.I recall I did enquire if there is any evidence on this point at the hearing with Mr Yu and Mr Chan.  Mr Yu confirmed that there was no evidence on the competence of the Nanjing court in this action but fairly drew my attention to the evidence in HCA 2345 where there is expert opinion from the 2^nd to 7^th defendants’ expert opinion therein asserting / confirming the ability of the shareholders to bring the action derivatively, although the plaintiffs’ expert did not agree.

492.On the other hand, Mr Chan orally submitted that the plaintiffs did not take any issue on the defendants’ ability to commence a derivative action in the Nanjing court.

493.With respect, I disagree with Mr Chan’s approach.  As the applicant for stay, the defendants bear the burden to establish, in the first place, the competence of the Nanjing court under the first stage of the three stage tests as elucidated in Rambas Marketing Co LLC v Chow Kam Fai David[2001] 3 HKC 250, at 255.  The defendants could not conveniently shift the burden to the plaintiffs for not taking any issue.  The defendants should have made good their case in the first place.

494.In the oral submissions of Mr Chan, it was further suggested that Hong Kong is definitely not the appropriate jurisdiction. Either the Nanjing court or the Cayman court would be more appropriate than the Hong Kong court to try this action.  He said it was either Nanjing or Cayman but definitely not Hong Kong.  I am not prepared to deal with whether the Caymen court could be more appropriate than the Hong Kong court as the defendants’ Stay Summons only suggested a stay in favour of Nanjing court but no others.

495.However, I would like to make a comment in this regard.

496.There can be no dispute that there is absolutely no evidence on the Cayman’s ability to hear a derivative action, which is irrelevant anyway.

497.But it was Mr Chan’s argument (orally) that in the absence of evidence on Cayman law, the defendants could utilise the presumption in favour of applying the domestic law.

498.I reject this submission.  In my view, it does not make sense at all, if not very odd, that the presumption, which is an evidentiary device, can be applied to discharge the very evidential burden which the defendants need evidence to establish.  If the defendants were right, it would simply be defeating the need to discharge the burden in a stay application based on forum non conveniens in the first place.

D.3.7   Material non-disclosure

499.Similarly, the parties have adopted their submissions made in HCA 2345 on material non-disclosure.  I shall do the same.

500.In addition, the defendants said the plaintiffs were guilty of not disclosing the following material matters:

(1) timing of plaintiffs becoming shareholders of Sinosoft and timing of brining HCA 2345 and the present derivative action;

(2) connection between plaintiffs and South China and Janful;

(3) the SGD1 acquisition of Infotech;

(4) the actions in the PRC; and

(5) letters from Janful and Baker & McKenzie to the HKSE and SFC prior to Sinosoft’s listing.

501.The plaintiffs’ also invited me to consider the issue of re-grant of fresh leave.

Timing of plaintiffs becoming shareholders of Sinosoft and timing of brining HCA 2345 and the present derivative action

502.No doubt, the plaintiffs submitted that this is not material to the court’s determination of whether leave to service out should be granted.

503.I reject the plaintiffs’ contention.  As said above, the timing of the acquisition of the shares is closely connected with the issue of whether the plaintiffs brought the action for a collateral purpose other than for the interest of the company.

504.I am of the view that this should have been drawn to the attention of the Master when they made the ex parte application.

Connection between plaintiffs and South China and Janful

505.The defendants’ complaint is that “[t]he connection of the Plaintiffs with Janful and South China and/or that the Plaintiffs are acting in accordance with the directions of Janful and South China.”: paragraph 41(2) of Yu Yifa’s Affirmation dated 23 December 2014; paragraph 68(2) of defendants’ written submission.

506.There are two complaints in one sentence, the first being the connection of the plaintiffs with Janful and South China, ie the plaintiffs in HCA 2345.

507.It is not in dispute that the 1^st plaintiff had been a director of Janful and the 2^nd plaintiff is an employee of various companies in the group headed by South China Financial Holdings Limited.  The 3^rd plaintiff is also one of the companies within this group headed by South China Financial Holdings Limited.

508.There can be no doubt that the plaintiffs in this action are connected with Janful and South China and which is a material view that in my view ought to be disclosed to the Master at the ex parte hearing.  This matter is highly relevant to the issue of whether the plaintiffs have commenced these derivative proceedings for a collateral purpose to serve the interest of Janful and South China in HCA 2345 rather than to facilitate the benefit of Sinosoft.

509.As regards the allegation that the plaintiffs are acting under the directions of Janful and South China, the evidence is less clear.  I note that at paragraph 31 of the 2^nd Affirmation of Cheung Choi Ngor (dated 25 March 2015), it was said that sub-paragraphs (1) to (3) of paragraph 16 of Yu’s Affirmation were correct.  The three sub-paragraphs set out the relationship between the plaintiffs and Janful and South China as aforesaid.  But before the sub-paragraphs, Yu alleged that “[t]he Plaintiffs are acting under the directions of Janful, South China, South China Financial, Ms. Cheung and/or Mr. Ng in commencing the Derivative Action.”  Thus, it is clear that Ms Cheung had carefully avoided making any response to this part of Yu’s Affirmation.

510.In the absence of clear evidence, I am not prepared to convict the plaintiffs of failing to disclose this fact, which I find to be highly material to the issue of collateral purpose / ulterior motive.  It is clear that the defendants have only made their assertions at paragraph 16 that the plaintiffs are directed by Janful and South China based on their relationship with each other.  But ultimately, having a relationship or a close relationship is one thing, acting in accordance with the directions of the HCA 2345 plaintiffs is quite another.  The fact that both sets of plaintiffs are represented by the same team of lawyers is only relevant to the issue of whether there exists a conflict of interests, but may or may not support the HCA 2423 plaintiffs are acting in accordance with the directions of the HCA 2345 plaintiffs.

511.This can be seen from the fact that this court has come to the conclusion that the plaintiffs in this action are acting with an ulterior motive without the need to find that the plaintiffs herein are being directed by South China and Janful.

The SGD1 acquisition of Infotech

512.This is of course a material matter for the service out application.  It is directly relevant to the alleged loss of Sinosoft.  But I am satisfied that there was disclosure: see §101 of the Statement of Claim.

The actions in the PRC

513.I refer to the analyses and conclusion under HCA 2345 and conclude that they are material matters which the plaintiffs have failed to disclose.

514.Obviously, the least the plaintiffs should do is to disclose the multitude of litigations in the PRC and let the court decide whether “forum shopping” has taken place.

Letters from Janful and Baker & McKenzie to the HKSE and SFC prior to Sinosoft’s listing

515.Before listing, there were complaint letters sent by Janful and Baker & McKenzie (acting for South China) to the HKSE and SFC, informing the latter two entities about the dispute between Sinosoft on the one part and South China and Janful on the other.

516.According to the defendants, the disclosure of the letters would inform the Master that the defendants had made no false or misleading statements to the HKSE and SFC and the on-going dispute between Janful and the 1^st to 4^th defendants prior to the company’s listing.  It would also show that the Defendants had not suppressed or concealed information in the Prospectus.

517.These are matters of factual disputes.  I agree that it would have been better had the plaintiffs disclosed them at the ex parte application but I would have thought that this does not constitute material non-disclosure as the disclosure of the letters do not affect the pleaded cause of action against the defendants.

The issue of re-grant?

518.For reasons which are obvious, I do not think a re-grant is appropriate.

519.It suffices to highlight the one reason to show that it is pointless to re-grant leave.  The reason is that the plaintiffs have simply failed to show that Sinosoft, the company on whose behalf the action is sought, has suffered any loss.

D.3.8   Conclusion

520.For reasons aforesaid, I would allow the defendants’ Stay Summons.  I shall set aside the leave to serve the Writ out of the jurisdiction and stay the proceedings.

D.4   Judgment Summons and Time Summons

D.4.1   The summonses

521.In light of the court’s decision to set aside the plaintiffs’ leave to serve the concurrent writ out of the jurisdiction and to stay the present action in favour of the Nanjing court, it is unnecessary to consider the Time Summons.  Neither is it necessary to discuss at great length the plaintiffs’ Judgment Summons which seeks to enter judgment against the 1^st to 4^th defendants in default of defence.

522.Nevertheless, I shall briefly deal with the two summonses in deference to the high power submissions made by Counsel.

523.I shall refer to the chronology set out in paragraph 296 hereinabove in my discussion.

D.4.2   Legal principles

524.It is not in dispute that where a party fails to comply with any rule or court order, any sanction for failure to comply imposed by such rule or order has effect unless that party applies for relief from sanction within 14 days of the failure: Order 2, rule 4 of the RHC. Here, the defendants had issued the Time Summons on 7 January 2015, nine days after the expiry of the Unless Order and had met the requirement of Order 2, rule 4.

525.In considering relief from sanction, the court is guided by Order 2, rule 5 which provides as follows:

“ 5. Relief from sanctions (O. 2, r. 5)

(1) On an application for relief from any sanction imposed for a failure to comply with any rule or court order, the Court shall consider all the circumstances including—

(a) the interests of the administration of justice;

(b) whether the application for relief has been made promptly;

(c) whether the failure to comply was intentional;

(d) whether there is a good explanation for the failure to comply;

(e) the extent to which the party in default has complied with other rules and court orders;

(f) whether the failure to comply was caused by the party in default or his legal representative;

(g) in the case where the party in default is not legally represented, whether he was unaware of the rule or court order, or if he was aware of it, whether he was able to comply with it without legal assistance;

(h) whether the trial date or the likely trial date can still be met if relief is granted;

(i) the effect which the failure to comply had on each party; and

(j) the effect which the granting of relief would have on each party.

(2) An application for relief must be supported by evidence.”

526.Both parties drew the court’s attention to Top One International (China) Property Group Co Ltd v Top One Property Group Ltd [2011] 1 HKLRD 606, where Fok J (as he then was) said as follows:

“ 32. The relevant legal principles governing the circumstances in which the court will extend time to permit compliance with an unless order were thoroughly analysed and discussed by Ribeiro J (as he then was) in Chan Chun Lung Allen v Ryland Ltd (unrep., HCA 4904/1996) paras.38 – 47.

...

34. Thus, the relevant principles applied by Ribeiro J in Chan Chun Lung Allen v Ryland Ltd were set out in paras.45 – 47 of his judgment and are summarised below:

(a) The court will ask whether a defendant’s failure to comply with an unless order was ‘intentional and contumelious’ or whether, on the contrary, he has been able ‘clearly [to] demonstrate that there was no intention to ignore or flout the order and that the failure to obey was due to extraneous circumstances’, keeping in mind that the court should not be astute to find excuses for such non-compliance.

(b) As with any other case in which a party approaches the court for an indulgence, it is incumbent on an applicant to adduce evidence upon which an exercise of discretion in his favour may be founded.

(c) Non-compliance is contumelious where it is the result of the litigant’s conscious and deliberate decision to ignore or disobey the court’s order in the absence of any extraneous excuse. Such deliberate conduct may be contrasted, for instance, with cases where the litigant has made a serious effort to comply in good faith but has been unsuccessful through bad luck or incompetence or with cases where the litigant has not complied because of circumstances outside his control (including cases where his solicitor has negligently or otherwise missed the deadline through no fault of the litigant).

35. Ribeiro J declined to lower the threshold, a trend which he noted was detectable in some of the English authorities, in particular Hytec Information Systems Ltd v Coventry City Council [1997] 1 WLR 1666 where, at p.1677, Auld LJ said:

In my judgment, there is no need to confine the test to that of an intentional disregard of a court’s peremptory order, whether or not it is characterised as flouting, contumelious, contumacious, perverse, obstinate or otherwise. Such an intent may be the most usual circumstance giving rise to the exercise of this jurisdiction. But failure to comply with one or a number of orders through negligence, incompetence or sheer indolence could equally qualify for its exercise. It all depends on the individual circumstances and the existence and degree of fault found by the court after hearing representations to the contrary by the party whose pleading it is sought to strike out.

...

41. In my view, the passage quoted above from Hytec Information Systems Ltd v Coventry City Council is entirely consistent with the more proactive case management approach encouraged by CJR and, in my view, CJR has had the effect that the Hytec approach now reflects the approach that should be applied in this jurisdiction.  That is to say, although intentional and contumelious disregard of a court’s peremptory order may be the most usual circumstance leading to the refusal of an extension of time to comply with a peremptory order, the exercise of the discretion to refuse an extension or to relieve a party from sanctions is not limited to cases of intentional and contumelious default.  As directed by O.2 r.5 of the Rules of the High Court, the court should consider all the individual circumstances including those listed in r.5(1) at subparas. (a) – (j).  Depending on the circumstances, failure to comply with one or a number of orders through negligence, incompetence or sheer indolence may be such as to lead the court to conclude there is an existence and degree of fault which warrants a refusal of an extension of time, so that relief from a sanction for non-compliance specified in a peremptory order (including an order striking out a pleading) should not be granted.  Any other conclusion would, in my opinion, be to ignore the positive duty placed on parties to assist the court to further the underlying objectives of CJR (O.1A r.3 of the Rules of the High Court) and on the court to do so by actively managing cases (O.1A r.4(1) of the Rules of the High Court).”

527.I will respectfully adopt the principles laid down in Top One.

528.When considering whether to grant the relief, one of the matters that I would take into account in the exercise of my discretion is whether the defendants were in breach of the Unless Order.  Even if I am of the view that the defendants were in breach of the Unless Order, Icouldstill allow relief against sanction.  When relief is permitted, the court shall extend the time for the filing and serving of the Defence as prayed by the defendants under the Time Summons.

D.4.3   Parties’ submissions

529.In gist, the defendants submitted that they are entitled to relief as:

(1) there was no breach of the Unless Order;

(2) even if there was a breach, there was no deliberate flouting of the Unless Order; and

(3) the decline of relief may impose a substantial risk of inconsistent risk of inconsistent judgments as Sinosoft may succeed in defending their case against Janful and South China in HCA 2345.  It would be irreconcilable with a judgment entered in default against Sinosoft in HCA 2423.

(4) there is a good case which should proceed to trial.

530.On Mr Chan’s submission that there was no deliberate flouting of the Unless Order, they said the situation in the present case is exactly the same as in HCA 2345 and HCA 1613 where an unless order was given on 17 July 2014 requiring the defendant to file a defence by 4 pm on 18 August 2014; failing which the plaintiffs would be at liberty to apply for judgment.  The relevant defendants in HCA 2345 and HCA 1613 took out the respective stay / setting aside summonses on the very last day of the time limit and did not file any defence.  But the plaintiffs in those two actions did not apply for default judgment.

531.In this present case, the defendants sought the advice from counsel and was advised that it was unnecessary to file a defence if an application for jurisdictional challenge was taken out before the deadline in the Unless Order as there would be an automatic extension of time for filing the defence by the operation of Order 18, rule 2(3).

532.In seeking to reinforce their submission of no deliberate flouting of the court order, the defendants drew attention to the facts that (a) they had all along complied with deadlines save the present one; (b) the failure was a genuine attempt to save costs and time and the filing of a defence would have no significance to the Stay Summons; (c) the Stay Summons was filed on 23 December 2014, 6 days prior to the expiry of the Unless Order and so there was no attempt to delay.

533.In addition, the defendants submitted that the application for relief has been made promptly after being informed of a potential breach of the Unless Order.  The delay was only 11 days, and only 4 days once they were aware of the non-compliance.  There are currently no dates for any hearing or any procedural steps that cannot be met. The late filing of the Defence causes no prejudice at all to the plaintiffs since the proceedings cannot proceed before the resolution of the Stay Summons. The effect of refusing relief is grave and serious and will mean denying the defendants the opportunity to defend on the merits a sizable fraud claim simply on the basis of default, which they maintain was caused by a failure which was not contumelious.

534.On the other hand, the plaintiffs submitted that the defendants’ conduct was clearly contumelious in that they made a conscious decision to disobey the Unless Order.  They said:

(1) There was a clear breach of the Unless Order.

(2) The defendants were at all material times fully aware of the terms of the Unless Order, but there is no evidence that they took any step to comply with it.

(3) The Unless Order was made on 24 November 2014, and the Stay Summons was taken out only 1 month later on 23 November 2014 without any prior notice to plaintiffs.  No explanation as to what happened during that 1-month period and whether any thought was given to complying with the Unless Order.

(4) The defendants’ only explanation for non-compliance with the Unless Order is that their Counsel advised that it was not necessary to file a defence where an application to challenge jurisdiction is pending. The plaintiffs criticised the explanation as unsatisfactory.

(5) The defendants and their legal representatives deliberately failed to mention that they intended to issue yet another stay application (after two applications) at the hearing before Master S Lo when the Unless Order was made, clearly with an attempt to ambush the plaintiffs.

(6) As a result of the repeated stay applications made by the defendants and the failure to comply with the Unless Order, these proceedings have already been delayed for almost 1.5 years (the defendants were served outside the jurisdiction in the PRC in May 2014).  This is plainly an abuse of process of the court.

(7) The plaintiffs will be seriously prejudiced in being denied its right to enforce the Unless Order, which entitles it to enter judgment against the defendants.  If an extension of time is granted, the proceedings will no doubt be further delayed for a substantial period.

(8) Finally, the plaintiffs said that entering judgment in favour of plaintiff in this case will not lead to any issue of “inconsistent and irreconcilable judgments”. This concern cannot be a relevant one when one party deliberately disobeyed a peremptory order, otherwise the court’s “forensic weapon” as a sanction to compel compliance cannot be deployed once there are co-defendants.  The 1^st to 4^th defendants are the only defendants who will be contesting the proceedings.  Sinosoft is a nominal defendant and Ding has not filed any acknowledgment of service.  The plaintiffs deny that liability of defendants in this case is contingent upon liability of Sinosoft being established in HCA 2345/2013.

(9) The plaintiffs also deny that the defendants had merits in their defence.

D.4.4   Breach of the Unless Order

535.There was a legal debate between the parties on whether there was a breach of the Unless Order by the defendants, and this is relevant before I consider whether granting relief from sanction is necessary. I shall consider this issue first.

Parties’ submissions

536.Mr Chan contended on behalf of the 1^st to 4^th defendants that a forum non conveniens application is an invitation to decline jurisdiction.  Such an application could be made when clearly the court would have jurisdiction over the matter.  On the other hand, he submitted, a challenge to service out of the jurisdiction which is part of the present challenge under the Stay Summons, if successful would lead to a complete denial of jurisdiction.  If the court has no jurisdiction over the matter, this is the end of the matter and, logically, the question of requiring the defendants to file the Defence simply does not arise.

537.He further contended that the effect of Order 18, rule 2(3) is to automatically extend the time for filing the Defence until the Stay Summons (which challenges jurisdiction) is heard.

538.Order 18, rule 2(1) governs the time for the filing of defence within 28 days unless the court gives leave to the contrary; and rule 2(3) applies where an application under Order 12, rule 8(1) or (2) has been issued.  The rules said:

“ 2. Service of defence (O.18, r.2)

(1) Subject to paragraphs (2) and (3), a defendant who gives notice of intention to defend an action must, unless the Court gives leave to the contrary, serve a defence on every other party to the action who may be affected thereby before the expiration of 28 days after the time limited for acknowledging service of the writ or after the statement of claim is served on him, whichever is the later.

(2) ...

(3)Where an application is made by a defendant under Order 12, rule 8(1) or (2), paragraph (1) shall not have effectin relation to him unless the application is dismissed or no order is made on the application and, in that case, shall have effect as if it required him to serve his defence within 28 days after the final determination of the application or within such other period as may be specified by the Court.”  [emphasis added]

539.Thus, Mr Chan said the effect of Order 18, rule 2(3) is clearly to extend the time for filing the defence until after the Order 12, rule 8 challenge is heard, provided that the application to challenge jurisdiction is filed within time.

540.However, in the case of Dongguan Dongxiang (CFI), Barnett J held that Order 18, rule 2(3) did not apply to an unless order:

“ In relation to the unless order, however, Mr. Wong was on stronger ground. In my view, he rightly argued that such an order is not just to ensure compliance with the rules or earlier orders made by the court but confers on the other party an accrued right, in this case to enter judgment. I simply do not see how such an order can be complied with by doing something which is not apparent on the face of the order. ...”

541.Mr Chan sought to argue that the CFI judgment of the Dongguancase is not binding on me and that the reasoning of Barnett J is unconvincing.

542.However, Mr Yu drew my attention to the fact that Barnett J’s decision was expressly affirmed by the Court of Appeal in (differently titled in Chinese) 東莞市東莞東祥裝飾有限公司 v Universal Right Ltd, unreported, CACV 42/1999, which said:

“ The Defendant, however, did not file its Defence by the time stipulated. Half an hour before the time expired, it filed a summons under Order 12 rule 8. That summons sought a declaration that the Court had no jurisdiction on the ground of forum non conveniens. ...

...

My view of the Order of 21^st May is that judgment was automatic as of one second past 4 p.m. on the 4th June. The order says that judgment be entered in default of the filing of the Defence. Hence, if the Defence was not filed, the judgment was automatic. There was no need for anybody to do anything further in the matter. I would also say that it appears form the application itself under Order 12 rule 8 and, indeed, from the affidavit filed on behalf of the Defendant, that it appears for some reason that the Defendant, or its advisers, may have thought that an application for trial in another jurisdiction on the basis of forum non conveniens was a Defence which was maintainable in the Action. Hence, the application was that the Court has no jurisdiction. That, of course, only has to be considered to be realised to be erroneous. An application for a stay of proceedings on the ground of forum non conveniens is simply a request to the Court to stay the proceedings so that the matter can be litigated in a forum which is more convenient, it is not a denial of jurisdiction by the Court itself.

... Counsel based himself upon the Notes in the White Book under Order 12 rule 8.  Those Notes are of course applicable in normal circumstances where time limits have not expired but they are not applicable, as is now conceded in this Court by Mr. Mok on behalf of the Defendant, in a case where the Court has made an Unless Order that a Defence should be filed.  Indeed, no indication had been given to the Master on the two occasions on which extensions of time had been sought, that any application under Order 12 rule 8 would be made for stay of proceedings on the ground of forum non conveniens.”  [emphasis added]

543.Faced with the Court of Appeal decision, Mr Chan argued that the point was conceded rather than argued, accordingly the Court of Appeal decision is not binding upon this court.

544.Mr Chan further submitted that in any event, the applicable Order 12, rule 8 in the Dongguancase was different from the present one.  He contended that the current Order 12, rule 8(6A) which empowers the court to give directions for further conduct of the proceedings was non-existent at the time of the Dongguan case (1999).  This reinforces his argument that the normal incident in default of defence shall not apply.

545.Moreover, Order 12, rule 8(6), which makes reference to rule 8(2) [20], was again a new addition and which did not exist at Dongguan’s time.  At the time of the Dongguancase, the old Order 12, rule 8(6) only covered a challenge to service and leave to service out and did not cover a jurisdictional challenge on the basis of forum non conveniens.

546.Thus, Mr Chan argued that the forum non conveniens application in the Dongguan case was not within Order 12, rule 8(1).  Dongguan case was therefore not an authority for the operation of Order 18, rule 3(2) which engaged Order 12, rule 8(1).

Discussion

547.Mr Chan’s first submission drew a distinction between a forum non conveniens application which requests the court to decline jurisdiction and a challenge to service out (of which the present is one) which if successful would mean automatic denial of jurisdiction.  I do not accept this submission.

548.In an Order 11 application, the court assumes jurisdiction and makes an order ex parte allowing service out.  I cannot see how the court can order or decline service out if the court does not have jurisdiction.  In fact, I would have thought the court does have jurisdiction until further order which usually happens at the inter partes stage when the order for service out is set aside or discharged.  A jurisdictional challenge under Order 11, even if successful, which leads to the termination or denial of jurisdiction is therefore no different from the court declining jurisdiction after it has assumed jurisdiction.

549.Secondly, I do not think the different wordings under the old Order 12, rule 8(1) in the Dongguan case helps the defendants.

550.Despite extensive references at the hearing to other paragraphs of Order 12, rule 8 and Order 18, rule 2, it seems to me clear enough that in fact, the main difference between the Order 12, rule 8 as pertaining in the Dongguan case and the present was the addition of Order 12, rule 2 and rule 2(A), which in short was the codification of the forum non conveniens ground as a jurisdictional challenge.

551.The amendments to both rule 8(6) and rule 8(6A) were mainly the additions of “or (2)”, so as to synchronise the two paragraphs with the newly inserted forum non conveniens ground under rule 8(2).

552.In short, the defendants were simply trying to get round the Dongguan case by saying that at that time, the current edition of Order 12, rule 8(1), with paragraph (2) as a statutory jurisdictional challenge based on forum non conveniens, was unavailable.

553.Dongguanwas a case on Order 12, rule 8(1), so is the present.  As long as Order 12, rule 8(1) is invoked, Order 18, rule 2(3) applies.  Whilst it is true that at the time of the Dongguan case, forum non conveniens as a ground of challenge was invariably made under the court’s inherent jurisdiction, this inherent jurisdiction has since been codified in Order 12, rule 8(2).  What is readily discernible is that both cases concern jurisdictional challenge based on forum non conveniens.  The Court of Appeal in Dongguanhad clearly affirmed Barnett J’s decision that Order 18, rule 2(3) does not apply to an unless order.  I agree with Mr Yu that the Court of Appeal decision was not simply based on counsel’s concession but was clearly of the view that Order 12, rule 8 did not automatically extend the time under Order 18, rule 2(3) where there was an unless order.

554.Accordingly, the defendants have clearly breached the Unless Order.  I do not accept there was compliance of the Unless Order by issuing the Stay Summons.  Nor do I accept that the Stay Summons will have the effect of an automatic stay under Order 18, rule 2(3).

555.But this is not the end of the matter.

556.In Dongguan, the terms of the unless order were that in default of filing of defence, the plaintiff was at liberty to sign judgment.  As the Court of Appeal said:

“ ... the Order of 21^st May is that judgment was automatic as of one second past 4 p.m. on the 4^th June. The order says that judgment be entered in default of the filing of the Defence. Hence, if the Defence was not filed, the judgment was automatic. ...”

557.In other words, the unless order in Dongguan case conferred a right of automatic judgment. Whereas, in the present case, the Unless Order debars the defendants from filing the Defence and merely gives the plaintiffs liberty to apply for judgment.

558.In my view, the distinction is an important one.

559.At the point of time when the unless order in Dongguantook effect, judgment was entered automatically.  Here in the present case, when the time stipulated in the Unless Order expired, only an accrued right of entering judgment has vested on the plaintiffs. In the Dongguansituation, given that judgment has been entered, effectively, no question of filing of defence (or whether the time of filing the defence has been extended) arises.  In the present case, the question remains valid and has to be answered.

560.Thus, as it happened, in the present case, the plaintiffs would still need to issue the Judgment Summons in order to enter judgment against the 1^st to 4^th defendants.  Whether or not judgment can be entered is something which will need to be considered by this court.  One of the arguments that the 1^st to 4^th defendants have raised against the Judgment Summons is the jurisdictional challenge, which is substantially the same as the jurisdictional challenge raised in the Stay Summons.  On the other hand, the 1^st to 4^th defendants have also applied for an extension of time to file the Defence and, given that no judgment has yet been entered, this court will need to deal with the Time Summons.  Unlike the situation in Dongguan, where judgment had been entered, the 1^st to 4^th defendants have not yet been automatically excluded from an opportunity of being heard on this Time Summons.

D.4.5   Other grounds

561.I have set out the parties’ submissions on grounds other than the breach of the Unless Order in Section D.4.3 hereinabove.  I shall not repeat here. I shall proceed to discuss the parties’ other grounds on the basis that there was a breach of the Unless Order.

562.I reject the defendants’ submission that the court should place weight on the fact that the plaintiffs in HCA 2345 and HCA 1613 did not apply for default judgment in similar circumstances.  In fact, the plaintiffs’ conduct in HCA 2345 and HCA 1613 has little relevance to how they will proceed in the present action.  No explanation is required of the plaintiffs as to why they did not apply for default judgment in those two actions.  The burden is on the defendants to satisfy the court as to why they should be entitled to relief.  As said at paragraph 47 of Daimler v Leiduck [2012] 3 HKLRD 119:

“ 47. ... it is not for the party seeking to take advantage of a default to apply to the Court in order to render a sanction for that default effective. Instead, the sanction takes effect immediately and it is for the party in default to apply for relief from the sanction. ...”

563.I also disagree that one could justifiably disobey a court order under the pretext that it would be cost and time-saving. In fairness, the defendants were not actually saying that they omitted to file the Defence because they were driven by a desire to save costs and time.  They were submitting that they should be excused as the failure was in part an attempt to save costs and time.  But in my view, that fact alone, whether it was in whole or in part, would not be sufficient to found a reason for relief.

564.The plaintiffs complained that the defendants’ conduct was contumelious and oppressive because they suppressed the intention to file the Stay Summons when they appeared before Master Lo.  They said it is obvious the defendants were trying to delay the matter.

565.I do not agree.  First, there is no evidence that the defendants had decided that they would issue the Stay Summons when the matter was before Master Lo.  Nor was there sufficient evidence for me to draw an inference against the defendants.  Secondly, it does not resemble an attempt to delay as the Stay Summons was taken out a few days earlier than the expiry of the Unless Order.  Usually, a litigant who plans to delay will normally wait until the last hour of the last day to spring an unmeritorious application.  This did not happen here.  Moreover, the Stay Summons was plainly not an unmeritorious one (as discussed in my judgement above).

566.I do not find the defendants’ non-compliance of the court order deliberate, contumelious or intentional.  At paragraph 34(a) and (c) of Top One, supra, His Lordship Mr Justice Fok (as he then was) has already said that a defendant could demonstrate no intention to ignore the court order and that the failure to obey was due to extraneous circumstances.  Such extraneous circumstances may include cases where his solicitor has negligently or otherwise missed the deadline through no fault of the litigant.  The list of extraneous circumstances is not meant to be exhaustive and I cannot see why it would not include an advice from counsel which turned out to be erroneous.

567.Here, despite the numerous submissions advanced, it is obvious that the only reason for the failure to comply with the Unless Order was the result of counsel’s advice, who thought that there was no need to file a defence if an application for a jurisdictional challenge was issued.

568.At the hearing, Mr Chan accepted that his team was not aware of the Court of Appeal decision which, for reasons unknown, was entitled東莞市東莞東祥裝飾有限公司 v Universal Right Limited, CACV 42/1999; whereas the first instance decision was reported as Dongguan Dongxiang Decoration Co Ltd v Universal Right Ltd [1999] 1 HKC 790. As revealed in the section above discussing the Unless Order, the Court of Appeal decision (and its binding effect on me) is pivotally fatal to the defendants’ argument on the interpretation of Order 18, rule 2(3) when applied to an unless order.  Had the Court of Appeal decision been drawn to the attention of the defendants and his own team, the advice might have been quite different.

569.I fully understand Mr Yu’s complaint that the failure was the result of the lawyers’ negligence and the defendants are free to pursue their own team.  But I cannot ignore the unique circumstance of this case, including the fact that the Court of Appeal decision had “slipped” from the attention of the defendants.  I can also appreciate that perhaps more diligent research might reveal the Court of Appeal decision.  I also understand that the plaintiffs could still contend that the mere presence of the Dongguan first instance decision, which counsel for defendants were well aware of before the hearing, would render the advice of the defendants’ lawyers negligent.

570.However, here, the court is not concerned with the existence of absence of negligence of the defendants’ counsel or indolence of the legal team, the court is considering whether the default was intentional or a deliberate flouting of the Unless Order.  Undoubtedly, the defendants had made a conscious decision not to file the Defence.  But I take the view that there is a difference between making a conscious decision based on erroneous understanding of the law or a failure to exhaust legal research, and a conscious decision to flout the order.  The former could not be said to be deliberate flouting in the circumstances of this case.  In fact, I do not see how that could be “more negligent” than the case of the solicitor forgetting and missing the deadline.  It remains not a deliberate or intentional disobedience of the court order.

571.My view is reinforced when I note that Order 2, rule 5(f) expressly distinguishes between non-compliance by the litigant and that by his legal representative.  Here, it is plain and obvious that the fault of overlooking the Court of Appeal decision must be entirely on the legal representatives and not the litigants themselves.

572.Moreover, the application for relief has been made promptly, in fact, within two days after the defendants were aware of the breach of the Unless Order.  There is no denial that this was the first time the defendants had breached a court order.  Other than that, they had complied with deadlines and had asked for extension of time permitted by the rules.  I am entitled to take them into account in favour of the defendants under Order 2, rule 5(b) and Order 2, rule 5(e).

573.Most importantly, and practically, no or no serious prejudice (which cannot be compensated by costs) would be visited upon the plaintiffs by the late filing of the Defence.  The defendants’ Stay Summons, which goes to the fundamental question of whether or not the court will accept or decline jurisdiction requires resolution in any event.  There are no dates for any hearing.  No milestone dates will be affected.  Discovery will not take place at this stage.  In fact, there is no indication that the case can proceed beyond where it currently stands before the adjudication and resolution of the Stay Summons which has the effect of complete disposal of the case in question.

574.Needless to add, I am entitled to take into account the fact that there are merits in the jurisdictional challenge and the fact that a litigant should not be lightly debarred from defending, all the more so when it is a fraud claim, which following the normal course of events, a judgment in default is rare.  Indeed, as it turns out, the defendants have succeeded in their Stay Summons.  This is a significant circumstance which I will take into account when exercising my discretion in favour of granting relief.

575.In light of what has been said, it is unnecessary to consider whether entering a default judgment will produce inconsistent and irreconcilable judgments, as I have held in favour of the defendants’ Stay Summons under HCA 2345 and in this action, and set aside the Writ under HCA 1613.

576.Mr Yu also accepted that the Judgment Summons, the Time Summons and the Amendment Summons should be dealt with together: paragraph 6 of plaintiffs’ written submission.  Now that the court has in essence allowed the Time Summons, it follows that the Default Judgment Summons should fail.

577.Furthermore, even if I were to accede to the plaintiffs’ submissions and refuse to grant relief, I am not prepared to allow the plaintiffs’ Judgment Summons and enter judgment against the defendants in default of defence, certainly not on such a fraud claim, with a considerable size and legion factual disputes.  This means the plaintiffs would have to prove their case against the defendants in the usual way.  If HCA 2345 and HCA 1613 or either of them were to proceed, it is more likely than not that the two or three cases would be heard together.  Put simply, the scenario of having inconsistent judgments can be avoided by listing the actions to be heard together.

D.4.6   Conclusion

578.Having considered all the circumstances of the case including in particular those articulated above, I am of the view that if necessary, I would have granted the defendants relief and allowed their application seeking an extension of time to file their Defence.

E.   ORDERS

579.I shall now set out my orders.

HCA 2345:

580.On the defendants’ Summons dated 18 August 2014 seeking, inter alia, to set aside the plaintiffs’ leave to serve the concurrent writ out of the jurisdiction upon the 2^nd to 7^th defendants, I grant an order in terms of paragraphs 1 to 3 of the Summons.

581.The plaintiffs shall pay the costs of and occasioned by the application to the 2^nd to 7^th defendants, to be taxed if not agreed.

HCA 1613:

582.On the 2^nd defendant Summons dated 16 August 2014 seeking, inter alia, to set aside the plaintiffs’ leave to serve the concurrent writ out of the jurisdiction, I make an order in terms of paragraphs 1 and 2 of the Summons.

583.The plaintiffs shall pay the costs of and occasioned by the application to the defendants, to be taxed if not agreed.

HCA 2423:

584.On the defendants’ Stay Summons dated 23 December 2014 seeking, inter alia, to set aside the plaintiffs’ leave to serve the concurrent writ out of the jurisdiction, I make an order in terms of paragraphs 1 to 3 of the Summons.

585.The plaintiffs shall pay the costs of and occasioned by the application to the 1^st to 4^th defendants, to be taxed if not agreed.

586.I dismiss the plaintiffs’ Judgment Summons dated 6 January 2015 seeking to enter judgment against the 1^st to 4^th defendants with costs of and occasioned by this application to be paid by the plaintiffs to the 1^st to 4^th defendants, to be taxed if not agreed.

587.I have allowed the Amendment Summons with costs to the plaintiffs at the very beginning, to be taxed if not agreed.

588.As regards the 1^st to 4^th defendants’ Time Summons dated 7 January 2015 seeking, inter alia, an extension of time to file their Defence, in light of the order that the plaintiffs’ concurrent writ was set aside, no order needs to be made on this Summons.

589.However, the Time Summons was issued as a result of the defendants’ breach of the Unless Order and the defendants were seeking the indulgence of the court, I see no reason why they should not bear the costs of and occasioned by their own breach.  They should pay the costs of this summons to the plaintiffs to be taxed if not agreed.

590.I dismiss the plaintiffs’ Strike Out Summons dated 8 January 2015, but the defendants shall only be entitled to 2/3 of the costs for reasons stated at paragraph 331 above, to be taxed if not agreed.

591.All costs orders are made on a nisi basis, and will become absolute within 14 days.

F.   NOTE OF THANKS

592.I am indebted to Counsel for their most helpful and able submissions, without which this judgment would not have been possible.

Mr Benjamin Yu SC, leading Ms Sara Tong, instructed by Baker & McKenzie, for the plaintiffs in HCA 2345/2013, HCA 1613/2013 and HCA 2423/2013

Mr MC Law, instructed by Locke Lord for the 2^nd to 7^th defendants in HCA 2345/2013 and the 2^nd defendant in HCA 1613/2013

Mr Edward Chan SC, leading Mr Damian Wong and Mr Alexander S T Wong, instructed by Locke Lord for the 1^st to 4^th defendants in HCA 2423/2013

The 1^st and 8^th defendants in HCA 2345/2013 did not appear

The 1^st defendant in HCA 1613/2013 did not appear

The 5^th and 6^th defendants in HCA 2423/2013 did not appear