China Baoli Technologies Holdings Ltd (Formerly Known As Rex Global Entertainment Holdings Ltd) v. Orient Equal International Group Ltd and Others

HCA 1399/2016

[2019] HKCFI 288

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1399 OF 2016

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Before: Hon B Chu J in Chambers

Date of Hearing: 22 November 2018

Date of Decision: 1 February 2019

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D E C I S I O N

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Introduction

1.The dispute between the 3^rd defendant and a Bahamian company named as 2^nd Third Party, Squadron Holdings SPV0164HK, Ltd (“TP2”), has somewhat eclipsed the main action commenced by plaintiff against the 3 defendants, respectively D1, D2 and D3.

2.The “tale” concerning the non-existence of the TP2[1] began when during Ds’ attempted service of the Third Party Notice on TP2 between 10-12 August 2016 in the Bahamas, Ds discovered that the company Squadron Holdings SPV0164HK,Ltd (the named lender of a loan to D3 on all loan documentations) did not in fact exist, or had not yet been incorporated.  The company was only incorporated a few days later on 17 August 2016.  To avoid confusion, the pre-incorporation entity has been referred to as Purported Squadron and the incorporated company has been referred to as New Squadron by other judges in their earlier decisions in this action, and I shall follow where appropriate/applicable. 

3.It was/is the position of TP2 that the subsequent incorporation of the company and adoption of the company’s pre-incorporation acts pursuant to section 70 of the International Business Companies Act 2000 in the Bahamas (“2000 Act”) would be a complete answer to Ds’ challenges to its authority or capacity.  Ds however disagree.  As seen later in this judgment, the applicability of section 70 of the 2000 Act to adoption of pre-incorporation contracts has yet to be determined by the Bahamian Court.

4.The 4 summonses presently before this Court are chronologically :

(1) A summons issued on behalf of D3 on 21 June 2018, for the return of a sum of HK$15,628,285 (“Sum”) that has been paid by D3 into court pursuant to an order of DHCJ Pang SC (“Payment Out Summons”);

(2) A summons issued on behalf of all Ds on 10 October 2018, for a formal discharge of the Injunction Order (defined below) which had expired (“Discharge Summons”);

(3) A summons issued on behalf of D3 on 14 November 2018, to seek leave to refer and rely on the 3^rd affirmation of D3’s Bahamian lawyer Christopher J Jenkins, exhibiting therein a copy of the Final Judgment (as defined below) and a copy of D3’s statement of claim in the Writ Action (as defined below);  

(4) A summons issued on behalf of TP2 on 19 November 2018 to have leave to file and serve the 4^th affirmation of Sean Nottage (“Nottage”), a director of Squadron Holdings Limited (“SHL”), the parent company of TP2, and who is said to be a promoter of TP2, in opposition to Payment Out Summons.

5.There was no opposition for D3 to refer and rely on the 3^rd affirmation of Christopher J Jenkins, but D3 opposed the filing of Nottage’s 4^th affirmation.  D3 had no objection to the Court considering that affirmation on de bene esse basis.

6.So far as P is concerned, its stance is that no step or application was required to discharge the Injunction Order due to its expiry and P is neutral in relation to the Discharge Summons.  As for the other 3 summonses, they concern disputes between D3 and TP2, and again P’s position is neutral, save that P should be entitled to costs to follow whatever event, payable by the losing party, be it D3 or the TP2.

7.TP2 does not oppose the Discharge Summons as such but New Squadron opposes the Payment Out Summons, and the issues before the Court are (i) whether New Squadron has any capacity to be heard on the summonses before the court and to oppose the payment out; and (ii) whether there is a good cause for payment out and/or there are any merits in the opposition of New Squadron. 

8.At the hearing before this Court, Mr Barrie Barlow SC leading Mr Justin Lam appeared for Ds, Mr William Wong SC leading Mr Michael Ng appeared for TP2. Mr But Sun Wai appeared for P.

Brief Background

9.So far in this action, there have been no less than 3 Rulings made by DHCJ Robert Pang SC respectively on 23 August 2016, 24 November 2016, and 29 March 2017 (respectively “1 Ruling”, “2^nd Ruling”, and “3^rd Ruling”) in relation to various applications made by the parties.  There has also been a decision from DHCJ Le Pichon which was handed down on 12 June 2017 (“Le Pichon Decision”).  The background and procedural history can be gleaned from these Rulings and the Le Pichon Decision.

10.P is a company incorporated in Bermuda and is listed on the Main Board of the Stock Exchange of Hong Kong.

11.D1 is a company incorporated in Hong Kong and Mr Huang Weibin, of an address in Beijing, is its director.  Mr Huang Weibin, of an address in Shenzhen, is the son of D2/Huang Dong Po.  The sole shareholder and director of D3 has since 20 August 2015 has been one Zhang Xiaomeng (“Zhang”). Zhang was/is an Executive Vice President of ENE-Carbon, a company listed on the Shenzhen Stock Exchange[2].

12.As for the Third Parties, The 1^st Third Party, a BVI company, (“Lantau”) was the lender of the loans to D1 and D2[3]. TP2 was the lender named on the loan documentations for the loan to D3.  The 3^rd Third Party (“SVK”) is a brokerage firm or financial services firm operating in United Kingdom, and the 4^th Third Party (“Wang”) of an address in Shenzhen, was the intermediary between Ds and the lenders. 

13.The main action was commenced in May 2016 by P, essentially to claim against Ds for an injunction to restrain Ds’ breach of their respective lock-up undertaking (“Lock-up Undertaking”) and for a declaration that Ds were in breach.

14.In October 2015, P entered into a sale and purchase agreement to purchase an interest in a company incorporated in the Cayman Islands called Yota, which was engaged in the smartphone development industry.  P decided to raise funds for the purchase of Yota by placing new shares to be issued at a price of HK$0.032 per share, through two securities firms, one of which was Haitong International Securities Company Limited (“Haitong”),

15.Ds were placees of a total of 1,667,000,000 of the P’s placing shares (“Placing Shares”) through Haitong, of which 417,000,000 were subscribed by D1, 500,000,000 were subscribed by Huang Dongpo and 750,000,000 were subscribed by D3.  The payments by D1, D2 and D3 were respectively HK$13,378,387.49 (for D1), HK$16,041,232 (for D2) and HK$24,061,848 (for D3)[4].

16.There was a condition precedent to the placing, namely that each placee had to execute the Lock-Up Undertaking to undertake during the lock-up period the placee would not, amongst other things, sell or otherwise transfer, dispose of or create any right over the Placing Shares or any interest therein.  The lock-up period was for 24 months after the date of allotment and issue of the Placing Shares (“Lock-up Period”). 

17.As seen from the Le Pichon Decision, on about 23 May 2016, having noticed an unusual spike in trading volume of its shares coupled with a sharp fall of about 13% in share price, P made enquiries of the major placees as a result of which P came to learn of Ds’ loan transactions and breach of the Lock-up Undertakings.  There was another large spike in trading volume coupled with another sharp fall in the share price, on 26 May 2016[5].

18.The above discovery led P to issue the writ herein on 27 May 2016 and to seek an ex parte injunction. 

19.An injunction order was granted by Ng J on 27 May 2016 ex parte to restrain Ds from breaching their respective Lock-up Undertaking, and the ex parte order was subsequently continued on the return day, 3 June 2016, by G Lam J until trial or further order (“Injunction Order”).  The day before the return day, the Clarification Summons (as defined below) was issued on behalf of TP2.  On 3 June 2016, G Lam J gave directions for filing of affirmations in respect of the Clarification Summons including for it to be set down for an early hearing.  At the same time, G Lam J had also ordered P to provide fortification of its undertaking as to damages to TP2, by way of a bank guarantee for HK$7m by P.  Subsequently, P and TP2 consented to an order that P was to pay HK$7m into court in place of the bank guarantee.

20.As said, one day prior to the hearing before G Lam J, on 2 June 2016, solicitors Messrs Oldham, Li and Nie (“OLN”) issued a summons on behalf of TP2 for clarification of the Injunction Order and/or setting aside the Injunction Order as against TP2 (“Clarification Summons”).  Later, on 4 July 2016, OLN issued another summons on behalf of TP2 for further fortification of P’s undertaking as to damages provided in the Injunction Order (“Fortification Summons”) and subsequently, after TP2 was served with the Third Party Notice, OLN issued a third summons on behalf of TP2 on 11 August 2016 to set aside the leave for P to serve Third Party Notice out of jurisdiction on TP2 (“Setting Aside Service Summons”).  These 3 summonses issued by OLN on behalf of TP2 are collectively referred to as “TP2 Summonses”.

21.So far as D3 is concerned, TP2 and D3 entered into a financing arrangement pursuant to which D3 and TP2 executed, amongst other things,  a loan agreement on 7 May 2016[6] (“Loan Agreement”) supplemented by a control agreement dated 11 May 2016[7] (“Control Agreement”).  In the Recital of the Loan Agreement, it was stated that the “Borrower” was in need of liquidity and was unable to obtain such liquidity through banks and other traditional lending courses and loan structures; and the “Borrower” was the owner of the 750,000,000 shares in P.  A “Funding Summary” was set out in the Loan Agreement.  The estimated “Gross Loan Proceeds” were stated to be HK$112,500,000 and the 750,000,000 shares were to be transferred to the “Lender” by 2 tranches, the 1^st tranche of 250,000,000 shares and the 2^nd tranche of 500,000,000 shares[8].

22.Pursuant to the Loan Agreement, the “Borrower” and the “Lender” agreed that the shares transferred into the Control Account for each tranche was to fund at a “Loan to Value” (LTV) of 50% as set forth in the “Funding Summary”. The “LTV” for the loan was to be calculated based upon the “Share Base Price” as defined in the Loan Agreement[9], based on the low of the one day, or 5 day Volume Weighted Average Price prior to the complete funding for each tranche of the loan[10].

23.Thereafter, pursuant to the Loan Agreement and the Control Agreement, on or about 19 May 2016, the 1^st tranche of 250,000,000 shares (“Shares”) was transferred by D3 out of its 750,000,000 Placing Shares from D3’s securities account at Haitong to a “Control Account”, namely a custodian account at HSBC of SVK, and D3 agreed to give total dominion and control over the Shares to TP2.

24.After the transfer of the Shares, the 1^st tranche of the loan of a sum of HK$20,454,000 was then remitted to D3’s bank account by TP2.  It would appear that on 24 May 2016, after the remittance, TP2 learnt of D3’s breaches of SFC regulations and TP2 instructed solicitors to write to D3, alleging that D3 had “stolen” the sum of HK$20,454,000 from TP2 and that D3 was involved in a fraudulent scheme to defraud the public in breach of various provisions under the Securities and Futures Ordinance, and TP2 further demanded an “Audit Letter” under clause 11.10 of the Loan Agreement[11].

25.It is TP2’s case that that under the financial arrangement provided to D3, TP2 had been expressly given the right to sell the Shares and that it was completely unbeknownst to TP2 at the time of the Loan Agreement that D3 was acting in breach of the Lock-up Undertaking by entering into the financing arrangement with TP2.  Further, since D3 only paid HK$8m in subscribing the Shares (250,000,000 @ HK$0.032 each), D3 had made a windfall profit in the amount of HK$12,454,000 pursuant to the financial arrangement/loan transaction. 

26.Zhang had filed his 1^st affirmation on behalf of Ds in support of P’s inter-partes summons for the continuation of the Injunction Order and to oppose TP2’s Clarification Summons.  According to Zhang, D3 is one of his investment vehicles set up for the purpose of investing in Hong Kong stocks, and that in about February 2016, he became aware of the opportunity to acquire the Placing Shares and that P’s shares were an attractive investment because of the Yota purchase agreement.  He then informed D2/Huang Dongpo and his son Huang Weibin of the investment opportunity, and that they were content to proceed with the investment in P through subscribing for the Placing Shares and that it was Zhang who handled the applications for subscriptions on behalf of all Ds[12]. Further, according to Zhang, he was told by his good friend and associate Li Wen Hao in about late April 2016 that Li had been approached by Wang, who claimed to be able to obtain loan facilities on favourable terms[13]. It was Wang who then introduced Lantau and/or TP2 to Li Wen Hao and Ds.

27.According to Zhang, Ds were then sent a number of forms and documents to sign, and that although they were unfamiliar with English and could not understand the transaction documents, they trusted Li Wen Hao who communicated to them the core terms of the arrangement, namely (i) the amount of the Placing Shares to be used as security, (ii) the term of the loan, (iii) the interest and (iv) the total amount that could be lent. They accordingly signed those loan documentations.

28.Li Wen Hao had filed his 1^st and 2^nd affirmations, also to support P’s inter-partes summons to continue the Injunction Order, and to oppose TP2’s Clarification Summons.  It was Li’s evidence that he did not speak English and that in mid April 2016 he came to know Wang through a chat group and that Wang knew that Li was looking for loan facilities for Ds through pledging shares.  It was also Li’s evidence that Wang was the agent for the lenders (which Li referred to as Lantau, TP2 and SVK) and that Wang was aware of the Lock-up Period, and had assured Li that there should be no concern that the collateral could be disposed of on the market during the Lock-up Period.

29.Thus, Ds’ case is that it was under the above circumstances that they each executed the loan documentations.

30.In the Third Party Notice, Ds are alleging fraud and/or deceit practised by the Third Parties on Ds in that D1 and D2 were respectively fraudulently induced to assign their portion of the Placing Shares to Lantau, and D3 was fraudulently induced to assign the Shares to SVK pursuant to the Loan Agreement and Control Agreement.

31.On the same day of issuing the Third Party Notice, 18 July 2016, Ds also issued a summons against the Third Parties seeking an injunction order to restrain them from dealing with the Placing Shares transferred by Ds (“Ds’ Injunction Summons”), which was later adjourned to the hearing on 22 August 2016. 

32.In the meantime, on 9 August 2016, Nottage purported to commence arbitration proceedings against D3 by a Notice of Arbitration[14] based on an arbitration clause in the Loan Agreement which provided for disputes to be referred to arbitration under the law of England and Wales through the Arbitration Society of England and Wales[15] (“Arbitration Proceedings”).

33.As mentioned earlier, Ds discovered when attempting service that the company named as TP2 did not exist.  Upon such discovery, they immediately sought leave to issue, during court vacation, a summons for an order that TP2 be struck out for want of authority and not be heard on any of the TP2 Summonses (“Authority Summons”). 

34.Ds’ leave application to issue the Authority Summons within vacation time, Ds’ Injunction Summons, the TP2 Summonses together with two other summonses issued by Lantau were fixed for a hearing before Deputy Judge Pang on 22 August 2016.  5 days before the hearing, TP2 Party was incorporated.

35.The hearing led to the 1^st Ruling in which the Deputy Judge Pang granted leave to Ds to issue the Authority Summons within vacation time, which was then fixed to be heard on 10-11 November 2016 as a preliminary issue.  Deputy Judge Pang adjourned all other summonses to a 4 day hearing to be fixed not earlier than 28 days from the conclusion of the hearing of the Authority Summons.

36.At the same time, pursuant to the 1^st Ruling and the order of the same date, ie 23 August 2016, Deputy Judge Pang also ordered that within 7 working days after TP2’s provision of sufficient evidence of the amount of sale proceeds of the Shares it held, D3 was to make payment into court the amount of the loan advanced by TP2 to D3 less the amount of the TP2’s sale proceeds (“Fortification Order”).  The Sum was subsequently paid into court by D3 pursuant to the Fortification Order.

37.On 24 August 2016, Ds, having obtained leave, formally issued the Authority Summons.  TP2 also issued a summons for leave to adopt these proceedings or part thereof issued prior to its incorporation, and also for leave for Nottage and the parent company SHL to join as interested party and to adopt these proceedings in the name of TP2 (“Joinder Summons”).  

38.The Authority Summons and the Joinder Summons were heard by Deputy Judge Pang on 10 November 2016.  This led to the 2^nd Ruling handed down on 24 November 2016 in which Deputy Judge Pang declined to make any ruling on the Authority Summons or on the question of s 70 of the 2000 Act, since by then, various proceedings had been commenced and going on in the Bahamas and instead, he adjourned the Authority Summons and the Joinder Summons to the 4 day hearing fixed for the other summonses pursuant to his 1^st Ruling.  Deputy Judge Pang further granted, amongst other things, leave to New Squadron to appear and to take part in the hearing of TP2 Summonses for the purpose of seeking the same relief and to have leave to rely on the evidence already filed by Purported Squadron (“Participation Order”)[16].

39.After the 2^nd Ruling, Ds sought leave to appeal and this led to the 3^rd Ruling in which Deputy Judge Pang refused Ds’ leave application.  Ds did not renew their leave application before the Court of Appeal.

40.Pursuant to the 1^st Ruling, a 4 day hearing was eventually fixed before DHCJ Le Pichon commencing from 9 May 2017.  As seen in the Le Pichon Decision, there were 8 summonses before her at the time, including the adjourned Authority Summons, the TP2 Summonses, Ds’ Injunction Summons and other summonses issued respectively by Lantau and SVK. 

41.On 10 May 2017, Deputy Judge Le Pichon ordered that the TP2 Summonses, and Ds’ various summonses including Ds’ Injunction Summons and the Authority Summons be adjourned pending the determination by the Courts of the Commonwealth of the Bahamas on the applicability or otherwise of s70 of the 2000 Act and refused the orders sought in the Joinder Summons on the ground that New Squadron, Nottage and SHL (referred to by the judge as ‘Squadron Parties’) lacked locus standi pending the aforesaid determination by the Courts of the Commonwealth of the Bahamas.

42.The Le Pichon Decision was handed down on 12 June 2017 and Deputy Judge Le Pichon further ordered that, amongst other things, Ds’ Injunction Summons as against TP2 be adjourned pending resolution of the Writ Action (as defined later).

43.P’s statement of claim herein was eventually filed in March 2018 and Ds’ defence was filed in June 2018.

44.It is not disputed the date of allotment and issue of the Shares to Ds was on about 22 April 2016, and that the Injunction Order has lapsed since about 22 April 2018 when the Lock-up Period expired.  This led to D3 issuing the Payment Out Summons for the return of the Sum paid by him pursuant to the Fortification Order made by Deputy Judge Pang and later, Ds issuing the Discharge Summons.

The proceedings in the Bahamas

45.As set out in the Le Pichon Decision, on 26 August 2016, TP2  issued an originating summons in the “Commercial Division” in the Supreme Court of the Bahamas under 2016 COM/COM 00059 against P, D2 and D3[17] (“59/16 OS Proceedings”) and on 1 September 2016, TP2 obtained ex parte declarations from Hilton J that TP2 had adopted the underlying contracts entered into in its name prior to its incorporation and that it could adopt legal proceedings commenced in its name prior to its incorporation.

46.This was followed by D3 issuing a writ on 6 September 2016  under 2016 CLE/GEN/01295 (“Writ Action”) against TP2 and Nottage as defendants seeking, amongst other things, declarations that Nottage lacked the capacity to commence the Arbitration Proceedings on behalf of TP2 prior to its incorporation, challenging the arbitration clause in the loan agreement and the applicability of s 70 of the 2000 Act[18].

47.D3 then applied ex parte to Bahamian Court to restrain Nottage and TP2 from taking any further action in the Arbitration Proceedings and on 16 September 2016 obtained such injunction (“16.09.16 Injunction”).

48.In the meantime, on 23 September 2016, Hilton J set aside his earlier ex parte order and also stayed the 59/16 OS Proceedings pending determination of the Writ Action.

49.D3 filed its statement of claim in the Writ Action on 3 October 2016 claiming 6 declarations against TP2 and/or Nottage and an order that the TP2 be struck from the Register of Companies on the grounds that it is being used in the furtherance of a fraudulent scheme involving TP2 and other persons[19].

50.On 2 November 2016, TP2 issued a 2^nd originating summons, this time in the “Common Law and Equity Division” under 2016 CLE/GEN/01458 and against Nottage as defendant only, but seeking the same relief in its originating summons issued in the 59/16 OS Proceedings and on the same day obtained ex parte declarations sought (“1458/16 OS Proceedings”)[20]. D3 later applied to join in as defendant in the 1458/16 OS Proceedings on 8 November 2016 and the ex parte order was set aside by Chief Justice Isaacs and other applications adjourned sine die.

51.On 7 November 2016, TP2 and Nottage applied to set aside the 16.09.16 Injunction and the application was heard by Madam Justice Indra H Charles on 14 March 2017.  The application was dismissed on 4 May 2017.  In her ruling (“Charles Ruling”)[21], Charles J held, amongst other things, that (i) a company that does not exist cannot bring legal proceedings and it cannot be disputed that legal proceedings include arbitration proceedings; (ii) Nottage did not have the capacity to commence the Arbitration Proceedings on behalf of TP2 prior to its incorporation; (iii) the Arbitration Proceedings were a nullity; and (iv) s 70 of the 2000 Act had no application to the commencement of legal proceedings prior to a company’s incorporation[22].

52.TP2 and Nottage had filed for an appeal which was fixed for hearing on 14 November 2017, but due to non observance of rules, the appeal was struck out due to lack of competence[23].

53.On 27 February 2018, TP2, Nottage and D3 consented to an order in the 1458/16 OS Proceedings (“Consent Order”)[24] that, irrespective of the contents of the originating summons, the sole substantive issue (other than costs) to be determined as between the parties in the originating summons is whether or not Squadron Holdings SPV0164HK, Ltd was entitled to and did ratify and adopt the Loan and Control Agreements executed on 7^th and 11^th May 2016 respectively between D3 and Nottage (for and on behalf of Squadron Holdings SPV0164HK, Ltd) under s 70 of the 2000 Act[25] (“Agreed Sole Issue”).

54.On 13 March 2018, upon the application and undertaking of D3 to provide a copy of the Consent Order to Hilton J, the 59/16 OS Proceedings were struck out by Hilton J as abuse of process.

55.The Agreed Sole Issue under the Consent Order in 1458/16 OS Proceedings was originally fixed to be heard on 23 March 2018 before Chief Justice Isaacs who unfortunately passed away.  The trial was later rescheduled to commence on 18 January 2019 before Charles J, for 60 days.

56.Following the Charles Ruling, on 8 November 2018, Charles J gave a final judgment for 2 of the 6 declarations sought by D3 in its statement of claim in the Writ Action, namely that (i) Nottage lacked the capacity under Bahamian law to commence the Arbitration Proceedings on 10 August 2016 and the Arbitration Proceedings commenced by Nottage purported on behalf of Purported Squadron are a nullity; (ii) the purported ratification of the directors’ resolution dated 17 August 2016 by New Squadron of the actions of Nottage in purporting to commence Arbitration Proceedings was ineffective as falling outside of the ambit of s 70 of the 2000 Act (“Final Judgment”). 

New Squadron’s capacity to be heard in the present summonses

57.Mr Wong submitted that at the present hearing, OLN acts for New Squadron.

58.Mr Wong further pointed out that since the hearing on 22 August 2016 before Deputy Judge Pang, OLN has been acting for, amongst others, New Squadron, on at least 4 occasions in this action, and on each of these prior occasions, D3 was fully aware that OLN acted on behalf for New Squadron, SHL and/or Nottage and that there is no basis to say that OLN has no authority to act for New Squadron.

59.As for the New Squadron’s locus standi to participate in this hearing, Mr Wong submitted that (i) D3 is estopped from repeating its arguments previously rejected by the court and (ii) in any event, New Squadron has indisputable locus standi.

60.For the issue estoppel, Mr Wong relied on the 2^nd Ruling pursuant to which the Deputy Judge Pang granted the Participation Order to New Squadron[26]. As there was no appeal, Mr Wong submitted that D3 is therefore bound by the Participation Order made in the 2^nd Ruling.

61.Mr Barlow however argued that the Participation Order was in relation to the Joinder Summons, which was subsequently refused by Deputy Judge Le Pichon.

62.In the 2^nd Ruling, DHCJ Pang had set out the orders sought by TP2 in the Joinder Summons, which were for leave to New Squadron, and/or alternatively for leave to Nottage or SHL to join as interested party, and to have leave to “adopt these proceedings or part thereof”.  Deputy Judge Pang had said he had problems with the way the Joinder Summons was formulated in that s70 of the 2000 Act “does not provide any ‘mechanism’ to adopt the Hong Kong legal proceedings”[27]. He made, instead, the Participation Order, for New Squadron, Nottage and SHL to take part in the hearing of the TP2 Summonses.

63.In the 3^rd Ruling, Deputy Judge Pang had further explained that the Participation Order was to ensure that the necessary parties would be before the Court at the substantive hearing, when it was the expressed intention of Ds to argue on the Authority Summons, and that the evidence which New Squadron and/or SHL and/or Nottage would be the same evidence filed by the Purported Squadron and no purpose would be achieved to have the same summonses and evidence filed yet again[28].

64.It would thus appear from his 2^nd and 3^rd Rulings that the Participation Order given by Deputy Judge Pang was not only with reference to the Joinder Summons, but also to the Authority Summons and the TP2 Summonses which were all fixed to be heard at the 4 day hearing.   

65.The Final Judgment is nothing new in that it in fact arose out of and was consequent upon the Charles Ruling and this was quite clear from D3’s own Bahamian lawyer Mr Jenkin’s 3^rd affirmation[29]. The Charles Ruling was prior to the hearing before Deputy Judge Le Pichon and was referred to in the Le Pichon Decision.   

66.It is also quite clear that the effect of the Le Pichon Decision and Deputy Judge Le Pichon’s order of 10 May 2017 is that the Authority Summons and the TP2 Summonses have all been adjourned, and notwithstanding the Joinder Summons was refused, this was only at the present stage, pending the determination of the application of s 70 of the 2000 Act by the Bahamian Court, namely the determination of the Agreed Sole Issue by Charles J. 

67.At present, the Agreed Sole Issue is still undetermined and the Writ Action is still unresolved.  In particular, the effect of the determination of the Agreed Sole Issue will be that either New Squadron was entitled and did ratify and adopt the Loan and Control Agreements executed by Purported Squadron and D3, or New Squadron was not.  If it was and it did ratify and adopt the Loan Agreement, one of the consequences could be that the arbitration clause would come into play again. 

68.Anyway, as said earlier, in my view, the Participation Order was not limited or with reference to the Joinder Summons only.  Thus, the refusal of the Joinder Summons should not affect the Participation Order in respect of the other summonses.

69.Further, if New Squadron has leave to take part in the hearing of the Authority Summons and TP2 Summonses and to seek like relief and the Authority Summons and the TP2 Summonses have not yet been determined, I see no reason why New Squadron cannot have the right to assert its interests in the present summonses, or to take part in the present hearing.  Although no formal summons has been taken out, Mr Wong has submitted that, insofar as it is necessary, New Squadron seeks leave from the Court to appear and take part in the Payment Out Summons and the Discharge Summons[30].

70.As submitted by Mr Wong, when the Fortification Order was granted, the New Squadron was already in existence and that the reference by Deputy Judge Pang to “Squadron” in the 1^st Ruling when dealing with the fortification, he was referring to the New Squadron[31]. I accept this.

71.The undertaking by P as to damages given in the Injunction Order was to abide by any order the Court may make as to damages in case the Court shall hereafter be of opinion that Ds, or any other party, shall have sustained any loss by reason of the Injunction Order which P ought to pay[32]. Further, it is stated in the Injunction Order that Ds or anyone notified of the Injunction Order may apply to the Court at any time to vary or discharge the order or so much of it as affects that person.

72.Deputy Judge Pang had in fact also said in his 2^nd Ruling, as follows[33]

“… It cannot be disputed that Squadron has been incorporated since 17 August 2016. It cannot be disputed that [Squadron] is potentially affected by the injunction taken out by the plaintiff in this action. As a party affected or potentially affected by an injunction, it would be entitled to apply to the court, independently of any acts done in its name prior to its incorporation, to set aside the injunction or so much of the injunction as affects it.”

73.Again, when Deputy Judge Pang referred to “Squadron” above, he clearly was referring to the New Squadron.  In any event, New Squadron was notified of the Injunction Order and, in my view was clearly affected and/or potentially affected by the continuation of the Injunction Order.

74.Having considered all the above, I accept Mr Wong’s submissions that New Squadron has locus standi or capacity to appear and to participate in this hearing and to rely on the evidence already filed by Purported Squadron, and if leave is necessary, such leave is hereby granted.

The Payment Out Summons

75.Under Order 22A rule 1(1) of RHC, save as provided therein, any money paid into court in an action may not be paid out except in pursuance of an order of the Court which may be made at any time before, at or after the trial or hearing of the action.

76.It is not disputed that the Court has an unfettered discretion whether to order payment out so as to achieve justice between the parties. As seen in Leader Honour Ltd v Fanling Property Co Ltd, unrep, DCCJ 3219 & 5342/2005, 28 April 2016, the Court may order the withdrawal of a sum paid into Court if good cause is shown, particularly if there has been a change of circumstances or the discovery of some new fact[34].

77.Mr Barlow also referred the Court to Dynasty Line Limited (Provisional Liquidators Appointed) and Sukamto Sia (also known as Sukamto Sukjarman) and Lee Howe Young, unrep, FAMV 38/2009, 26 November 2009. In this decision, the issue was whether money paid into court to fortify an undertaking in damages in support of a Mareva injunction should be retained in court and made available to satisfy outstanding costs orders made in favour of the defendants after the relevant action had been stayed and the injunction discharged.

78.In the Dynasty Line case, it was common ground that the plaintiff did not have any assets and that the litigation was funded by creditors, and that the money paid into court was provided by a creditor.  The evidence was that the money was provided for the sole purpose of providing fortification to meet the Court’s condition for continuing the Mareva injunction and that involved setting up a fund in court to be applied for the specific contingent purpose of compensating the 2^nd defendant in case he should later be shown to have suffered damage as a result of the continuation of the injunction.  There was no necessity in principle for such a fund to derive from the assets of the plaintiff giving the undertaking[35]. It was held by Ribeiro PJ that as it was accepted that the 2^nd defendant did not suffer any damage as a result of the continuation of the injunction, the purpose of the payment into court was spent and no reason had been shown why it should not be released to the plaintiff’s solicitors[36].

79.However, in the present case, Mr Wong had argued that the purpose of the fortification was not spent and it was not accepted that New Squadron did not suffer any damage as a result of the then continuation of the Injunction Order.

80.Whether the 1^st fortification of HK$7m ordered by G Lam J to be paid by P, or the 2^nd fortification of the Sum paid pursuant to the Fortification Order, the purpose of the fortification was for the purpose of compensating TP2 (albeit New Squadron was not incorporated at the time of the 1^st fortification), in case TP2 should later be shown to have suffered damage as a result of the continuation of the Injunction Order.  In fact, it is New Squadron’s case that it has suffered substantial damages as a result of the continuation.  In the Fortification Summons, TP2 was seeking further fortification in the sum of HK$69,007,875 in addition to the earlier sum of HK$7,000,000 already paid by P as fortification.

81.At the hearing on 3 June 2016, G Lam J had observed, amongst other things, that TP2 seemed to be an innocent party caught up by the Injunction Order, in that the then evidence showed that it was both out of pocket as to the money (loan) and as to the Shares, and the issue was whether the Injunction Order should override TP2’s rights in respect of the Shares. The relevant parts of the transcript of the hearing before G Lam J were referred to in Mr Wong’s skeleton submissions of 1 August 2016 which were before Deputy Judge Pang, and Deputy Judge Pang was aware of the effect of the continuation of the Injunction Order on New Squadron.

82.In the 1^st Ruling, Deputy Judge Pang indicated that in light of the issue over the Authority Summons there would inevitably be delay and that such delay would likely to be substantial.  Mr Wong, who appeared for TP2 at the hearing on 22 August 2016 had asked for fortification to the extent of the loan outstanding, Deputy Judge Pang said he saw no reason why this should not be granted to the extent that TP2 had not already sold the Shares, namely the loan minus the sale proceeds of the portion of the Shares sold.  He had also considered Ds’ position, but came to the view that the Fortification Order would not create great injustice for D3. 

83.Deputy Judge Pang had further said that he was satisfied that TP2 had provided sufficient evidence in the 5^th and 6^th affirmation of Benjamin Holland, the Managing Director of TP2 (“Holland”) as to the amount of proceeds it received from sale of the Shares it obtained from D3.  The then evidence from Holland in his 5^th and/or 6^th affirmation was that 16,075,000 out of 250,000,000 or 6.43% of the Shares were sold on 23 May 2016[37], and the gross proceeds of sale were HK$4,825,715[38].  Thus the Sum was the loan of HK$20,454,000 less HK$4,825,715.

84.D3’s Payment Out Summons was supported by (i) an affirmation of Huang Dongpo/D2 filed on 22 June 2018 on behalf of D3, and later (ii) an affirmation of Huang Weibin filed on 31 October 2018 on behalf of D3 in reply to Nottage’s opposing affirmation.

85.Huang Weibin has summarised the Payment Out Summons was based on 2 “supervening events”:-

(i) The lapse or expiry of the Lock-up Undertakings and consequently the Injunction Order;

(ii) The “false” evidence provided by Purported Squadron which formed the (false) premise upon which Deputy Judge Pang made the Fortification Order.

86.The lapse or expiry of the Lock-up Undertakings and the Injunction Order was not disputed.

87.As for the so-called “false” evidence, Mr Barlow submitted that Holland had provided no supporting documentary evidence in his 5^th and/or 6^th affirmation and that later evidence showed that Holland’s undocumented claims to be false and that TP2/Purported Squadron had sold all of the Shares before the Injunction Order[39].

88.D2/Huang Dongpo had in his affirmation claimed that the Shares transferred to the HSBC account pursuant to the Loan Agreement and/or Control Agreement were never held by the Purported Squadron or SVK, rather the HSBC account was held by one Raiffeisen Bank International AG, as disclosed by HSBC in a related action HCA 923/2018 pursuant to a disclosure order, and that it was clear that the Shares were sold or disposed of by Purported Squadron at the outset, contrary to the version of events presented by Holland in his affirmations.

89.In response to the above, Nottage had in his 3^rd affirmation explained that what D3 said above was based upon a misconceived understanding of the “Chain of Custody Arrangement” of the Shares (“Chain of Custody Arrangement”).  Nottage’s evidence was that as SVK is a boutique securities firm based in London, it is not a CCASS member or participant, and in order for SVK to transact in Hong Kong shares, it has a clearing and custody arrangement with various custody channels; and that the transfer into the HSBC account held by the Raiffeisen Bank was pursuant to the Chain of Custody Arrangement. 

90.Thus, according to Nottage, there was no sale or disposal of the entirety of the Shares, and the only sale was of 16,075,000 of the Shares as deposed in the 5^th and/or 6^th affirmation of Holland, and that this had been further confirmed by SVK.  Further, Nottage referred to an email from Holland to Ms Kennie Cheung of D3 on 16 May 2016 informing D3 that there was to be an intermediary bank on SVK’s side called Raiffeisen Bank International (“16.05.16 Email”)[40].

91.In reply to Nottage’s 3^rd affirmation, Huang Weibin said that there should be detailed contractual documentation governing all the rights and obligations of the parties involved in the Chain of Custody Arrangement, and that TP2 had not produced any.  Huang Weibin maintained that the entirety of the Shares had been sold and that the buyer had deposited them into the HSBC account held by Raiffeison Bank.  He then referred to a letter dated 24 May 2016 from HSBC’s solicitors Deacons and exhibited as “HWB-1” to his affirmation[41] (“HSBC Letter”).

92.The HSBC Letter confirmed receipt of a 1^st tranche of 410,000,000 shares and 2^nd tranche of 250,000,000 shares (which would appear to be the Shares transferred from D3 on 19 May 2016) from Haitong on 19 May 2016, and a 3^rd tranche of 382,000,000 shares from Haitong on 23 May 2016, all pursuant to Settlement Instructions given by Raiffeisen Bank to HSBC. Thereafter, on 24 May 2016, one tranche of 24,800,000 shares were delivered to BNP, and on 25 May 2016, another tranche of 21,200,000 shares and a 3^rd tranche of 16,075,000 shares were delivered to BNP pursuant to Settlement Confirmations given by HSBC to Raiffeisen Bank. 

93.As set out in the HSBC Letter, 1,042,000,000 of shares in P were transferred into the account at HSBC held by Raiffeisen Bank (“Raiffeisen Account”) on 19 and on 23 May 2016 and on 24 and 25 May 2016, a total of 62,075,000 shares were transferred out of the Raiffeisen Account.

94.The 16.05.16 Email was headed “Settlement Instructions for 250MM Shares 164 HK (HKZQ) 17 May 2016”[42], and detailed settlement instructions had been set out therein.  As said earlier, there was in fact mention of an intermediary bank on SVK side called Raiffeisen Bank International registered with HSBC, and that the transfer of the Shares to SVK would initiate on Tuesday 17 May 2016 and that settlement would be on Thursday 19 May 2016.  The delivering firm was stated to be Haitong and the account of the receiving firm under “Receiving Firm Information” was the Raiffeisen Account, and under the “additional information”, it was stated that the settlement was for further credit to SVK.

95.Even though it might not have been known by D3 at the time that the account for the receiving firm was that of Raiffeisen Account, the 16.05.16 Email had clearly mentioned Raiffeisen Bank being the intermediary, and the credit of the Shares into the receiving firm’s account was for further credit to SVK.

96.Having considered the information provided in the HSBC Letter, I do not consider the information therein to be inconsistent with the evidence of Holland in his 5^th and/or 6^th affirmation.

97.Further, the information in the HSBC Letter did not show that TP2 was “dumping” the Shares as alleged by D3.  The most it showed was a total of 62,075,000 shares were transferred out of the Raiffeison Account on 24 and 25 May 2016, which even if they had all come from the Shares transferred by D3, this would not support D3’s allegation of TP2’s full disposal of the Shares from the outset, or that the Raiffeison Account was the account of “the buyer”[43].

98.Huang Weibin had also produced copies of WeChat messages between 25 May 2016 and 28 May 2016[44] in his affirmation to show that Robert Marino of Lantau (“Marino”) had repeatedly stated that the plummet in P’s shares was due to TP2 “dumping” the Shares as soon as they were received[45].

99.Huang Weibin did not make clear who the participants of the WeChat messages were, apart from saying that one of them was Marino. Insofar as one can make out, the other participants “Winston” and “LWH”[46] appeared to be from Ds’/borrowers’ side.  There were messages from Marino to Winston on 25 May 2016 in which Marino had said “Looks like Squadron is dumping all of Xiaomeng’s stock”[47], and later Marino had  said “Please keep in mind that the more Squadron DUMPS… The more stock we will need to keep! The price is going lower and lower.  Tell them to stop dumping…… Squadron must have dumped 40+M”[48]. 

100.However, the messages also showed that Winston had said that Lantau was selling P’s shares as well to which Marino did not deny and  merely claimed they had hedged 8m shares[49]. Winston subsequently replied to Marino that they just confirmed Squadron did not sell any shares, and that it was all Lantau’s position.  However, Marino said Squadron was using the same broker SVK as Lantau, and that Marino knew this for a fact[50]. Notwithstanding what was said by Marino, Winston was asking Lantau to stop dumping from the SVK account[51] Marino blamed Squadron and later, Marino had also said they had hedged 21M shares on 25 May 2016.

101.It would appear from the messages that a default event involving the loan transaction from Lantau to Ds (or D1/D2) had been triggered and Winston and Marino were negotiating a discounted settlement agreement for the return of the shares held by Lantau.  From the messages, the “dumping” appeared to be from SVK, which according to Marino, both Lantau and TP2 were using as broker.  Hence, the selling by SVK could be for Lantau or TP2 or both.  More importantly, there was no evidence in those WeChat messages that Winston had ever said that neither Lantau nor Squadron had the right to sell the Placing Shares pledged with them.   Winston was clearly aware of the shares in P were being sold by either TP2 or by Lantau, and there was at the same time hedging by Lantau. 

102.It appeared in the midst of those messages Winston was fired and LWH then came into the picture communicating with Marino.  The messages then indicated Marino accusing the “borrowers” having defrauded Lantau and threatening that if no settlement was reached, Lantau would team up with P and SFC[52]. In response, LWH then alleged fraud on the part of Lantau.

103.As it turned out, it would appear that Ds have “teamed up” with P.  Anyway, I do not find that those WeChat messages would support D3’s case that TP2 had fully disposed of the Shares from the outset, nor do I find there is at present any sufficient evidence for D3 now to allege that the evidence of Holland in his 5^th and/or 6^th affirmation about the number of the Shares sold by TP2 was false.  In fact, SVK had confirmed the number of the Shares sold by TP2.

104.Huang Weibin in in his affirmation had also claimed that the Deputy Judge Pang had no jurisdiction to make the Fortification Order against D3. However, D3 did not appeal against the Fortification Order.   Mr Wong had referred to Gee on Commercial Injunctions, 6^th Ed 2016 and submitted that the court had power to require the undertaking to be fortified by someone other than the application[53]. I agree with Mr Wong that D3 should have appealed against the Fortification Order instead of now challenging it on jurisdiction through the back door.  The Sum was paid in pursuant to an order of the Court, and under Order 22A rule (1), D3 had to demonstrate good cause for the Sum to be withdrawn.  The expiry of the Lock-up Period or the discharge of the Injunction Order alone would not be in my view sufficient.

105.Mr Barlow submitted that the Sum sitting in court cannot serve any useful purpose whatsoever because it can never be availed by any other party other than the party that paid it into court, and that party seeks its release and so there is simply no purpose in the money remaining in court.  Mr Barlow also pointed out that D3 was not the one who gave the undertaking as to damages.

106.As said earlier, New Squadron was affected and/or potentially affected by the then continuation of the Injunction Order.

107.Mr Wong had stressed that Deputy Judge Pang granted the Fortification Order for the purpose of affording some comfort to New Squadron due to substantial delay over the determination of the Authority Summons and/or the TP2 Summonses and any payment out at this juncture to D3 would defeat the purpose that the Sum intends to serve.

108.The loan was received by D3 and had not been repaid.  At the moment, the trial of the Agreed Sole Issue and the Writ Action is proceeding in the Bahamas and the Authority Summons and the TP2 Summonses have not yet been dealt with. There has been no material change in circumstances which warrants the payment out of the Sum to D3, and even though the Injunction Order has lapsed, the damages suffered by New Squadron as a result of the Injunction Order has not yet been ascertained.  In any event, I find that there is at present no urgency in the payment out of the Sum.

109.Although New Squadron had invited this Court to dismiss the Payment Out Summons outright, Mr Wong had in my view rightly pointed out that a more appropriate way would be to adjourn the Payment Out Summons, pending the determination of the Agreed Sole Issue and that upon such determination, the parties can then all come back and take stock of the issues when all the evidence could then be placed before the court.

110.Having considered the circumstances of this case, I have come to the view that the Payment Out Summons should be adjourned sine die with liberty to restore upon the final determination of the Agreed Sole Issue by the Bahamian Courts.  I therefore so order and costs to be reserved.

Discharge Summons

111.It is not really disputed that P’s undertaking as to damages continues beyond the discharge and so the discharge is really a formal exercise.  I see no reason why the discharge of the Injunction Order should not be granted, subject to there being no payment out of the Sum until further order.

112.The matter of the formal discharge could have been dealt with by consent between all parties, including P.  I am therefore of the view that there should be no order as to costs.

The 3^rd affirmation of Christopher J Jenkins

113.There was no objection to D3’s summons to refer to and rely on the above affirmation.  I will grant leave as sought in paragraph 1 of the summons issued by D3 on 14 November 2018.  There be no order as to costs, as the matter could have been dealt with by way of consent.

The 4^th affirmation of Nottage

114.Mr Wong indicated during the hearing that the only evidence in the 4^th affirmation of Nottage which would be relied on by New Squadron in the present hearing was the notice of the trial of the Agreed Sole Issue before Charles J on 18 January 2019[54].  There was no reason why the notice could not be referred to, which was to update the Court as to the then position of the proceedings in the Bahamas. 

115.Anyway, in light of my decision to adjourn the Payment Out Summons, I am of the view that the summons for leave to file Nottage’s 4^th affirmation should also be adjourned sine die with liberty to restore and costs to be reserved.  I therefore so order.  I also order that there be a hearing for directions prior to the restoration of the Payment Out Summons, since parties may wish to file further evidence, in particular updating evidence in relation to the Bahamian proceedings.

Mr But Sun Wai, instructed by Michael Li & Co, for the plaintiff

Mr Barrie Barlow SC and Mr Justin Lam, instructed by K & L Gates, for the 1^st to 3^rd defendants

Mr William Wong SC and Mr Michael Ng, instructed by Oldham Li & Nie, for the 2^nd third party