Asia-pac Infrastructure Development Ltd and Others v. Shearman & Sterling (A Firm) and Others

HCA 806/2006

[2019] HKCFI 1395

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 806 OF 2006

________________________

________________________

_______________

D E C I S I O N

_______________

1.This is the application of the 1^st to 8^th Defendants (“Shearman Defendants”) for the trial of a preliminary issue, namely, whether the Deeds of Assignment (“DA”) vesting the causes of action of the 2^nd to 4^th Plaintiffs in the 1^st Plaintiff are void for being champertous.

2.This application is disputed by the Plaintiffs, whilst the 9^th Defendant is maintaining a neutral position. 

Background

3.There is a helpful summary of the background as well as the issues of this case set out in Appendix 1 of the skeleton submissions of Mr Man SC, who appeared with Mr Leung for the Shearman Defendants.

4.For the present purpose, I am content with a very brief outline of this case.  The Plaintiffs were related companies.  Apart from the 1^st Plaintiff, they were BVI companies.  Back in 1999, another company in their group, Greater Beijing First Expressways Ltd (“GBFE”), which operated a joint venture business in the Mainland, ran into financial problems and was unable to honour the payment obligations under certain exchange notes issued and sold by it in the US bond market.  The Shearman Defendants and the 9^th Defendant were lawyers engaged by GBFE to advise it in the matter. 

5.GBFE’s attempt to restructure its debts was unsuccessful.  In due course, the note holders petitioned the winding up of GBFE and its liquidation was ordered in June 2000.

6.In this action, it is alleged that the Defendants were negligent in advising the Plaintiffs and GBFE.  There are essentially 2 complaints.  Firstly, the Defendants failed to advise GBFE to undertake Chapter 11 protection in the US court.  The loss of such protection resulted in the liquidation sale of GBFE’s assets.  The consequential loss to GBFE was in the tune of US$322 million.  Secondly, during 1999-2000, the 1^st to 3^rd Plaintiff had paid a total of HK$62 million to GBFE by way of loans.  It is alleged that the Defendants had failed to advise them on the risk that such loans might be unrecoverable in the event of the winding up of GBFE. 

7.In March 2006, GBFE’s causes of action against the Defendants were assigned by its liquidators to the 4^th Plaintiff.  On 3 August 2009, the DA were executed.  The causes of action assigned in favour of the 1^st Plaintiff included those which were previously assigned to the 4^th Plaintiff by GBFE.

Law

8.There is no argument over the following principles : 

(1)     The general rule is that all the issues are to be tried at the same time.  The burden is on the applicant to demonstrate that it is just and convenient to depart from the general rule (see Telford Development Ltd v Shui On Construction Co Ltd [1990] 2 HKC 110 at 117B);

(2)     The exercise for the court is not one of balancing the advantages against the detriment or prejudice to the opposing party (Mai Gou v Mak Chik Lun [2001] 3 HKLRD 248 at 252E-G & 253A-B);

(3)     Instead, trial of preliminary issue should only be ordered in exceptional circumstances or on special ground (Mai Gou at 251C-D);

(4)     The court should be mindful that a trial of preliminary issue may add to difficulties forappellate courts and tends to increase the costs and time of legal proceedings (Mai Gou at 251E-F).

9.Both sides had referred to the case of Steele v Steele [2001] CP Rep 106 where Neuberger J (as he then was) set out a number of factors (some of which overlap) to be considered in determining whether to order a trial of a preliminary issue (see pp.4-7) :

(1)     Whether the determination of the preliminary issue would dispose of the whole case or at least one aspect of the case;

(2)     Whether the determination of the preliminary issue would significantly cut down the costs and the time involved in pre-trial preparation or in connection with the trial itself;

(3)     If the preliminary issue is an issue of law, the amount of effort involved in identifying the relevant facts or the extent to which it could be determined on agreed facts;

(4)     If the facts are not agreed, the extent to which that impinges on the value of a preliminary issue;

(5)     Whether the determination of the preliminary issue would unreasonably fetter the parties or the court in achieving a just result;

(6)     The risk that ordering a preliminary issue would increase the costs or delay the trial, and (conversely) the prospects that such an order may assist in settling the dispute;

(7)     The extent to which the determination of the preliminary issue may be irrelevant.  The more likely it is that the issue will have to be determined by the court, the more appropriate it can be said to have it as a preliminary issue;

(8)     The risk that the determination may lose its effect by triggering an application to amend the pleadings.

Analysis

10.It is right to say that the Shearman Defendants have made out a forceful case on its application based on a number of considerations.  Firstly, the validity of the DA, which goes to the locus of the 1^st Plaintiff in pursuing this action, save for the loan it granted to GBFE, is a discrete issue.  There are ample examples of locus or similar discrete issue, like limitation defence, being tried as preliminary issue.

11.Secondly, if the preliminary issue is resolved in favour of the Shearman Defendants, it would dispose of much of the 1^st Plaintiff’s claims against them, leaving behind only its claim on the loan.  Plainly, it would be much easier for the parties to endeavour to settle a HK$62 million case based on the loans than one of HK$62 million plus US$322 million.

12.Thirdly, apart from its size, the undervalued sale of GBFE’s assets is by far the most complex claim to be resolved.  Mr Man described the claim as counter-factual in that the court will be asked to examine what would have happened, eg, if Chapter 11 advice was given by the Defendants, how the note holders would have reacted and how it would have been deal with by the BVI court.  So far, 13 witnesses have been identified.  On documentary evidence, this court was informed that the discovery made by the 9^th Defendant alone involved about 500 box files.  Expert evidence will be required on 3 areas, namely, BVI law, US law and valuation.   

13.Further, it cannot be over emphasised that the court will have to consider events which took place no less than 20 years ago. Currently, the trial is nowhere in sight.  I shall return to this point below.

14.By comparison, the resolution of the proposed preliminary issue will not involve the events happened between 1999 and 2000. The issue will be whether there was genuine pre-existing commercial interest behind the DA.  The Shearman Defendants’ case is that the DA were created to circumvent security for costs order against the 2^nd to 4^th Plaintiffs[1].  I see no reason to doubt Mr Man’s submission (and no demur had been voiced on behalf of the Plaintiffs) that the witnesses involved on that issue are likely to be different to those for the events between 1999 and 2000.   The trial of the preliminary issue is likely to be reasonably short and straightforward.

15.Fourthly, this is an exceptional case in terms of its staleness.  This action was started in 2006 in respect of events which took place between 1999 and 2000.  Despite the encouragement of this court in 2017[2] for progress to be made, discovery was only completed in May 2008 and no further step had been taken since to advance this case.  I have been informed that the Shearman Defendants are still considering how best to review the very substantial discovery made by the 9^th Defendant.  No witness statement has been exchanged and the trial is nowhere in sight. 

16.Delay of this sort can constitute grave injustice to the Shearman Defendants whose professional reputation and livelihood are at stake.  A trial of the proposed preliminary issue would certainly be a progression in this case, and it is likely to energise the parties to overcome their inertia. 

17.In any case, as Mr Man had submitted, the trial of preliminary issue may proceed in tandem with the rest of the work required for the trial of this action.

18.Fifthly, the issue of the DA is one which this court will have to resolve in any case.  This brings me to the heart of the controversy in this application.  Appeared on behalf of the Plaintiffs with Mr Kwok, Mr Carolan very fairly acknowledged that there is “some force” in this application.  However, he submitted that the Plaintiffs intend to amend their case by reinstating the claims of the 2^nd to 4^th Plaintiffs[3] as an alternative in the event that the DA are held to be invalid, and with such amendment the arguments over the validity of the DA would fall away (see para 9(8) above).  The intended amendment would be straightforward and would not be prejudicial to the Shearman Defendants, said Mr Carolan.   

19.The position adopted by the Plaintiffs gave rise to a concern of the court whether this application should be determined before the amendment application.  On the other hand, there is no amendment application before court and, as Mr Man had made clear, such an application would be subject to vigorous opposition. Further, Mr Carolan had made clear that it was not the Plaintiffs’ intention to apply to adjourn this application pending the determination of his proposed amendment. 

20.In the premises, this application shall be determined on the existing material. 

21.I agree with Mr Man that the prospects of an amendment to reinstate the claims of the 2^nd to 4^th Plaintiffs do not carry substantial weight.  I have little doubt that if the application is made, it will be hotly contested.  The Shearman Defendants had made clear their contention, inter alia, that the DA were engineered to defeat a security for costs order and it will be an abuse of process for the Plaintiffs to blow hot and cold as an attempt to fend off an attack on the validity of the DA.  I should refrain from saying more about the merits of the intended amendment application, save to note that the contention of the Shearman Defendants echoed an observation made by DHCJ Wilson Chan (as he then was) in a Decision in this case dated 19 November 2014, §10. 

22.Further, in the event that the proposed amendment is successfully made, Mr Man accepted that this court may then revisit whether the trial of preliminary issue should continue, if it sees fit. 

Disposition

23.For these reasons, I am of the view that it is just and convenient to have a trial of preliminary issue over the validity of the DA.  I allow this application with an order nisi that the costs of and occasioned by it be to the Defendants with a certificate for 2 counsel in favour of the Shearman Defendants (save that the costs of 2 affirmations filed by them are disallowed for the reasons ventilated during the hearing).

24.The parties are to endeavour to agree the directions for the trial of preliminary issue within 14 days from today. Unreasonableness in doing so may be penalised on costs.  In the absence of complete agreement, a succinct joint letter should be written to court setting out the disagreements and the respective position of the parties.  The matter may then be determined on paper if the court sees fit. 

Mr Paul Carolan and Mr Eugene Kwok, instructed by ONC Lawyers, for the 1^st to 4^th Plaintiffs

Mr Bernard Man SC and Mr Wilson Leung, instructed by MinterEllison LLP, for the 1^st to 8^th Defendants

Mr Sumarsono Darsono, of Reynolds Porter Chamberlain, for the 9^th Defendant