Power Securities Co Ltd (Formerly Known As Jun Yang Securities Co Ltd) v. Sin Kwok Lam and Others

HCA 1719/2018

[2019] HKCFI 2920

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1719 OF 2018

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BETWEEN

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BETWEEN

(By Counterclaim)

AND

HCA 1071/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1071 OF 2019

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BETWEEN

________________

(Heard together)

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J U D G M E N T

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Introduction

1.The main applications which fall for determination are various applications to strike out and dismiss the counterclaim and claim respectively brought by Sin Kwok Lam (“Sin”) in the two captioned actions, namely HCA 1719/2018 (“2018 Action”) and HCA 1071/2019 (“2019 Action”).

2.There are also (a) fall-back applications for the consolidation, or hearing together, of the 2018 Action and the 2019 Action, should the strike out applications fail, and (b) applications relating to the filing of evidence by Sin out of time and in breach of an unless order.

3.The applications arise against an apparently complex procedural history.  However, that complexity ultimately identifies the simplicity of the answer to part of the main applications.  The remainder of the answer to the main applications turns on a pure question of law, relating to the potential application of the doctrine barring recovery of “reflective loss”.

The Parties

4.Power Securities Company Limited (“Power Securities”) is licensed by the SFC to carry out Type I (dealing in securities) regulated activities.  Sit Sai Hung Billy (“Sit”) was, and remains, an executive director of Power Securities’ parent company.

5.Best Year Enterprises Limited (“Best Year”) is a company incorporated in the BVI.  Sin was the sole shareholder and director of Best Year until at least 5 March 2018, when Sin says he transferred ownership of Best Year to a Yan Xianchang (“Yan”).  Sin was also the sole shareholder and director of Enhance Pacific Limited (“EPL”) until at least 2 March 2018, when Sin says he transferred ownership of EPL to a Mai Shao Hang (“Mai”).

6.Sin alleges that Tang Ching Ho (“Tang”) exercises de facto control over Power Securities, and that he was one of the conspirators in the conspiracy alleged by Sin in his pleadings (“Alleged Conspiracy”) (see below).  Sin alleges that another conspirator was Ng Kam Lung Volais (“Ng”).

7.At the hearing, Ms Linda Chan SC and Mr Thomas Wong appeared for Power Securities and Sit, Ms Bonnie YK Cheng appeared for Ng, Mr Jin Pao SC and Mr Victor Lui appeared for Tang, and Mr Barrie Barlow SC and Mr Justin Lam appeared for Sin.

Background Facts and Procedural History

8.On 16 February 2016, Power Securities and Best Year entered into an agreement (“Margin Agreement”), under which Power Securities was to act as Best Year’s securities broker, extending credit to Best Year in connection with securities dealing on a margin securities trading account (“Margin Account”) held in Best Year’s name.  As collateral, Best Year deposited 180 million shares in a company listed on the GEM Board of the Hong Kong Stock Exchange, namely First Credit Finance Group Limited (“First Credit”).  Sin was an Executive Director and the Chairman of First Credit from late 2011 to 7 February 2018.

9.On 8 September 2018, a margin shortfall occurred in the Margin Account, as a result of the drop in share price of the First Credit shares.  Power Securities made margin calls on Best Year, which were not complied with, so that the amounts owed became immediately due and payable under the Margin Agreement.  Between 14 and 25 September 2017, Power Securities exercised its contractual rights to liquidate the pledged shares and to apply the proceeds in part repayment of the amount due on the Margin Account.  As at 25 September 2017, the debit balance remained at around $29 million.

10.On 11 December 2017, Power Securities commenced proceedings against Best Year in HCA 2851/2017 (“2017 Action”).  The claim was to repayment of the debit balance in the Margin Account together with interest.

11.Between 9 February 2018 and 12 March 2018, Sin effected various transactions which Power Securities now says were for the purpose of defrauding Best Year’s creditors and/or were not genuine transactions.  On 9 February 2018, Best Year sold its only assets, being its remaining 365,656,000 shares in First Credit, to EPL for $9,982,408.80.  The sale price of $0.00273 per share was a significant undervalue to the market.  On 2 March 2018, Sin sold his entire shareholding in EPL to Mai for $16,194,240.

12.On 8 March 2018, EPL sold 145,160,000 of the First Credit shares to an unknown third party for $11,612,800 (being $0.08 per share).  On 12 March 2018, EPL sold 129,840,000 of the First Credit shares to an unknown third party for $11,685,600 (being $0.09 per share).

13.On 24 July 2018, Best Year commenced proceedings in HCA 1700/2018 against Power Securities, Ng, Tang and Sit.  The statement of claim (“1700 SOC”) endorsed on the writ was verified by a statement of truth signed by Sin. The 1700 SOC alleged a conspiracy between Ng, Tang and Sit in September 2017, in which they “conspired and combined together wrongfully with the sole or predominant intention of injuring [Best Year] and/or causing loss to [Best Year] by … generating a fall in value in the shares in First Credit … with a view to crushing the share price of First Credit” so as to acquire the shares pledged by Best Year at a substantial undervalue.  The alleged motivation for the conspiracy was “a wholly unreasonable and unjustified victimisation and hatred of” Best Year.  The 1700 SOC also alleged that Best Year (not Sin) had suffered loss and damage in that the value of the shares in First Credit had decreased drastically as a result of the Alleged Conspiracy.

14.On 26 September 2019 Best Year wholly discontinued its claim in HCA 1700/2018, in the face of an application by Power Securities and Sit five days earlier for that claim to be struck out.

15.In the meantime, on 25 July 2018, Power Securities commenced the 2018 Action against Sin, Mai, Best Year and EPL seeking (amongst other things) to set aside the various transactions between 9 February 2018 and 12 March 2018 as dispositions to defraud creditors pursuant to section 60 of the Conveyancing and Property Ordinance Cap 219, and to restrain EPL from disposing of or dealing with any remaining First Credit shares or monies received for disposition of other First Credit shares.

16.On 21 September 2018, Power Securities issued an application for summary judgment in the 2017 Action.  The application was supported by an affidavit of Ho Chun Kit (“Ho”), a director of Power Securities.  It was opposed by an affirmation of Sin dated 5 November 2018, on behalf of Best Year.  Sin’s affirmation attached as an exhibit a draft defence and counterclaim (“DCC”), and Sin verified in the affirmation the truth of the facts pleaded in the DCC.  Sin also sought to explain that he gave instructions for the withdrawal of HCA 1700/2018 because Best Year’s defence and counterclaim in the 2018 Action was in general in line with that claim, though with slight differences which he also explained.

17.The summary judgment application was heard on 3 January 2019, when Master Martin Wong entered summary judgment in favour of Power Securities in the sum of $31,198,758.70 plus interest.  Best Year subsequently sought to appeal.

18.On 8 March 2019, Best Year and Sin filed a defence and counterclaim in the 2018 Action. Although with the addition of Sin as a counterclaimant, the counterclaim is based on the same Alleged Conspiracy previously pleaded in the 1700 SOC and the DCC.  The loss and damaged alleged to have been suffered was the drastic decrease in value of the First Credit shares.  The defence and counterclaim was amended on 5 July 2019, and re-amended on 20 August 2019 (“RADCC”), as to which see below.

19.On 22 May 2019, Best Year applied for leave to file fresh evidence in its appeal from the grant of summary judgment.  The application was heard and dismissed by Mimmie Chan J on 20 June 2019.  From the court file in the 2017 Action, I can see that the fresh evidence sought to be adduced was in and exhibited to the second affirmation of Sin filed in those proceedings. The exhibits were essentially the evidence by which Sin or Best Year intended to make good the case pleaded in the DCC.

20.In dismissing the application, Mimmie Chan J said inter alia the following:

“2. However flexible the standard to adopt, I am not satisfied that the evidence sought to be adduced was not available, or would not have been available and could not have been obtained by the Defendant - if representatives of the Defendant had exercised reasonable diligence before the hearing in January 2019.

3. … there has been no explanation whatsoever as to why the directors of the Defendant and other representatives of either the Defendant or Mr Sin could not have helped Mr Sin to find and review the relevant records, and to give the instructions to lawyers to prepare the necessary evidence to resist summary judgment. … There was ample time to do this between September and November 2018 when the Defendant’s evidence was due. There was also ample time between November 2018 and January 2019 for the Defendant to apply to the Court either to adjourn the Order 14 hearing, if necessary, or to seek leave to produce the further evidence, upon reasonable endeavours and diligence being made by the Defendant and its representatives and lawyers during this period.

4. … This is a blatant attempt to have a second bite of the cherry to produce evidence in an attempt to procure a different outcome for the Order 14 application.

5. Nor am I satisfied that the allegedly new or further evidence now obtained contains material evidence which would probably have an important influence on the outcome of the Order 14 application made by the Plaintiff against the Defendant, on its straightforward claim of the Defendant’s failure to comply with the margin calls upon the occurrence of an event of default under the Margin Agreement.  The claims of alleged conspiracy and price manipulation of the pledged shares had already been raised in the Defence or evidence originally filed in opposition to the application for summary judgment, but were rejected by the Master.  The materials on which the Defendant now seeks to rely go nowhere to establishing that the Plaintiff was a party to the alleged conspiracy, and are irrelevant to the defence of breach of alleged oral agreement argued before and dismissed by the Master on the basis of there being contradictory evidence.”

21.There was no appeal from the dismissal of that application, and there has been no further progress of the appeal since then (though this in part may be due to the winding up of Best Year – see below).

22.On 17 June 2019, Best Year and Sin commenced the 2019 Action.  By that action, Best Year seeks to restate the account balance on the Margin Account, by removing the effect of the Alleged Conspiracy.  Best Year also seeks to set aside the summary judgment on the basis that it was obtained by fraud (the fraud alleged being that the affidavits filed by Power Securities failed to disclose the Alleged Conspiracy).  Best Year and Sin together also claim damages for losses caused by the Alleged Conspiracy.  The claim is pleaded in a full Statement of Claim (“SOC”).

23.On 24 June 2019, Harris J ordered Best Year to be wound up by reason of its failure to pay the judgment debt ordered by summary judgment. Before making the order, Harris J noted that Best Year had filed evidence (in the form of two affirmations from Yan) asserting that there was a defence to the claim on the basis that the judgment had been obtained by fraud and the filing of “perjurious testimony”.  Although Yan’s affirmations did not descend to detail of the fraud, Harris J noted that Mimmie Chan J had rejected the application to file evidence in support of the appeal, apparently on the basis that she thought that the evidence added nothing to the defence advanced in the evidence before the Master.  Harris J saw no basis for adjourning the petition, and no basis for not making the normal winding up order.

24.As a result of that winding up order, a stay has been ordered of Power Securities’ claim against Best Year, and Best Year’s counterclaim, in the 2018 Action.  Similarly, the 2017 Action has been stayed sine die.

25.On 24 and 25 June 2019, the current strike out summonses were issued, by which Power Securities, Ng, Tang and Sit seek to strike out Sin’s counterclaim in the 2018 Action.  On 23 July 2019, the strike out summonses were issued, by which Power Securities and Tang seek to strike out Sin’s claim in the 2019 Action.  The summonses expressly identify that the counterclaim/claim should be struck out because they are barred by the principle against reflective loss.

26.The original and amended defence and counterclaim in the 2018 Action pleaded the same basis of alleged loss and damage, being the decrease in value of the First Credit shares held by Best Year.  However, after the strike out summonses were issued, Sin filed the RADCC, in which the green amendments in paragraphs 102 and 102A sought to address the issue of reflective loss. Paragraph 102 now identifies that by reason of the matters pleaded in the defence and “to avoid even further injury to be inflicted by” the alleged conspirators, Sin “had no choice but to extricate himself from the First Credit stock market and cut his losses by disposing of his shareholding in Best Year and [EPL], which indirectly held the remainder of Sin’s First Credit Shares, at a depressed price which would otherwise have obtained a much higher price had the conspiracy not taken place”.  Paragraph 102A sets out the averment that such loss “is not reflective of Best Year and/or [EPL]’s loss”.  The only pleaded basis as to why that would be so is the factual averment “since [ie because] Mr Sin no longer has any interest and is no longer a shareholder in either Best Year or [EPL]”.

27.Therefore, it was only on 20 August 2019 by the filing of the RADCC that Sin alleged for the first time that he had personally suffered loss as a result of the Alleged Conspiracy.  The pleader seems specifically to have recognised the problem which might arise from the principle against recovery of reflective loss, and that the prior version of the amended defence and counterclaim falls foul of that principle.  So, he or she has offered the way around that problem as the disposition of ownership of the companies which held and owned the First Credit shares which diminished in value.

Sin’s Affirmations

28.I need to deal with a preliminary point relating to two affirmations filed by Sin, each headed with the titles of both the 2018 Action and the 2019 Action.

29.On 16 August 2019, Registrar S Kwang made orders in both actions giving directions as to the filing of evidence, and directing that no further evidence should be filed without leave of the Court.  Sin did not comply with the timetable for filing his evidence.  As a result, on 30 October 2019 (following a hearing apparently fixed to commence at 3pm on that day) Master Kot made an unless order, namely that unless by 5pm on the same day, 30 October 2019, Sin were to file and serve his affirmation in opposition to the strike out summons, he should be debarred from doing so.

30.It seems that the Sin affirmation (in draft but exhibited to a solicitor’ s affidavit) was served on the solicitors for Power Securities and Sit only after 5pm, and then was incomplete.  The full document was served only at 5.06pm (though I think it was filed within time).  The signed affirmation was affirmed on 31 October 2019, and filed the following day.

31.Although the default was pointed out to Sin and his solicitors, and that the sanction takes effect automatically so that the person in default is required to apply for relief from sanction, Sin only applied for sanction from relief by summons dated 5 November 2019.  Against the relatively short delay of six minutes, Ms Chan has not really opposed the relief from sanction, albeit she asks for Sin to pay the costs occasioned by his failure to comply with the unless order, on a full indemnity basis.  Anyway, as it happens, Power Securities and Sit have also managed to file the third affidavit of Ho, which responds to some points in Sin’s affirmation.

32.But the oddity of the situation arises as follows.  The summons dated 25 October 2019, by which Sin sought an extension of time for him to file his affirmation, was issued and served only on solicitors for Power Securities and Sit.  As a result, the solicitors and counsel for Tang and Ng had no knowledge that an extension of time had been sought, nor that an unless order granting further time had been made, nor that Sin had filed an affirmation, nor that Sin had applied for relief from sanction, until 20 November 2019 when the solicitors were liaising as to the production of the bundle for this hearing.  In those circumstances, Mr Pao and Ms Cheng oppose any use of the Sin affirmation, on the basis that it is simply inadmissible.

33.If I were to allow the relief from sanction, which Ms Chan does not seriously oppose when she has filed an affidavit in reply, it would seem artificial to permit the use of the Sin affirmation in the context of the strike out application made by Power Securities and Sit, but not to permit it in the context of the strike out applications made by Tang and Ng.  Against all the circumstances, I allow the use of the Sin affirmation in the context of all strike out applications.  In the exercise of my discretion to do so, amongst other things, I have taken into account the fact that the Sin affirmation is significantly similar to, and at least overlapping with, Sin’s affirmation filed as the new evidence which he or Best Year asked to be admitted for the purpose of the appeal from the grant of summary judgment, which Mimmie Chan J refused.  I also take into account that it is part of the argument on the strike out applications that the material in that affirmation was held to have been incapable of advancing the defence which Best Year wished to pursue on the pleading in the DCC, which is largely reproduced in the RADCC in the 2018 Action and the SOC in the 2019 Action.  Consistently with that stance, no application was made by either Mr Pao or Ms Cheng for any adjournment, nor was there any real attempt to identify prejudice which might flow to their clients if the Sin affirmation were to be admitted as evidence.

34.Sin has also sought to adduce a second affirmation in opposition to the present applications.  That affirmation is essentially to produce a page of exhibit which it is said was inadvertently omitted from one of the exhibits to the first affirmation.  On that basis, I also allow the second affirmation.

Applicable Principles – Strike Out Applications

35.The principles applicable on applications to strike out pleadings are settled.  In any strike out application, the onus is on the applicant to demonstrate that the case is one in which it is plain and obvious that the action, or part of the pleading, can summarily be dismissed and that the opponent’s case is bound to fail.  Because striking out is a drastic remedy, no court should strike out a pleading unless satisfied that the legal basis of the claim is unarguable or almost incontestably bad.  Where the legal viability of the cause of action is sensitive to the facts, or where the legal principle is a developing principle, an order for striking out should not be made.

36.Obviously, it is not an abuse of process for a party to pursue to trial a claim that is reasonably arguable.  Further, striking out a pleading which does not disclose a reasonable cause of action is not a bar to a differently pleaded version of the same contemplated case which does plead a reasonable cause of action.

37.If the application to strike out is on the basis that there is no reasonable cause of action, no evidence is admissible and the application is determined on the face of the pleaded cases.  If other bases of application are put forward, such as an alleged abuse of process, affidavit evidence may be admitted.  On a strike out application, there should be no mini-trial upon affidavit evidence, and generally disputed questions of fact are to be assumed in favour of the pleader, or stood over to trial.

Applicable Principles – Reflective Loss

38.In Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1, the House of Lords considered a number of authorities which were held (at 35F-36A, per Lord Bingham) to support the following propositions:

(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 the 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 the 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 from that suffered by the company caused by breach of duty independently owed to the shareholder, each may sue to recover the lost cause 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.

39.It was pointed out (at 36B-E) that these principles do not resolve the crucial question which the Court must make whether on a strike out application or at trial.  On the one hand the Court must respect the principle of company autonomy, ensure that the company’s creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered.  On the other hand, the Court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation.  Hence, the problem can be resolved only by close scrutiny of the pleadings at the strike out stage and all proven facts at the trial stage, if there is one.  The object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether the loss claimed is merely a reflection of the loss suffered by the company.  In some cases, the answer will be clear, but in others, inevitably, a final judgment may be called for.  At the strike out stage, any reasonable doubt must be resolved in favour of the claimant.

40.It is no answer to say that the diminution in the value of shares is also a personal loss to the shareholder.  This is because (at 66C-D, per Lord Millett) that is not the point.  The point is that it merely reflected the diminution of the company’s assets.  The test is not whether the company could have made a claim in respect of the loss in question; the question is whether, treating the company and the shareholder as one for this purpose, the shareholder’s loss is franked by that of the company.  If so, such reflected loss is recoverable by the company and not by the shareholders.

41.The focus is neither on the capacity in which the claim is brought, nor the specific cause of action, and not on whether a wrong has been done to the plaintiff personally, but upon the type of loss suffered.  When invoked, it requires the Court to embark upon an assessment, the critical question being whether the claimant’s loss can be made good if the company enforces its rights against the defendant.  If it can, the loss is a reflective loss and the claim should be struck out: Basab Inc v Superb Glory Holdings Ltd [2017] 20 HKCFAR 384, at §8.

42.This also identifies that the principle applies even if the defendant’s respective duties to the company and the shareholder are wholly distinct and unrelated to each other.  Further, while the principle is often said to prevent double recovery, it is equally relevant in situations where double recovery is not strictly in issue, for example where a company chooses not to pursue a remedy against the defendant, or is unable to do so through lack of means, or has settled the claim.

43.Nor is the principle limited to claims brought by a shareholder in his capacity as such.  For example, it has been held to be applicable to creditors or employees of a company who are not shareholders themselves.

44.In Sevilleja Garcia v Marex Financial Limited [2019] QB 173, the English Court of Appeal considered whether the rule applied to unsecured creditors.  The question arose in the context of a strike out application, and it was held (at §12) that the issue is a pure question of law which will not be affected by any facts which might emerge at trial, so that the question should be decided at once.  In doing so, it considered (at §32) the four justifications for the rule which emerged from the authorities, being: (1) the need to avoid double recovery by the claimant and the company from the defendant; (2) causation, in the sense that if the company chooses not to claim against the wrongdoer, the loss to the claimant is caused by the company’s decision not by the defendant’s wrongdoing; (3) the public policy of avoiding conflicts of interest, particularly if the claimant had a separate right to claim it would discourage the company from making settlements; and (4) the need to preserve company autonomy and avoid prejudice to minority shareholders and other creditors.

45.Hence, Flaux LJ (with whom Lewison and Lindblom LJJ agreed) held (at §33):

“It follows that the justification for the rule is not limited to company autonomy, in the sense of the unity of economic interest between a company and its shareholders as Prudential Assurance v Newman Industries might be thought to suggest. Once it is recognised that the justification for the rule is wider, it is difficult to draw a principled distinction between a claim by a shareholder qua creditor … and a claim by any other creditor who is not a shareholder. As a matter of logic and principle, it is difficult to see why a claim by a creditor who has one share in a company should be barred by the rule against reflective loss whereas a claim by a creditor who is not a shareholder is not. That point is well illustrated by the example of a creditor who owns shares in the company, whose claim is initially barred by the rule, but, on this hypothesis, if he sells the shares, the rule no longer bars his claim. That makes no logical or legal sense at all.”

46.That last point was emphasised by Flaux LJ (at §36) when he referred to a concern about perpetuating “the illogical and unprincipled distinction to which I have drawn attention between the shareholder with one share who was a creditor, whose claim is barred by the rule against reflective loss on the current state of the authorities, and the creditor with no shares or who has sold his shares, whose claim is not barred”.  Lewison LJ also emphasised (at §70) that “the decision of the House of Lords in Johnson establishes that a claim brought by a shareholder, even if not in his capacity as such, is barred by the rule against reflective loss if the loss that he himself has suffered would have been made good by restoration of the company’s assets”.

47.I have been told that the decision in Garcia is going, with leave, to the UK Supreme Court.  Nevertheless, I agree with the analysis of the Court of Appeal on the above points.  It would be an illogical and unprincipled distinction, if one is drawn between a claim made by a person as a shareholder and a claim made by a person as a former shareholder, if the loss that he himself says he has suffered would have been made good by restoration of the company’s assets.  Indeed, if such a distinction were to be made, that would be a recipe for abuse, stripping the principle of much of its force.

48.By way of analogy, Ms Cheng has drawn my attention to section 725(5) of the Companies Ordinance Cap 622, which gives the court powers to order a person to pay damages to an unfairly prejudiced member or former member of a company.  That subsection tends to support the absence of any distinction between claims made by past and present members of a company, in that it provides that:

“To avoid doubt, a member, past or present, of a company is not entitled to recover, by way of damages under subsection (2)(b) or (4), any loss that solely reflects the loss suffered by the company that only the company is entitled to recover under the common law.”

49.Mr Barlow referred me to Primeo Fund (in official liquidation) v Bank of Bermuda (Cayman) Limited (CICA (Civil) Appeal 21/2017), a decision of the Court of Appeal of the Cayman Islands. In that case, the factual situation was the opposite to the present case, in that the claimants were not shareholders of the companies at the time when the cause of action arose, but had become shareholders by the time that the proceedings were commenced.  The decision was that their claims were barred by the principle against reflective loss because, at the times their claims were made, those claims were reflective of claims available to the companies in which they had become shareholders (at §415).

50.But in reaching that conclusion, I note that the court expressly approved (at §382ff) the rationale and justifications of the principle identified by Flaux LJ in Garcia’s case.  There was also specific approval (at §392) of the “illogical and unprincipled distinction” identified by Flaux LJ.  Therefore, I do not think that the converse factual situation, and the decision on it in the Primeo case, assists Mr Barlow.  As I read it, Primeo is a case which identifies that if, when he brings a claim, a shareholder claims for loss which is reflective of a claim available to the company, then that claim is barred.  It does not matter that the shareholder was not previously a shareholder.  But that is not to say – and the ratio of the case does not say – that a shareholder whose claim is barred can avoid the bar by ceasing to be a shareholder.

51.Mr Barlow has also placed reliance on the cases of Stein v Blake [1998] BCC 316 and Heron International Ltd v Lord Grade [1983] BCLC 244, pointing out that they were both referred to, but clearly not overruled, by the House of Lords in Johnson.  In the Stein case, Millet LJ referred (at 319G) to the earlier decision in the Heron International case, where it was recognised that breach of directors’ fiduciary duties may cause loss to the shareholders because they are deprived of the opportunity of realising their shares to greater advantage.  So, (at 320E) a distinction was drawn between (a) loss sustained by a shareholder by a diminution in the value of his shares by reason of the misappropriation of the company’s assets, and (b) loss caused directly to a shareholder who has been induced to part with the shares at an undervalue.  It was noted that the shareholder has a personal cause of action to recover in respect of the second type of loss, but not the first.

52.Whilst I acknowledge that neither Stein nor Heron International was overruled by the decision in Johnson, nor did those decisions detract in any way from the conclusions of the House of Lords as to the principle against reflective loss, and the underlying rationale and justifications.  Essentially, the earlier cases merely identified that where a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of duty independently owed to the shareholder, the shareholder may sue to recover the loss cause to him by breach of the duty owed to him.  To my mind, those cases are essentially examples falling within Scenario 3 of the three scenarios identified in Johnson.

53.In any case, the question will be into which scenario the particular facts fit.  This exercise is what was performed by the House of Lords (at 36F-37B) by reference to the individual heads of claim pleaded by Mr Johnson.  So, whilst Mr Barlow relied on the second head of claim, being cost of personal borrowings, as to which the House of Lords noted that it would be necessary to engage in close examination of both the ingredients and the quantum of the claim, among other things to be sure that it was not a disguised claim for loss of dividend, so that it could not be struck out at that stage as bad on its face, that is not the precise head of claim being pursued by Sin in the present case.  Instead, it will be necessary to look at the facts and nature of his claim with the focus on the nature or type of the loss being pursued.

54.Lastly, it is important to point out that on a strike out application put forward on the basis that the claim is barred by the doctrine against reflective loss, the question is whether the action is sustainable or not, not whether it should be allowed to proceed to trial as a matter of discretion.  It is a matter of principle, and there is no discretion involved.  If the principle is offended, the claim should be struck out.

Applicable Principles – Res Judicata / Issue Estoppel

55.The applicable principles were summarised by Anthony Chan J in Capital Wealth Finance Group Limited v Lai Yueh-Hsing (unreported, HCA 686/2012, 31 July 2015) at §§20-29.

56.To give rise to an estoppel, the earlier decision relied upon must satisfy the following requirements: (1) it must be judicial in the relevant sense; (2) it was in fact pronounced; (3) the tribunal had jurisdiction over the parties and the subject matter; (4) the decision was (a) final and (b) on the merits; (5) it determined the question raised in the later litigation; and (6) the parties are the same or their privies or the earlier decision is in rem.

57.A res judicata estoppel may be a cause of action estoppel and prevent a party from asserting or denying, as against the other party, the existence of a particular cause of action, the non-existence or existence of which has been determined in a previous judgment.  Alternatively, there may be issue estoppel, which prevents a party from asserting or denying, as against the other party, an issue which has been determined in a previous judgment.

58.A decision will create an issue estoppel if it determined an issue in a cause of action as an essential step in its reasoning.  Only determinations which are necessary for the decision, and fundamental to it, will create an issue estoppel.

59.I think it is settled that a successful application for summary judgment is capable of giving rise res judicata.

60.Judgments in personam are binding only as between the parties to them and those who are privies.  As to what amounts to privity, or what has been described as “sufficient community of interest”, an example would be the trustee of property in dispute and beneficiary.  The required commonality is a direct interest in the subject matter of the litigation, a parallel or corresponding interest in that subject matter and not simply a financial interest in the result of the action.  It is essential that the party to be estopped by privity must have some kind of interest, legal or beneficial, in the previous litigation or its subject matter.

61.Part of the question is to consider the extent to which the new party can be said to be, in reality, the party to the original proceedings by reason of his relationship with that party and against this background whether it is just that the new party should be bound by the outcome of the previous litigation.

Applicable Principles – Henderson Abuse of Process

62.The type of abuse known as res judicata in the wider sense, or Henderson abuse, was summarised in Ko Hon Yue v Chiu Pik Yuk (2012) 15 HKCFAR 72 at §§82-83.  The essence of the doctrine is that a party ought generally not to be permitted to raise in subsequent proceedings claims or issues which that party could and should have raised in earlier proceedings.  The abuse will usually take the form of the other party being “vexed” or “oppressed” by the subsequent set of proceedings.  The court is required to exercise a discretion, and to assess a number of factors and to balance competing interests, including not just those of the litigants before it, but also taking into account the other interests involved in the administration of justice.

63.There is an underlying public interest in finality in litigation, reinforced by the emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole.

64.A collateral attack on a final decision of the court is an abuse of process and a scandal to the administration of justice if the same question, having been disposed of by one case, is litigated again by a party merely changing the form of the proceedings: see Ho Kin Man v Commissioner of Police [2014] 3 HKLRD 478 at §§25 and 35; Yifung Properties Limited v James Nicholas Barrie Smith [2019] 1 HKLRD 36.

65.In assessing whether or not there has been such an abuse, the court is engaged in 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: see Johnson at 31D-E.

66.In the fairly recent case of Michael Wilson & Partners Limited v Sinclair [2017] 1 WLR 2646, the English Court of Appeal considered authorities relating to abuse of process.  The following themes were said to arise from the cases, relevant to that appeal.

67.First, the power to strike out a claim for abuse of process where there is no res judicata or issue estoppel is founded on two interests: the private interest of a party not to be vexed twice for the same reason, and the public interest of the state in not having issues repeatedly litigated.  There may be unfairness to the party and/or the risk of administration of public justice being brought into disrepute, where either or both interests may be engaged.

68.Secondly, whilst an abuse may occur where it is sought to bring new proceedings in relation to issues that have been decided in prior proceedings, there is no prima facie assumption that such proceedings amount to an abuse.  The court’s power is used only where justice and public policy demand it.

69.Thirdly, to determine whether proceedings are abusive the court must engage in a close merits-based analysis of the facts. In carrying out this analysis, it will be necessary to have in mind that: (a) the fact that the parties may not have been the same in the two proceedings is not dispositive, since the circumstances may be such as to bring the case within the spirit of the rules; thus (b) it may be an abuse of process, where the parties in the later civil proceedings were neither parties nor their privies in the earlier proceedings, if it would be manifestly unfair to a party in the later proceedings that the same issues should be re-litigated, or if there is an element of vexation in the use of litigation for an improper purpose.

70.However, it will be a rare case where the litigation of an issue which has not previously been decided between the same parties or their privies will amount to an abuse of process.

71.Privity of interest is a matter of substance, not form: see Spencer Bower and Handley: Res Judicata 4^th Ed at §9.47.  On occasions, courts have been prepared to pierce the corporate veil and recognise the substantial identity between a company and its controlling directors and shareholders.  The text references the Johnson case, in which Lord Bingham held that a formulaic approach to the rule in Henderson should not be taken, and on the facts of that case pointed out that the company was the corporate embodiment of Mr Johnson: he made decisions and gave instructions on its behalf; if he wished to include his personal claim in the company’s action, or to issue proceedings in tandem with those of the company, he had power to do so.

72.Against these points, Mr Barlow rightly reminds me, and I have in mind, the salutary reminder of the rare circumstances in which it would be appropriate to pierce the corporate veil, given by the Supreme Court in Prest v Petrodel Resources Limited [2013] UKCS 34.  It was pointed out by Lord Sumption at §16 that, though the expression is sometimes used indiscriminately to describe a number of different things, properly speaking, “piercing the corporate veil” means disregarding the separate personality of the company.  In the following paragraphs, §§17-35, Lord Sumption analysed what he concluded lead to the recognition of only a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company.  He held such an approach to be consistent with authority and with long-standing principles of legal policy.

73.However, in my view, considering whether a company and its shareholders are to be regarded as privies in the particular circumstances calling for the examination of the question whether there is a Henderson abuse does not require disregarding the separate personality of the company in the shareholder.  In other words, I do not think it is piercing the corporate veil, properly speaking.  For example, in the Johnson case, the court merely pointed out the practical realities in the consideration of whether or not an abuse of process was thought to have occurred.

Analysis – Reflective Loss

74.On the application to strike out on this basis, no evidence is admissible.  The facts pleaded by Sin in the RADCC are to be taken as true.  Therefore, it is to be assumed that Sin did in fact divest himself of ownership of Best Year and EPL by the transactions pleaded in paragraph 102.  So I assume in favour of Sin the one factual basis upon which he pleads that the principle against reflective loss does not apply.

75.Nevertheless, I agree with the submissions made by Ms Chan, Ms Cheng and Mr Pao that Sin’s counterclaim in the RADCC in the 2018 Action and his claim in the SOC in the 2019 Action violate the principle against recovery of reflective loss.

76.On the original pleading, both Best Year and Sin would have suffered some loss in terms of their respected shareholding in Best Year and EPL, and First Credit.  But, however it is viewed, the real alleged loss, being the diminution in the share value of First Credit said to have arisen from the market manipulation caused by the Alleged Conspiracy, was in fact only suffered by Best Year and EPL.  Those two companies were the only material shareholders of shares in First Credit; Sin was not a shareholder. Any loss caused to Sin in diminution of the value of his shares in Best Year simply reflects the loss caused to Best Year from its holding of shares in First Credit (those shares being its only or main asset).  The same is so as far as the shares were held by EPL.

77.Had Best Year brought a successful claim to recover the difference in share value of the First Credit shares, on the basis that the Alleged Conspiracy had not occurred, Sin’s loss would have been automatically recovered when Best Year’s assets were replenished through the judgment.  So, Sin’s alleged loss is precisely that type of loss precluded by the principle against recovery of reflective loss.  Indeed, as a matter of that principle, only Best Year is allowed to recover the alleged loss, and to the exclusion of Sin, it being irrelevant whether Best Year has in fact sued, declined to sue or failed to sue.

78.The green amendments in the RADCC – notably added only after the winding up of Best Year and after the strike out applications had been issued – are not such as to change the position.  First, it might be pointed out that there is a significant contradiction on the face of the pleading as to the reason why Sin made the various transactions in February and March 2018.  At paragraph 96(2) of the RADCC it is pleaded that the sale by Sin was intended to be a clean cut from First Credit in view of its wholesale change of board, Sin’s own resignation as the Chairman and Executive Director of First Credit, and in anticipation of the wholesale of all the shareholding as controlled by Sin to a third party.  It is specifically pleaded that there was no commercial incentive for Sin to retain any control or interest over First Credit, whether via Best Year, EPL or otherwise.  However, inconsistently with that pleading, is the pleading in paragraph 102 that “to avoid even further injury to be inflicted by” the conspirators “Sin had no choice but to extricate himself from the First Credit stock market and cut his losses by disposing of his shareholding in Best Year and [EPL], which indirectly held the remainder of Sin’s First Credit Shares, at a depressed price which would otherwise have obtained a much higher price had the conspiracy not taken place”.

79.Even the suggestion of the “depressed price” is difficult to reconcile with the earlier averment in paragraph 96(4) that there was good consideration for the 9 February 2018 sale by Best Year of its First Credit shares to EPL, and that the price paid and received was “a fair market value as at 9 February 2018”, for reasons which are then particularised (and which have nothing to do with a forced sale at a depressed price to cut losses).

80.But, secondly and in any event, in so far as Sin claims that the “depressed price” was caused by the Alleged Conspiracy itself, that would still merely be reflective of the fall in the share value of First Credit, which loss was suffered by Best Year and EPL.  That damage or loss occurred at the time of the drop in share price of First Credit, and independently of any later decision by Sin to sell his interest in the holding companies.  Indeed, all the relevant alleged unlawful tortious conduct comprising the Alleged Conspiracy was fully performed by the end of September 2017.

81.It is noteworthy that no further tortious conduct is pleaded as might have given rise to any separate liability to Sin beyond the conduct pleaded as to the Alleged Conspiracy.  That is to say, Sin has not articulated any basis for claiming any loss which is separate and distinct from that allegedly suffered by Best Year and EPL, caused by any breach of duty independently owed to him.  Of course, in other cases there may be tortfeasors who cause different losses to different parties in different ways, but that is not what happened, or what is pleaded, in this case.  Nothing is pleaded which might justify liability twice for the same amount of loss, one felt by Best Year/EPL, the other by Sin.  That is contrary to at least one of the underlying rationales of the rule against recovery of reflective loss.  The subsequent sale by Sin is irrelevant to, and had no effect on, the loss suffered by the companies which actually held the First Credit shares.

82.I also do not think that Sin has suffered any separate or distinct loss.  Where the value of the shares in Best Year were wholly reflective of the value of Best Year’s shareholding in First Credit, any diminution in value was reflective of the diminution in the value of the First Credit shares.  It might also be noted, though it need not be part of the reasoning, that it was open to Sin to have imposed a condition on his sale of the shares in Best Year that if the new owner were to pursue and recover damages said to have arisen from the Alleged Conspiracy, the consideration for the sale would be varied accordingly.  Any pursuit of the claim by Best Year would have required the full involvement and cooperation of Sin, as he is the one (the only one) with relevant direct knowledge of what he says amounts to the Alleged Conspiracy, and it only makes logical commercial sense for that cooperation to come at the cost of his indirect reflected loss being made good. Hence, I do not think it can properly be said that Sin was deprived of any particular opportunity of realising his shares to greater advantage.

83.In any event, I do not think the disposal by Sin of his shareholding in Best Year and EPL (to which Best Year had transferred some of its First Credit shares) alters the legal analysis.  As indicated above, I wholly agree with the reasoning in Garcia, that it would be illogical and legally nonsensical for Sin’s claim, barred by the principle against reflective loss at the time that he was a shareholder, somehow to be revived by his choice of selling shares in the company which held the First Credit shares.

84.Seeking to resolve the question only by close scrutiny of the pleadings at the strike out stage, as the authorities require, I would ascertain that the loss claimed is one which would be made good if the company had enforced its full rights against the party allegedly responsible, and the loss claimed is merely a reflection of the loss suffered by the company, Best Year or EPL.  That answer seems to me to be clear.  Engaging in close examination of both the ingredients and the apparent quantum of the claim, and focusing on the type of loss asserted, Sin’s claim is but a disguised claim for loss arising from the diminution in value of the First Credit shares said to have been caused by the Alleged Conspiracy.

85.Hence, Sin’s claims in the RADCC and the SOC fall to be struck out at this stage as bad on their face.

86.For the avoidance of doubt, I do not accept that this is a case where the pleading does not disclose a reasonable cause of action but a differently pleaded version of the same contemplated case might plead a reasonable cause of action.  My decision that the claims fall to be struck out as offending the principle against reflective loss is dispositive, but nevertheless I will go on to deal with the other aspects of the argument.

Analysis – Res Judicata

87.The res judicata point was taken mainly by Ms Chan, and Mr Barlow suggested that Mr Pao was “astute” not to have taken the same bad point.  But I do not think it is a bad point.

88.As Ms Chan identifies, the Court has already considered and rejected the Alleged Conspiracy in the 2017 Action.  Although Sin was not a party to the 2017 Action, he was in my view a privy of Best Year properly to be estopped from re-litigating the same issue.  At the time of the commencement of the 2017 Action, Best Year was solely owned and controlled by Sin.  Even after he says he sold the company, all instructions to Best Year’s solicitors must have come from Sin.  He was the one who verified the DCC, and made the affirmation opposing the summary judgment application.  He was the one who sought to adduce the further evidence for the intended appeal against the grant of summary judgment, which application for admission of evidence was subsequently rejected by Mimmie Chan J.  Sin now seeks to rely on precisely similar factual allegations and the same cause of action as those advanced for Best Year in the 2017 Action, and in which Sin had a clear interest.

89.Mr Barlow says that the principal relating to res judicata does not apply because there is no duality of parties and no duality of causes of action, and because the summary judgment against Best Year does not constitute a final judgment against any non-party such as Sin.

90.As the last point, I think that jumps the gun on the analysis.  It is important not to elide the various elements of the analysis.  The first questions relate to whether or not the earlier decision is judicial, was in fact pronounced, in circumstances where the tribunal had jurisdiction over the parties and the subject matter, and was final on the merits.  I think all of those requirements are satisfied.  I also think that the question determined was the one which is sought to be raised by the subsequent litigation.  Therefore, the remaining question is whether Sin was a privy, who should be taken to be bound by the previous decision.  For reasons I have already given, I think that Sin is a privy.

91.Whilst I acknowledge some element of tension between the arguments on the ground invoking the reflective loss principle, which insists upon corporate autonomy, and the ground relating to res judicata which relies on an element of privity between Best Year and Sin, I do not think that is an elision or equation of a shareholder with the company. Also, for the avoidance of any doubt, I also proceed in this analysis on the basis that Sin’s pleaded case is taken to be true; in other words, I do not proceed on any assumption that the evidence that Sin sold his shares in Best Year is a recent fabrication.

Analysis – Abuse of Process

92.I accept that Sin’s claims amount to an abuse of process in the Henderson sense.

93.The Alleged Conspiracy allegations were fully ventilated before, and were rejected by, the Master when he gave summary judgment.  His decision was that the pleaded case and the evidence adduced in support of that pleaded case disclosed no reasonable defence.  In other words, it was not even arguable.  Though an appeal was launched, Best Year has not pursued that appeal.  But the attempt to adduce further evidence for the appeal was also dismissed.

94.I agree that there was a second attempt to run the same factual case in the action which was discontinued, HCA 1700/2018. I also agree that there was an attempt to have, as it has been described, a third bite of the cherry in the opposition to the winding up proceedings, which Harris J rejected before making the order to wind-up Best Year.  There was also the renewed attempt to run the same case in the RADCC in the 2018 Action, and in the SOC of the 2019 Action.  The attempt to run additional and duplicative arguments, in slightly different form of proceedings, seems to me to be a collateral attack on the finality of the summary judgment.

95.Mr Pao coined the interesting phrase “re-litigation squared”.  As he put it, not only has Sin provided an excuse for litigating again, but that excuse has already been dealt with and rejected in previous litigation.  By reference to the Johnson case at 32D-E, Mr Pao points out that Sin could have joined the 2017 Action as an additional plaintiff by counterclaim.  I agree.  I also agree that the effect of Mimmie Chan J’s judgment is to have rejected the excuse for not having produced the materials earlier, and to have rejected the suggestion that the proposed new evidence would have made any material difference.

96.That the parties to the subsequent proceedings are not entirely the same as the parties to the 2017 Action does not change the analysis.  A difference in parties is no bar to the application of the Henderson principle in appropriate circumstances.  Sin is a privy, the person with all knowledge and the instigator/director/instructor/driver of the Best Year position.  The slightly different form and nature of the various proceedings is immaterial in the overall assessment as to whether the subsequent claims are abuses of process.  In my view, they are abuses.

97.Therefore, I reject Mr Barlow’s submission that the argument as to abuse of process should fall at the first hurdle.  Mr Barlow says that the decision on the 2017 Action, where Sin was not a defendant and never made a party, means that the abuse argument could not succeed.  But that ignores the fact that Sin was in reality the driver of Best Year’s case in the 2017 Action, and indeed had been the sole shareholder and director at the time that the action was commenced.  As to the argument that he was somehow incapacitated from properly giving assistance to Best Year in its opposition to the summary judgment application, that argument has already been dismissed by Mimmie Chan J.  Should it matter, I agree with the basis for her dismissal of that argument.

98.Of course, I accept that it is ordinarily appropriate to start new proceedings where an application is made to set aside a judgment, where it is said that the judgment was obtained by fraud.  I accept that that may give rise to a separate cause of action, which is why it is best raised by separate action.  But I do not accept that Sin’s claim could not have been raised by him in the 2017 Action, as an additional party to the counterclaim, where he was the person who had full knowledge as to the relevant circumstances which he has asserted, albeit at that point only on behalf of Best Year.

99.It may be right, as Mr Barlow submits, that the Sin claims themselves have never been tried by any court, and have never been explored.  But that does not mean his now pursuit of those claims is not an abuse of the process.  First, I do not accept the submission that the evidence which Sin wishes to adduce has never been engaged; it was engaged, and it was rejected.  In any event, it is the essence of the Henderson abuse consideration that an abuse may have occurred in circumstances where a person could, and it is therefore taken that he should, have pursued a claim in the earlier proceedings.  I reject the submission that Sin could not have pursued his claim in the earlier proceedings; plainly, he could.

Analysis – Duplication of Actions

100.In any event, even had I not decided that the RADCC and the SOC are both liable to be struck out, I would have struck out the SOC and dismissed the 2019 Action on the basis that it is duplicative of the matters raised in the 2018 Action.

101.This is all the more so, once it is recognised that Best Year is for all practical purposes unlikely to pursue the 2019 Action, and Sin’s only interest and claim in the 2019 Action is already canvassed, or perfectly capable of being fully canvassed, in the 2018 Action.

Result

102.In the light of my findings relating to the merits of the strike out applications, the alternative consolidation or hearing together applications simply fall away.  Therefore, I make no order on those applications.  I do not think any significant costs were incurred in relation to those applications, and I therefore also make no order as to costs on those summonses.

103.On the strike and applications, I accede to the applications to strike out the RADCC in the 2018 Action and the SOC in the 2019 Action, and to dismiss Sin’s claims in both actions.

104.I see no reason why costs should not follow the event of those applications.  However, as I have not heard any costs argument, I will in the first instance make a costs order nisi that the costs of the various applications will be borne by Sin, to be taxed if not agreed on the party and party basis, payable forthwith.  Should any party wish to seek to vary that costs order nisi, application should be made within 14 days, and I will deal with that application on the papers. Otherwise, the nisi order will become absolute after the expiry of that 14-day period.

Mr Barrie Barlow, SC and Mr Justin Lam, instructed by K & L Gates, for the 1^st defendant (by Original Action) and the 2^nd plaintiff (by Counterclaim) in HCA 1719/2018; and for the 2^nd plaintiff in HCA 1071/2019

Ms Linda Chan, SC and Mr Thomas Wong, instructed by DLA Piper Hong Kong, for the plaintiff (by Original Action) and the 1^st and 4^th defendants (by Counterclaim); and for the 1^st defendant in HCA 1071/2019

Ms Bonnie YK Cheng, instructed by Gallant, for the 2^nd defendant (by Counterclaim) in HCA 1719/2018

Mr Jin Pao, SC and Mr Victor Lui, instructed by King & Wood Mallesons, for the 3^rd defendant (by Counterclaim) in HCA 1719/2018; and for the 2^nd defendant in HCA 1071/2019