China Medical Technologies, Inc (in Liquidation) and Others v. Wu Xiaodong and Others

HCA 3391/2016

[2019] HKCFI 2957

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3391 OF 2016

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BETWEEN

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HCA 1417/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1417 OF 2013

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BETWEEN

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(Consolidated by Order of Master Chow dated 23 July 2018)

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J U D G M E N T

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Introduction

1.There are before this court:

(1) The 2^nd Defendant’s Summons dated 1 June 2018, as amended on 24 January 2019, to strike out certain paragraphs of the Statement of Claim filed herein on 12 December 2017 (“SOC”) relating to claims made pursuant to ss 275 and 276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”) on the ground that they disclose no reasonable cause of action and constitute an abuse of process (“Strike-Out Summons”);

(2) The Plaintiffs’ Summons dated 8 June 2018 under RHC O 2 r 1 to cure any irregularity in the manner of commencement of the claims made pursuant to ss 275 and 276 of the Ordinance and they be continued by way of the Amended Writ of Summons in this Action (“O2 r1 Summons”). 

2.In the limited time available, this court only heard submissions on s 276 of the Ordinance.  This is the court’s judgment in relation to that section.

Background

3.This Action has a chequered history.  In its judgment dated 22 May 2019, this court summarised the salient background facts and the Plaintiffs’ case against the Defendants, including the 2^nd Defendant (“Mr Tsang”).  For ease of comprehension of this judgment, this court will repeat some of those facts in so far as concerned Mr Tsang.

“The Parties

5. The 1^st Plaintiff, China Medical Technologies, Inc., was incorporated in the Cayman Islands in July 2004. Its shares were listed on NASDAQ in August 2005 and were delisted in February 2012. It was the holding company of a group whose principal business was said to be developing, manufacturing and marketing advanced surgical and medical equipment in the PRC. The 1^st Plaintiff was grossly insolvent with provable claims of over US$400m. In July 2012, it was wound up by the Grand Court of the Cayman Islands. On 1 September 2014, Harris J made an ancillary winding up Order against it in HCCW 435 of 2012.

6. The 2^nd Plaintiff, CMED Technologies Ltd, is the 1^st Plaintiff’s wholly owned subsidiary.

7. The 3^rd Plaintiffs were appointed as the provisional liquidators of the 1^st Plaintiff by Order of Harris J in November 2012. On 5 February 2015, they became the Liquidators of the 1^st Plaintiff (‘Liquidators’).

8. Mr Wu was at all material times the founder, Chairman, CEO, director and the largest shareholder of the 1^st Plaintiff. From January 2006 to July 2012, he was a director of the 2^nd Plaintiff.

9. Mr Tsang was the 1^st Plaintiff’s director from June 2007 to December 2011 as well as its CFO from January 2005 to January 2012. He was also a director of the 2^nd Plaintiff from January 2006 to December 2011. He was the second most senior executive of the 1^st Plaintiff after Mr Wu …

…

Plaintiffs’ substantive case

27. As succinctly summarized in Ms Chan SC’s skeleton argument and executive summary, the Plaintiffs claim that the former senior management of the 1^st and 2^nd Plaintiffs, assisted by their associates, perpetrated, participated in and/or benefited from the fraudulent misappropriation of US$521.8m in cash (‘Fraud’) through purported acquisitions (‘Acquisitions’) from the 7^th Defendant, Supreme Well Investments Limited (‘Supreme Well’), and its subsidiaries, of the following alleged medical technologies:

(1) FISH, acquired pursuant to a contract dated 6 February 2007 for US$176.8m; and

(2) surface plasma resonance technology (‘SPR’) acquired pursuant to a contract dated on or around 5 October 2008 for US$345m.

28. It is the Plaintiffs’ case that:

(1) the FISH and SPR technologies were worthless in that they were not new technologies;

(2) Supreme Well, the counter-party to the Acquisitions, was in fact controlled by Mr Tsang, who was the sole authorised signatory of its bank accounts with Bank of China (Hong Kong) Limited (‘BOC’) and The Bank of East Asia, Limited (‘BEA’) into which US$355.5m of the consideration paid by the 1^st and 2^nd Plaintiff was deposited. The balance was paid to Supreme Well by other means;

(3) Mr Tsang authorised the transfer of funds from Supreme Well to the bank accounts of other persons and entities (‘Supreme Well Payees’) all of whom were associated with or controlled by Mr Wu, Mr Tsang and/or their associates; and

(4) the Supreme Well Payees subsequently transferred all or some of the funds to the bank accounts of other persons and entities (‘Further Supreme Well Payees’), some of whom were associated with or controlled by Mr Wu, Mr Tsang and/or their associates, and thereafter to further recipients.

29. Mr Wu orchestrated, participated and conspired in the Fraud. The Plaintiffs claim US$524.6m against Mr Wu:

(1) US$521.8m misappropriated from the 1^st and 2^nd Plaintiffs by reason of, inter alia, his breaches of duty and trust and unlawful conspiracy; and

(2) US$2.8m, being salary and bonuses paid to him from January 2006.

30. Mr Tsang acted on both sides of the Acquisitions and directed payment of the consideration received by Supreme Well to the Supreme Well Payees. He received US$7.47m directly and US$379m through entities controlled by him. The Plaintiffs claim US$524.7m against Mr Tsang:

(1) US$521.8m misappropriated from the 1^st and 2^nd Plaintiffs by reason of, inter alia, his breaches of duty and trust and unlawful conspiracy; and

(2)   US$2.9m, being salary and bonuses paid to him from January 2006.”

4.In so far as s 276 is concerned, the paragraphs in the SOC which Mr Tsang seeks to strike out are:

(1) Paragraph 11.1 in which it is pleaded that Mr Tsang and others acted in fraudulent breach of their fiduciary, equitable, tortious, statutory and contractual duties as directors and/or officers of the 1^st and/or 2^nd Plaintiffs and acted in breach of trust, misapplied or retained or has become liable or accountable for money or property of the 1^st Plaintiff or was guilty of misfeasance or breach of duty in relation to the 1^st Plaintiff for the purposes of s 276.

(2) Paragraph 295: The Plaintiffs pleaded that by reason of his participation in the Theft (or the fraudulent misappropriation of US$521.8m referred to above) and the matters pleaded in Section E of the SOC (breaches of duties), Mr Tsang and others have misapplied or retained or become liable or accountable for money or property of the 1^st Plaintiff or has been guilty of misfeasance or breach of duty in relation to the 1^st Plaintiff which is actionable at the suit of the 1^st Plaintiff.

(3) Paragraph 296: The Plaintiffs pleaded that in the premises, the 3^rd Plaintiffs seek remedies against inter alia Mr Tsang under s 276 to compel him to repay or restore the money or property of the 1^st Plaintiff in the amount of at least US$521.8m or any part thereof as the Court may direct, with interest at such rate as the Court thinks fit, or to contribute such sum to the assets of the 1^st Plaintiff by way of compensation as the Court thinks just.

(4) Paragraph 333.4 in which it is pleaded that the Plaintiffs are entitled to orders pursuant to s 276.

(5) Paragraph 5 of the Prayer for Relief which contains the Plaintiffs’ claim for orders pursuant to s 276. 

Deliberation

5.S 276(1) of the Ordinance provides:

“(1) If in the course of winding up a company it appears that any of the persons specified in subsection (1A) has misapplied or retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance, breach of duty or breach of trust in relation to the company which is actionable at the suit of the company, the court may, on the application of the Official Receiver, or of the liquidator, or of any creditor or contributory, examine into the conduct of the person, and compel the person to repay or restore the money or property or any part thereof respectively with interest at such rate as the court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance, breach of duty or breach of trust as the court thinks just.”

6.Under s 276(1A), specified persons include inter alia a person who is or has been an officer of the company.

7.On the Plaintiffs’ pleaded case, Mr Tsang is undoubtedly a person within s 276(1A).  Mr Alder’s objections to the s 276 “claim” pleaded in the SOC are that:

(1) The s 276 “claim” should have been commenced by Summons under Rule 58(1) of the Companies (Winding-up) Rules, Cap 32H (“Rule 58”) in the winding up proceedings in Hong Kong.

(2) The s 276 “claim” pleaded in a High Court Action is misconceived in principle.  The section provides a summary procedure whereby the rights of a company in liquidation may be enforced against past or present officers within existing winding up proceedings. 

(3) S 276 does not create any new duty on the part of, or any independent cause of action against, officers of a company.

(4) It is both improper and inappropriate for the Plaintiffs to advance a “claim” under s 276 by way of pleadings in an ordinary High Court Action.

8.The relevant parts of Rule 58 provide:

“(1) An application under any of the following provisions—

(a) section 276 of the Ordinance;

…

shall be made by a summons returnable in the first instance in chambers, in which summons shall be stated the nature of the declaration or order for which application is made, and the grounds of the application, and which summons, unless otherwise ordered by the court, shall be served, in the manner in which an originating summons is required by the Rules of the High Court (Cap 4 sub leg A) to be served, on every person against whom an order is sought, …

(2) On the return of the summons, the court may give such directions as it shall think fit as to the taking of evidence wholly or in part by affidavit or orally, and the cross-examination either before a judge on the hearing in court or in chambers of any deponents to affidavits in support of or in opposition to the application and as to any report it may require the Official Receiver or liquidator to make and generally as to the procedure on the summons and for the hearing thereof.”

9.S 276 is generally known as the “misfeasance” proceedings provision.  The section is a procedural section only and does not create new rights—it merely provides a summary method of enforcing existing duties arising before or as appropriate in the winding up of a company: Butterworths Hong Kong Company Law (Winding Up and Miscellaneous Provisions) Handbook 4^th Ed [276.02].

10.Similarly, in Liquidator of Wing Fai Construction Co Ltd (in liq) v Yip Kwong Robert [2018] 1 HKC 472 at [96], G Lam J observed:

“96. It is common ground that s 276 merely provides a summary procedure whereby existing rights of a company in liquidation may be enforced against past or present officers of that company. The section does not create any new duty on the part of or any independent cause of action against officers of a company: see eg In re B Johnson & Co (Builders) Ltd [1955] Ch 634, 647–648; Revenue and Customs Commissioners v Holland [2010] 1 WLR 2793, §55 …” (emphasis added)

11.It seems to this court the first 2 objections raised by Mr Alder really boil down to procedural irregularity: if the Plaintiffs intend to invoke s 276 and seek the remedies available to them under that section against Mr Tsang, they should comply with Rule 58 by issuing a misfeasance summons.  In this regard, it should be noted that the procedure laid down in Rule 58 is mandatory—an application under s 276 “shall be made by a summons …”. 

12.Also in this regard, it should be noted that in his 5^th affidavit dated 25 June 2018 (“Borrelli 5”), Mr Borrelli acknowledged that an application under s 276 is to be made by summons returnable at the first instance in chambers.  If so, there is no justification for the Plaintiffs to knowingly flout Rule 58 and plead a “claim” under s 276 in the SOC as if it created a new duty on the part of or an independent cause of action against officers of a company giving rise to remedies, discretionary or otherwise, in a High Court Action. 

13.The only justification put forward in Borrelli 5 at paragraphs 7 and 8 are that:

“7. The Liquidators were advised that the Companies Rules are silent as to the procedure where, as in the present action, the s.275 and s.276 claims are part of a larger overriding claim and combined with other causes of action, including against other defendants.

8. In the circumstances, on advice, the Liquidators made the decision to include the S.275 and S.276 Claims as part of their overall claim, by writ of summons. This decision was made on the basis that:

8.1 the Plaintiffs had multiple related causes of action against the Defendants in HCA 3391/2016 and each of these related causes of action, including the S.275 and S.276 Claims:

(a) stem from the same subject matter, referred to as the ‘Theft’ (as set out in the Statement of Claim at Section D);

(b) are brought by interrelated parties, being the First, Second and Third Plaintiffs;

(c) are brought against interrelated parties, being the 1^st to 23^rd Defendants; and

(d) require consideration by the parties and the Court of interrelated legal and factual issues, as set out in the Statement of Claim;

8.2 the pleading of the S.275 and S.276 Claims in the Statement of Claim is interconnected with and relies on matters pleaded in respect of the Theft at Section D of the Statement of Claim;

8.3 the pleading of the s.276 claim is also interconnected with and relies on the matters pleaded in respect of the breaches of duties by the directors and officers of the First and Second Plaintiffs at Section E of the Statement of Claim;

…”

14.From the Plaintiffs’ point of view, it may be more convenient for them to lump everything in one single document, instead of (i) properly identifying the relevant facts they need to put forward before the court in support of a s 276 (or s 275) Summons and (ii) separately pleading in a statement of claim the material facts in support of their “multiple related causes of action against the Defendants in HCA 3391/2016”.  But convenience of the Plaintiffs is not a valid ground to ignore the mandatory terms of Rule 58.  It is pointless for the Plaintiffs to issue the O2 r1 Summons to cure the irregularity in the manner of commencement of the “claim” made pursuant to s 276 so that it can be continued by way of the Amended Writ of Summons in this Action.  The simplest and most cost-effective way to cure the irregularity is to issue a misfeasance Summons and seek appropriate directions from the court, if so advised, such that the Summons and this Action can be heard together in order to avoid the possibility of conflicting decisions.  Instead, the Plaintiffs chose to incur their time and costs to argue that s 276 can be pleaded in a High Court Action as though it gave rise to an independent cause of action.

15.As for the 3^rd and 4^th objections, as this court points out earlier, s 276 is a procedural section only—legally speaking, there is no such thing as a s 276 “claim”, or “cause of action” for that matter.  If so, the application to strike out such parts of the SOC concerning s 276 as disclosing no reasonable cause of action must succeed. The s 276 “claim” is not a cause of action at all—let alone a reasonable cause of action.

16.As Mr Alder vividly points out in his skeleton argument, it makes no more sense to plead s 276 as a “claim” in a statement of claim than it would to plead a RHC O 14 (which is also a procedural section) “claim” in a statement of claim in a High Court Action. 

17.In his skeleton arguments, Mr Nip reiterates the reasons given in Borrelli 5 that in light of the particular circumstances of the present case where the Plaintiffs have multiple related causes of action stemming from the same subject matter against interrelated parties, the Liquidators made a conscious decision to include the s 276 “claim” in the present action. 

18.Mr Nip submits that the Plaintiffs are unaware of any authority for the proposition that s 276 can only be pursued by summons in the winding up proceedings.  On the contrary, In re B Johnson & Co (Builders) Ltd [1955] Ch 634 at 647, Evershed MR held that s 333 of the Companies Act 1948 (the former English equivalent of s 276) provided a non-exclusive method of litigating particular claims.  That is true as far as it goes.  But in order to fully understand what the learned Master of the Rolls meant by non-exclusive method, one must quote a fuller passage of the judgment:

“… Section 333, it has been many times said, is a purely procedural section. I do not in the least seek, by so stating, to lessen its significance: I mean (to restate it) that it does not create any new cause of action; it only provides a method of litigating particular claims; and, in providing a method, it is not exclusive. Prima facie (though, as will be later seen, there are difficulties in the plaintiff’s way in this case), if the procedure of section 333 is not open against any person who is within the section, the claimant may proceed by ordinary action.” (emphasis added)

19.Mr Nip further cites Phillips v McGregor-Paterson [2010] 1 BCLC 72 and Parkinson Engineering Services plc (in liquidation) v Swan [2010] Bus LR 857 as examples where misfeasance proceedings under s 212 of the Insolvency Act 1986 (the current English equivalent of s 276) were commenced by way of a standard claim form issued in the Chancery Division of the High Court.  Mr Nip’s diligence in his research and his efforts to cure the irregularity mentioned in the O2 r1 Summons are highly admirable.  The short answer is that these cases are not authorities which justify the Plaintiffs in ignoring the mandatory terms of Rule 58 or prohibit this court from holding that the proper way to cure the admitted irregularity is by issuing a misfeasance Summons under that Rule. 

20.To conclude, this court agrees with Mr Alder that, in so far as s 276 is concerned, the Strike-Out Summons should succeed and the O2 r1 Summons should be dismissed. 

Disposition and costs order nisi

21.In so far as s 276 of the Ordinance is concerned, there shall be an order in terms of paragraph 1 of the 2^nd Defendant’s Strike-Out Summons while the Plaintiffs’ O2 r1 Summons is hereby dismissed.

22.There shall be an order nisi that costs of both Summonses be to the 2^nd Defendant, to be taxed if not agreed, and paid by the Plaintiffs forthwith, certificate for counsel. 

23.Liberty to the parties to apply for directions in relation to s 276 of the Ordinance in terms similar or substantially similar to the consent summons dated 22 November 2019.

24.Lastly, this court thanks counsel on both sides for their helpful assistance. 

Mr Norman Nip, instructed by Lipman Karas, for the Plaintiffs

Mr Edward Alder, instructed by P C Woo & Co, for the 2^nd Defendant

Lam, Lee & Lai, for the 3^rd Defendant, was excused from attendance

Tony Kan & Co, for the 5^th Defendant, was excused from attendance

Sidley Austin, for the 6^th Defendant, was excused from attendance

Eversheds Sutherland, for the 13^th Defendant, was excused from attendance