China Shanshui Cement Group Ltd and Others v. Zhang Caikui and Others

HCA 2880/2015

[2019] HKCFI 3033

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2880 OF 2015

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J U D G M E N T

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Introduction

1.Though there are other defendants to these proceedings, the current application is concerned only with the 1^st and 2^nd defendants.  By summons dated 11 July 2019, the 1^st defendant (“Zhang Snr”) and the 2^nd defendant (“Zhang Jnr”) (together “Zhangs” or “both defendants”) seek:

(1)     to strike out §§33, 47-60 and 62 of the of the plaintiffs’ re-amended statement of claim (“RASOC”) as against Zhang Snr, on the grounds that they are frivolous, vexatious or otherwise an abuse of the Court’s process;

(2)     to strike out §§80-108 of the witness statement (“Yen’s WS”) of Yen Ching Wai David (“Yen”) as against Zhang Snr, accordingly;

(3)     to strike out §§44D(1), (2) and (6)(b) of the RASOC as against both defendants, on the grounds that they are frivolous, vexatious or otherwise an abuse of the Court’s process;

(4)     to strike out §§141-142, 143 (to the extent of RMB79.33 million) and 144-147 of Yen’s WS and §§106(2), 110-111, 112 (to the extent of RMB79.33 million) and 113-116 of the witness statement (“Liu’s WS”) of Liu Yiu Keung Stephen (“Liu”) as against both defendants be struck out, accordingly;

(paragraphs (1) to (4) together being the “Strike Out Application”)

(5)     to discharge the Mareva injunction order made by G Lam J on 18 July 2017 (“Mareva Order”) as against Zhang Snr (“Discharge Application”); and

(6)     to vary the Mareva Order as against Zhang Jnr or to reduce it to a ceiling figure of HK$20 million (“Variation Application”).

2.The applications are concerned only with three aspects of the claims against made the Zhangs in this action (together “Relevant Claims”):

(1)     the “Qilu Claim” – RASOC §§44D(1)-(2): arising from the alleged misappropriation of RMB146.88 million in relation to the acquisition of a 30% interest in Qilu Property Co. Ltd (“Qilu Property”) by the 4^th plaintiff (“Shandong Cement”);

(2)     the “Shanshui Heavy Claim” – RASOC §44D(6)(b): arising from the alleged misappropriation of RMB79.33 million as to Shandong Cement’s 44.99% interest in Shanshui Heavy Industries Co., Ltd (“Shanshui Heavy”); and

(3)     the “Professional Fees Claim” – RASOC §§33, 47-60 & 62: arising from the alleged wasted legal costs in the sum of HK$20 million as regards Cayman Islands proceedings commenced by the 1^st plaintiff (“CSC”) in November 2015.

3.Both defendants were represented by Mr Jean-Paul Wou of Counsel.  The plaintiffs were represented by Mr David Chen of Counsel.

Background and Relevant Procedural History

4.CSC is a Cayman company, whose shares are listed on the Hong Kong Stock Exchange (“HKSE”).  CSC wholly and directly owns the 2^nd plaintiff (“CSCHK”) (a Hong Kong company), which wholly and directly owns the 3^rd plaintiff (“CPC”) (another Hong Kong company), which in turn wholly and directly owns Shandong Cement (a PRC company).

5.The China Shanshui group (“Group”) principally engages in the production, distribution and supply of cement and related construction products.  The fight for control of CSC and the Group has been the rich source of litigation in recent years, not just in this action but also in a number of other related actions.

6.The Zhangs and the 3^rd to 8^th defendants are former directors of CSC.  The 9^th defendant (“CNBM”) is a PRC company who shares are listed on the HKSE.  The 10^th defendant (“ACC”) is a Taiwanese company who shares are listed on the Taiwan Stock Exchange.  CNBM and ACC carry on similar businesses to that of CSC.

7.This action arises out of the defendants alleged unlawful attempts to gain and retain control over CSC.  It is alleged that the unlawful conduct was principally spearheaded by Zhang Snr in collaboration with CNBM and ACC, who received assistance from Zhang Jnr and the other defendants. The plaintiffs’ principle claims are broadly (a) in conspiracy (as against all defendants) and (b) in breach of fiduciary duties (as against the Zhangs and the 3^rd to 8^th defendants).

8.Amongst the alleged overt acts of the conspiracy and the breaches of fiduciary duty are allegations relating to the wrongful presentation in November 2015 of a winding up petition in the Grand Court of the Cayman Islands, which sought to windup CSC, and the related application to appoint provisional liquidators over CSC (“Cayman Proceedings”).

9.The former Board of Directors of CSC, which comprised the Zhangs and the 3^rd to 8^th defendants, was completely replaced by 1 December 2015.  CSC issued the writ in this action on 4 December 2015.

10.On 4 November 2016, CSC, CSCHK and CPC obtained an ex parte worldwide Mareva injunction order from Au-Yeung J against the Zhangs, restraining them from removing from Hong Kong, disposing of otherwise dealing with diminishing the value of their assets up to the ceiling figure of $411 million.  Shandong Cement was subsequently joined to the action and the plaintiffs’ summons to continue that injunction was amended to include Shandong Cement.  The Zhangs took out a mirror application to discharge that injunction, and a further application to vary the injunction including to reduce the frozen sum to $240 million.  The continuation, discharge and variation applications were heard by G Lam J on 7 June 2017, leading to his judgment of 18 July 2017.

11.The application for the injunction was founded on the three claims comprising the Relevant Claims.  At the time the matter was heard, the Zhangs had not filed any defence.  G Lam J naturally approached the matter by reference to considerations of good arguable case, real risk of dissipation, sufficient assets within jurisdiction, and material non-disclosure.

12.It was noted that there was no dispute that CSC had demonstrated a good arguable case for its claim in relation to the Cayman Proceedings, by reference to an expenses amount of approximately HK$24 million.

13.As to the Qilu Claim, G Lam J noted that the claim was based on the fact that the new management had been unable to locate the original of the equity transfer agreement (“ETA”) – by which it was said the acquisition of 30% in Qilu Property had been made – or any meaningful documentation, books or records of Qilu Property, for audit purposes.  On that basis, a note in the 2015 audited accounts of CSC identified that the Group had fully impaired the carrying amount of the investment of RMB146.88 million. Recognising that the plaintiffs had to show a good arguable case on their claims “in the sense of a case which is more than barely capable of serious argument, and yet not necessarily one which the Judge believes to have a better than 50% chance of success”, G Lam J noted one prominent feature of the case was that the Zhangs had neither applied to strike out any claim nor filed any defence, which was significant in the assessment of the strength of the plaintiffs’ case at the inter partes stage.  Therefore, his conclusion was:

“The fact is that Shandong Cement had parted with substantial funds, at a time when the Zhangs were in charge of the Group and under fiduciary duties, and yet there is no document available now to show that Shandong Cement received anything of value. It seems to me that the plaintiffs have established a good arguable case for this claim, though this is not inconsistent with there being potentially arguable defences available to the Zhangs.”

14.As for Shanshui Heavy, G Lam J identified that essentially the plaintiffs’ case has two aspects.  The first is that the Zhangs caused Shandong Cement to enter into an agreement to sell 55% of the issued capital of Shanshui Heavy to two purchasers (“Shandong Zhusheng” and “Tiandi Zhangshan”).  The purchase price of RMB94.05 million was allegedly partially set-off against trade payable balances alleged to have been due from Shandong Zhusheng, Tiandi Zhangshan and nine other suppliers, with the balance unpaid.  But the plaintiffs allege in effect that Shandong Cement was caused to part with 55% of Shanshui without receiving anything in return, hence the claim to RMB94.05 million.  The second aspect is the Shanshui Heavy Claim, and it arises from a note in the 2015 accounts of the CSC Group, where the new board decided to recognise full impairment loss of the carrying value of the remaining 44.99% interest in Shanshui Heavy in the sum of RMB79.33 million. The impairment was because the recoverable value of the investment had been reassessed, where it was considered that the discounted cash flow analysis was lower than the carrying amount of the investment.

15.G Lam J was satisfied that the plaintiffs had made out a good arguable case to the extent of the RMB94.05 million for the 55% interest.  But he thought the claim for RMB79.33 million stood on a somewhat different footing.  As the sum was written off in the accounts on a discounted cash flow analysis, and there was no suggestion in the accounts that the write-off was due to deprivation by the Zhangs of the group’s access to Shanshui Heavy, he thought there was no good arguable case shown for the claim of this amount from the Zhangs.

16.After considering the matters overall, including risk of dissipation, the location of assets and the allegations of material non-disclosure, G Lam J discharged the worldwide Mareva order previously granted, but imposed the new Mareva Order (not worldwide, but otherwise in substantially the same terms, subject to some variation).  There was variation of the ceiling sums so as to include HK$24 million to CSC for the Professional Fees Claim and HK$167 million (RMB146.88 million) to Shandong Cement for the Qilu Claim, for a total restrained sum of HK$191 million.

Applicable Principles – Striking Out

17.The principles applicable on applications to strike out pleadings are well settled.  As is often said, it is only in plain and obvious cases that the court should exercise its summary powers to strike out a pleading.

18.Essentially, a claim may be struck out if it fails to disclose a reasonable cause of action on its face (the facts pleaded being taken in favour of the pleading party, and no evidence being admissible).  A claim is frivolous when it is not capable of reasoned argument, or is without foundation, or where it cannot possibly succeed.  A claim is vexatious where it is oppressive and/or lacks bona fides.

19.One recent helpful summary of the material principles was given by Au-Yeung J in Yifung Properties Ltd v Manchester Securities Corp (unreported, HCA 1341, 1359/2014, 19 October 2015), which summary included the following points:

(1)     Each limb under Order 18 rule 19(1) forms a separate ground for striking out.  Accordingly, although a cause of action might appear to be reasonable on the face of a set of pleadings, the court is at liberty to consider evidence and decide if the pleading should be struck out under another limb.

(2)     Where a litigant brings a claim knowing that there is no substance in it or that it is bound to fail, or if the claim is on its face so manifestly misconceived that it can have no prospect of success, it may be deemed frivolous and an abuse of process.  The court should see what the party in question knew or ought to have known if he had gone about the matter seriously.

(3)     Vexatiousness implies the doing of something over and above that which is necessary for the conduct of the litigation, and suggests the existence of some spite, or desire to harass the other side to the litigation, or some other improper motive.

(4)     To decide that the litigant has been frivolous or vexatious and thus abused the process of the court is a serious finding to make, for it will generally involve bad faith on his part and one would expect the discretion to be exercised sparingly.

20.As to expunging material from witness statements, the court certainly has jurisdiction to strike out or expunge any scandalous matter.  Evidence that bears no relevance to the pleaded issues in dispute is scandalous and inadmissible, and liable to be struck out.  A witness statement which is inconsistent with the party’s own pleadings should be struck out, and to decide relevance the court will only refer to the pleadings. Evidence which is beyond the ambit of the pleaded issues is scandalous and should be struck out.  Merely putting material in a witness statement served pursuant to Order 38 rule 2A cannot render something admissible if it was otherwise inadmissible.  Before trial, the court should only strike out those parts of a witness statement that are plainly objectionable; in any case of doubt, the matter should be left for determination by the trial judge.

The Qilu Claim

21.Mr Wou submits that the approach to consideration of this aspect can be framed by the following chronology.  The defence was filed in September 2017; the plaintiffs’ witness statements were in January 2018; CSC made public announcements in October 2018 and March 2019; CSC’s 2018 annual report was issued in April 2019.

22.But it is first helpful to look at the precise nature of the existing pleading in RASOC §§44D(1) and (2).  Together with the introductory part of §44D, those paragraphs read as follows:

“44D. In anticipation of their Anticipated Ouster and since their 1 December 2015 ouster from the Board/GroupCo, each of the Zhangs has committed the following further breaches of his fiduciary/constructive trustee’s duties:-

(1) During the period July to September 2015, the Zhangs misappropriated RMB146.88 million of the funds of Shandong Cement, which, within the business records of Shandong Cement (the relevant parts of which the Plaintiffs recovered on or about 30 January 2016), the Zhangs attempted to disguise as a purported (but bogus) purchase by Shandong Cement of a 30% interest in a Mainland Company named [Qilu Property].

(2)  Since then, in order to conceal their misconduct, the Zhangs have unlawfully misappropriated the relevant books and records of Shandong Cement and kept them from Shandong Cement’s lawful board of directors and auditors.”

23.The nature of that type of claim is clear.  As Mr Wou says, for the plaintiffs to succeed at trial, they would have to prove on the balance of probabilities that: (a) the Zhangs misapplied the funds of RMB146.88 million; (b) they did so dishonestly; (c) they misapplied the funds to their own use; (d) the acquisition of the 30% interest in Qilu Property was bogus; and (e) they had seized the related books and records of Shandong Cement, preventing access to them.

24.In 2017, the Plaintiff’s case was that the then management could not locate the original of the ETA or the books and records of Qilu Property.  It was in those circumstances that they had decided to impair fully the carrying amount of the investment.  At the time of the hearing before G Lam J, as he noted and on which point he placed some reliance, no defence had yet been filed.

25.The defence was filed later, on 18 September 2017.  It asserts that the acquisition was a genuine commercial transaction, and the claim is founded on the plaintiffs’ own management decision to impair the investment in Qilu Property, when the plaintiffs had recovered, or ought to have recovered Shandong Cement’s books and records since their seizure of its headquarters in January 2016.

26.Mr Wou also refers to the fact that CSC has made various public announcements admitting that it has indeed located both (a) the original ETA, and (b) the financial information in books and records of Qilu Property.

27.He referred first to CSC’s 2017 Annual Report, which appeared in any event to cast some doubt on the basis of the pleaded claim.  In that report, the auditor referred to the then inability to find the ETA and the books and records of Qilu Property, but expressed being unable to obtain sufficient appropriate audit evidence to satisfy themselves as to the existence, accuracy and recoverable amount of the interest and associates as at 31 December 2017 and as to whether any impairment loss or reversal of impairment loss should be recognised in consolidated profit or loss for the year then ended.  In the same report, it was stated that as at 31 December 2017 the Group held investments in associates, including a 30% interest in Qilu Property (which is not consistent with the suggestion of a “bogus” investment).

28.In an announcement dated 31 October 2018, relating to the application made by CSC to the HKSE for resumption of trading in its shares, CSC stated that the issues of being unable to locate the ETA and the 2015 and 2016 financial information of Qilu Property had been resolved, and that CSC was conducting relevant assessment and communication with Qilu Property.  Again, the announcement suggested that the 30% interest truly belonged to the Group, and was at its disposal.

29.On 20 March 2019, CSC made preliminary announcement of results for the financial year ended 31 December 2018.  In respect of Qilu Property, the announcement stated that:

“the Group was able to obtain access to the financial information and books and records of Qilu Property and Shanshui Heavy Industries as at 31 December 2018. Based on the management assessment with reference to the net book value of Qilu Property and Shanshui Heavy Industries as at 31 December 2018 as disclosed in Note 18, the recoverable amounts of Qilu Property and Shanshui Heavy Industries are assessed to be nil as at 31 December 2018.”

30.CSC’s Annual Report for 2018 was published on 23 April 2019.  Again, a note to the financial statements summarised the financial information for Qilu Property, which must have been on books and records being available.  Its net liabilities were identified as RMB113,475,000 (for 2017) and RMB166,289,000 (for 2018).  It was on that basis – and, as Mr Wou says, not otherwise – that the carrying amount of the 30% interest in Qilu Property was assessed to be nil for both financial years, and that there was no reversal of impairment losses made in the accounts.

31.Therefore, Mr Wou is correct when he says that, throughout the past four years, CSC has not suggested to its shareholders or the investing public at large either (a) that the Zhangs had helped themselves to RMB146.88 million, or (b) that the acquisition of 30% of Qilu Property was in any way “bogus”.  Rather, the stated interest was consistently and repeatedly affirmed as having in fact been acquired and retained.

32.As already stated, the plaintiffs now have the ETA, which is dated 23 July 2015, together with a Deed of Settlement dated 11 September 2015 signed by the vendor shareholders of Qilu Property and by Shandong Cement.  There is also a certificate of receipt for RMB146.88 million dated 21 December 2016 issued by Qilu Properties.

33.Public search results from the National Enterprise Credit Information Publicity System from 2016 and 2019 also show Shandong Cement’s registered 30% interest in Qilu Property.  The results also identify that Qilu Property is a going concern with a registered and paid up capital of approximately RMB83 million, that neither of the Zhangs hold board or management positions, and that a Beijing Court has frozen Shandong Cement’s 30% stake pending litigation (at least suggesting that the applicant for the freezing order considered the stake to be of some value).

34.Whilst I do not agree with Mr Wou’s sweeping submission that “contemporaneous documents do not lie” – because, as anyone involved in litigation for many years will tell you, frequently documents do lie – there is more force in his submission that the evidence is overwhelming.

35.As to the witness statements, Yen’s WS merely refers to the inability to locate the original ETA, then makes the assertion that the vendor shareholders are able to deny the transfer if that original version cannot be produced.  Referring only to the Annual Reports for 2015 and 2016, Yen says that due to the lack of financial statements and accounts for Qilu Property the board of CSC decided fully to impair Shandong Cement’s investment in that company.  Liu’s WS repeats the same material verbatim.  Both witness statements were made in January 2018, and it is fair to say that events have overtaken what was stated in them.

36.But in any event, there is the stark mismatch between the content of the witness statements and the pleaded case.  Neither Yen’s WS nor Liu’s WS suggest any misappropriation or bogus transaction. Whilst the probability, on the current interlocutory progress of this matter, is that further and updating witness statements will be served by the parties at some point before any trial, it is difficult to see how any witness statements could put forward evidence in support of the case of misappropriation and bogus transaction as currently pleaded in the RASOC.

37.On the basis of the materials now available, which Mr Wou says gives rise to a fundamental change in circumstances since the matter was considered by G Lam J, Mr Wou submits that the Qilu Claim is frivolous or otherwise an abuse of the court’s process.  Mr Wou emphasises that it is trite that allegations of fraud and dishonesty should not be made lightly, and the Court should view with disfavour any attempt to smear an opponent without basis.

38.On the other side, Mr Chen does not accept that G Lam J only found a good arguable case on the Qilu Claim because at that stage the Zhangs had not filed any defence or made an application to strike it out, or that there was no document to show that Shandong Cement received anything of value.  He submits that it does not follow from the fact that the Zhangs have filed a defence and made the application to strike out that there is no longer a good arguable case on the Qilu Claim.  That proposition is obviously correct, but it does not necessarily answer the current question posed by the strike out application on the evidence now available.

39.Also, I do not think Mr Chen is on sure ground when he suggests that “properly understood” G Lam J found a good arguable case independently, and the absence of defence or strike out application merely substantiated his views.  Indeed, as Mr Chen himself identifies, the nub of the reasoning of G Lam J was that Shandong Cement had parted with substantial funds but there was no document available to show that it received anything of value.

40.Mr Chen however goes on to make the submission that the books and records now recovered have only confirmed that CSC has received nothing of value from its payment of RMB146.88 million to acquire the interest in Qilu Property.  He says that whilst Mr Wou’s submissions focus on the recovery books and records, they gloss over the fact that those books and records now recovered do not dispel the notion that Shandong Cement received nothing of value.

41.But the problem for Mr Chen is that that is not really relevant to the (currently) pleaded case.  Perhaps more importantly, it does not seem to be the plaintiffs’ actual case that the purchase of the 30% interest in Qilu Property was bogus.  Not only is that not the case put forward in the witness statements, such a case is inconsistent with the public statements made by the Group, and no steps have been taken to unravel the transaction on the basis that it was not genuine.

42.In light of the exchanges between Bench and Bar table during the hearing, Mr Chen offered a possible amendment to be made to the RASOC, adding a new §(1A) in between §§44D(1) and (2), in the following terms:

“(1A) Alternative to (1) above, during the period July to September 2015, the Zhangs misapplied or caused to be misapplied RMB146.88 million of the funds of Shandong Cement in the acquisition of a 30% interest in Qilu Property. The value of the said 30% interest in Qilu Property was valueless or of insignificant value such that the RMB146.88 million was misapplied for the benefit of the sellers of the said 30% interest. In other words, the Zhangs gave away or caused to be given away RMB146.88 million of Shandong Cement’s assets for no or no meaningful consideration.”

43.Precisely because it is pleaded as an alternative, I do not think that this pleading (if permitted) could enhance the quality of the existing pleaded case based upon the alleged misappropriation, bogus transaction and concealment.  On the original pleading, it seems to me that the following position has been reached.  The witness statements do not support, and are not capable of supporting, the pleaded claim in §44D(1).  The evidential materials which have become available since the original pleading, and since the witness statements were filed, demonstrate such inconsistencies and contrary information that it is possible to say now that the pleaded claim in that paragraph is bound to fail.  On that basis, it falls to be struck out.

44.If there is still a claim to be put forward by the plaintiffs in relation to the Qilu Property investment, it is not an alternative; rather, it is simply the plaintiffs’ new or now stated claim in that regard.  On that basis, I do not think it appropriate for me to grant leave now to amend to raise such a claim.  Indeed, where the proposed new §44D(1A) was drafted somewhat ‘on the hoof’ during the argument, it may not be fair to the plaintiffs to tie them to that particular formulation.  Further, it seems to me that the case which the plaintiffs might now wish to put forward is essentially a case that might be expected to allege some knowledge on the part of the Zhangs that they knew the investment was of no or of insignificant value.  Otherwise, as Mr Wou points out, the allegation might amount to little more than one of making a bad investment, not giving rise to an actionable cause of action in law.  Further, if it is to be alleged that the purpose of the transaction was to benefit the sellers, one might expect to see some better particularisation of such an allegation.

45.So, though I strike out the existing Qilu Claim, I do so without prejudice to any application that the plaintiffs might wish to make to amend the RASOC to raise some other claim relating to or arising out of the same transaction.  Any such amendment application, if made, can be dealt with on its own merits.  (See also the Postscript at the end of this Judgment.)

46.As I have struck out the Qilu Claim as currently pleaded, it seems to me to follow that the relevant paragraphs of the witness statements, which in any event do not support the case pleaded, also fall to be struck out.

The Shanshui Heavy Claim

47.Together with the introductory part of §44D, §44(6)(b) reads as follows:

“44D. In anticipation of their Anticipated Ouster and since their 1 December 2015 ouster from the Board/GroupCo, each of the Zhangs has committed the following further breaches of his fiduciary/constructive trustee’s duties:-

(6) The Zhangs have refused to account to the Plaintiffs for their misappropriation of Shandong Cement’s assets and in particular for the following:-

(b)     Shandong Cement’s remaining 44.99% shareholding in Shanshui Heavy which the current Board and the Group’s auditors reasonably value at RMB79.33 million.”

48.Again, it can be seen that it is the plaintiffs’ pleaded case that the Zhangs have refused to account for their “misappropriation” of the 44.99% shareholding in Shanshui Heavy.  So, Mr Wou says, for the plaintiffs to succeed at trial they will have to prove on the balance of probabilities that: (a) the Zhangs had misapplied or misappropriated Shandong Cement’s 44.99% in Shanshui Heavy; (b) they did so dishonestly; and (c) they misapplied the shareholdings to their own use.  But, the plaintiffs’ only real complaint is that the board of CSC has decided fully to impair the carrying amount of Shandong Cement’s investment using the discounted cash flow analysis.

49.Indeed, Mr Wou points out that this was the basis upon which G Lam J held that there was no good arguable case on the Shanshui Claim. The write-off of value, in the sum of RMB79.33 million, flowed from the discounted cash flow analysis, rather than anything to do with the Zhangs.

50.As to the witness statements, Yen’s WS refers to the full impairment as a result of the cash flow analysis, and also refers to the fact that in January 2016 the Zhangs caused Shanshui Heavy to commence proceedings against Shandong Cement.  Liu’s WS merely repeats the same materials.  Neither suggests misappropriation by the Zhangs, and misapplication of the 44.9% to their own use.

51.Mr Wou also refers to the search results from the National Enterprise Credit Information Publicity System, which shows Shandong Cement as the registered shareholder of a 44.99% interest in Shanshui Heavy, which is said to be a going concern with the registered paid-up capital of RMB171 million, and in which the Zhangs hold no board or management position.  The results also identify that the Jinan Court had previously frozen the 44.99%, albeit that the freezing was lifted in November 2018.

52.Similarly, the various public announcements made by CSC state that the 44.99% shareholding is in fact still held, albeit that the carrying amount of the investment was fully impaired, first because of the lack of access to books and records and subsequently because of the reassessment following the discounted cash flow analysis.

53.On that basis, Mr Wou submits that the Shanshui Heavy Claim also has no prospect of success, is frivolous or otherwise an abuse of the Court’s process, and should not be left so as to serve only the purpose of wasting Court time and the parties’ costs at trial.

54.On the other side, Mr Chen first complained of the apparent shift in the argument on this aspect of the strike out application.  He correctly identified that the only basis originally advanced to strike out the Shanshui Heavy Claim was that G Lam J had held that there is no good arguable case on it, in so far as the RMB79.33 million is concerned.  I agree with him that such a contention is misconceived.

55.The “good arguable case” threshold is much higher than that of a “serious issue to be tried”: see Hong Kong Civil Procedure 2020 §29/1/66.  Therefore, the absence of a good arguable case may be consistent with there being a serious issue to be tried.  So, unless any other reason is advanced as to why there is no serious issue to be tried, the strike out application must fail.

56.But the argument now advanced, says Mr Chen, wholly departs from the original case on the strike out. Further, the original contention that there is no good arguable case, and so for that reason the claim must be struck out, is no longer maintained.  This change of position, says Mr Chen, is unfair and deprives the plaintiffs of any meaningful opportunity to address the criticisms now made by the Zhangs on the plaintiffs’ evidence.

57.However, it seems to me that the pleading in relation to the Shanshui Heavy Claim is materially different from that relating to the Qilu Claim.  The latter specifically pleads a bogus transaction, specifically to disguise a misappropriation of funds, which was subsequently deliberately concealed by the misappropriation of books and records.  But the former does not refer to any disguised bogus transaction, and seems to me to use the word “misappropriation” in a potentially much wider sense.  This seems to me apparent from the other matters of complaint pleaded in §44D(6).

58.Again, as I previously mentioned, it seems inevitable that further witness statement materials will be filed, which may deal with this aspect of the case on an updated basis.  I suppose it is also possible that amendments might be sought better to clarify the nature of the claim intended.  In any event, I do not think it can be said at this stage that the Shanshui Heavy Claim is frivolous or otherwise an abuse of the Court’s process.  I am not, therefore, going to strike it out.

59.Nor does it seem to be necessary, or even helpful, to strike out those parts of the current witness statements which deal with that claim, albeit now possibly on a historic basis which has changed over time.

The Professional Fees Claim

60.This aspect of the claim is sought to be struck out only in so far as it is pleaded against Zhang Snr.

61.Mr Wou points out that it is the plaintiffs’ case that Zhang Snr, together with others, caused CSC to convene a board meeting on 10 November 2015 during which the then CSC board deliberated and passed a resolution to apply in the Cayman Islands for the appointment of joint provisional liquidators in order to carry out a scheme of arrangement involving CSC’s creditors and shareholders.

62.However, there can be no dispute that Zhang Snr had stepped down from the CSC board on 13 October 2015, one month also before the November meeting.  Further, on the plaintiffs’ pleaded case, Zhang Snr did not attend the 10 November 2015 board meeting, and played no part in passing the resolution at that meeting.  The minutes of the meeting confirm that position.

63.Nowhere in §§80-108 of Yen’s WS, which deals with the Professional Fees Claim, is there a single reference to Zhang Snr.

64.Nevertheless, I do not think the entire pleading relating to the Professional Fees Claim is liable to be struck out in so far as it pleads a case against Zhang Snr.  As I understand it, Mr Chen accepts that Zhang Snr was not present at the 10 November 2015 board meeting, and so could not have actually voted and did not vote for the resolution made at that meeting, and in so far as it is necessary to do so Mr Chen would make that clear by appropriate amendments at some stage.

65.But, many of the allegations made in the context of the Professional Fees Claim deal with activities said to have been conducted for and on behalf of the “Concert Party”, a term defined in RASOC §20, and which refers to an alleged collaboration between various people and both Zhang Snr and Zhang Jnr.  This is, of course, connected to the conspiracy plea.  On the usual approach to a claim in conspiracy, Zhang Snr might be held liable notwithstanding having no part in some of the individual overt acts which are said to constitute the conspiracy, so long as he was a knowing participant in the conspiracy and engaged in some overt act(s) of it.

66.I also reject Mr Wou’s argument that against the factual background of the shareholdings and constitution of the board that it is necessarily “counter-intuitive” to suggest that the board members were accustomed to act in accordance with the instructions of Zhang Snr, as opposed to that of the substantial shareholders who nominated them.  That seems to me to be a matter ripe for exploration at any trial.

67.There was also the pursuit by Mr Wou of various arguments relating to alleged ulterior motives or improper purposes, to which Mr Chen responded in his argument.  But I do not think I need to rehearse those various arguments, as they do not seem to me to be helpful in the context of, and certainly not dispositive of, the strike out application.

68.In conclusion, I do not strike out the Professional Fees Claim made against Zhang Snr.

Discharge and Variation Applications

69.Mr Wou submits that the Relevant Claims are frivolous, vexatious and unsustainable.  He says it must necessarily follow that on the current materials before the Court, there is no good arguable case and hence the Mareva Order ought to be discharged.

70.Mr Chen correctly points out that the discharge application hinges upon the outcome of the strike out application.

71.As pointed out above, the Mareva Order was made by reference to two sums and two claims, being HK$24 million for the Professional Fees Claim and HK$167 million (RMB 146.88 million) for the Qilu Claim, for a total restrained sum of HK$191 million. On my conclusions on the strike out application, therefore, no discharge of the Mareva Order follows.

72.As to the Variation Application, Mr Wou submits that the restrained sum should be reduced to HK$20 million, being the “identifiable losses” relating to the Professional Fees Claim.  He says that this was the plaintiff’s own case in the affirmation leading the application for the injunction, but for “some unknown reason” the Mareva Order was made to freeze the hire sum of HK$24 million.

73.However, the reason is not “unknown”.  RASOC §58 pleads a claim to a total of HK$24,155,083 as particularised by the individual smaller sums that make up that total.  I do not think it would be right at this stage to vary the particular element of the ceiling figure, when it reflects the pleaded claim.  It might also be noted that the Mareva Order does not include within the restrained total (as sometimes is the case) any sum relating to interest or costs.

74.Therefore, I dismiss the Discharge Application and the Variation Application.

Result

75.In the circumstances, on the Zhangs’ summons dated 11 July 2019, I make an order in terms of paragraph 3, save for the deletion of the reference to “(6)(b)”.  Otherwise, paragraphs 1, 2, 3, 4 and 5 are dismissed.

Costs

76.As to costs, it seems to me that where (a) the Zhangs have succeeded in striking out the Qilu Claim (albeit without prejudice to the possibility that the plaintiffs may make an amendment application so as to plead a recast claim relating out of the Qilu Property transaction), and (b) the plaintiffs have succeeded in defeating the remainder of the Strike Out Application, as well as the Discharge Application and the Variation Application, the appropriate order is to make no order as to costs.

77.Nevertheless, as the parties have not had the opportunity to make any costs or omissions in the light of the conclusions in this Judgment, I shall make such an order on a nisi basis.  The nisi order shall become absolute, should neither party make an application for variation within 14 days.  Should either the plaintiffs or the Zhangs, or both sides, make a variation application within 14 days, they should do so by letter to the Court, explaining the variation sought and the basis for it.  Thereafter, the other side may respond to that variation application within 14 days.  No further submissions will be permitted.  I shall then deal with any variation application on the papers.

Postscript

78.As a result of the administrative issues caused by the Covid-19 situation and the resultant General Adjournment Period (“GAP”), there has been a delay in the ability of the Court to hand down this Judgment. During the GAP, it has been brought to my attention that the plaintiffs issued a summons on 23 January 2020 (just before the GAP) seeking leave to amend the re-amended statement of claim in the terms of the draft annex to the summons.  That summons was listed for hearing at 9:30am on 12 February 2020, which was during the GAP so that the hearing was automatically adjourned to a date to be re-fixed.

79.The proposed amendments are to §44D of RASOC and relate to the claim arising out of the Qilu Property transaction, albeit in terms different from the draft amendment previously proposed (see above).  The summons also seeks an injunction order to be made, apparently at least in part flowing from the proposed further amendment.

80.I do not think the new summons impacts my above analysis and conclusions.

81.Further, I have already indicated that any application which the plaintiffs might make to amend the re-amended statement of claim would be dealt with on its own merits.  In those circumstances, I shall leave that summons to be dealt with in due course once the GAP has ended, and the summons can be re-listed for consideration.

Mr David Chen, instructed by Haldanes, for all plaintiffs

Mr Jean-Paul Wou, instructed by Deacons, for the 1^st and 2^nd defendants