Trenus Oceanway Ltd v. Richland International Ltd and Another

HCCW 352/2014

[2021] HKCFI 243

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 352 OF 2014

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D E C I S I O N

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Introduction

1.As the action number for the present unfair prejudice petition demonstrates the present proceedings have been on foot for some considerable time.  Although the Petitioner and the 1^st Respondent, are companies the real antagonists are their beneficial owners (Chu Kong and Lau Wing Yan) respectively, whose disputes have given rise to a number of actions both here and in the British Virgin Islands and on appeal have reached on one occasion the Privy Council.  Until about 2014 they were partners carrying on a successful shipping business known as the Pacific Bulk group.  In short it is Mr Chu’s case in the Petition that in 2014 Mr Lau engineered Mr Chu’s exclusion from the Pacific Bulk group’s business and he seeks an order that either the 1^st Respondent, Mr Lau, buys his shares or the Company be wound-up.

2.The Petitioner seeks by its summons dated 16 October 2020 to strike out the following paragraphs of the Amended Defence:

(1)     Paragraphs 29.10(a) to (d).

(2)     Part of Paragraph 44.1.

(3)     Part of paragraph 46.

(4)     The annex to the Amended Defence.

The controversial pleading

3.Before addressing the applications it is necessary to understand the defences that are advanced in the controversial paragraphs and also the background to the present application.  Mr Lau does not dispute that in 2014 he took over control of the Pacific Bulk group. He pleads in paragraphs 29.3 and 29.4 of the Amended Defence that in or around January 2014 he and Mr Chu entered into an oral agreement defined in the Amended Defence as the “PB Restructuring Agreement”, which is how I shall refer to it.  In paragraph 29.9 Mr Lau pleads:

“Moreoever, since the PB Restructuring Agreement, Mr. Chu fully acknowledged and recognised that the PB Restructuring Agreement was binding and effective. Richland will rely inter alia on the correspondence between and/or involving Mr. Lau and Mr. Chu both prior to and/or subsequent to the PB Restructuring Agreement. Subsequent to the PB Restructuring Agreement, Mr. Chu immediately withdrew from the management of the PB Group and moved out of the office premises used by the PB Group in early 2014, and began to set up his own shipping and logistics business using companies with the different brand/prefix ‘Quadrolink’ in April2014.”

4.In the first of the paragraphs, which, Mr Chu, seeks to  strike-out (29.10(a) to (d)) it is then pleaded:

“29.10. Further to and/or by reason of the matters aforesaid in this Paragraph and insofar as is necessary, it is averred that (i) it would be unconscionable for Mr. Chu (and his corporate vehicles, including the Petitioner) to deny, and/or (ii) Mr. Chu (and his corporate vehicles, including the Petitioner) are estopped, debarred or prevented from denying, the PB Restructuring Agreement, the PB Trust Arrangement and/or that Mr. Lau’s full beneficial ownership over the PB Companies (including the Company and PB Cayman) as from around January 2014. Richland further avers as follows:

(a) For the purposes of implementing the auditing process under the PB Restructuring Agreement, Mr. Lau caused reviews to be conducted on the accounts of a number of the operating and cash management entities of the PB Group in around April to May 2014.

(b) Following the said reviews, Mr. Lau discovered that, without the knowledge or consent of Mr. Lau, Mr. Chu had transferred or caused to be transferred more than US$200 million from the companies jointly owned by Mr. Lau and Mr. Chu (including the PB Companies), to Mr. Chu himself (and/or his associates).

(c) Pending discovery and/or interrogatories, it is averred that approximately US$70 million had not been returned by Mr. Chu (and/or his associates) to the PB Companies, and it is averred that the said transfers constituted wrongful misappropriations from the PB Group (including PB Cayman) for the personal benefit of Mr. Chu (and/or his associates) (the ‘Unlawful Misappropriations’). A table setting out the aforesaid transfers, including the Unlawful Misappropriations, is attached as the Annex herein.

(d)   Despite repeated requests from Mr. Lau, Mr. Chu has failed to return the sums wrongfully transferred by way of the Unlawful Misappropriations, nor provided any proper explanation as to the Unlawful Misappropriations.”

5.The Annex referred to in paragraph 29.10(e) runs to some 153 items consisting of transfers between August 2003 and June 2013 (alleged “Unlawful Misappropriations”).  This plea was in the original defence, which was served in November 2018.

6.Paragraphs 44.1 and 46 were also in the original Defence, although they were substantially amended in May 2020.  They read as follows.  The amendments are underlined and it is those parts of the paragraphs, which the Petitioner seeks to strike-out.

“44.1. Paragraph 48(1) is denied in its entirety. It is denied that the affairs of the Company and/or PB Cayman have been and/or continued to be conducted by Mr. Lau in an ‘oppressive’ and/or ‘unfairly prejudicial’ manner, whether as alleged or otherwise. Further or alternatively, by reason of the matters aforesaid, the Petitioner and/or Mr. Chu in seeking to wind-up the Company on just and equitable grounds did not come to the Court with clean hands.

…

46.       Paragraph 50 is denied in its entirety.  It is denied that Richland should be ordered to purchase the Petitioner’s shares in the Company, and/or that Mr. Lau had committed any ‘breaches’, whether as alleged or otherwise.  Richland repeats the matters aforesaid, and avers that Mr. Lau is and remains the full beneficial owner of the Company, pursuant to the PB Restructuring Agreement.  Further or alternatively, by reason of the matters aforesaid, Mr. Lau’s conduct was not unfairly prejudicial to the Petitioner and/or Mr. Chu, and/or Mr. Chu should not be granted any of the relief’s pleaded in the Points of Claim (and the Petition); and that if (which is denied) the 1^st Respondent is to be ordered to purchase the Petitioner’s shares in the Company, any valuation must take into account the Unlawful Misappropriations.”

7.Essentially what is being asserted by Mr Lau is that the Unlawful Misappropriations have the following consequences for Mr Chu’s claim:

(1)  The Petitioner is prevented from denying the PB Restructuring Agreement; alternatively,

(2)  as a consequence Mr Chu does not come to court with clean hands and this inhibits any right he might otherwise have had to equitable relief.

(3)  Mr Chu’s conduct is relevant to whether or not Mr Lau’s conduct was unfairly prejudicial and by reason of Mr Chu’s conduct whatever action Mr Lau might be found to have caused to occur was not unfairly prejudicial.

8.The inclusion of paragraphs 29.10(a) to (d), 44.1 and 46  first became controversial when I heard a summons issued on 26 September 2019 for leave to file an additional witness statement and amend the Defence and a summons issued by the 1^st Respondent on 20 November 2019 for specific discovery.  Due to the general adjournment period caused by Covid-19 the applications were dealt with on paper and I delivered a decision on 29 April 2020.  I granted the summons dated 26 September 2019 and allowed the amendments, which introduced to paragraphs 44.1 and 46 the parts that the Petitioner now seeks to strike-out.  The specific discovery application sought disclosure of documents relevant to the 153 items.  I allowed the application.  I will not repeat the reasons, which are explained in my April 2020 decision.

9.In July 2018 trial dates had been fixed for 12 October 2019 with 12 days reserved.  The Pre-Trial Review (“PTR”) took place on 17 September 2020.  However, at this time the Petitioner had still not completed complying with the specific discovery order.  In addition the 1^st Respondent indicated that it wished to adduce expert accounting evidence relevant to the transactions detailed in the Annex to the Amended Defence.  The implication of this was that the trial dates would have to be vacated.  The Petitioner opposed this course and invited me to determine that the defence advanced in paragraphs 29.10(a) to (d) and 44.1 and 46 were obviously meritless, the 1^st Respondent should not be permitted to advance them at trial and, if I so ordered, the trial could commence on 12 October 2020.  I rejected this course.  As I explained at the PTR if the Petitioner took the view that the defence pleaded in paragraphs 29.10(a) to (d) and 44.1 and 46 were unsustainable it should have applied to strike them out.  I note that as is clear from paragraph 9 of my April decision I took the view that the amendments to paragraphs 44.1 and 46 did not introduce anything substantively new, they simply clarify the import of the two paragraphs.

Strike-out application

10.The present application to strike-out the controversial paragraphs was issued and an early date for its hearing arranged in order that it could be determined before further applications for specific discovery and expert evidence are heard on 19 February and 18 March 2021 respectively as if I grant the application it is likely to render the subsequent applications otiose.  On 19 October 2020 the 1^st Respondent served Answers to the Petitioner’s request for further and better particulars of the paragraphs of the Amended Points of Defence to which the Petitioner takes objection.

11.It seems to me clear that the application to strike-out paragraphs 44.1 and 46 stands or falls depending on my determination of the application in respect of paragraph 29.10.  I say that because having allowed the amendments on the basis that they do not add anything substantively new any attempt to persuade me now to strike-out those paragraphs because they are individually objectionable, rather than as a consequence of them becoming unsustainable or irrelevant as a consequence of striking-out paragraph 29.10, is inviting me to reverse the decision to allow the amendments, which is impermissible.  Mr Joffe sought to persuade me that I should reject the whole application because by allowing the amendments I must be taken to have accepted that the defence, which they sought to clarify was sustainable otherwise I would not have allowed the amendment.  I do not accept that this is a correct characterisation of what I decided as at that time I was not focusing on the question of the sustainability or otherwise of the whole of defence as I was faced with piece-meal complaints about the defence on behalf of Mr Chu rather than a strike-out application.  In my view it is, therefore, permissible for Mr Chu to attempt to strike-out the entire controversial paragraphs, although I accept that the amendments in isolation are not susceptible to striking-out at this stage having been allowed by me.  If the Petitioner thought that the amendments should not have been allowed because they disclose no reasonable cause of defence it should have appealed my order of 29 April 2020.  However, as these amendments did not materially change the defence pleaded in the relevant paragraphs before amendment and I was told by Mr Joffe that they were intended to clarify the pleas, little turns on this.

12.Mr Wong argued that the substance of the defence pleaded in the controversial paragraphs is that even if the PB Restructuring Agreement was never concluded Mr Chu is not entitled to rely on the consequence of that, namely, that Mr Lau’s diversion of the Company’s assets was unlawful and necessarily unfairly prejudicial conduct, because of the Alleged Misappropriations.  Mr Wong submits that any misappropriations by Mr Chu between August 2003 and June 2013 cannot possibly be a defence to the wrongful diversion complaint.  If the court were to reject the existence of the PB Restructuring Agreement and find that Mr Lau had wrongfully diverted the Company’s business to companies under his control a finding of misappropriation cannot deprive Mr Chu of a right to relief to which he might otherwise be entitled.  Mr Chu also complains about the inadequacies of some parts of the pleading, which I shall address later.  Before considering whether the principal complaint and other criticisms are correct I will address the legal principles relevant to this application.

Legal Principles

13.It is not controversial that I should only strike-out the relevant paragraphs if I am satisfied that it is plain and obvious that they do not disclose a sustainable cause of defence.  In fact this I take to be so uncontroversial that neither team of counsel cited authority for the proposition.  It follows that I am not concerned to resolve disputed issues of fact or law unless the it is clear what the answer is.  This is relevant in relation to the clean hands issue.  Mr Joffe argues on behalf of Mr Lau that guidance as to the ambit of a clean hands defence is to be found in the decision of the Court of Appeal in which Rogers VP says this [1]:

“Abuse of position in the Company

Quite separately from the foregoing considerations, there is also the question of whether any special relationship could be prayed in aid by Mr Ng given his conduct in defrauding the Company of its profits and assets and sharing the spoils with Mr Kei. At p.14 of the judgment, the Judge referred to the argument by Counsel on behalf of the second respondent that Mr Ng’s real objective was not to further the Company’s prosperity but to siphon off the profits. The Judge dismissed the point on the basis that there was no evidence that this was Mr Ng’s intention when forming the Company. That is, to all appearances, correct. However, in my view, it is reading Lord Wilberforce’s speech too literally to hold that simply because at the formation of the Company there was a personal relationship which involved mutual confidence which may have been intended to be faithfully carried out, that relationship survived a blatant abuse of confidence on the part of the person seeking to found his case of justice and equity upon it. In short, by abusing his position and siphoning off profits, Mr Ng had destroyed the basis of the mutual trust and confidence.

Whether one considers this to be an application of the equitable maxim of ‘clean hands’ in my view matters not. The Judge below dismissed the application of the maxim on the basis that the petitioner’s misconduct was only relevant if it was causative of the breakdown in confidence on which the petition was based. Of course, if the misconduct were causative of the breakdown, that in itself would be conclusive. But I do not consider that a petitioner can consistently and persistently abuse his position to defraud the Company and then rely upon some prior arrangement based upon mutual confidence, to which he had not adhered, to found his claim.

There is a clear distinction between such a concept and the one which Lord Oliver was dealing with in the case of Vujnovich & Another v Vujnovich (1989) 5 BCC 740. In that case, the misconduct complained of was not merely not causative of the breakdown, but had taken place after the events which gave rise to the action in the first place.

Whilst the dictum of Lord Cross in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at p.387F:

‘A petitioner who relies on the “just and equitable” clause must come to court with clean hands, and if the breakdown between him and the other parties to the dispute appears to have been due to his misconduct he cannot insist on the company being wound-up if they wish it to continue.’

addresses the position of misconduct that was causative of the breakdown, the Judge’s statement was not directed to misconduct which negatived the original agreement of mutual trust and confidence. It does not avail the petitioner in this case to say that the second respondent was not aware of his misconduct. The reason that the second respondent was not so aware lay in the fact that the petitioner co-operated with the second respondent’s agent to deceive the second respondent. It seems to me that it cannot be right that a person can rely on principles of justice and equity when he founds his claim on an agreement which not only has he not honoured but has deliberately abused.

For this reason also, I consider that Mr Ng cannot bring himself within the just and equitable provisions of s.177.”

14.The matter went to the Court of Final Appeal. At [17] Ribeiro PJ agreed with the approach of the Court of Appeal [2]:

“We also agree with the Court of Appeal that it lies ill in the mouth of a petitioner who has defrauded the company and his fellow investors to complain that he has not been accorded equitable treatment by those other investors, characterised as members of an alleged quasi partnership. It is a well-known principle that he who seeks equity must do equity.”

15.It is clear from these passages that it is at least arguable that Mr Lau can rely on misconduct by Mr Chu as a defence to Mr Chu’s claim for relief which is equitable in character regardless of whether or not the conduct was causative of the breakdown in the relationship between the shareholders.  Mr Wong argued that the English authorities demonstrate that there must be a causal relationship.  This maybe, but apart from the obvious point that it does not follow that the law in Hong Kong is the same, it is not an issue, which I should attempt to resolve on a strike-out application.  It is arguable that Mr Lau can rely on misconduct by Mr Chu regardless of whether or not it caused the behaviour by Mr Lau, of which Mr Chu complains and says lead to the breakdown of their relationship.  As a consequence matters, which      pre-date the breakdown ([29.10]) or occurred after them such as the competition claim ([40.3]) may be relevant to a consideration of what relief Mr Chu is entitled to if Mr Chu establishes the complaints on which he relies and the court finds they constitute unfairly prejudicial behaviour.

16.This disposes of Mr Wong’s principle argument that the events relied on by Mr Lau are not capable of constituting a “clean hands” defence and thus the pleadings raising the matters said to constitute “clean hands” are demurrable.

17.As I mention in [12] Mr Wong also took subsidiary points on the adequacy of the pleadings.  It seems to me that now that the amendments to the Points of Defence and the Answers to the Requests for Further and Better particulars have been served the complaints are arid particularly as the debates that have taken place on the hearing of the discovery application, at the Pre-Trial Review and now on the present strike-out application leave no room for misunderstanding, about what the defences are.

Conclusion

18.I, therefore, dismiss the summons.  I make a costs order nisi that the Petitioner pay the 1^st Respondent’s costs forthwith with a certificate for two counsel such costs to be taxed if not agreed.

Mr William Wong SC, Mr Michael Lok and Ms Jasmine Cheung,   instructed by Sit, Fung, Kwong & Shum, for the petitioner

Mr Victor Joffe, Mr Mike Lui and Ms Theresa Chow, instructed by DLA Piper Hong Kong, for the 1^st Respondent