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

HCA 806/2006

[2021] HKCFI 1380

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 806 OF 2006

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BETWEEN

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JUDGMENT

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1.This is the trial of a preliminary issue, namely :

“whether, if (which is not admitted by the Shearman Defendants) the alleged Deeds of Assignment were executed as pleaded in §40A of the Re-Amended Statement of Claim, they were invalid as they involved assignments of a bare right to litigate”.

2.There is an unusual feature in this trial, namely, none of the parties has called any witness.  Hence, the trial proceeded on the documentary evidence and the submissions of the parties.

Issues

3.The issues in this trial are as follows :

(1) There are arguments on the pleadings as to who bears the burden of pleading and proving a positive case on the validity or invalidity of the Assignments in question (“Assignments”) and whether the respective case has been sufficiently pleaded.  There is also an argument whether the Plaintiffs can rely upon an unpleaded issue based upon a recent Judgement of Mr Justice Ng;

(2) Whether the Assignments were grounded upon genuine and pre-existing commercial interest at the time they were created, the absence of which would render them champertous and void;

(3) Connected with (2), the Defendants say that the Assignments were devices engineered by the Plaintiffs to evade the liability to pay security for costs in their favour;

(4) Whether the Defendants are precluded from arguing the validity of the Assignments by virtue of the doctrine of issue estoppel.

The Parties

4.The 1^st Plaintiff (“P1”) is a Hong Kong company.  According to the Re-Amended Statement of Claim (“RASOC”), it was established to develop infrastructure joint venture projects in the Mainland. It was put into creditors’ voluntary liquidation on about 10 April 2013.

5.The 2^nd and 3^rd Plaintiffs (“P2” and “P3”) are both BVI companies.  According to the RASOC, P2 and P3 were (a) associated companies of P1 and (b) P1, P2 and P3 were controlled by Mr David Ho Yuk Wah (“Ho”).

6.The averment that P1 to P3 were controlled by Ho was admitted by the 1^st to 8^th Defendants (“Shearman Defendants”).

7.The 4^th Plaintiff (“P4”) is also a BVI company.  The Plaintiffs’ pleaded case is that it was a joint venture between Ho (through his company Carnation Developments Ltd) and Mr Gao Kun.  It was a holding company of, inter alia, Greater Beijing First Expressways Ltd (“GBFE”) which was also a BVI company.  These averments were admitted by the 9^th Defendant (“HB”).

8.Further, P4 became associated with P1 to P3 when on about 6 March 1997 10% of its shares was taken over by Asia-Pac Expressways Investment Management Ltd.  This averment was not admitted by the Defendants.

9.The Shearman Defendants comprise the law firm Messrs Shearman & Sterling and various partners of that firm.

10.HS is and was at all material times a firm of solicitors.

The Action

11.The details of this Action are not very important for present purposes.  They may be summarised as follows.  The Plaintiffs’ claims arose out of 2 sets of interest-bearing notes issued by GBFE in the amount of USD288 million in June 1997 (“Notes”).

12.Beginning in about 1997, GBFE instructed various professionals to advise on the Notes, from their issuance to, subsequently, the restructuring of its obligations thereunder.  The Defendants were amongst those instructed.

13.According to the RASOC, GBFE experienced cashflow problems in early 1999 and failed to pay interest on the Notes in the sum of USD13,555,000 which was due on 15 December 1999.  The failure led to an acceleration of the maturity of the Notes.  They became immediately repayable by GBFE on 11 February 2000.

14.On 13 April 2000, a winding-up petition was presented against GBFE in HCCW 338/2000.  On 12 June 2000, a winding-up order was made against GBFE by the court.  The Plaintiffs pleaded that in December 2002, GBFE’s assets were sold for USD200 million, when they were worth in fact USD522 million.

15.In these proceedings, the Plaintiffs bring various claims in negligence and breach of duty against the Defendants.  There are essentially two complaints :

(1) The Defendants ought, but failed, to have advised GBFE to undertake a unilateral filing for Chapter 11 protection in the US courts.  Due to such omission, GBFE lost the opportunity of an application under the relevant provisions in the US bankruptcy code prior to the presentation of the winding-up petition in HCCW 338/2000, and lost the relevant protections under those provisions.  GBFE suffered loss in the tune of USD322 million;

(2) Separately, P1 to P3 had, via P4, paid a total of HKD62 million to GBFE by way of loans in 1999-2000.  The Defendants had failed to advise them on the risk that they might not be able to recover the money if GBFE was wound-up, which caused them loss.

16.The undervalued sale claim originally belonged to GBFE, but it was assigned to P4 in 2006 by GBFE’s Liquidators with the approval of the court (by an order dated 14 March 2006) for USD130,000 plus USD250,000 for the Liquidators’ costs.

17.By way of 3 Deeds of Assignment dated 3 August 2009, ie, the Assignments, the claims of P2 to P4 had purportedly been assigned to P1.  The validity of the Assignments goes to the locus of P1 in pursuing this Action.  If it is resolved in favour of the Defendants, it will dispose of a very substantial portion of P1’s claims, namely, that based on Chapter 11 protection in the amount of USD322 million, leaving behind its own claim on the loans to GBFE at about HKD62 million (maximum).

Relevant procedural history

18.This action was commenced by the Plaintiffs on 11 April 2006 by their Writ of Summons.  The Statement of Claim was filed on 11 May 2007.

19.On 30 January 2008, Master Yu ordered the Plaintiffs to provide security for the Shearman Defendants’ costs up to and including discovery.  The Plaintiffs appealed against the Order, which resulted in the decision of Poon J (as he then was) dated 23 December 2008 (“Poon J Decision”), in which it was held, inter alia, that P2 to P4 had to provide security (but not P1) in the sum of HKD1 million.

20.It can be seen from paras 15 to 19 of the Poon J Decision that the court was not satisfied that P1 would be unable to pay the Shearman Defendants’ costs.  It was held that P1’s financial position had markedly improved by reason of the investments in it by Ontrade Properties Ltd (“Ontrade”) and King Ocean Development Inc (“King Ocean”).  It should be noted that those investments were disputed by the Shearman Defendants who, despite their inability to adduce supporting evidence, argued that they were sham transactions.

21.It is uncontroversial that the security for costs ordered by Poon J was paid by P1[1].  It should be noted that, as stated in para 25 of the Poon J Decision, P1 had undertaken to the court to pay the security ordered against P2 to P4.

22.On 2 July 2009, P2 to P4 were ordered by Master de Souza to provide security for HS’s costs in the sum of HKD2 million by 23 July 2009.  The deadline of the compliance was subsequently extended to 20 August 2009 by consent following a request made by P2 to P4 on 16 July 2009.  It was during this agreed period of extension of time that the material transactions took place.

23.At the trial, this court was informed by the Defendants that the order for security made by Master de Souza was stayed due to the Assignments, to which I now turn.

The Assignments

24.Five days before the Assignments were made, the following transactions took place on 29 July 2009 :

(1) P1 became the sole shareholder of P2 by a transfer of 1 share in P2 from P3 to P1 at a stated payment of HKD100,000;

(2) P2 entered into a Debt Assignment purportedly assigning “a portion” of the debts owed to it by P4 in favour of P1 at the consideration of HKD100,000;

(3) P3 entered into a Debt Assignment purportedly assigning to P1 “a portion” of the debts owed by P4 to it at the consideration of HKD100,000; and

(4) P1 acquired 2,573,500 shares in P4 at HKD0.1 per share, amounting to 51.05% of the latter’s issued share capital.

25.On 3 August 2009, the Assignment were executed, by which P2 to P4 purported to assign their causes of action herein to P1 :

(1) For the Assignment between P1 and P2, the recitals stated, inter alia, that (i) P2 was a wholly owned subsidiary of P1; (ii) it had assigned to P1 all of the debt owed to it by P4; and (iii) P1 had funded the costs of this Action to date, and P2 considered it more efficient for P1 to continue the prosecution of the Action.  For the consideration of HKD100,000, P2 assigned to P1, inter alia, all of its rights against the Defendants arising out of or in respect of the claims in the Action, the right to prosecute in the name of P2, and the right in and to apply for the release of the HKD1 million paid into court pursuant to the Order of Poon J (Clause 2).

(2) The terms of the Assignment between P1 and P3 were basically identical to those between P1 and P2, save that P3 was described in the recitals as a majority shareholder of P1.

(3) In respect of the Assignment between P1 and P4:

(a) The recitals stated, inter alia, that (i) P1 was the majority shareholder and majority creditor of P4 following the assignments of debt by P2 and P3; and (ii) P4 was unable to fund the cost of the Action, and required ongoing financial support and expertise of P1 to continue the prosecution of the Action;

(b) Accordingly, for the consideration of HKD1,000,000 and 30% of any amount received by P1 by way of settlement, compromise, judgment or order in respect of the Action after deducting costs, P4 assigned to P1, inter alia, all of its rights against the Defendants arising out of or in respect of the claims in the Action, the right to prosecute in the name of P4, and the right in and to apply for the release of the HKD1 million paid into Court (Clause 2).

26.Notices of Assignment were served on the Defendants on 10 August 2009.

Further security for costs

27.Following the Assignments, the Plaintiffs applied by Summons to re-amend the Amended Statement of Claim to plead the Assignments.  The hearing of the amendment application, as well as two security for costs Summonses taken out by the Shearman Defendants and HB respectively, took place before DHCJ Mayo in November 2011.  Judgment was handed down on 6 December 2011 (“Mayo Judgment”) by which, inter alia, the application to amend was dismissed.

28.Further evidence was adduced by the Defendants before DHCJ Mayo on P1’s financial position, addressing in particular the evidence previously put before Poon J by it.  Para 66 of the Mayo Judgment held as follows :

“What is very clear from all of this is that there must be grave doubts concerning the reliability of the evidence which was before Poon J and that rather than being arms length transactions [the Ontrade and King Ocean transactions] were simply dishonest attempts by P1 and those associated with it to defeat the security for costs application.”

29.Security for costs in the sums of HKD1 million and HKD2 million was ordered against P1 in favour of respectively the Shearman Defendants and HB by DCHJ Mayo.

30.P1 appealed the Mayo Judgment only on the amendment application.  The Court of Appeal allowed the appeal by an Order dated 16 May 2012.

31.By a Decision of DHCJ Wilson Chan (as he then was) dated 19 November 2014, inter alia, further security for costs was ordered against P1 in favour of the Shearman Defendants and HB in the respective sum of HKD3.4 million and HKD3.1 million.

32.It was observed by DHCJ Wilson Chan that the Assignments were unsuccessful tactics of the Plaintiffs to seek to defeat the orders for security for costs (Decision, §§8-11).

Relevant discovery

33.An Order was made on 22 November 2017 for discovery by P1 of relevant documents relating to the relationship between the Plaintiffs, the assignments of debt, the inability of P4 to fund the litigation requiring P1’s ongoing support and documents relating to P1’s funding[2]. P1 purported to comply with the Order by filing its 3^rd Supplemental List of Documents on 3 January 2018.

34.Further Orders were subsequently made against the Plaintiffs for discovery in June 2019 and July 2019.  An Unless Order was made against them on 8 July 2019, pursuant to which the Plaintiffs filed their 4^th Supplemental List of Documents on 5 August 2019.

35.Notwithstanding the above, the Defendants complained, with justifications (see further below), that the Plaintiffs’ discovery was inadequate and had failed to present a complete picture.  For instance, the Plaintiffs had failed to disclose :

(1) A complete set of corporate documents regarding P4 so as to demonstrate the existence or extent of P1’s alleged interest in P4 before and after the Assignments.  In particular, P4’s Register of Members had not been disclosed;

(2) Documents evidencing the alleged debts owed by P4 to P2 and P3 and the size of these debts relative to P4’s total indebtedness;

(3) Any documents evidencing: (i) the payment of the alleged consideration referred to in the Assignments, and in the various transactions on 29 July 2009; or (ii) the alleged funding arrangements between the Plaintiffs.

36.The Plaintiffs had failed to remedy the inadequacy of their discovery despite the Defendants’ complaints.

37.It was observed in a Reasons for Decision of this court dated 29 November 2017, §18, that Ho was providing assistance to P1’s Liquidators (“Liquidators”) in the conduct of this Action.  This court has not been informed whether the assistance had continued thereafter.

Applicable principles

38.There is no argument over the applicable principles.  The arguments concern the application of the principles.  The law on maintenance and champerty was authoritatively stated by the CFA in Unruh v Seeberger (2007) 10 HKCFAR 31.

39.The following summary of the principles is adopted with modifications and gratitude from that set out in the skeleton arguments of Mr Man SC, who appeared with Mr Ho, for the Shearman Defendants.

40.In essence :

(1) Maintenance is “directed against wanton and officious intermeddling with the disputes of others in which the defendant has no interest whatever, and where the assistance he renders to the one or the other party is without justification or excuse”: Unruh, §84;

(2) Champerty is a form of maintenance, and occurs “when the person maintaining another takes as his reward a portion of the property in dispute”.  In other words, what marks out champerty from other forms of maintenance is “the notion of a division of the spoils”: Unruh, §85.

41.Whether a contract is vitiated on the grounds of maintenance or champerty is a matter of public policy and involves a value judgment that certain conduct should be considered “officious intermeddling” in someone else’s litigation or “trafficking in litigation” which deserves to be made unlawful: Unruh, §86.

42.At §§99-104 of Unruh, Ribeiro PJ set out a number of considerations of modern public policy which result in conduct being characterised as maintenance or champerty.  The following are relevant :

(1) First, the mischief to be discouraged by the law of maintenance and champerty as adumbrated in the old authorities remains the same:

(a) As to maintenance, this mischief is directed at “officious intermeddling in litigation”, in particular where this results in oppression of the person against whom the action is brought and possibly if it may result in the general encouragement of litigiousness;

(b) As to champerty, the public policy involves concerns that an agreement to share in the spoils of litigation may: (i) encourage the perversion of justice and endanger the integrity of judicial processes; and (ii) involve a stranger to the litigation trafficking or gambling in the outcome of the litigation, such as where profit is made by a third party with no genuine commercial interest in the transaction.

(2) Second, in considering whether a transaction is void for champerty, the totality of the facts must be examined, asking whether they “pose a genuine risk to the integrity of the court’s processes”. Legitimate common interests of a social or commercial character in a piece of litigation, and policies in favour of ensuring access to justice, must be weighed against the public policies against intermeddling in litigation.

43.Against the above background, it has long been settled that an assignment of a bare right to litigate, ie, a right to litigate unsupported by an interest of a kind sufficient to justify the assignee’s pursuit of the proceedings for his own benefit, is void because it is champertous: Simpson v Norfolk and Norwich University Hospital NHS Trust [2012] QB 640, §15 (Moore-Bick LJ); Trendtex Trading Corporation v Credit Suisse [1982] AC 679, 703C-D (Lord Roskill).  The essence of the objection is that a cause of action is not to be regarded as a marketable commodity: Re A [2020] HKCFI 493, §75 (Marlene Ng J).

44.A plaintiff may establish a legitimate interest, typically a genuine commercial interest, in the outcome of litigation sufficient to justify his support of the litigation commenced by others, without engaging the prohibition against maintenance and champerty: Unruh, §§92 and 105.

45.As to what constitutes a genuine commercial interest :

(1) A commercial interest in the outcome of the litigation must be pre-existing at the time of the assignment of the right to litigate: HKSAR v Mui Kwok Keung [2014] 1 HKLRD 116, §62 (Macrae JA).  See also Unruh, §§111 and 116;

(2) The commercial interest must be genuine.  The manufacturing of a state of affairs to lay the ground for an assignment of what would be a bare right to litigate would not amount to a genuine pre-existing commercial interest: Beijing Tong Gang Da Sheng Trade Co Ltd v Allen & Overy [2014] 2 HKLRD 86, §§26 and 31 (DHCJ Le Pichon); the Court of Appeal upheld the ruling on champerty in [2015] 3 HKLRD 247, §51 (Kwan JA);

(3) The interest must exist independently of the assignment itself: Unruh, §105;

(4) In judging whether the assignee has a genuine commercial interest, the court must look at the transaction as a whole: Low Chun Song v Ka Wah Bank Ltd [1991] 1 HKC 241, 246H (Kempster JA);

(5) A potential return on assigned cause of action may be so vastly disproportionate to the consideration paid for the assignment, as to call into question the genuineness of the commercial interest asserted: Beijing Tong Gang, 1^st instance, §§30, 32 and 43; CA, §§47-51.

46.I propose to deal firstly with the pleading arguments and the issue estoppel, both of which may be disposed of relatively swiftly.

Pleadings

47.There are 2 complaints by the Defendants. Firstly, it was said that the Plaintiffs had failed to plead to the defence raised by both the Shearman Defendants and HB that the Assignments concerned bare rights to litigate.  Indeed, there was no specific plea made in the Re-amended Replies in response to the defence.

48.The CFA had disapproved the slipping in of an unpleaded case when evidence is being given in the hope that the other side is not sufficiently alert to object: Kwok Chin Wing v 21 Holdings Ltd (2013) 16 HKCFAR 663, §21 (Ma CJ).

49.Secondly, the Defendants said that they were surprised and prejudiced by the recent introduction and reliance by the Plaintiffs of the Judgment of Mr Justice Ng in HCA 971/2012 ([2020] HKCFI 2518]) dated 28 September 2020 (“Ng Judgment”).  It was an action by the trustees-in-bankruptcy (“Trustees”) of Ho to recover assets which they claimed belong to Ho’s bankruptcy estate.  Although P1 and P3 were parties to that action, none of the Defendants was a party.

50.In respect of the first complaint, I agree with the Defendants in respect of the requirement of the Plaintiffs to plead to the defence of bare right to litigate.  In particular, the Plaintiffs should have pleaded their case on the pre-existing genuine commercial interest relied upon for the Assignments in the Replies.

51.For completeness, I am of the view that the burden of proof in respect of the validity of the Assignments is on P1 because (a) it relies upon the Assignments to advance the causes of action which belonged to the other Plaintiffs but for the Assignments; and (b) it was required to plead the Assignments, and the general rule is that the burden of proof rests on the party pleading the issue.

52.However, I do not believe that the pleading issue here is either fatal to the Plaintiffs’ case or had caused any real prejudice to the Defendants.  Firstly, the validity of the Assignments is an agreed issue set out in the Final List of Agreed Issues filed pursuant to the directions of this court.

53.Secondly, Mr Siu, who appeared for the Plaintiffs, had made clear that on the issue of genuine commercial interest the Plaintiffs are relying on (a) the association between the Plaintiffs as pleaded in paras 2 and 3 of the RASOC; (b) the matters referred to in the Assignments; and (c) Ho’s beneficial interest in the Plaintiffs.

54.Putting (c) aside, whilst those matters should have been clearly set out in reply to the defence in question, I do not believe that the Defendants were caught by surprise about the reliance of the same by the Plaintiffs.  The requests for specific discovery show that they were alive to the issues.

55.The allegation of Ho’s beneficial interest in the Plaintiffs is a different kettle of fish.  It was neither pleaded in any way, nor referred to in the Assignments.  The only basis upon which the Plaintiffs can rely upon the assertion is the proposition that the Ng Judgment constituted a judgment in rem, and it binds the Defendants regardless of whether they were party to that action.  In his submissions, Mr Siu did not go as far as suggesting that there was such a judgment in rem.

56.I therefore do not see why the Plaintiffs can be permitted to rely upon a wholly unpleaded point and thereby catching the Defendants by surprise (see also para 65 below).  For the analysis on pre-existing genuine commercial interest, I shall ignore the assertion that the Plaintiffs were beneficially owned by Ho.

Issue estoppel

57.It is perfectly plain from the judgment of the CA on the appeal against the Mayo Judgment that it was not concerned with the issue of validity of the Assignments.  Rather, the issue was whether the re-amendment of the ASOC involved a cause of action which did not exist at the time of the Writ[3].

58.In respect of Mr Siu’s submission on issue estoppel in the wider sense based on the Yat Tung principle, the proposition is that the Defendants should have but failed to argue the validity of the Assignments when the Plaintiffs sought to re-amend the ASOC.

59.I am unable to accept the submission.  There is a distinction between the viability of a plea in respect of which a party seeks to introduce in his pleading, and the substantive merits of the issue to be pleaded.  At the amendment stage, the court would only be concerned with the former.  The Plaintiffs’ submission would turn an amendment application into a trial of the new issue.

60.I therefore hold that there is no issue estoppel against the Defendants which may inhibit them from arguing the validity of the Assignments.

Pre-existing genuine commercial interest

Evidence

61.The starting point of the analysis should be the relevant facts which can be established on the evidence before the court.  The court is much hampered by the lack of witness from the Plaintiffs, unless the documentary evidence is self-explanatory.

62.To begin with, there is no evidence at all to explain the reason for the Assignments.  Putting aside the Defendants’ case that the Assignments were engineered to evade the liability for security for costs, the lack of explanation may impact adversely on the genuineness of the alleged commercial interest and whether such interest was pre-existing.

Association between the Plaintiffs

63.In para 2 of the RASOC, the Plaintiffs pleaded that P2 and P3 were at all material times associated companies of P1, and that P1 to P3 were companies controlled by Ho.  Ho’s control of P1 to P3 was admitted in the Shearman Defendants’ Re-amended Defence, para 4.  HB had made no such admission.

64.In para 3 of the RASOC, the Plaintiffs pleaded that P4 was Ho’s joint venture with another person, P4 was the holding company of GBFE and P4 became associated with P1 to P3 since 6 March 1997[4].  No admission was made by the Defendants on the alleged association (HB had admitted the joint venture and holding company status).

65.The state of the pleadings dictates that the Plaintiffs must prove their case on the issue of association.  The concept of “associated companies” is, as admitted by Mr Siu, a vague one.  However, I cannot agree with Mr Siu that the vagueness allows the Plaintiffs latitude in their case.  In particular, the plea of association does not provide a legitimate basis for the Plaintiffs to rely on the alleged beneficial ownership of Ho in the Plaintiffs.

66.The upshot is that there is no admission to paras 2 and 3 of the RASOC which can assist the Plaintiffs in proving their case on pre-existing genuine commercial interest.

67.I turn to the matters referred to in the Assignments.

P1’s ownership of P2

68.In respect of the allegation that P2 was wholly owned by P1, it is supported by :

(1) By an instrument of transfer dated 29 July 2009, P3 transferred its 1 share in P2 to P1.  The stated consideration was HKD100,000;

(2) The sole director of P2 resolved on 29 July 2009 to approve the transfer;

(3) A share certificate dated 29 July 2009 was issued to P1;

(4) P2’s register of shareholders showed that its 1 share was initially allotted to Ho (on 15 June 1998 at USD1), then it was transferred to Newcast Group Ltd (on 24 November 2000 at HKD2.5 million), Grand Asia Group Holdings Ltd (on 4 June 2007 at USD1), P3 (on 20 April 2009 at USD1), and eventually P1.

69.On the face of these documents, the entire shareholding in P2 held by P3 was transferred to P1 shortly before the Assignments were made.  There is, however, no evidence of payment of the consideration or how it was assessed.  I note that the 1 share was previously transferred to Grand Asia and P3 at USD1.  I do not know why the value of the share had appreciated from USD1 to HKD100,000 in less than 3 months.

P3’s shareholding in P1

70.In respect of the majority shareholding held by P3 in P1, the 2008 Annual Return of P1 stated that P3 had acquired 999,999 of the 1,000,000 issued shares in P1 on 22 June 2007.  There was subsequently an expansion of capital to 1,750,000 shares whilst P3’s shareholding remained unchanged. Consequently, P3 was holding 57.14% of P1’s shares on the day of the Assignments.

P1’s shareholding in P4

71.As regards P1’s 51.05% shareholding in P4, that can be seen from the following documents :

(1) By an instrument of transfer dated 29 July 2009, P1 acquired 743,510 shares in P4 at HKD0.1 per share.  The corresponding agreement was also dated 29 July 2009;

(2) By another instrument of transfer dated 29 July 2009, P1 acquired another 1,829,990 shares in P4 also at HKD0.1 per share;

(3) By a resolution of all directors of P4 dated 29 July 2009, the transfers of 743,510 shares and 1,829,990 shares to P1 were approved;

(4) Corresponding share certificates were issued to P1;

(5) The registered agent of P4 confirmed that as on 8 January 2010, P1 held 2,573,500 shares in P4 (743,510 + 1,829,990), representing 51.05% of P4’s issued share capital.

72.There is no evidence of payment of the consideration, nor evidence about the assessment of the consideration or the value of the shares.

P1 as a creditor of P4

73.The evidence that P1 was a creditor of P4 (by virtue of the assignments by P2 and P3 to it of debts owed to them by P4: see para 24(2) and (3) above) is highly problematic.

74.There is a debenture dated 20 June 1998 between P4 as charger and P2 as chargee which referred to a loan agreement of the same date by which P2 had agreed to make available to P4 a loan of up to USD20 million.  The loan was defined as the “GBFE Working Capital Loan”.  There is no loan agreement before the court.

75.There is no document at all about any loan relationship between P3 and P4.

76.On 18 November 1999, P4 wrote to P2 requesting to draw HKD35 million under a loan agreement dated 20 June 1998 and a supplemental agreement dated 14 September 1998 (“Loan Agreement”) (neither of these documents is before the court).  The instruction was for the payment to be made to David Y W Ho & Co (Ho’s firm of solicitors) for the account of GBFE. It appears from the documents of payment that the money was transferred by P3 to Ho’s firm (“Client’s A/C”) on the same day. 

77.On 19 November 1999, P4 wrote to P2 requesting to draw HKD7.625 million under the Loan Agreement to be paid to Ho’s firm for GBFE.  Again, P3 made the transfer on the same day.

78.On 29 November 1999, P4 wrote to P2 requesting to draw HKD2.325 million under the Loan Agreement to be paid to Ho’s firm for GBFE.  P3 made the transfer on the same day.

79.The above evidence suggest that between 18 November and 29 November 1999 approximately HKD45 million was transferred by P3 to Ho’s firm for GBFE.

80.On the face of the debenture, P4 might have borrowed from P2 for the use by GBFE as working capital.  Without any explanation from any witness, at the highest, the evidence suggest that P4 was indebted to P2 in the sum of about HKD45 million.  I fail to see how the Plaintiffs can rely upon such evidence to prove any debt between P4 as debtor and P3 as creditor.  It might be the case that P2 was indebted to P3 who lent the HKD45 million to the former and the money was used as the loan to P4.

81.I reject any reliance by the Plaintiffs on the transfers made by P3 to GBFE on 25 January and 16 February 2000 in the respectively sum of HKD14,018,692 and HKD2,803,738.  On the face of the documents, the transfers had nothing to do with P4.

82.Coming back to the loan relationship between P2 and P4, the evidence before the court is not consistent with the RASOC (the pleading itself is not free from ambiguities).  Paras 27 and 30A pleaded as follows[5]:

“27. … the 1^st and 2^nd to 3^rd Plaintiffs advanced through the 4^th Plaintiff to GBFE two tranches of funds in the respective amounts sum of HK$45,000,000 in late November 1999 and the sum of_HK$17,000,000 in late January 2000 (collectively the “1999 Loans”). …

…

39A. The 1^st to 4^th Plaintiffs have therefore suffered loss and damage.

Particulars of damage

The 1999 Loans said two tranches of the funds in the respective amounts of HK$45 million and HK$17 million advanced by the 1^st and 2^nd to 3^rd Plaintiffs to GBFE via the 4^th Plaintiff (see Paragraph 27 hereinabove).”

83.On those pleas, the HKD45 million was lent to GBFE “via P4”.  It is unclear whether the debtor was GBFE or P4.

84.I have not overlooked the pleaded case of the Plaintiffs that P4 was the holding company of GBFE.  That issue itself has to be proved because it was not admitted by the Shearman Defendants.  Such proof is not before the court.

85.The difficulty with the Plaintiffs’ case does not stop here.  There is a conflict between the P2’s Debt Assignment to P1 on 29 July 2009 and the subsequent Assignment regarding the amount of debt assigned to P1.  The earlier document referred to a portion of the debt being assigned (which was described as “the subject matter of the claim [in these proceedings]”[6]), whereas the later document stated that all the debt owed to P2 by P4 was assigned to P1.

86.In short, at the highest, the allegation that P1 was a creditor of P4 can only be based on P4’s indebtedness to P2.  However, the state of the evidence, considered against the RASOC, is highly unsatisfactory.  I am not inclined to accept that the allegation has been made out.

87.Even if I were wrong to reject the evidence of P4’s indebtedness to P2, P1’s claim as a creditor of P4 is premised upon the July 2009 Debt Assignment in its favour by P2.  It will be seen below that I reject the July 2009 transactions as constituting genuine commercial interest. It must follow that I would reject any reliance by P1 on the July 2009 Debt Assignment for the present purpose.

P1 funding these proceedings

88.Firstly, there is no funding agreement before the court.  I agree with the submission of Mr Stock SC, who appeared with Ms Cheung for HB, that such an agreement would have to be scrutinised by the court because it might have infringed the rule of champerty and thus void.  Such an agreement was held to be champertous in Beijing Tong Gang, supra.

89.Secondly, Mr Siu accepted that there is no audited financial statements of P1 from which the court may be able to discern the funding of these proceedings by P1 in favour of the other Plaintiffs.

90.The relevant documentary evidence amount to very little.  Firstly, on 27 February 1998, P1 had paid HKD1 million for security for costs.  That appears to be the security ordered by Master Yu against the Plaintiffs (see para 19 above).  Prima facie, the obligation to pay the security must be joint and several amongst the Plaintiffs.

91.On 13 March 2009, P1 wrote to Messrs Tanner de Witt (“TDW”) referring to this action and enclosing a cheque for HKD395,191.48 to “top up the HK$1,000,000 security for costs ordered by Poon J”.  The court has not been provided with the details of that top up.  However, in view of the Poon J Decision, it is likely that the top up was for the benefit of P2 to P4.

92.On 20 December 2011, P1 wrote to TDW enclosing a cashier order of HKD40,000 to “top up the HK$2,000,000 security for costs to be payable to the Court for [HB]”.  That payment was likely to be in compliance of the security ordered against it by DHCJ Mayo (see para 29 above).

93.Secondly, there are some documents which evidenced the payment of costs relating to these proceedings by P1 to TDW :

(1) On 5 February 2008, HKD80,827.60 was paid;

(2) 25 March 2008, GBP7,500;

(3) 7 April 2008, HKD20,000 (for Richards Butler’s costs[7]);

(4) 15 May 2008, HKD160,193;

(5) 22 May 2008, HKD50,000;

(6) 29 May 2008, HKD50,000 (for engagement of accountants);

(7) 16 June 2008, HKD55,000;

(8) 22 August 2008, HKD69,883.70.

94.Given the fact that P1 is a party to these proceedings, I am unable to see an adequate foundation to say that, instead of discharging its own obligations, these were costs paid by P1 on behalf of all the Plaintiffs or on behalf of P2 to P4.

95.In light of the paucity of evidence, I am unable to accept that P1 had been funding these proceedings on behalf of the other Plaintiffs.  At the highest, these documents may suggest that the other Plaintiffs were liable to reimburse P1 for certain payments, eg, the top up of HKD395,191.48. There is no evidence whether the reimbursement had or had not been made.

96.Rightly, Mr Stock made the point that since P1 was the only Hong Kong company, it is possible that it was channelling the payments by P2 to P4 to TDW, ie, acting as their paying agent.  In other words, the funds might have come from the other Plaintiffs.

97.Pausing to take stock after having considered the available evidence, it may be shown that: (i) P2 was wholly owned by P1 since 29 July 2009; (ii) P3 owned 57.14% of the shares in P1 since June 2007; and (iii) P1 owned 51.05% of the shares in P4 since 29 July 2009.

98.I now consider whether the Plaintiffs’ case of pre-existing genuine commercial interest has been made out.

Analysis

99.There is no dispute that ownership of the company in which the cause of action is vested may amount to genuine commercial interest: see, eg, Massai Aviation Services v AG [2007] UKPC 12.

100.The Plaintiffs’ case based on P1’s ownership of P2 and P4 rests entirely on the 29 July 2009 transactions.  The genuineness of these transactions is disputed by the Defendants.  This is unsurprising because commercial interest which was engineered to prop up an otherwise champertous assignment cannot be genuine.

101.In National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514, at 540, Lindgren J held :

“… the genuine commercial interest referred to in Trendtex is not a nebulous notion of the general commercial advantage of the assignee but something more specific and limited. In particular, it does not embrace an interest arising from an arrangement voluntarily entered into by the assignee of which the impugned assignment is an essential part … Rather, the expression refers to a commercial interest which exists already or by reason of other matters, and which receives ancillary support from the assignment.”

See also Beijing Tong Gang referred to in para 45(2) above.

102.The following factors weigh heavily against the Plaintiffs on the genuineness of the alleged commercial interest.  Firstly, neither the July 2009 transactions nor the Assignments have been unexplained as to why they came to be made.  The circumstances, in particular the timing of these transactions (see para 22 above) give rise to the inference that they were indeed generated to evade the payment of security for costs.  That was the view taken by both DHCJ Mayo and DHCJ Wilson Chan.  It is also a view to which this court is driven based on the evidence.

103.Secondly, there is not a shred of evidence about payment of the stated considerations (in the Assignments as well as the Debt Assignments, the payment of consideration was “acknowledged” in those documents).  The adoption of the sum of HKD100,000 as consideration for most of the transactions suggests that there was no genuine assessment of the value of what was assigned.

104.Further, it was pointed out by Mr Stock[8] that there are inexplicable features in some of the transactions, eg, P1 had allegedly acquired the entire shareholding in P2 for HKD100,000 (which should have included, in effect, the benefit of P2’s claim against the Defendants).  However, several days later P1 allegedly paid a further HKD100,000 to acquire P2’s cause of action herein.

105.Thirdly, the fact that P1 came to own shares in P2 and P4 only days before the Assignments is plainly relevant on both the genuineness of the transactions and whether P1’s interest was “pre-existing”. There is considerable force in Mr Stock’s characterisation of the transactions as “artificial, contrived and self-serving”, especially when they are viewed in light of the unsatisfactory evidence.

106.Finally, there is no explanation by the Plaintiffs on the deficiency of their evidence.  I agree with Mr Stock that the absence of plainly relevant evidence gives rise to adverse inference to be drawn against the Plaintiffs.  For instance, the absence of evidence of payment by P1 for the shares in P2 and P4, viewed in light of the circumstances, gives rise to the inference that these were not genuine transactions, but engineered as the commercial interest needed to support the Assignments.

107.There are 2 further points to be dealt with. Firstly, the Defendants say that the vastly disproportionate return on the alleged acquisition of the causes of action by P1 should be taken into account against the Plaintiffs’ case on genuine commercial interest (see para 45(5) above).

108.Whilst I accept that the return, which according to Mr Stock can amount to 1,500 times of the acquisition price on full recovery of the claims herein, is a matter against the Plaintiffs, it is very difficult to evaluate the weight of the point without an adequate appreciation of the merits of the claims and the burden of the litigation.  Where an assigned cause of action is weak and expensive to litigate, the return of the “investment” would naturally be high.  It should be noted that the cause of action by GBFE was assigned with the approval of the court at a very modest price compared with the size of the claim (see para 16 above).

109.Secondly, the Plaintiffs rely on 2 authorities for the proposition that assignments of causes of action in order to avoid security for costs, may be unobjectionable per se: Eurocross Sales Ltd v Cornhill Insurance plc [1995] 1 WLR 1517, per Bingham MR (as he then was) at 1526C-D; Norglen Ltd v Reeds Rains Prudential Ltd [1999] 2 AC 1, per Lord Hoffman at 16F.

110.However, I agree with the Defendants that in those cases there was no question of champerty or maintenance, and therefore they do assist in the analysis of this case.  In Eurocross (1525C-D), the assignments were not alleged to be champertous.  In Norglen (11E-G), since the assignments were at the behest of liquidators, the usual considerations of champerty or maintenance did not come into play.

111.In the premises, I am unable to accept P1’s purported ownership of shares in P2 and P4 as genuine commercial interest.

112.On the pre-existing element, although I agree with Mr Siu that the issue is not a matter of counting days, plainly this requirement cannot be met by the creation of commercial interest to side-step the rule of champerty.  At the risk of stating the obvious, the rule serves to prevent the trafficking of litigation, such creation of commercial interest sits poorly with the rule.  It must follow from the rejection of the July 2009 transactions as constituting genuine commercial interest that I am equally not satisfied that there was any such interest pre-existing at the time of the Assignments.

113.This leaves only P3’s pre-existing 57.14% shareholding in P1.  Firstly, there is no authority to the effect that an assignor’s shareholding in the assignee is a sufficient commercial interest for the present purpose.

114.The case of Jeb Recoveries LLP v Judah Eleazar Binstock [2015] EWHC 1063 (Ch) did not establish any general principle on which the Plaintiffs may rely.  In that case, the assignee was a special purpose partnership of 3 persons, the assignor partners.  The commercial objective of the assignee was to recover debts and claims of its partners, and the partners had agreed to share the profits derived from any fruits of any litigation.  It was held by HHJ Baker QC that the claim should not be struck out as offending the public policy aimed at protecting the integrity of the legal process (§§5, 54 and 67).

115.I agree with Mr Man that it is readily understandable that there was no trafficking in litigation in Jeb Recoveries given that the claims remained those of the assignor partners who would obtain any profits derived from the same.

116.The present case is rather different.  P1, as a company partly owned by P3, had no pre-existing genuine commercial interest in P3’s litigation.  It did not stand to benefit from any positive outcome achieved by P3 in the litigation.  Contrast the converse situation, an assignee shareholder would stand to gain indirectly from a positive outcome in the litigation of the assignor company in which it holds shares.

117.I bear in mind the applicable principles.  I am unable to see any pre-existing genuine commercial interest which could be derived from the fact that P3 had a 57.14% shareholding in P1 to justify the Assignment of a bare cause of action belonging to it in favour of P1.

Conclusion and disposition

118.For these reasons, I hold that each of the Assignments is champertous and void.

119.I grant the relief sought in para 85 of Mr Man’s Skeleton Submissions in favour of both the Shearman Defendants and HB (para 85.2 thereof should be appropriately modified to include HB).

120.I make an order nisi that the costs of and occasioned by this trial be to the Defendants with certificates for 2 counsel.

121.Last but not least, I am grateful to counsel for their assistance.

Mr Patrick Siu, instructed by ONC Lawyers, for the 1^st – 4^th Plaintiffs

Mr Bernard Man SC and Mr Justin Ho, instructed by Kirkland & Ellis, for the 1^st – 8^th Defendants

Mr Alexander Stock SC and Ms Elizabeth Cheung, instructed by Reynolds Porter Chamberlain, for the 9^th Defendant