Power Securities Co Ltd (Formerly Known As Jun Yang Securities Co Ltd) v. Sin Kwok Lam and Others
Read the full judgment text of CACV 594/2019 on BabelCite. This Court of Appeal judgment was delivered on 21 April 2023.
1. I agree with the judgment of Yuen JA.
Cited by 1 case · Cites 12 cases
|
CACV 594/2019 & CACV 59/2020 (Heard Together) [2023] HKCA 594 On Appeal From [2021] HKCFI 2920 CACV 594/2019 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 594 OF 2019 (ON APPEAL FROM HCA NO 1719 OF 2018 and HCA NO 1071 OF 2019) _________________________________________ HCA 1719/2018 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1719 OF 2018 ___________________________________________ BETWEEN
______________________________________ (By Original Action) BETWEEN
______________________________________ (By Counterclaim) AND HCA 1071/2019 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1071 OF 2019 ________________________ BETWEEN
________________________ (HEARD TOGETHER) AND CACV 59/2020 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 59 OF 2020 (ON APPEAL FROM HCA NO 1071 OF 2019) BETWEEN
______________________ (HEARD TOGETHER)
___________________ J U D G M E N T ___________________ Hon Chu VP: 1.I agree with the judgment of Yuen JA. Hon Yuen JA: Introduction 2.On 5 December 2019, Coleman J (“the judge”) gave a judgment (“the Judgment”)1 in two actions heard together, viz.
3.1.The judge had to determine:
3.2.For reasons summarized later in this Judgment, the judge struck out Mr Sin’s pleadings in both actions, and dismissed his counterclaim in the 2018 Action and his claim in the 2019 Action. Accordingly, the judge made no order on the other applications. 4.1.On 27 December 2019, Mr Sin lodged a notice of appeal (CACV594/2019) against the Judgment in both actions. On 11 March 2020, he lodged a notice of appeal (CACV 59/2020) which was an appeal from the 2019 Action only, but which contained similar contents as the notice of appeal in CACV594/2019. 4.2.On 11 June 2020, the notices of appeal in both appeals were superceded by a supplemental notice of appeal which contained similar contents. These were the appeals which came before this court. 5.After the hearing of the appeals, the Privy Council (“PC”) gave judgment in Primeo Fund (in official liquidation) v Bank of Bermuda (Cayman) Ltd and another4. The parties made further written submissions in relation to this judgment which will be discussed in §§61 - 67 below. Background The parties 6.1.Best Year was a BVI company of which Mr Sin was the sole shareholder and sole director until 5 March 2018, when he transferred the shares to Yan Xianchang (“Yan”) and ceased to be the director. 6.2.EPL was also a BVI company of which Mr Sin was the sole shareholder and sole director until 2 March 2018, when he transferred the shares to Mai and ceased to be the director. 7.1.First Credit Finance Group Ltd (“First Credit”), which was in the business of money lending, was listed on the GEM Board of the Hong Kong Stock Exchange. 7.2.Mr Sin indirectly held 16.51% of its shares (“the Sin Block”), “of which 559,856,0005 shares were held via Best Year and 39,200,000 shares were held via [EPL]”6. He was the chairman and executive director of First Credit until 7 February 2018. 7.3.Trading in First Credit shares has been suspended by the Securities and Futures Commission since 24 November 2017. 8.Power Securities was a securities company. Mr Sit was one of its directors. Mr Sin alleges that Mr Tang exercised de facto control over Power Securities, and that Mr Ng was Mr Tang’s nominee. The Margin Agreement 9.On 16 February 2016, Best Year and Power Securities entered into an agreement (“the Margin Agreement”) under which
10.On 8 September 2017, as a result of a drop in First Credit’s share price, a margin shortfall occurred in the Margin Account. Power Securities made margin calls on Best Year, which were not complied with. Pursuant to the provisions of the Margin Agreement, the entire sum owing (about $55 million) became immediately due and payable. 11.Between 14 and 25 September 2017, Power Securities liquidated the pledged shares, but as at 25 September 2017, a debit balance of $29,277,247.70 (“the debit balance”) remained owing. Power Securities’ action against Best Year for the debit balance in the 2017 Action 12.On 11 December 2017, Power Securities sued Best Year in HCA2851/2017 (“the 2017 Action”) for the payment of the debit balance together with interest, and further or alternatively, damages for breach of the Margin Agreement. 13.1.On 21 September 2018, Power Securities applied for summary judgment. 13.2.Mr Sin filed an affirmation in opposition on behalf of Best Year, exhibiting a draft Defence and Counterclaim in which Best Year was the sole plaintiff. In the affirmation, he alleged that Power Securities, Mr Sit, Mr Tang and Mr Ng (“the alleged wrongdoers”) were parties in a conspiracy, manipulating the market to cause a drop in the share price of First Credit and disposing of the pledged shares, so that Mr Tang could gain majority control of First Credit (“the alleged conspiracy”). 14.On 3 January 2019, Master Martin Wong gave summary judgment against Best Year. 15.1.On 8 January 2019, Best Year filed an appeal against this order. 15.2.On 22 May 2019, Best Year made an application to adduce fresh evidence on appeal. The application was dismissed by Mimmie Chan J on 20 June 2019, from whose order there was no appeal. 16.On 24 June 2019, Best Year was wound up by Harris J after he rejected its argument of the alleged conspiracy in opposition to the petition. 17.On 28 June 2019, pursuant to the winding-up order, Master Kwang made an order staying Power Securities’ claim against Best Year and Best Year’s counterclaim in the 2018 Action. 18.On 18 July 2019, Mimmie Chan J made a consent order staying Best Year’s appeal against the summary judgment in the 2017 Action. Events after commencement of the 2017 Action 19.Rewinding to 7 February 2018, Mr Sin ceased to be chairman and executive director of First Credit. Best Year’s disposition of First Credit shares to EPL 20.Two days later, on 9 February 2018, Best Year sold its known remaining assets (being 365,656,000 shares in First Credit) to EPL for $9,982,408.40 ($0.0273/share7). The transaction was done “off exchange”, i.e. it was not done through open trading on the stock exchange8. Sin’s involvement with Best Year and EPL 21.1.It is common ground that at the time of the above disposition, Mr Sin was the sole shareholder and sole director of both Best Year and EPL. 21.2.On 2 March 2018, Mr Sin transferred his shareholding in EPL to Mai, and ceased to be its director. 21.3.On 5 March 2018, Mr Sin transferred his shareholding in Best Year to Yan, and ceased to be its director. 21.4.Mr Sin’s case is that since 2 March 2018 and 5 March 2018, he has had no control over or interest in EPL and Best Year respectively9. EPL’s disposition of First Credit shares 22.On 8 and 12 March 2018 respectively, EPL sold to unknown parties, also off exchange,
Best Year’s action against Power Securities etc in the 1700 Action 23.1.On 24 July 2018, Best Year started proceedings against the alleged wrongdoers in HCA1700/2018 (“the 1700 Action”) alleging (among other things) that these defendants had conspired to injure it by generating a fall in value in First Credit shares in September 2017. Best Year claimed that as a result, it had suffered loss and damage. Mr Sin was not a party. 23.2.On 26 September 201811, this action was withdrawn on Mr Sin’s instructions as Best Year’s “authorized representative”. Power Securities’ action against Sin, etc in the 2018 Action 24.1.The day after the 1700 Action was instituted, on 25 July 2018, Power Securities started the 2018 Action against Mr Sin, Mai, Best Year and EPL. In brief, Power Securities claimed (among other things), that:
24.2.Power Securities claimed (among other things):
Counterclaim in the 2018 Action 25.1.On 8 March 2019, Best Year filed a counterclaim. It was the only plaintiff in the counterclaim at this stage. At §4, Mr Sin’s sale of his shareholding in Best Year to Yan was pleaded, at §77, Best Year’s sale of First Credit shares to EPL was pleaded, and at §79, Mr Sin’s sale of his shareholding in EPL to Mai was pleaded. 25.2.At §85, it was pleaded that “Mr Sin and Best Year have suffered loss and damage in terms of the significant diminution in the value of the shares in First Credit, with quantum to be assessed” (emphasis added) but his loss was not particularised. 25.3.After Best Year was wound up on 24 June 2019, the counterclaim in the 2018 Action was amended on 5 July 2019 (“ADCC”) only by adding Mr Sin as 2nd plaintiff. Best Year and Sin’s claims against Power Securities and Tang in the 2019 Action 26.1.On 17 June 2019 a week before the hearing before Harris J to wind-up Best Year, Best Year and Mr Sin filed a statement of claim (“SOC”) against Power Securities and Mr Tang. It also pleaded the alleged conspiracy and claimed that the summary judgment against Best Year was obtained by fraud. 26.2.In this action, Mr Sin claimed as a result of the alleged conspiracy:
26.3.It would appear from the court files that this action has not been stayed vis-a-vis Best Year even though it has been wound up. The position of Best Year’s liquidators is not known. It was not referred to by the judge, nor by the parties before us. Applications to strike out 27.The alleged wrongdoers applied in June and July 2019 to strike out Mr Sin’s pleadings on the basis that: (1) they disclosed no reasonable cause of action, and/or (2) that they were frivolous, vexatious and/or otherwise an abuse of process, “in that the claims therein are barred by the principle against reflective loss”. Re-amendment of the counterclaim in the 2018 Action 28.1.In the counterclaim in the 2018 Action, as noted above Mr Sin was added as a claimant by amendment on 5 July 2019. At §85 ADCC, it was pleaded that “Mr Sin and Best Year have suffered loss and damage in terms of the significant diminution in the value of the shares in First Credit, with quantum to be assessed” but his loss was not particularised. 28.2.After the applications to strike out were filed, the RADCC was filed on 20 August 2019 deleting Best Year as a plaintiff in the counterclaim and adding that:
29.When the judge said in the Judgment (§27) that it was “only on 20 August 2019 by the filing of the RADCC that Sin alleged for the first time that he had personally suffered loss as a result of the Alleged Conspiracy”, that should be understood to mean Mr Sin’s claims of loss by reason of his sales of his shareholding in Best Year and EPL, as particularised in the new §§102 - 103 of the RADCC. As noted above, in the ADCC in the 2018 Action12 and the SOC in the 2019 Action SOC13, Mr Sin had already alleged that he (as well as Best Year) had suffered loss and damage by the alleged wrongdoing, although his loss was not particularised. Sin’s pleadings in the 2018 and 2019 actions 30.Mr Sin’s pleadings in both actions by the time the applications to strike-out were heard before the judge may be summarized as follows:
The judge’s Judgment 31.In the Judgment, the judge set out the principles applicable to strike out applications (§§35 - 37). It has not been suggested on appeal that the judge was wrong in his understanding of the relevant principles. The judge’s decision on the bar against reflective loss 32.1.At §38, the judge referred to what he called the “three scenarios”16 setting out the principles applicable to reflective loss in Lord Bingham’s judgment in Johnson v Gore Wood & Co (a firm)17, as follows:
32.2.At §39, the judge also referred to a passage in Lord Bingham’s judgment in which he said that at the strike-out stage, “the object is to ascertain whether the loss claimed appears to be one ... which would be made good if the company had enforced its full rights against the party responsible”18. 32.3.At §40, the judge also referred to a passage in Lord Millett’s judgment in which he said that the diminution in the value of the shareholder’s shares was of course a personal loss and not the company’s loss, “but that is not the point. The point is that it merely reflected the diminution of the company’s assets”19. 33.At §§41 - 42, the judge held, citing the Court of Final Appeal in Basab Inc v Superb Glory Holdings Ltd20, that the focus is upon the type of loss suffered, the critical question being whether the shareholder’s loss could be made good if the company enforced its rights against the wrongdoer. The principle applied even if the wrongdoer’s obligations to the company and the shareholder were wholly distinct and unrelated, and even if the company had chosen not to sue the wrongdoer, so that there would be no issue of double recovery if the shareholder did. 34.At §43, the judge said that the bar against reflective loss was not limited to claims brought by a shareholder in his capacity as such. “For example, it has been held to be applicable to creditors or employees of a company who are not shareholders themselves” (emphasis added). I will discuss this statement later in this Judgment (§72). 35.At §§44 - 45, the judge discussed the judgment of the English Court of Appeal in Sevilleja Garcia v Marex Financial Ltd21. At §49, the judge discussed the Judgment of the Cayman Islands Court of Appeal in Primeo. 36.1.Pausing here, between the time of the judge’s Judgment and the hearing of this appeal, the UKSC overturned the judgment of the English Court of Appeal in Marex, and after the hearing of our appeal, the PC overturned the judgment of the Cayman Islands Court of Appeal in Primeo. As a result, we received post-hearing written submissions from the parties on Primeo (PC). 36.2.The UKSC judgment in Marex and the PC judgment in Primeo will be discussed later in this Judgment. 37.1.Coming back to the judge’s Judgment, at §47, the following holdings are significant:
37.2.At §50, the judge noted that the ratio of the Cayman Islands Court of Appeal judgment in Primeo “does not say - that a shareholder whose claim is barred [by reflective loss] can avoid the bar by ceasing to be a shareholder”. 38.1.At §53, the judge held that it was necessary to look at the facts and nature of Mr Sin’s claim “with the focus on the nature or type of the loss being pursued” (emphasis added). 38.2.In his analysis of the reflective loss argument, the judge assumed (as it was a strike-out application) that Mr Sin did in fact divest himself of ownership of Best Year and EPL (§74). 38.3.However, at §§76 - 77, the judge noted that “the real alleged loss being the diminution in the share value of First Credit said to have arisen from the market manipulation caused by the Alleged Conspiracy, was in fact only suffered by Best Year and EPL”, for only they, not Sin, were the shareholders of First Credit. The loss to Mr Sin was the diminution of the value of the shares in Best Year. If Best Year recovered the difference in First Credit’s share value, its (Best Year’s) assets would be replenished, and the value of Mr Sin’s shares in Best Year would be restored. Therefore, Mr Sin’s alleged loss was “precisely that type of loss precluded by the principle against recovery of reflective loss” (emphasis added). 39.1.In §§78 - 79, the judge noted the “significant contradiction” on the face of Mr Sin’s pleadings as to why he caused Best Year to sell the First Credit shares to EPL, and his sale of his shareholdings in EPL and Best Year. At §96(2) RADCC, Mr Sin referred to the “clean cut” from First Credit by reason of the change of board23. Yet at §102, he said he had cut his losses “to avoid even further injury to be inflicted” by the alleged conspirators. 39.2.In any event, at §§80 - 82,
39.3.In §§83 - 84, the judge held that Mr Sin’s disposals of his shareholdings in Best Year and EPL did not alter the legal analysis, holding that it would be “illogical and legally nonsensical” for Mr Sin’s claim, which would be barred by reflective loss when he was a shareholder, to be “revived” when he chose to sell his shareholdings in Best Year and EPL. Mr Sin’s claim remained one for loss arising from the diminution of the value of First Credit shares. 40.The judge stated that his decision on the reflective loss argument was dispositive of the applications to strike out, although he also considered other arguments advanced by some of the applicants (§86). The judge’s decision on Res Judicata/issue estoppel 41.Power Securities and Mr Sit had also advanced an argument based on res judicata or issue estoppel, the relevant principles being set out by the judge in §§55 - 61. 42.Power Securities and Mr Sit relied on the summary judgment given against Best Year in the 2017 Action, where the same allegations of conspiracy had been made but were rejected by the court. 43.In discussing this argument, the judge proceeded on the assumption that Mr Sin has sold his shareholding in Best Year (§91) but nevertheless held that Mr Sin was a privy of Best Year by reason of his relationship with it, having been its sole controller at first, and then, even after the sale of his shareholding and no longer being a director, being involved in the litigation, by e.g. verifying the pleadings and being the deponent of the affirmation filed in opposition to the application for summary judgment (§§88 - 91). The judge held that as Mr Sin was a privy of Best Year, the summary judgment in the 2017 Action was binding on him. The judge’s decision on Henderson abuse of process 44.At §§62 - 73, the judge set out the relevant principle for res judicata in the wider sense set out in Henderson v Henderson 24(ie a party should not be allowed to raise in subsequent proceedings claims or issues which he could and should have raised in earlier proceedings, as that amounts to an abuse of the process). 45.The judge noted that the same allegation of conspiracy had been made in the 2017 Action and in the winding-up proceedings, and had been rejected in both. The judge described Mr Sin as “the instigator/director/instructor/driver” of the Best Year position in those proceedings (§96), and he could have pursued his claim as an additional party to the counterclaim in the 2017 Action (§§98 - 99). The judge’s decision on duplication of actions 46.In any event, the judge held that he would have dismissed the 2019 Action as “Best Year is for all practical purposes unlikely to pursue the 2019 Action and Mr Sin’s only interest and claim in the 2019 Action is already canvassed, or perfectly capable of being fully canvassed, in the 2018 Action” (§101). Appeal 47.Mr Sin’s main grounds of appeal may be summarized as follows:
Argument based on bar against reflective loss 48.Mr Joffe argued that:
Discussion 49.The first issue is what is the common law on reflective loss now as declared by the UKSC and followed by the PC, and whether this court should apply it. The common law on reflective loss declared by the UKSC in Marex 50.1.I shall first discuss the UKSC judgment in Marex, where the English Court of Appeal’s judgment was the first case in the UK in which the bar against reflective loss was applied to a claimant which was purely a creditor of a company (§77). An enlarged panel of seven justices of the UK Supreme Court was convened “with the object of examining the rationale for the reflective loss principle and the coherence of the law in this area” (§115). 50.2.In the result, the majority decided on “bright line” rules which reduce complexity28, whereas the minority decided on a more nuanced approach which in their view, would avoid the “serious injustice in relation to a shareholder who ... has a good [personal] cause of action and has suffered loss which is real and is different from any loss suffered by the company” (§167). 50.3.In short, the majority held that avoidance of double recovery did not justify the reflective loss rule, but that the rule remained applicable to cases of company law (but not to the general law of damages), by reason of the “proper plaintiff” rule in Foss v Harbottle29. The minority held that the reflective loss rule was not justified even in company law cases. Marex (UKSC) 51.1.The claimant was a creditor of two companies. It obtained judgment against them. The defendant (who controlled the companies) stripped the companies of their assets. The companies were wound up, but as the defendant controlled the liquidator first appointed (§20), the latter took no steps to recover the assets. 51.2.The claimant applied for leave to serve the defendant out of the jurisdiction. The judge at first instance gave leave. The English Court of Appeal overturned that decision, on the basis that the claim was barred by the principle against reflective loss which was thought to apply to the general law of damages. 52.In the UKSC, Lord Reed PSC for the majority30 undertook a detailed analysis of the bar against reflective loss which I understand to be as follows (in summary).
53.At §67, Lord Reed held:
54.1.At § 79, Lord Reed held that it is necessary to distinguish between:
54.2.In case (1), the shareholder cannot sue, even though he may claim to have suffered loss as a consequence of the company’s loss, and even though the value of his shares is not “fully replenished” by what the company does (eg deciding not to sue, or deciding to compromise for a lesser sum). The reason for the shareholder not being able to sue is the Foss v Harbottle rule (§§80 - 81). 54.3.At §83, Lord Reed held:
55.In the case of a pure creditor, there is no conflict with the rule in Foss v Harbottle (§85). In Lord Hodge’s judgment, he gave another example of a shareholder pursuing a personal claim against the wrongdoers in another capacity, such a guarantor, where the bar does not apply (§98). 56.1.At §89, Lord Reed re-affirmed the approach adopted in Prudential and by Lord Bingham in Johnson, and departed from the reasoning in the other speeches in the latter. 56.2.As noted by Lord Reed in §78, Lord Millett’s approach in Johnson was followed by the CFA in Waddington. I will discuss this in §71 below. 57.1.Lord Sales JSC for the minority37 agreed that the appeal should be allowed, but for fundamentally different reasons. Essentially, he considered the holding of the English Court of Appeal in Prudential was too wide (§148). Although the decision itself was correct because the plaintiff in that case had no cause of action for a personal claim (§148), he considered that the reasoning for the court’s wider holding was not sustainable (§143) as it had not focused on the independent nature of the cause of action that a shareholder plaintiff may have in his personal capacity38 (§142), and it is a “false premise” to predicate that the loss suffered by the company and the loss suffered by a shareholder is “identical” (§151, §180). 57.2.Lord Sales held that Prudential did not lay down a rule of law that a shareholder is deemed to suffer no different loss of his own (§118). He considered that where the wrongs and the losses suffered are different, and the shareholder and the company each have distinct causes of action, the shareholder’s personal cause of action falling outside the rule in Foss v Harbottle (§165), the company can recover e.g. for loss of profits, and the shareholder can recover for the diminution in value of his shares (§155). 58.Lord Sales noted that even if the company does recover its loss from the wrongdoer, it may be some time later, and the shareholder may still have suffered a loss, depending on timing (§153). In some passages which may be relevant to the case before us, he said (§153):
and (§158):
59.1.Unlike Lord Reed, Lord Sales considered that the issue of double recoverability was important (§119), as shown in Johnson where that issue was common among all five law lords (§174). 59.2.Lord Sales held, in relation to double recovery, that if the losses are not identical, double recovery would not necessarily follow from allowing the shareholder to bring his personal claim (§182). In any event, the court could take steps to “manage the coincidence of claims by the claimant and by the company by procedural means” (§161), for a “procedural approach allows for nuanced adjustment of the vindication of parallel claims in the light of all relevant evidence about the circumstances regarding the interests of the company and the shareholder ... to ensure no double recovery ...” (§162). 60.In conclusion, the majority held that the reflective loss rule was “a rule of substantive law associated with the rule in Foss v Harbottle and concerned with the recognition in law of particular types of loss. It is not a procedural rule concerned only with the avoidance of double recovery”39. That should now be taken as the common law (as declared by the UKSC) governing the rule barring reflective loss. Primeo (Privy Council) 61.I shall now discuss Primeo. By the time this was heard in the Privy Council (April 2021) by five of the seven justices in Marex, the judgment in Marex had been delivered (July 2020) and it was agreed by the parties that Cayman Islands law regarding the reflective loss rule was the same as English law, i.e. as determined by the majority in Marex. 62.1.Primeo had “invested” substantially in a Ponzi scheme operated by Bernard Madoff (in fact, every time funds were received by the scheme, they were immediately misappropriated). Primeo at first directly “invested” in the scheme. Later, it transferred its “investment” to a fund company, Herald, in which it acquired shares (“the Herald Transfer”). Primeo then made further “investments” in the scheme through Herald and another fund company in which Primeo bought shares. 62.2.Primeo suffered losses as a result of the collapse of the scheme, and sued their professional service providers which (Primeo alleged) as administrators, had failed to perform their accounting duties with reasonable skill and care. Primeo alleged that if they had done so, they would have found the accounts were falsely over-valued by reference to the scheme’s fictitious assets. Primeo’s auditors would then have found there was insufficient audit evidence, and Primeo would not have made some of those “investments”, or would have redeemed them at a time when repayments could have been received. 63.The Cayman Islands Grand Court held at first instance that Primeo’s claims infringed the reflective loss rule. This was upheld in the judgment of the Cayman Islands Court of Appeal (delivered before the UKSC judgment in Marex). 64.In the Privy Council, five issues were identified, only two of which are material to this appeal, viz:
65.Regarding (1) and (2), the issue was “what was the relevant time to determine whether the reflective loss rule applies”, ie. was it
66.1.The Board held that the court must determine when the loss occurred, and the nature of the loss at that time (ie whether the loss had a status which was recognised by the law). At §59, it held:
66.2.In a passage particularly relevant to our case, the Board held (§61):
66.3.And at §62, the Board referred to “strange and unprincipled results [if a claimant can sue after selling his shares] which ... undermine the Marex principle itself and the values it protects”, including:
67.Since Primeo had already acquired a cause of action against the service providers before the Herald Transfer, and since the reflective loss rule was “forward-looking” in that it is directed to characterisation of loss suffered by a claimant after it becomes a shareholder, Primeo was not barred from suing for loss before the Herald Transfer (§§66 - 67). In respect of the issue of possible double recovery by Primeo, the Board held that it would have to be managed by procedural mechanisms (§§71 - 72). Should this court apply Marex? 68.The next issue is whether this court should follow the UKSC judgment in Marex. 69.1.In Monat Investment Ltd v All persons in occupation of Part of the Remaining Portion of Lot No.591 in Mui Wo D.D. 4 No16 Ma Po Tsuen, Mui Wo, Lantau Island40, which was concerned with a UKSC decision41 which revised the common law in relation to the defence of illegality, this court42 discussed the stare decisis rule in Hong Kong which was stated by the CFA in Solicitor (24/07) v Law Society of Hong Kong43. 69.2.In Monat, this court examined previous CFA cases on the defence of illegality which only followed Tinsley pursuant to the stare decisis rule set out in Solicitor (24/07). We came to the view that as the nature of the issue (the common law defence of illegality) was the same in Hong Kong as in the UK, no constitutional provisions were engaged, and there were no local circumstances which detracted from the persuasive effect of the UKSC decision in Patel, it was logical for this court to follow the common law as now expounded by the UKSC in Patel. 70.1.In the present case, the CFA had pronounced on the reflective loss rule in Hong Kong in Waddington and Basab, and did not simply follow Johnson as a matter of stare decisis. In Waddington, Lord Millett44 referred to his judgment in Johnson and the avoidance of double recovery. Nevertheless, he held that the reflective loss rule was “a matter of principle” (§82). In Basab, Tang PJ giving the judgment of the appellate committee45 refused leave to appeal, applying the reflective loss rule and referring to the avoidance of double recovery (§8). 70.2.Accordingly, I am of the view that in the present case, where there is a difference between Waddington and Marex (whether the avoidance of double recovery does or does not justify the reflective loss rule), this court remains bound by Waddington. 70.3.Be that as it may, the decision of the UKSC to overturn double recovery as one justification for the reflective loss rule only affects claims under the general law of damages (eg by creditors), not claims for diminution in value of shares under company law, where the barring of such claims is justified essentially by the rule in Foss v Harbottle (§52 above) which is engaged by the nature of the claimant’s loss. It is clear to me that our case would fall within case (1) of Marex (see §54.1 - 54.2 above). Sin’s claim 71.As the CFA held in Waddington, as “a matter of principle”, a shareholder cannot claim for loss which was merely reflective of the loss suffered by the company. The fact that the reflective loss rule was justified by the avoidance of double recovery did not turn the principle into only a procedural rule. Importantly, Mr Joffe accepted at the hearing that double recovery was not the only rationale for the bar against reflective loss in Hong Kong (see Wah Nam Group Ltd v Roderick John Sutton46 and Topping Chance Development Ltd v CCIF47). Irrespective of whether the rule was justified by the avoidance of double recovery, the focus was on the nature of the loss, not whether the shareholder has an independent cause of action, or whether the company’s actions or inactions would or would not replenish his loss. 72.In our case, the loss Mr Sin claims was the diminution in value of the shares of Best Year and EPL, caused by the alleged wrongdoers’ market manipulation of the First Credit share price in September 2017. As the diminution must have crystallised before trading in First Credit was suspended in November 2017 (before Mr Sin sold his shares in Best Year and EPL), the nature of his loss was clearly reflective loss. The judge was clearly right in so finding. The subsequent sales did not make any difference to the nature of Mr Sin’s loss. In selling his shares, he was only liquidating or quantifying the loss which he had suffered. The fact that the judge had referred to the reflective loss rule applying to a creditor (which would not be supportable on the rationale of reflective loss being the rule in Foss v Harbottle, which does not apply to creditors48) does not affect the crux of his judgment, which was based on the principle which applies to a shareholder. 73.Our case is different from the hypothetical situation postulated at p.320 F - H in Stein v Blake, where Millett LJ (as he then was) contrasted the case before him with a situation where there was not only misappropriation of the company’s assets, but also concealment of the misappropriation inducing the shareholder to sell his shares at an undervalue. In the case before us, Mr Sin was (on his own case) well aware of the alleged conspiracy before he sold the shares in Best Year and EPL. 74.The fact that Mr Sin made his claim only after he sold the shares in Best Year and EPL does not make any difference. Waddington held that the reflective loss rule was a matter of principle, not a procedural rule. Therefore, the bar applied at the time when the cause of action accrued to Mr Sin, which was at the latest November 2017. The decision in Primeo discussed at §66 above supports this view. 75.The judge was therefore right to strike-out the RADCC in the 2018 Action and the SOC in the 2019 Action on the reflective loss rule (which he said was dispositive of the matter) and to make the consequent orders. Other grounds 76.1.As a matter of completeness, I would add that I would not have supported the other grounds for strike-out. 76.2.For the purposes of the strike-out, it had to be assumed that Mr Sin had in fact sold his shares in Best Year and in fact had no further interest in or control of it. He was only its authorised representative. In Prest v Petrodel Resources Ltd and others50, the UKSC “re-emphasised the distinct legal personality of a company distinct from that even of a sole shareholder. It examined the strictly limited circumstances in which the court can pierce the ‘corporate veil’ to impose legal consequences on the person or persons behind the veil which did not include res judicata”51. In the present case, the judge did not seek to rely on piercing the corporate veil (§73). As the divesting of Mr Sin’s interest in Best Year had occurred in March 2018, he could not have been its privy (even “in reality”49) for the purposes of res judicata/issue estoppel when summary judgment was entered against it in January 2019. 76.3.As for Henderson abuse, it cannot be assumed that, after the sale of Mr Sin’s shares in Best Year, its new controller would have agreed to his participation as a party in Best Year’s proceedings. The fact that Mr Sin was Best Year’s authorized representative does not mean that he controlled the conduct of the case on its behalf52. And, as noted above, nothing is known of the position of Best Year’s liquidators, e.g. whether they would continue to seek to set aside the summary judgment for fraud. In the absence of such information, the respondents’ argument based on Mr Sin’s actions being an abuse of process as a collateral attack on the summary judgment is not plainly and obviously established. 76.4.As for duplication of actions, it is well-established that a strike out is a last resort, and it would appear from the Judgment that the judge had not considered other, less robust, directions such as an order that the actions be heard together. Order 77.For the reasons above, I would dismiss the appeals. It was agreed that costs would follow the event with certificate for two counsel, where two counsel appeared for a respondent. Hon Barma JA: 78.I agree with the judgment of Yuen JA.
Mr Victor Joffe and Mr Justin Lam, instructed by Jones Day, for the 1st defendant (by original action) and the 2nd plaintiff (by counterclaim) in HCA 1719/2018 and the 2nd plaintiff in HCA 1071/2019 Mr Ambrose Ho SC and Mr Johnathan HY Tsang, instructed by DLA Piper Hong Kong, for the plaintiff (by original action), the 1st and 4th defendant (by counterclaim) in HCA 1719/2018 and the 1st defendant in HCA 1071/2019 Ms Bonnie YK Cheng, instructed by Gallant, for the 2nd defendant (by counterclaim) in HCA 1719/2018 Mr Jin Pao SC and Mr Victor CI Lui, instructed by King & Wood Mallesons, for the 3th defendant (by counterclaim) in HCA 1719/2018 and the 2nd defendant in HCA 1071/2019 [2] Wound up by Harris J’s order made on 24 June 2019, see §16 below. [3] Deleted as a party to the counterclaim in the Re-Amended Defence and Counterclaim in the 2018 Action (“RADCC”) filed on 20 August 2019, see §28.2 below. [4] [2021] UKPC 22, 9 August 2021. [5] cf This figure was put at “545,656,000 shares” in Mr Sin’s affirmation in the 2018 Action (see §24 below), filed 7.11.2018, §5(2)(a), but the difference in the quantity is not material to this appeal. [6] 2018 Action, RADCC §26(4)(b). [7] The share price of “$0.00273” referred to in §29 of the SOC in the 2018 Action and §11 of the Judgment is incorrect. [8] Admitted in the 2018 Action, RADCC §86. [9] 2018 Action, RADCC §8. [10] Not admitted in the 2018 Action, RADCC §92. [11] The reference to “2019” in §14 of the Judgment was in error. [12] See §24 above. [13] See §26.2 above. [14] 2018 Action, RADCC §96(2). [15] 2018 Action, RADCC §98. [16] Judgment, §52. [17] [2002] 2 AC 1, 35 - 36. [18] At p.36. [19] At p.66. [20] (2017) 20 HKCFAR 384, §8, approving Landune International Ltd v Cheung Chung Leung [2006] 1 HKLRD 39, CA §24. [21] [2019] QB 173. [22] Judgment, §§44 - 46. [23] This was not referred to in Mr Sin’s Skeleton Arguments on appeal, 11.6.2021, §2(f). [24] (1843) 3 Hare 100. [25] (2008) 11 HKCFAR 370. [26] [1998] BCC 316, 318. [27] Mr Sin joined as a party to the counterclaim by amendment filed on 5 July 2019. [28] As acknowledged by Lord Sales: §167. [29] (1843) 2 Hare 461; see §52 below. [30] Lady Black and Lord Lloyd-Jones JJSC agreed with Lord Reed’s judgment. Lord Hodge DPSC gave a separate judgment in agreement with Lord Reed. [31] Described by Lord Hodge as a “bright line legal rule”: §109. [32] [1982] Ch 204. [33] Or a reduction in distributions. [34] See also Lord Hodge’s judgment, §99. [35] Although Lord Hodge recognized that the Prudential rule “excludes the possibility of double recovery”: §108. [36] [1897] AC 22. [37] With whom Lord Kitchin and Baroness Hale JJSC agreed. [38] eg. Conspiracy to injure the shareholder: cf RADCC §83 “... [the alleged wrongdoers] have conspired and combined together wrongfully and with the intention (whether or not the sole or predominant intention) of injuring Mr Sin and Best Year ...”. [39] As summarised in Primeo (PC), §55. [40] [2023] HKCA 479, 31.3.2023. [41] Patel v Mirza [2017] AC 467, which overturned Tinsley v Milligan [1994] 1 AC 340. [42] Kwan VP, Chu VP and Yuen JA. [43] (2008) 11 HKCFAR 117. [44] With whom CJ Li, Bokhary, Chan and Ribeiro PJJ agreed. [45] Ribeiro and Fok PJJ being the other members. [46] [2018] HKCA 687, §17. [47] [2020] HKCA 478, §22. [48] cf Johnson at p.66, followed in Landune §32. [49] Resolution Chemicals Ltd v H Lundbeck A/S [2014] RPC 5. [50] [2013] 2 AC 415. [51] Spencer Bower and Handley: Res Judicata 5th ed. §9.42, p.157. [52] cf Deutche Bank AG v Sebastian Holdings Inc [2014] 4 Costs LR 711, §§17 - 18. |
Cases cited in this judgment
Other judgments that cite this case
Further hearings and rulings under CACV 594/2019