Zhang Rui Kang and Others v. Tunghsu Group Co Ltd and Others

HCA 1359/2021 and HCA 1391/2021
(Heard Together)

[2023] HKCFI 1866

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1359 OF 2021

____________

____________

And

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1391 OF 2021

____________

____________

(Heard Together)

_____________

D E C I S I O N

_____________

1.This is the substantive hearing of the following summonses:

(1)  the summons taken out by the defendant (“the Company”) dated 15 June 2022 in HCA 1391/2021 pursuant to Order 12, rule 8(1) and (2) (“Company’s Summons”) for, inter alia:

(a)  an order that the Order by Master SH Lee dated 27 September 2021 granting leave to serve the Amended Writ of Summons out of jurisdiction on Company be set aside; or

(b)  alternatively, a declaration that this Court should not exercise any jurisdiction it may have against Company;

(2)  the summons taken out by the defendants (“Ds”) dated 15 June 2022 in HCA 1359/2021 pursuant to Order 12, rule 8(1) and (2) (“Ds’ Summons”) for, inter alia:

(a)  an order that the Order by Master Kent Yee dated 20 September 2021 granting leave to serve the Amended Writ of Summons out of jurisdiction on Ds be set aside;

(b)  a declaration that this Court should not exercise any jurisdiction it may have against Ds; or

(c)  alternatively, an order pursuant to Order 12, rule 8(2)(b) to stay this action against Ds in favour of courts in the Mainland China.

2.The two summonses are heard by me together at the same time. In the hearing before me, the Company and Ds are represented by Mr William Wong SC (leading Mr Lai Chun Ho and Mr Sim Jing En), and the plaintiffs in these two actions are represented by Mr Chua Guan Hock SC (leading Mr Alexander Tang and Mr Joshua Yeung).

3.For ease of reference, unless otherwise indicated, the following abbreviations are adopted in this decision:

Action	Parties	Abbreviations
HCA 1391/2021	1st Plaintiff and 2nd Plaintiff	Z&L
	Defendant	Company
HCA 1359/2021	1st Plaintiff to 6th Plaintiff	“P1” to “P6” respectively, and “Ps” collectively
	1st Defendant	Company
	2nd Defendant to 6th Defendant	“D2” to “D6” respectively, and “the Directors” collectively
	1st Defendant to 6th Defendant	“Ds” collectively

4.With the parties’ consent, I direct that the evidence filed in relation to one summons be deemed as also evidence in relation to the other summons.

5.The authorities cited by both sides in these applications are voluminous.[1] For avoidance of doubt, the authorities referred to in the parties’ submissions (both written and oral) which have not been mentioned in this decision have also been considered by the Court.

A.  BACKGROUND

6.Ps are investors (investing over US$100M) into bonds (ie the Notes) issued by the Tunghsu Group. The holding company of the Tunghsu Group is the Company, a company limited incorporated in Mainland China.

7.The Notes (totally US$342M) are issued by a special purpose vehicle wholly-owned by Tunghsu, namely Tunghsu Venus Holdings Limited (“TV”), a company limited incorporated in BVI. The Company provided a parent company guarantee for TV’s repayment obligations under the Notes (“the Guarantee”).

8.The Notes and the Guarantee are contained in an indenture (“the Indenture”), the governing law of the Indenture is New York law.

9.According to the matters pleaded in the Statement of Claim in HCA 1359/2021 (“1359 S/C”):

(1)  P1 subscripted the Notes through various banks, including some in Hong Kong.

(2)  P2 and P3 subscripted the Notes through some banks in Hong Kong.

(3)  P4 to P6 subscripted the Notes through some banks in Singapore.

10.The Company and TV both defaulted on the Notes since 2020. To date, Ps have received no repayments of the principal.

11.The Directors are ordinarily resident in Mainland China and stationed for work purposes in the Mainland.

12.Ps’ case is that from the financials published, Tunghsu Group’s default is preceded by a dramatic and significant outbound cash flow to the extent of US$6.4B (“Outbound Cash Flow”), which remains wholly unexplained and from which a case of misappropriation and/or breach of fiduciary duties can clearly be made.

13.In 1359 S/C, it is pleaded:

“38. …… [Ps] aver that the suspicious Outbound Cash Flow which led to the drastic decrease in [the Company]’s consolidated cash position and liquidity in the drastic magnitude of over RMB49,000,000,000 is in fact wrongful misappropriation of [D1]’s and its consolidated subsidiaries’ assets. Further or in the alternative, the Directors had recklessly allowed [the Company] to make the foregoing Outbound Cash Flow. In any event, the Outbound Cash Flow was not in the best interest of, and in fact against the interest of, [the Company] and/or its consolidated subsidiaries. In procuring, causing and /or allowing the suspicious Outbound Cash Flow, the Directors had breached their duties as directors (including fiduciary duties) owed to [the Company] and/or its consolidated subsidiaries.

39. The matters and facts pleaded [in the above] manifest the intention of the Directors to cause damage to [Ps] by inducing or procuring [the Company] to breach the payment obligations under the Notes and /or the Guarantee Obligations.

40. Furthermore, as pleaded above, the Directors’ acts of inducing or procuring [the Company] to breach the obligations under the Notes and /or the Guarantee Obligations were conducted in breach of their duties owed to [the Company] and/ or its consolidated subsidiaries. Therefore, the Directors’ acts of inducement or procurement could not have been done in good faith.” (Emphasis added)

14.Ps have commenced various sets of legal proceedings to seek recovery.

(1)  Z&L have already obtained judgment against the Company and TV for unpaid principal and interest accruing from the Notes from the New York Court, the jurisdiction to which the Company and TV have expressly submitted to (“the NY Judgment”).

(2)  In HCA 1391/2021, Z&L sue upon the NY Judgment, to enforce that judgment in Hong Kong.

(3)  In HCA 1359/2021:

(a)  P3 to P6 claim against the Company by relying upon the Notes;

(b)  All Ps pursue against the Directors by reason of the matters set out in [38] to [40] of 1359 S/C.

15.In the Offering Circular of TV dated 7 June 2017, Tunghsu Group is described as a “leading industrial conglomerate in China engaging in diversified businesses, including optoelectronics, renewable energy, high-end equipment and services, real estate, green building materials and financial services.”

16.P’s case is that the Company has the following Hong Kong companies, as direct or indirect subsidiaries:

(1)  Chuanglian Huatai (Hong Kong) Co Ltd

(2)  Tunghsu International Limited

(3)  Tunghsu Global Investment Holdings Limited

(4)  Hongkong Tunghsu Ding Tai Co Ltd

(5)  Hongkong Tunghsu Sheng Lin Co Ltd

(6)  Tianlong Huatai Industry (Hong Kong) Limited

(7)  Tunghsu Hong Kong Holdings Limited

(8)  Hong Kong Oceans Resources Limited

17.Ps also say that two of the Directors of the Company, namely D2 and D3, hold 4 additional Hong Kong companies, 2 of which use the 東 旭 name.

(1)  Tunghsu Capital Limited

(2)  Capital Gainer Limited

(3)  China Dongxu Group Limited

(4)  Highspace Trading Limited

18.According to Ps, all these companies (“the Hong Kong Companies”) registered with the Hong Kong Inland Revenue Department, and had business registration certificates.

(1)  Hongkong Tunghsu Ding Tai Co Ltd

(2)  Hongjong Tunghsu Sheng Lin Co Ltd

(3)  Tunghsu Hong Kong Holdings Limited

19.As to Tunghsu Hong Kong Holdings Limited, Ds say that it has a bank account “primarily … as a conduit to receive and transfer payment of funds that does not belong to itself…and has intercompany debts…”[2]

20.In June and December 2017, TV issued the Notes to raise US$440M. the Company acted as the guarantor. Ps have subscribed for over US$100M in total. Ps’ case is that this fund raising exercise has a close relationship with Hong Kong.

(1)  The fund raising exercise was done in Hong Kong by the lawyers in Hong Kong. At the time of issuance of the Notes, the Company’s lawyers as to US law and the Company’s lawyers as to BVI law were both lawyers working in Hong Kong. The initial purchasers were also represented as to US law by the lawyers working in Hong Kong.

(2)  The Trustee of the Notes appointed by the relevant indenture (“the Indenture”) was also a Hong Kong company, namely Citicorp International Limited.

(3)  A significant portion of the funds for the Notes were raised in Hong Kong, and the proceeds routed through Hong Kong’s banking system:

(a)  The Company and TV promoted the Notes in Hong Kong through various advertisements and activities, and the Company also participated in the Fitch Ratings process, through which investors from Hong Kong were encouraged to invest in the Notes.

(b)  The Notes were also sold through Hong Kong banks. The vast majority of the Notes held by Ps were subscribed through the banks in Hong Kong. The money used by Ps to subscribe for the Notes were transferred through Hong Kong bank accounts.

(4)  The vast majority of interest payments (ie those for P1 to P3, equivalent to 96.6% of the total amounts due under the Notes to Ps) were made to Hong Kong bank accounts.

21.At the beginning, the Company paid interest semi-annually in accordance with the Notes.

22.On 8 June 2020, the Company announced that it had insufficient resources to repay the Notes on maturity.

23.On 30 June 2020, the Tunghsu Group issued its 2019 financial statements. For the first time, the auditors of the Tunghsu Group (“the Auditors”) did not give a clean audit opinion, but gave a qualified opinion. The qualification was due to the failure of the Tunghsu Group’s management to provide sufficient audit evidence on the liquid assets of the Tunghsu Group.

(1)  The Company’s liquid assets in 2018 and 2019:

RMB Billions	Cash	Advance Payments	Other Accounts Receivables	Total Liquid Assets
2018	41.1	0.8	17.9	73.2
2019	0.6	3.5	60.7	66.3

(2)  The Auditors took the view that the Tunghsu Group’s management had not given sufficient and appropriate audit evidence to prove:

(a)  the reasonableness of the Advance Payments and the ability for such contracts to be performed in full; and

(b)  the nature, date and place of payment of the Other Accounts Receivables, and the appropriateness of the provision for bad debts.

(3)  As a result of these qualifications, there was no effective audit on the veracity of 97% of Tunghsu Group’s total liquid assets.

24.Ps claim that the Outbound Cash Flow is evidenced by the following:

(1)  at the Company’s level, cash dropped from RMB 41.1B to RMB 0.6B, a 98.5% drop of RMB 40.5B;

(2)  at the consolidated level (Tunghsu Group as a whole), cash dropped from RMB 56.2B to RMB 7.0B, an 87.5% drop of RMB 49.2B.

25.Ps claim that the Company’s financial statements give no good explanation for the Outbound Cash Flow. Ps also claim that there is no satisfactory explanation for some changes, including the following:

(1)  For cash outflow arising from raising of funds, there was a sharp increase from 2018 to 2019, ie from RMB 6.1B to RMB 42.9B. The increase was over 600%. This is said to be attributable to a significant surge in “account current” from RMB 1.14B to RMB 38.6B - an increase over 33 folds.

(2)  For cash out flow arising from investing activities, there was also a significant increase from 2018 to 2019, from RMB 30.9B to RMB 74.5B, an increase of 141%. This is said to be attributable to inter alia, a significant surge in so-called “account current” from RMB 8.1B to RMB 62.1B - a 667% increase.

26.Ps do not accept the reasons provided by Ds as satisfactory explanations for the following reasons:

(1)  It is unknown what “account current” is, and why would be such significant surges within 1 financial year.

(2)  Given the cash difficulties (which led to the default on 12 Dec 2019), applying common and commercial sense, the management would have preserved cash, and cut down on investing activities. However, cash outflow for investing activities increased dramatically even within 2019 (of the RMB 74.5B of “other investing activities”, some 2/3, or RMB 53B, is attributable to the 2^nd half of 2019).

27.Ps say that after the Outbound Cash Flow, the Company (and its consolidated subsidiaries) only had a total of RMB 1,833,539,490.09 worth of utilisable monetary assets (ie approximately US$265,730,349.46) at the end of 2019. Putting aside unpaid interest payments, this is much lower than the total principal amount of US$340,152,000 due under the Notes. The Company was therefore unable to honour its obligations under the Guarantee.

28.Upon maturity of the Notes on 12 June 2020, Ps took action to enforce their rights under the Notes.

(1)  On 16 June 2020, P1 issued a statutory demand against TV in the BVI Court. On 14 July 2020, P2 also issued a statutory demand. TV tries to set aside the said statutory demands. On 5 November 2020, the BVI Court ruled against TV and refused to set aside the statutory demands. On 1 February 2021, the BVI Court made a winding-up order against TV.

(2)  On 6 July 2020, Z&L issued proceedings in the New York Court against the Company and TV for the outstanding principal and interest under the Notes. On 1 September 2021, a default judgment (ie the NY Judgment”) was entered against the Company and TV.

(3)  Z&L and Ps have also commenced these proceedings in Hong Kong.

B.  COMPANY’S SUMMONS IN HCA 1391/2021

29.Both Mr Wong and Mr Chua have made thorough submissions concerning the Company’s Summons. Having considered the evidence before me and the respective submissions made by the parties, with respect, I am unable to accept Mr Wong’s submissions, and I am in agreement with Mr Chua.

30.Z&L are relying upon the gateway in Order 11 rule 1(1)(m) (“gateway (m)”) in support of their application for leave to serve the Amended Writ of Summons out of jurisdiction on the Company. In respect of granting leave to serve out of jurisdiction under gateway (m), it is common ground that the principles are as follows[3]:

(1)  There is no express or implied requirement for a plaintiff seeking to enforce a foreign judgment to show that there are assets in the jurisdiction.

(2)  Under gateway (m), there is no determination of issues to take place in Hong Kong. The very purpose of service out of the jurisdiction is for enforcement in the jurisdiction.

(3)  The Court should not automatically exercise its discretion in favour of permitting service out of the jurisdiction unless it is just to do so. It will ordinarily not be just to do so unless there is a real prospect of a legitimate benefit to the plaintiff’s proceedings if leave to serve out of the jurisdiction is granted.

31.The difference between Mr Wong and Mr Chua is whether there would is a real prospect of a legitimate benefit to Z&L’s proceedings if leave to serve out of the jurisdiction is granted.

32.The relevant principles are as follows:

(1)  Jurisdiction for service out would be exercised when there is “a real prospect of a legitimate benefit”. This is akin to the second core requirement to wind-up a foreign company.[4]

(2)  Accordingly, the Court should apply a “pragmatic approach”. The benefit “will vary from case to case depending on its facts”, and “need not be monetary or tangible in nature”. It is satisfied if there is “some useful purpose serving the legitimate interest” of a party.[5]

(3)  The legitimate benefit can be indirect or prospective.[6]

(4)  The possibility of benefit is not invariably shown by the presence of assets.[7]

(5)  The reality is that in cases involving deliberate wrongdoings, “it is often difficult to locate a defendant’s assets”, and “Judgment debtors are often reluctant to advertise the nature and whereabouts of their assets”.[8] With the reality in mind, a “somewhat speculative” benefit of discovering where a party’s assets are located nonetheless suffices for the gateway under Order 11 rule 1(1)(m).[9]

33.Mr Wong argues that:

(1)  The Company has no asset within the jurisdiction. Although presence of assets within the jurisdiction is not a formal requirement under gateway (m), it is clearly an important factor that should be given heavy weight in determining whether a legitimate benefit exists. This is a matter of common sense, and “it is readily understandable why it would be necessary to point to the presence of assets within the jurisdiction as capable of showing the “legitimate benefit” of dragging a foreign defendant to the jurisdiction”.[10]

(2)  The Company does not have any assets in Hong Kong:

(a)  The Company is incorporated in the Mainland, with no connections to Hong Kong.

(b)  Its business activities are predominantly conducted in the Mainland, and naturally that is where the bulk of its assets are located. The Company’s three major listed subsidiaries are all listed on the Shenzhen Stock Exchange.

(c)  The Company has no current presence or business operations in Hong Kong, and does not have any plans for future business expansion to Hong Kong at this time.

(3)  Z&L say that the Notes giving rise to the NY Judgment have substantive connections with Hong Kong which denotes present and/or future assets in Hong Kong. This is incorrect.

(a)  The issuance of the Notes and the NY Judgment would not in any way suggest that the Company has assets in Hong Kong.

(b)  The Company only acted as a guarantor and was not the issuer of the Notes. The Company has not participated in any activities undertaken by TV. Interest payments were made by TV, not the Company.

(4)  The Company’s activities in Hong Kong are neither here nor there.

(a)  In relation to the Company’s participation in Fitch Ratings process, the Fitch-Ratings are Fitch Ratings-Hong Kong/Shanghai, and not purely Hong Kong. It is unclear how participating in such ratings processes can show that the Company has assets in Hong Kong. In any event, the Company withdrew from such ratings processes on 20 may 2019, more than 4 years ago.

(b)  As to the Company’s engagements with different professional in Hong Kong in connection with the issuance of the Notes, this is a matter occurred years ago.

(5)  Regarding the Hong Kong Companies mentioned by Z&L, 4 of them are not the Company’s subsidiaries (see [17] above). The fact that the Company and these companies may have some common directors has no bearing on whether the Company owns shareholdings in these companies. As to the remaining 8 companies (see [16] above), the Company only has indirect shareholdings in them. These shareholdings are held through offshore companies (either Mainland China or BVI), whose shares this Court would have no jurisdiction to charge by way of a charging order.[11] As such, there is simply no way Z&L can enforce the NY Judgment (once recognized) against the assets of the Company in Hong Kong. Further, the 8 subsidiary companies have no or negligible assets in Hong Kong and have never declared dividends. Only three subsidiaries have Hong Kong bank accounts with negligible amounts therein. None of the subsidiaries has any real business operations in Hong Kong and the Company is not a creditor of any of these subsidiary companies.

(6)  Regarding prospective benefit, service out can only be justified by a prospective benefit where fraud or dissipation of assets is involved.[12] There is nothing in HCA 1391/2021 suggesting fraud or dissipation of assets. Further, the mere speculation that the Company may have assets in Hong Kong in the future is insufficient to suffice as a real prospect of a legitimate benefit in these specific circumstances.

(7)  For the same reasons, Z&L also cannot rely upon methods of and aids to enforcement as a legitimate benefit justifying service out. In particular, the purported legitimate benefit must be assisting the discovery of the whereabouts of the defendant’s assets “in the context of the evidence to date of dissipation”[13]. In the absence of such allegation or evidence, assistance to enforcement cannot constitute a real prospect of a legitimate benefit.

34.With respect, I am unable to accept Mr Wong’s submissions.

(1)  As to whether the Company has any assets in Hong Kong, as pointed out by Mr Chua, it is worth to note the following:

(a)  The Company has continuously maintained the business registration of the 8 subsidiaries in Hong Kong. This would only be necessary if the 8 subsidiaries are carrying on business in Hong Kong.[14]

(b)  As to whether the Hong Kong Companies only have negligible balances in their Hong Kong bank accounts, only a snapshot showing the bank accounts’ balances on a particular date is produced. This is not a piece of meaningful evidence, as money can be moved in and out of an account very quickly. Meaningful evidence would be the bank statements covering a reasonable period of time. However, these have not been produced by the Company.

(c)  The Company has not filed any evidence saying that the Company does not use the international banking system in Hong Kong or transfer funds through Hong Kong bank accounts.

(2)  Mr Chua has aptly drawn my attention to Fonu, in which Clarke MR said:

“40. Mr. Demirel has been involved in business in Turkey on a very large scale indeed. He…has made use of the international banking system…It seems to us that, if free to do so, he might use other parts of the international banking system of which London is now a central part. It is we think a reasonable possibility that one of these days Mr. Demirel will have assets in London, either in the form of physical assets or claims against other institutions…”

(3)  As submitted by Mr Chua, there is every possibility that the Company’s assets would pass through Hong Kong, especially when:

(a)  The Company received the proceeds raised by the Notes via Hong Kong.

(b)  The Company has a history of using its HK subsidiaries as paying conduits.

(c)  The Company is continuously using the services of Hong Kong advisers and lawyers. By necessity, the Company would need to pay these Hong Kong professionals.

(4)  Having considered the authorities cited by Mr Wong, with respect, I do not think that there is a principle in those cases only allowing service out by relying upon prospective benefit if fraud or dissipation is involved. In any event, according to Ps’ case in HCA 1359/2021, the Company’s default in performing its obligations under the Guarantee is caused by the Outbound Cash Flow, which in turn is caused by the wrongful acts of the Directors. Ps’ claim against the Directors will be explored in an action at the appropriate forum. With the big picture in mind, there is no reason not allowing Z&L to rely upon prospective benefit in support of the service out.

(5)  I agree with Mr Chua that there is a real possibility of the Company’s assets being in Hong Kong, whether now or in future.

(6)  Further, I agree with Mr Chua that another possible benefit is investigating and locating the assets. As said in Fonu:

“43. There is a further consideration. If [the plaintiff] obtains a judgment in England it can properly make use of the various methods of and aids to enforcement, including an oral examination of the judgment debtor as to the nature and whereabouts of his assets at the time, which is not of course now but when the English judgment is obtained (if it is).”

(7)  The Hong Kong Court has jurisdiction to allow service out of examination orders in appropriate circumstances.[15]

(8)  As submitted by Mr Chua, there is a benefit to Z&L if they have a judgment recognized in Hong Kong and can enforce it by way of seeking examination of the directors of the Company. If the directors comply with the examination order, they would have to disclose information concerning the properties and means of the Company, and some assets of the Company may be located for the satisfaction of the Hong Kong Judgment as a result. If the directors refuse to comply with an examination order issued by the Hong Kong Court, they could be liable for contempt and could be under a warrant of arrest in Hong Kong. This in turn would restrict the ability of the Company and the directors to use Hong Kong’s legal-financial services, including with no realistic chance to successfully list the Company in Hong Kong in the future. The commercial leverage generated is another sufficient benefit.[16]

(9)  I further agree with Mr Chua that the fact that the Company is spending substantial time and costs to resist the enforcement of the NY Judgment in Hong Kong speaks louder than mere words. Applying common and commercial sense, if enforcing the NY Judgment in Hong Kong would mean nothing to the Company, the Company would not incur substantial time and costs to resist the enforcement.

35.Mr Wong further argues that the Master’s Order should be set aside because of the material disclosure by Z&L in the ex parte application before the Master. Mr Wong submits that in that application, Z&L failed to disclose the following:

(1)  the relevant legal principles on the determination of applications under gateway (m), such as the requirement of a real prospect of a legitimate benefit; and

(2)  the fact that Z&L have no substantive evidence to demonstrate the Company’s alleged assets in Hong Kong, which may serve as a plausible defence.

36.In the Affirmation of Li Zhaoting filed on 30 May 2022 in HCA 1391/2021 (“Li’s 1391 Affirmation”), the Company has also raised the following complaints in relation to material non-disclosure:

(1)  Z&L have falsely claimed that the Company had made interest payments under the Notes up to 12 December 2019. In fact, the interests were paid by TV, not the Company. See [21] of Li’s 1391 Affirmation.

(2)  Z&L failed to identify that 3 of the alleged subsidiaries of the Company “were either struck off or deregistered”. See [22] of Li’s 1391 Affirmation.

37.In my view, in relation to the Company’s Summons in HCA 1391/2021, there was no material non-disclosure by Ps in the ex parte application before the Master.

(1)  As submitted by Mr Chua, in the context of service out applications, the duty of making full and frank disclosure is less onerous than in the context of a Mareva injunction, which involves the making of an exceptional and draconian order by the Court.[17]

(2)  Having considered the authorities provided by the parties, in my view, a useful summary of the principles concerning the duty of making full and frank disclosure in the context of service out applications can be found in Qatar Airways Group Q.C.S.C. v Middle East News FZ LLC[18], in which Saini J said:

“383. As to the legal principles:

i) The applicant on an ex parte (without notice) application has a duty to make full and frank disclosure of all matters which are material to the exercise of the Court's discretion.

ii) As to materiality: "A fact is material if it would have influenced the judge when deciding whether to make the order or deciding upon the terms upon which it should be made" (Alliance v Zhunus [2015] EWHC 714 (Comm) [65]).

iii) The full and frank duty only relates to the matters which the Court has to decide. So, on an application to serve out, where only a serious issue to be tried is relevant to the merits (MRG (Japan) Ltd v Engelhardt Metals Japan Ltd [2003] EWHC 3418 (Comm), [26]-[27]):

‘The focus of the inquiry is on whether the court should assume jurisdiction over a dispute. The court needs to be satisfied that there is a dispute properly to be heard (i.e. that there is a serious issue to be tried); that there is a good arguable case that the court has jurisdiction to hear it; and that England is clearly the appropriate forum. Beyond that, the court is not concerned with the merits of the case.

……

In my view, a failure to refer to arguments on the merits which the defendant may seek to raise in answer to the plaintiff's claim at the trial should not generally be characterised as a failure to make a full and fair disclosure, unless they are of such weight that their omission may mislead the court in exercising its jurisdiction under the rule and its discretion whether or not to grant leave.’

iv) Courts have recognised that non-disclosure arguments are routinely deployed by respondents for procedural advantage. The Court takes a realistic view, particularly in complex cases:

‘…where facts are material in the broad sense in which that expression is used, there are degrees of relevance and it is important to preserve a due sense of proportion. The overriding objectives apply here as in any matter in which the Court is required to exercise its discretion…I would add that the more complex the case, the more fertile ground for [the respondent] raising arguments about non-disclosure and the more important it is, in my view, that the judge should not lose sight of the wood for the trees…in applying the broad test of materiality sensible limits have to be drawn.’

(Crown Resources AG v Vinogradsky, unreported, 15 June 2001, approved in Kazakhstan Kagazy Plc v Arip [2014] EWCA Civ 381 at [36]).

v) It is not necessary to refer to every authority if the principle derived from them is drawn to the court's attention: Wild Brain Family International Ltd v Robson [2018] EWHC 3163 (Ch) [48]:

‘Without seeking to diminish the importance of the fair presentation obligation in any way whatever, it seems to me that there must be some limit to that obligation. To take an example, just because a respondent might have taken the court to a number of cases to reinforce a legal proposition, so long as the applicant has fairly drawn to the court's attention the principle derived from those cases, I do not think that the applicant is required to take the court to those cases in the way the respondent would have done. To repeat what Popplewell J noted in the Fundo case, "the ultimate touchstone is whether the presentation of the application is fair in all material respects.’

vi) There are important obligations on a party advancing an allegation of non- disclosure: "Where non-disclosure is alleged it is indeed incumbent on the party making the allegation to give proper particulars of the case being advanced, so that it can be fairly responded to by the other party" and there must not be "a moving target": Public Institution for Social Security v Amouzegar [2020] EWHC 1220 (Comm) [149]. That is because "an allegation that a Claimant or his lawyers have failed in [the duty of full and frank disclosure] is a serious allegation involving misconduct or default on the part of the Claimant or his lawyers. If it is to be made, adequate and clear notice of it must be given and full details provided" (Bracken v Gutteridge, unreported, 17 December 2001 (Ch) ). It is not appropriate for unspecific complaints to be made in evidence and it is not appropriate for specific complaints to be made for the first time in skeleton arguments.”

(3)  In my view, by [28] to [35] of the Affidavit of Tsui Koon Yee Danny filed on 15 September 2021 in HCA 1391/2021, Z&L have drawn the Court’s attention to the requirement that they have to show a real prospect of a legitimate benefit, which may be indirect or prospective, to them from these proceedings. They have also explained why there would be a real prospect of legitimate benefit to them from these proceedings. With the aforesaid principles in mind, and also bearing in mind that the full and frank disclosure only relates to the matters which the Court has to decide, and the only issue in question is whether there is a serious issue to be tried, I do not think that Z&L has failed to observe the requirement of making full and frank disclosure in the ex parte application before the Master.

(4)  As to the other points made in Li’s 1391 Affirmation, I am of the view that these points cannot make good the Company’s complaint based upon material non-disclosure.

(a)  There is no dispute that Z&L did receive interests up to 12 December 2019. Technically and strictly speaking, those interests were paid by TV, not by the Company. However, it can hardly be said that the identity of the payer of the interests is a material fact in this case.

(b)  As to the allegation that 3 of the alleged subsidiaries of the Company “were either struck off or deregistered”, particulars were given in [12] of Li’s 1391 Affirmation. Having gone through [12] of that affirmation, Mr Li in fact only mentioned that 2 companies were “undergoing deregistration”. Mr Li did not set out any particular of any company which had already been struck off or deregistered.

(5)  I would also say that if there were material non-disclosure as contended by the Company, I would set aside the Master’s Order but would exercise my discretion to grant retrospective leave to Z&L to serve the proceedings out of the jurisdiction. As pointed out by Rogers VP in PEWC v Texan Management Ltd[19], “the question which the court must consider is whether, on all the facts now known, it is appropriate that the proceedings are served outside the jurisdiction”. Based upon the evidence before me, I am of the view that leave to serve the proceedings out of the jurisdiction ought to be granted in this case.

38.For the sake of completeness, I would also say, as submitted by Mr Chua, forum conveniens issues do not arise in respect of an application under gateway (m).[20]

39.For these reasons, I would dismiss the Company’s Summons in HCA 1391/2021.

C.  Ds’ SUMMONS IN HCA 1359/2021

40.P1 to P3 have successfully obtained leave to serve the Amended Writ of Summons out of jurisdiction by relying upon Order 11 rule 1(d), (e) and (f). P4 to P6 are relying upon Order 11 rule 1(d)(i) and/or (ii).

41.For the purpose of obtaining leave to serve the writ out of the jurisdiction under Order 11, what the plaintiff would need to show is a serious issue to be tried in the plaintiff’s case. The principles have been summarized by G Lam J (as he then was) in China Medical Technologies Inc v Paul, Weiss, Rifkind, Wharton & Garrison LLP[21], in which the learned judge said:

“222. At this stage the prospects of [the plaintiffs’ case] can only be investigated to an extent limited by the inherent nature of the exercise. The standard of “serious issue to be tried” is a relatively low threshold. There is no serious issue if [the plaintiff’ case] lacks reality but otherwise it is irrelevant whether the court thinks that its chances of success are 90% or 20% ...... On a full investigation the defendants may well turn out to be correct, but based on the limited materials at this stage, I do not think that [plaintiff’s] argument is so hopeless as to fail to give rise to a serious issue to be tried. ……” (Emphasis added)

42.I also bear in mind the requirement in Order 11 rule 4(2), which is as follows:

“No such leave shall be granted unless it shall be made sufficiently to appear to the Court that the case is a proper one for service out of the jurisdiction under this Order.”

43.Having considered the parties’ respective submissions and the evidence, I am of the view that Ds are entitled to have an order to set aside the leave to serve the Amended Writ of Summons out of the jurisdiction.

C1. Locus

44.It is common ground that Ps are beneficial owners, not the registered holders of the Notes. Ps are holding the Notes through various banks in Hong Kong and in Singapore.

45.In respect of P3 to P6’s claim against the Company, P3 to P6’s claim is based upon the Guarantee in the Indenture. Mr Wong submits that P3 to P6 do not have the necessary locus to pursue the claim against the Company. Having considered the parties’ respective submissions, I am in respectful agreement with Mr Wong.

46.Mr Wong and Mr Chua have referred me to various clauses in the Indenture. With no disrespect to both Senior Counsel, it would not be necessary for me to set out all those clauses in this decision. In my view, Mr Wong is plainly correct on this issue.

47.In Clause 1 of the Indenture, some definitions have been set out, including the following:

(1)  “Holder” means the Person in whose name a Note is registered in the Note Register;

(2)  “Note Register” means the register of Noteholders which the Parent Guarantor will procure to be kept by the Note Registrar

There is no dispute that Ps are not “Holders”. Only those banks through which Ps subscribed the Notes are “Holders” of the Notes. Ps are only beneficial owners of the Notes.

48.Mr Wong submits that under the Guarantee in the Indenture, the Company is only liable to “Holders” of the Notes and not to anyone else. Mr Wong has referred me to the following:

(1)  As per the Guarantee contained within the Indenture:

“The Parent Guarantor hereby guarantees as principal obligor to each Holder of a Note authenticated by the Trustee and to the Trustee and its successors and assigns the due and punctual payment of the principal of, premium, if any, and interest on, and all other amounts payable under, the Notes and the Indenture ……”. (Emphasis added)

(2)  Clause 11.1 of the Indenture provides:

“the Parent Guarantor hereby guarantees as principal obligor to each Holder of a Note authenticated by the Trustee and to the Trustee and its successors and assigns the due and punctual payment of the principal of, premium, if any, and interest on, and all other amounts payable under, the Notes and this Indenture.” (Emphasis added)

49.In my view, the Guarantee is provided by the Company to the Holders of the Notes as defined in the Indenture and its successors and assigns.

50.Mr Chua refers me to Clause 2.4.5 of the Indenture, which provides:

“If at any time the Common Depositary notifies the Issuer in writing that it is unwilling or unable to continue as Common Depositary for the Global Notes, the Issuer shall appoint a successor common depositary with respect to such Global Notes. If (1) a successor common depositary for such Global Notes is not appointed by the Issuer within 90 days after the Issuer receives such notice or becomes aware of such ineligibility, or (2) either Euroclear or Clearstream, or a successor clearing system is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or announces an intention to permanently cease business or does in fact do so, or (3) any of the Notes has become immediately due and payable in accordance with Clauses 6.1 and 6.2 and the Issuer has received a written request from a Holder, the Issuer will execute, and the Trustee, upon receipt by the Trustee of an Officers’ Certificate of the Issuer directing the authentication and delivery thereof, will authenticate and deliver, Certificated Notes in any authorized denominations in an aggregate principal amount equal to the principal amount of such Global Notes in exchange for such Global Notes.”

51.Mr Chua submits that in Clause 2.4.5, there is a process whereby certificated notes can be issued. Such a clause anticipates that beneficial owners would become holders of individually certificated Notes. I have no difficulty in accepting this. However, unless and until the process specified in Clause 2.4.5 has been started and completed, the beneficial owners of the Notes would remain as beneficial owners only, and would not be regarded as “Holders” of the Notes. Up to now, P3 to P6 remain as beneficial owners of the Notes, and they are not “Holders” of the Notes.

52.Clause 6.6 of the Indenture is important. It provides:

“A Holder may not institute any proceeding, judicial or otherwise, with respect to this Indenture or the Notes, or for the appointment of a receiver or trustee, or for any other remedy under this Indenture or the Notes, unless:

6.6.1 the Holder has previously given the Trustee written notice of a continuing Event of Default;

6.6.2 the Holders of at least 25% in aggregate principal amount of outstanding Notes make a written request to the Trustee to pursue the remedy;

6.6.3 such Holder or Holders offer the Trustee indemnity and/or security satisfactory to the Trustee against any costs, liability or expense to be incurred in compliance with such request;

6.6.4 the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity and/or security; and

6.6.5 during such 60-day period, the Holders of a majority in aggregate principal amount of the outstanding Notes do not give the Trustee a written direction that is inconsistent with the request.”

53.In accordance with Clause 6.6, it is plain and obvious that only Holder(s), after complying with all the conditions set out in Clauses 6.6.1 to 6.6.5 (“the Conditions”), can sue by relying upon the matters in the Indenture, including the Guarantee. With the presence of Clause 6.6 in the Indenture, in my view, it would not be arguable that P3 to P6, being merely beneficial owners and not “Holders” of the Notes, may sue the Company by relying upon the Guarantee in the Indenture. It is not arguable that while a holder’s right to sue has been curtailed by Clause 6.6, a beneficial owner would have an unrestricted right to sue the Company. Clearly, Clause 6.6 cannot be construed in this way.

54.Further and in any event, even if a beneficial owner may still sue the Company notwithstanding the presence of Clause 6.6, there is no reason why the Conditions in that clause would not apply to a beneficial owner. Before P3 to P6 commencing the proceedings in HCA 1359/2021, the Conditions have not been satisfied.

55.For the reasons above, it is plain and obvious that P3 to P6 do not have the locus to pursue against the Company by relying upon the Guarantee in the Indenture.

56.Mr Chua has reminded me that the Indenture is governed by New York law and referred me to Diverse Partners, LP v Agribank FCB[22], in which the New York Court held that it is arguable that a beneficial holder of notes also has locus to sue. In that case, the defendant filed a motion to dismiss the plaintiff’s claim for breach of contract of certain global notes on the basis that the plaintiff lacked standing. The challenge was that the plaintiff, as a beneficial owner of the notes, did not have the standing to sue. The New York Court held that on a proper interpretation of the indenture therein, “at a minimum, the Agreement is ambiguous relative to whether a beneficial owner of a Global Security has a right to sue for breach of the Agreement”, and therefore it “would be inclined to deny Defendant's motion to dismiss based on the ambiguity in the contract alone”. With respect, I am of the view that P3 to P6 may not derive assistance from this case, for there are material differences between the indenture in that case and the Indenture in the present case. For the reasons above, I am of the view that under the Indenture, P3 to P6 do not have the locus to sue the Company by relying upon the Guarantee in the Indenture.

57.Mr Chua argues that the NY Judgment is a final and conclusive judgment between P1 and P2 on the one hand and the Company on the other hand. While P3 to P6 are not parties to the NY Judgment, they can still rely upon the NY Judgment for they are privies. The NY Judgment gives rise to res judicata as against the Company on the issue of locus. Mr Chua has referred me to China North Industries Investment v Chum[23], in which Stock JA (as he then was) said:

“81. …… The required commonality is a direct interest in the subject matter of the earlier litigation, a parallel or corresponding interest in the subject matter and not simply a financial interest in the result of the action ……”

58.Mr Chua argues that P3 to P6 have a parallel and direct interest in the earlier NY Judgment. Like P1 and P2, they are beneficial owners of the Notes. This suffices to give them sufficient privity of interest to make them eligible to rely on res judicata concerning locus for the NY Judgment. The corollary is that the Company is barred by reason of res judicata from contesting P3-P6’s locus to sue the Company.

59.With respect, I am unable to agree that there is sufficient privity enabling P3 to P6 to take advantage of the NY Judgment.

(1)  In determining whether there is a sufficient degree of identification between Party A (a party to previous proceedings) and Part B (a new party), it would be necessary to examine[24]:

(a)  the extent to which Party B had an interest in the subject matter of the previous action;

(b)  the extent to which Party B can be said to be, in reality, the party to the original proceedings by reason of his relationship with that party; and

(c)  against this background to ask whether it is just that the new party should be bound by the outcome of the previous litigation.

(2)  Based upon Ps’ pleaded case, P2 is at all material times the majority shareholder and the sole director of P5 and P6. Save that, there is no relationship between P1 and P2 on the one hand and P3 to P6 on the other hand.

(3)  As said by Anthony Chan J at [33] in Capital Wealth Finance, Party A cannot be said as having a parallel or corresponding interest in Party B’s assets merely because Party A is the directing mind and will of Party B. Further, although P2 is the majority shareholder of P5 and P6, it is plain and obvious that P5’s assets and P6’s assets cannot be regarded as P2’s assets, and vice versa. The fact that P2 is the majority shareholder and the sole director of P5 and P6 cannot lead to the conclusion that there is sufficient privity between P2 on the one hand and P5 and P6 on the other hand.

(4)  With respect to Mr Chua, it cannot be said that P3 to P6 are privy to the NY Judgment because they are also beneficial owners of some Notes. If this point is correct, any beneficial owner of any Notes would be privy to the NY Judgment. This cannot be correct.

(5)  In my judgment, there no sufficient reason to say that there is privity between P1 and P2 on the other hand and P3 to P6 on the other hand. P3 to P6 cannot take advantage of the NY Judgment by saying that they are privy to that judgment.

60.Mr Chua has also submitted that the Company should not be allowed to raise the locus point in this hearing. Mr Chua argues:

(1)  The burden of raising the locus point is on the party who disputes the same.[25]

(2)  No prior notice was given to P3 to P6 before raising this point in Ds’ Skeleton Submissions dated 27 June 2023.

(3)  It is important to bear in mind that the Guarantee in the Indenture is governed by US law. Had this point been raised at an earlier time, P3 to P6 would have had the opportunity to adduce evidence on the New York law to deal with this point. By not raising this point at an earlier time, P3 to P6 have been deprived of the said opportunity. As a matter of procedural fairness, the Company should not be allowed to rely upon that point in this hearing.

61.With respect, I am unable to accept Mr Chua’s submissions on this point.

(1)  It is true that the locus point was not raised in any of the affirmations filed by Ds in relation to Ds’ Summons. However, the point has been squarely raised in Ds’ Skeleton Submissions dated 27 June 2023. If it would be necessary for Ps to rely upon some expert evidence on New York law to deal with the point, Ps would still have some time to prepare the evidence before the hearing on 11 July 2023. Ps have not said that they have tried to, but they do not have sufficient time to prepare the necessary evidence on New York law before the hearing on 11 July 2023.

(2)  Upon closer examination, the two cases cited by Mr Chua in fact cannot support the position adopted by Ps.

(a)  In Tang Man Kit, Yuen J (as she then was) said at [25];

“The burden is of course on the Defendant to show that [the Plaintiffs] have no authority to sue.”

In my view, the Company have discharged the burden of showing that P3 to P6 have no authority to sue by referring me to the relevant clauses in the Indenture.

(b)  In ARC Trade Finance Fund, DDJ Simon Ho said at [77]:

“In my view, if the defendant wanted to launch a challenge to the plaintiff’s locus to standi to sue, Mr Ilikas should have pointed this out in his supporting affirmation. (see Hong Kong Civil Procedure 2017, vol 1, para.13/9/21; Tong Yi Sang & Anor v Fung Law & Ng & Ors [1993] 2 HKC 665, per Kaplan J at p 672B-E) If that was not done, and such point was not even taken in Mr Fong’s first and supplemental skeleton submissions lodged with the court before the hearing, the defendant could not blame the plaintiff for not providing sufficient materials at the hearing to answer the locus standi point while the defendant itself had failed to keep its own house in order. ……” (Emphasis added)

As said in subparagraph (1) above, the locus point has been clearly raised in Ds’ Skeleton Submissions dated 27 June 2023. Prior notice has been given to Ps that the Company would take this point in the hearing on 11 July 2023. The point is not suddenly raised by Mr Wong for the first time in the hearing on 11 July 2023. Clearly, the situation in ARC Trade Finance Fund are different from the situation in this case.

(3)  Further, as pointed out by Mr Wong, Mr Chua has made the following point in Ps’ Written Submissions dated 29 June 2023:

“100(e) Governing Law. The Indenture is governed by New York Law. It has been said that, in matters of contractual interpretation, the approaches between the New York and English courts (and thus the Hong Kong courts) are not “so different”: King v Brandywine Reinsurance Co [2005] 1 Ll 655 (CA) … at §34 per Waller LJ. The Hong Kong Courts would therefore generally apply New York Law more reliably than the PRC Courts: Dicey, Morris & Collins on the Conflict of Laws (16^th ed 2022) … at §12-034. This is another factor in favour of trying the Action in Hong Kong instead of the PRC.” (Emphasis added)

Mr Chua has adopted the position that in term of the approaches concerning contractual interpretation, there is no material difference between the New York Court and the Hong Kong Court. That being the case, with respect, there is no force in the submission that Ps have not been given an opportunity to adduce expert evidence on New York law to meet the challenge on locus.

C2.  Reflective loss

62.The reflective loss principle, as summarized by Mr Wong in his submissions, is as follows:[26]

(1)  A claim for loss by a plaintiff is not recoverable against a third party where the claim only reflects loss suffered by the company, and the company also has a claim against the third party.

(2)  The applicability of the rule against reflective loss is not based on the relationship of the plaintiff to the company and is not limited to a claim brought by a shareholder. Therefore, the rule also applies to a claim brought by a creditor of the company even if he is not a shareholder.

(3)  The common thread is that the plaintiff’s loss would be made good if the company recovers from the defendant. In particular, it would be an illogical and unprincipled distinction, if one is drawn between a claim made by a person as a shareholder and a claim made by a person as a former shareholder, if the loss that he himself says he has suffered would have been made good by restoration of the company’s assets.

(4)  It is a matter of principle; there is no discretion involved. The rule against reflective loss can apply at the outset of proceedings and not necessarily only after trial.

63.Notwithstanding the recent decision by the UK Supreme Court in Sevilleja Garcia v Marex Financial Ltd[27], the reflective loss principle as stated by the Court of Final Appeal in Waddington Ltd v Chan Chun Hoo[28] remains as the law in Hong Kong. In a very recent judgment by the Court of Appeal in Power Securities Co Ltd v Sin Kwok Lam[29], Yuen JA has clearly stated that Waddington remains as a binding authority in Hong Kong. The Court of Final Appeal’s decision in Waddington, and the Court of Appeal’s decision in Power Securities, are binding upon this Court.

64.Mr Wong has made the following points in his submissions:

(1)  As per Ps’ pleaded case, the Directors have wrongfully misappropriated the Company’s assets. Further or alternatively, they have recklessly allowed the Company to make the Outbound Cash Flow, which was against the interest of the Company. In this regard, the Directors had breached their fiduciary duties as directors owed to the Company.[30]

(2)  As a result of all these, the Company is unable to pay Ps the amounts due under the Notes.

(3)  In the circumstances, in accordance with Ps’ pleaded case, the loss suffered by Ps in fact only reflects the loss suffered by the Company because of the alleged wrongful acts of the Directors. That being the case, Ps’ claim against the Directors is barred by the reflective loss principle.

65.Mr Chua submits that the Company, being a company incorporated in Mainland China, the issue of reflective loss is governed by lex incorporationis, and such law may or may not recognize the reflective loss principle. Mr Chua relies upon Topping Chance Development Ltd v CCIF CPA Ltd[31], in which Kwan VP said:

“44. The second difficulty pertains to the fact that Longyu was incorporated in the Mainland and other parties against whom it is said to have a claim are all Mainland parties. There is no evidence whether Mainland law, being the law of the place of incorporation, does or does not recognise the principle against recovery of reflective loss…” (Mr Chua’s emphasis)

66.Mr Chua argues that without adducing expert evidence on Mainland Chinese law concerning reflective loss, the Directors’ challenge based upon reflective loss fails in limine.

67.With respect, I am unable to agree.

(1)  In Topping Chance Development, the Court of Appeal was considering a striking out application by the defendant in that case. It is trite that in a striking out application, everything pleaded by the plaintiff in the statement of claim would be assumed to be true. [44] of the judgment in Topping Chance Development should be read in that context.

(2)  In an Order 11 application, the burden is on the plaintiff seeking leave to serve the writ out of the jurisdiction to show a serious issue to be tried. Although this is a relatively low threshold, nonetheless the burden of showing a serious issue to be tried is on the plaintiff. In this case, Ps have not adduced any evidence to show that the reflective loss principle may not exist in Mainland Chinese law. That being the case, it would be assumed that on this point, Mainland Chinese law is same as Hong Kong law. Accordingly, Ps would not be able to show a serious issue to be tried in their claim against the Directors.

68.Mr Chua has also argued that the law regarding reflective loss is in a state of flux, citing the UK Supreme Court’s decision in Marex. With respect, as said in the above, the Court of Appeal has stated in Power Securities that the reflective loss principle remains as the law in Hong Kong very recently. So far as the law in Hong Kong is concerned, the position is clear.

69.I agree with Mr Wong that Ps’ claim against the Directors cannot be allowed to proceed by reason of the reflective loss principle.

70.If I were wrong in rejecting the point taken by Mr Chua based upon Topping Chance Development, that would mean that it would be necessary to examine whether the reflective loss principle exists in Mainland Chinese law. This would be a factor that this Court has to take into account in considering forum conveniens.

C3.  Double Actionability

71.Mr Wong submits that Ps’ claim against the Directors has not satisfied the double actionability rule, and Ps should not be allowed to proceed with the claim. His submissions are as follows:

(1)  The double actionability rule requires that if a tort is committed abroad, the claim needs to be actionable both under Hong Kong law and the law of the place where the tort occurred.[32]

(2)  In deciding where the tort is committed, one looks back over the “series of events constituting the tort” and asks where “in substance” the cause of action had arisen. It is “not the right approach to say that, because there was no complete tort until the damage occurred, therefore the cause of action arose wherever the damage happened to occur.”[33] In considering the substance, the following should be borne in mind:

(a)  For conspiracy claims, particular weight would be attached to the place where the agreement/combination occurred, as this is the gist of the tort of conspiracy.[34]

(b)  For claims in tort of procuring a breach of contract and causing loss by unlawful means, particular weight should be attributed to the place where the acts of procurement or unlawful means were carried out, and/or where the intention to procure the breach of contract or to cause loss was formed, as these matters form the gist of the torts.[35]

(3)  Ps claim against the Directors in tort is governed by Mainland Chinese law, for the substance of the tort is committed in the Mainland. There is no equivalent tort in Mainland Chinese law equivalent to the tort of procuring a breach of contract or the tort of causing loss by unlawful means in Hong Kong law. Accordingly, Ps have failed to satisfy the double actionability rule. In this regard, Ds have adduced expert evidence on Mainland Chinese law in support of Ds’ submission.

72.Mr Chua has drawn my attention to the comments on the double actionability rule made by Lord Sumption in Xiamen Xinjingdi Group Co Ltd v Eton Properties Ltd[36]:

“The double actionability rule has been discarded in a number of common law jurisdictions including Australia and Canada, and abolished by statute in others, including England and New Zealand. Its application in Hong Kong may one day need to be reconsidered.”

73.Mr Chua submits that in view of the Court of Final Appeal’s comments in the Xiamen Xinjindi case, it is uncertain that whether the double actionability rule would continue to apply in Hong Kong in the future. However, Mr Chua has fairly accepted that the Court of Final Appeal in the Xiamen Xinjindi case has chosen not to rule on the applicability of the double actionability rule in Hong Kong, and proceeded to consider the case as if the rule continued to apply. Ps reserve their position to argue whether the double actionability rule should still apply as a matter of Hong Kong law.

74.Be that as it may, I have to proceed on the basis that the double actionablity rule is still the law in Hong Kong.

75.Mr Chua submits that the double actionability rule does not apply in this case. Mr Chua submits that:

(1)  In determining whether the double actionability rule applies, the Court would generally consider where the substance of the tort was committed, from the perspective of the victim(s):

(a)  In a case concerning negligent advice, it has been held that the tort is committed where the advice is received, rather than where the advice was given.[37]

(b)  It has been held that if acts committed abroad had the “inevitable and intended consequence” of having effect in a jurisdiction, this is a relevant factor that supports that jurisdiction as where the “substance” of the tort was committed.[38]

(2)  This approach accords with common sense. In the modern era of instantaneous communication, and global connections, the material conduct that gives rise to a tortious claim could be committed in more than one jurisdiction, or in a jurisdiction unrelated to the commercial relationship between the parties.

(3)  If this approach is not adopted, that would lead to a highly problematic, and fragmented approach to application of the double actionability rule. This is highly undesirable to litigants, who may be prejudiced by being inevitably required to spend additional time and costs on obtaining foreign legal advice to avoid potentially offending the double actionability rule.

(4)  With all these in mind, the substance of the tortious claims against the Directors was committed in, and sustained in Hong Kong, such that the double actionability rule does not apply:

(a)  The conduct of the Directors had the inevitable and intended consequence of a breach of the guarantee obligations owed by the Company under the Indenture to the Trustee, a Hong Kong company.

(b)  This breach of the guarantee obligation is the unlawful conduct that forms the basis of Ps’ tortious claims against the Directors. In essence, they specifically directed their conduct to breach the obligation owed to the Trustee in Hong Kong.

(c)  Further, P1 to P3 directly suffered damage in Hong Kong. The jurisdiction where the damages is suffered for tortious claims is the jurisdiction where funds are to be received under the contract.[39] On the evidence, the funds payable to P1 to P3 are to be paid to their respective bank accounts in Hong Kong. As such, P1 to P3 suffered damage from the Directors’ tortious conduct with damage sustained in Hong Kong, where funds are to be received.

(d)  The substance of the tortious acts by the Directors was committed in, and sustained in Hong Kong. As such, the double actionability principle does not apply.

76.As pointed out by Mr Wong, Mr Chua’s point in fact has been refuted by the stance adopted by P4 to P6. As said in the above, P4 to P6 do not rely upon gateway (f) to seek leave to serve the Amended Writ of Summons out of the jurisdiction. That means that P4 to P6 do not regard that there has been any tortious act committed by the Directors in Hong Kong. Further, I am of the view that since all Ps are co-plaintiffs relying upon the same causes of action in their claim against the Directors, while P4 to P6 admit that there has been no tortious act committed by the Directors in Hong Kong, P1 to P3 are not entitled to argue otherwise.

77.Mr Wong further submits that the torts allegedly committed by the Directors were committed in Mainland China, and hence the proper law of the tort should be Mainland Chinese law.

(1)  The gravamen of the torts of procuring a breach of contracts and causing loss by unlawful means must relate to the place where the intention to procure the breach of contract or to cause loss was formed and/or where the acts of procurement or unlawful means were carried out.[40]

(2)  According to Ps’ pleaded case, the alleged wrongful acts / intention of the Directors would have been committed or formed in the Mainland, as opposed to anywhere else in the world.

(3)  The cases cited by Ps are clearly not comparable:

(a)  Ennstone Ltd is a decision in very specific circumstances, where the fundamental feature of the tort consists in essence of the giving of negligent advice. In that context, the tort is committed where the advice is received. In respect of the tort of inducing a breach of contract or the tort of causing loss by unlawful means, where the fundamental feature of the tort revolves around the acts comprising the inducement or unlawful means, the tort should be committed in the place where the inducement occurred or the unlawful means used.

(b)  ABKCO Music & Records is a case concerning the interpretation of s.16(2) of the Copyright, Designs and Patent Act 1988 and is entirely irrelevant. In any event, it does not assist other than reinforcing that the applicable test remains where the claim in substance arose.

(4)  In this case, the underlying rationale of the economic torts of procuring a breach of contract and/or causing loss by unlawful means are the same in that it pertains to striking through a third party. The fundamental features of the tort must be in relation to the acts through which the damage is done.

(5)  Ps heavily relies on the fact that the damage was suffered in Hong Kong. Ps has not offered any answer to the fact that it is “not the right approach to say that, because there was no complete tort until the damage occurred, therefore the cause of action arose whenever the damage happened occur”.[41]

78.On any view, at the very least, as to whether there has been any tort committed by the Directors in Mainland China in Ps’ pleaded case, and whether the double actionability rule applies to Ps’ claim against the Directors, these issues are highly contentious.

79.If the alleged wrongful acts of the Directors are covered by the double actionability rule, as to whether those acts are actionable wrongs under Mainland Chinese law, both Mr Wong and Mr Chua has referred me to the expert evidence adduced by the parties respectively and various materials on Mainland Chinese law. Suffice for me to say that this issue is also highly contentious.

80.All these contentious issues concerning the double actionability rule would be relevant in considering forum conveniens and the complaint of material non-disclosure made by the Directors.

C4. Forum Conveniens

81.The principles concerning forum conveniens in the context of an application made under Order 11 have been summarized by Cheung JA in Dynasty Line Ltd v Sukamto Sia[42]. In that case, Cheung JA said:

“56. When this topic is considered in the context of service out of jurisdiction under Order 11, it is important to bear in mind three matters which are distinct from an application to stay Hong Kong proceedings based on forum non conveniens.

(a) The burden in Order 11 cases is on the plaintiff, whereas in cases in respect of stay of proceedings the burden is on the defendant.

(b) In Order 11 cases the plaintiff is seeking to persuade the Court to exercise its discretionary power to permit service on the defendant outside the jurisdiction. Order 11, rule 4(2) expressly provides that the Court will only do so if the case is ‘a proper one’ for service outside jurisdiction.

(c) The jurisdiction exercised under Order 11 may be ‘exorbitant’ in the sense that the jurisdiction is extraordinary in that under conflict of law rules, a Hong Kong Court will not recognize that a similar power is possessed by a foreign court over a Hong Kong litigant in the absence of some treaty providing for such recognition. The effect is not merely that the burden of proof rests on the plaintiff to persuade the Court that Hong Kong is the appropriate forum for the trial of the action, but that he has to show that this is clearly so. In other words the burden is the opposite of that applicable where a stay is sought of proceedings started in Hong Kong as of right, see: Spiliada Maritime Corp v Cansulex Ltd at 480-481 per Lord Goff.” (Emphasis added)

82.In my view, there is no or no sufficient reason in support of the contention that Hong Kong is clearly the appropriate forum for the resolution of the disputes in this case.

(1)  Since the Indenture is governed by New York law, like P1 and P2, P3 to P6 may go to the New York Court to enforce the Guarantee in the Indenture against the Company. In fact, if P3 to P6 pursue their claim against the Company in the New York Court, the parties would have no need to adduce expert evidence on New York law. In respect of this claim, there is no evidence to show that P3 to P6 will be deprived of a legitimate personal or juridical advantage if the claim is tried in the New York Court, not in the Hong Kong Court. There is no reason to say that the Hong Kong Court is clearly the appropriate forum.

(2)  Regarding Ps’ claim against the Directors:

(a)  As discussed in the above, in respect of double actionability, Mainland Chinese law is relevant, and many issues concerning Mainland Chinese law would need to be resolved in the trial.

(b)  Further, if Ps are allowed to proceed to the trial, as to whether Ps’ claim against the Directors would be barred by the reflective loss principle, Mainland Chinese law would need to be considered.

(c)  The Company is a company incorporated in Mainland China. All the Directors are located, ordinarily resident and stationed for work purposes in Mainland China.

(d)  The alleged wrongful acts of the Directors (if true) are committed in Mainland China.

(e)  Plainly, it would be more desirable to resolve contentious points of law under Mainland Chinese law in the Mainland Court.

(f)  It can hardly be said that P4 to P6’s claim against the Directors has any clear connection with Hong Kong.

(g)  In respect of P1 to P3’s claim against the Directors, the only connection with Hong Kong is that they received and expect to continue to receive payments under the Notes in Hong Kong. However, this factor would not be a significant factor in considering forum conveniens.

(h)  There is no evidence showing that if Ps’ claim against the Directors is tried in the Mainland Court, Ps will be deprived of a legitimate personal or juridical advantage.

83.With all the aforesaid in mind, in my judgment:

(1)  In respect of P3 to P6’s claim for enforcing the Guarantee against the Company, the New York Court, not the Hong Kong Court, is the appropriate forum.

(2)  In respect of Ps’ claim against the Directors, the Mainland Court, not the Hong Kong Court, is the appropriate forum.

84.By reason of forum inconveniens, I am of the view that this case is not “a proper one for service out of the jurisdiction” under Order 11[43]. Accordingly, the leave granted by the Master permitting service out must be set aside.

C5.  Material Non-disclosure

85.In D2’s Affirmation filed on 15 June 2022 in this action, Ds raised that Ps had failed to disclose, inter alia, the following material matters in the ex parte application for leave before the Master:

(1)  the possible defence by relying upon the double actionability principle, which may be a complete defence to Ps’ tortious claim against the Directors;

(2)  the alleged tortious acts of the Directors in Ps’ case may be governed by Mainland Chinese law; and

(3)  the existence of another potential and more appropriate forum for the resolution of Ps’ claims.

86.In my view, these are indeed material matters, which would have a real impact on the outcome of Ps’ application for service out of the jurisdiction. These matters ought to be disclosed in the ex parte application before the Master. Failure to disclose these matters constitutes material non-disclosure.

87.Since I have found that there has been material non-disclosure in the ex parte application, I would exercise my discretion to set aside the leave granted by the Master. For the reasons set out in subsections C1 to C4 above, even without the material non-disclosure, the ex parte leave would be set aside in any event. Accordingly, I would not re-grant leave to Ps to allow Ps to serve the proceedings out of the jurisdiction.

C6.  Conclusion on Ds’ Summons in HCA 1359/2021

88.To sum up, I am of the following view:

(1)  As to P3 to P6’s claim against the Company by relying upon the Guarantee in the Indenture, P3 to P6 do not have the necessary locus to sue. In respect of this claim, there is no serious issue to be tried.

(2)  Ps’ claim against the Directors has been barred by the reflective loss principle and cannot be allowed to proceed. There is no serious issue to be tried in this claim. Alternatively, if the applicability of the reflective loss principle would depend upon whether the same requirement exists in the Mainland Chinese law (for the Company is a company incorporated in Mainland China), the applicability of the reflective loss principle would be an issue closely connected with the Mainland Chinese law. This is a factor which the Court has to take into account in considering the forum conveniens.

(3)  As to whether Ps’ claim against the Directors would be barred by the double actionability rule, there are various contentious issues under this head, which involve complicated questions under Mainland Chinese law. All these issues would be relevant factors in considering forum conveniens.

(4)  There is no or no sufficient reason in support of the contention that Hong Kong is clearly the appropriate forum for resolving the disputes in HCA 1359/2021. In respect of P3 to P6’s claim for enforcing the Guarantee against the Company, the New York Court, not the Hong Kong, is the appropriate forum. In respect of Ps’ claim against the Directors, the Mainland Court, not the Hong Kong Court, is the appropriate forum.

(5)  At the very least, there has been material non-disclosure by Ps in respect of the matters set out in [85] above in the ex parte application before the Master.

(6)  With all the aforesaid in mind, this case is not “a proper one for service out of the jurisdiction” under Order 11. I would set aside the leave granted by the Master and refuse to re-grant leave to Ps.

89.Mr Wong and Mr Chua have also made extensive and detailed submissions on some other matters, including whether Ps have pleaded a proper case based upon the tort of inducement and the tort of causing loss by unlawful means against the Directors. With no disrespect to both Senior Counsel, I am not prepared to go into those matters in this decision, for the analysis set out in the above would be sufficient for the disposal of Ds’ Summons.

D.  DISPOSITION

90.For the reasons above, I dismiss the Company’s Summons in HCA 1391/2021, but allow the application as per Ds’ Summons in HCA 1359/2021.

91.As to costs of these two summonses, I direct that:

(1)  the parties do lodge with the Court and exchange written submissions as to costs within 7 days;

(2)  the parties do lodge with the Court and exchange written reply submissions as to costs within 7 days thereafter;

(3)  unless the Court directs otherwise, the costs of these two summonses would be determined by me on paper without an oral hearing after considering the aforesaid written submissions.

92.I further direct that, in each case:

(1)  the defendant(s) should prepare a draft order in accordance with this decision and serve the same on the plaintiffs within 7 days;

(2)  the plaintiffs do provide comments (if any) on the said draft order to the defendant(s) within 7 days thereafter;

(3)  the defendant(s) do submit the draft order, together with the comments from the plaintiffs and the defendant(s)’ responses to those comments (if any), to the Court for my approval within 7 days thereafter.

93.For avoidance of doubt, for the purpose of computing the time set out in the aforesaid directions, time shall continue to run during the Summer Vacation.

94.Lastly, it remains for me to thank all counsel for the helpful assistance rendered to the court.

Mr Chua Guan-Hock SC, Mr Alexander Tang and Mr Joshua Yeung, instructed by Ribeiro Hui, for the 1^st to 6^th Plaintiffs in HCA 1359/2021 and the 1^st and 2^nd Plaintiffs in HCA 1391/2021

Mr William Wong SC, Mr Lai Chun Ho and Mr Sim Jing En, instructed by Jun He Law Offices, for the 1^st to 6^th Defendants in HCA 1359/2021 and the Defendant in HCA 1391/2021