Ren Yun Liang and Others v. China Merchants Bank Co Ltd and Others

HCA 1456/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1456 OF 2005

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BETWEEN

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Before:  Mr Recorder B Yu, SC in Chambers

Dates of Hearing:  13, 28 – 29 December 2006

Date of Judgment:  29 January 2007

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J U D G M E N T

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Applications

1.There are before me two applications, one by the 4^th Defendant, and the other by the 6^th and 7^th Defendants, to discharge the Order of Master Ho dated 2 September 2005 granting leave to the Plaintiffs to serve the Concurrent Writ of Summons out of the jurisdiction.  For convenience, I shall refer to the 4^th, 6^th and 7^th Defendants collectively as “the relevant Defendants”.

Background

2.The Plaintiffs, together with one Chiu Sin Ling (“Ms Chiu”), were previously shareholders and directors of the 8^th Defendant (“Chinaup”), a company incorporated under the laws of Hong Kong.

3.Chinaup was a joint venture partner in a Sino-foreign equity joint venture for the development of a golf course in Pebble Beach in Dalian, the People’s Republic of China (“PRC”).

4.At the material time, there were two joint venture partners: Chinaup and Dandong Friendly Enterprise Holding Company (“Dandong”).  Under a 1997 agreement, Dandong and Chinaup agreed that the amount of investment shall be US$51 million.  Chinaup was to have a 75% interest while Dandong was to have 25%.  In March 2000, the investment capital was further increased to US$80 million.  The joint venture vehicle was a company called Dalian Golden Pebble Beach Golf Club Co. Ltd. (“Golden Pebble”).  The construction of the golf course commenced in about 1994 and was completed in 2002.  It is being operated by Golden Pebble.

5.The 1^st Defendant (“CMB”) is a bank established under the laws of the PRC.  CMB granted banking facility to Chinaup under various loan agreements.  The 4^th Defendant is the General Manager of CMB.  The 6^th and 7^th Defendants are at all material times officers of CMB.

6.The first of the loan agreements between Chinaup and CMB was dated 12 September 1995 (“the September 1995 agreement”).  Under that agreement, CMB agreed to extend a facility of US$5 million to Chinaup for the issuance of a standby letter of credit.  The 2^nd agreement was dated 8 January 1996 (“the January 1996 agreement”).  That agreement extended a US$10 million facility to Chinaup.  The 3^rd agreement was a loan agreement dated 8 November 1996 (“the November 1996 agreement”) under which CMB agreed to make available to Chinaup a US$35 million facility in four tranches.  Tranches B and C in the respective sums of US$10 million and US$5 million were for the purpose of repaying the respective facilities under the January 1996 agreement and the September 1995 agreement.  Tranche A in the sum of US$10 million was said to be for general working capital purposes of Chinaup; while Tranche D, also in the sum of US$10 million, was said to be used for general working capital purposes of Chinaup.

7.Clause 7.2 of the November 1996 agreement provided that CMB’s obligation to make any advance under any of Tranche B, C or D is subject to the receipt by CMB of, inter alia, a Shares Charge over Chinaup shares.  The Shares Charge was in form an agreement between the Plaintiffs and Ms Chiu as “Shareholder” and CMB as the Bank.  The 1^st and 2^nd Plaintiffs did not physically sign or execute the Shares Charge.  That document was dated 6 December 1996 and was executed by the 3^rd Plaintiff acting as the attorney for and on behalf of the 1^st and 2^nd Plaintiffs.  It was also executed by the 3^rd Plaintiff on his own behalf and by Ms Chiu on her own behalf.  Clause 14.1 of the Shares Charge provided that, for the purpose of securing CMB’s interest in the shares, the Shareholder irrevocably and by way of security appoints CMB as its attorney to execute or sign any document and do any act or thing which the Shareholder is obliged to do under any finance document.  An irrevocable proxy and power of attorney form was attached to the Shares Charge.

8.In January 2004, CMB caused the shares held in the name of the Plaintiffs and Ms Chiu to be transferred to the 2^nd and 3^rd Defendants.  The 5^th and 6^th Defendants were at the same time appointed directors of Chinaup.

9.The Plaintiffs’ principal claim in this action is for a declaration that the Shares Charge is void, unenforceable, or should be set aside.  As against the relevant Defendants, the reliefs sought are for a series of declarations consequential on the alleged invalidity of the Shares Charge and the transfer of shares effected thereunder; and for damages to be assessed.

Plaintiffs’ allegations

10.The claim of invalidity of the Shares Charge was based essentially on 2 grounds: illegality and want of authority.  As regards illegality, the Plaintiffs’ case is that Golden Pebble was incorporated pursuant to the approval of the Foreign Trade Committee of Dalian, and that it was a condition of such approval that the foreign venture partners should abide by  PRC laws, in particular, that their contribution towards the Sino-foreign joint venture enterprise must originate from their own foreign resources as opposed to resources raised from enterprises conducting business in the PRC.  It is said that CMB is an enterprise conducting business in the PRC, and that the various loans obtained from CMB were either directly or indirectly used to finance Chinaup in respect of its obligation to provide capital for the Sino-foreign joint venture.

11.The Plaintiffs’ case is that the facilities granted by CMB were illegal under PRC law as no approval had been obtained from the State Administration of Foreign Exchange of the PRC.

12.There is also a separate ground of illegality with regard to the transfer.  The Plaintiffs allege that it is illegal under PRC law for CMB to be a registered shareholder of any non-banking institution, whether in its own name or through its nominees or agents (see para. 30 of the Amended Statement of Claim).

13.The allegation of want of authority is to be found in paragraph 24(2) of the Amended Statement of Claim.  It is alleged that CMB wrongfully caused the 3^rd Plaintiff to execute the various documents on behalf of the 1^st and 2^nd Plaintiffs, well knowing that the 3^rd Plaintiff did not have their authority so to do.

14.Paragraph 33 of the Amended Statement of Claim pleads a scheme to defraud the Plaintiffs “from their right over the assets of Golden Pebble” or their right to commence legal proceedings against CMB for embezzling or misappropriating Golden Pebble’s assets from Golden Pebble.  The scheme was alleged to have been designed by CMB “or” by CMB together with the 4^th, 5^th, 6^th and/or 7^th Defendants.

15.Various particulars are given under paragraph 33 of the Statement of Claim.  These particulars fall into the following groups.

(1)     Firstly, it is alleged that CMB caused and/or permitted at least two bank accounts to be opened in its branch office in the Dalian Development Zone, both registered as being held by Golden Pebble but were allegedly opened without Golden Pebble’s authority.  It is alleged that all income and receipts of Golden Pebble (totaling not less than RMB32,000,000) were misappropriated into these accounts.  There is a further allegation that some RMB 1,200,000 was paid out of these unauthorized accounts to one Zhang Manchang and a Feng Lucheng with the assistance of CMB, its officers and agents and/or servants.

(2)     Secondly, it is alleged that CMB caused a company called Beijing Hua Pu Dun Gold Club Management Ltd (“Hua Pu dun”) to be appointed by Golden Pebble to manage the golf club knowing that the management contract was entered into to defraud Golden Pebble.  It is claimed that CMB caused Golden Pebble to pay RMB6 million as remuneration for performing the management contract, which is said to be excessive.

(3)     Thirdly, it is alleged that in or around June to September 2004, some RMB1,200,000 of Golden Pebble’s assets that were held in the unauthorized accounts were embezzled or misappropriated therefrom for the benefit of a Zhang Manchang and a Feng Lucheng with the assistance of CMB, its officers, agents and/or servants who knowingly assisted or participated in such embezzlement or misappropriation of Golden Pebble’s assets.

(4)     Fourthly, that since CMB gained control over Golden Pebble in or around July 2003, an aggregate sum of over RMB50 million have been embezzled, misappropriated or otherwise diverted from Golden Pebble by CMB.

16.Various particulars have been given on how CMB caused its officers to gain control over Golden Pebble and the opening of the accounts.

17.Before I deal with the various grounds advanced on behalf of the relevant Defendants in support of their application, it would be convenient to set out the principles which the parties agreed should apply to an application to set aside leave to serve a writ out of the jurisdiction.

Principles applicable

18.On an application by a defendant to set aside leave granted under Order 12 rule 8, the Court is called upon to consider:

(1)     Whether the plaintiff can show a good arguable case that the case falls within one or more of the categories sent out in Order 11 rule 1.  The requirement of showing a good arguable case is the threshold which the plaintiff must cross to demonstrate that the Court has jurisdiction under Order 11.  The plaintiff is not, however, required to show a good arguable case on the merits.  It suffices for the plaintiff to show that there are serous issues to be tried.  (Hong Kong Civil Procedure 2007 para. 11/1/8 p. 104 and Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438 per Lord Goff at p. 452B-457C.)

(2)     Where the plaintiff can establish that the case falls within one of the categories in Order 11 rule 1, the Court is required to exercise a discretion and decide, in the words of Order 11 rule 4(2) whether it is a “proper” case for service out.  In the exercise of such discretion, the Court may consider questions of forum non conveniens.

Material non-disclosure

19.On behalf of the relevant Defendants, Mr Chan SC advanced an argument that leave granted in the present case ought to be set aside on the ground of material non-disclosure.

20.The evidence relevant to this ground can be briefly stated.  I have already noted that one of the basis upon which the Plaintiffs seek to set aside the Shares Charge is the contention that CMB wrongfully caused the 3^rd Plaintiff to execute the various documents on behalf of the 1^st and 2^nd Plaintiffs, well knowing that the 3^rd Plaintiff did not have their authority so to do.  At the ex parte stage, the Plaintiffs only relied on two affirmations of their solicitors, Mr Ng.  Nothing was said by Mr Ng on this issue.  There was not even an attempt to verify the correctness of the assertions in the Statement of Claim.

21.The relevant Defendants have put in an affirmation just one day before the scheduled hearing of these summonses exhibiting four documents: (i) a power of attorney dated 18 November 1996 executed by the 1^st Plaintiff before a Notary Public in Los Angeles reciting inter alia the November 1996 loan agreement and the draft Shares Charge and appointing the 3^rd Plaintiff as the attorney for the 1^st Plaintiff to execute the Shares Charge and take such other steps and do such other things contemplated by the Shares Charge, (ii) a power of attorney dated the same date signed by the 2^nd Plaintiff before the same Notary Public in identical terms as the one executed by the 1^st Plaintiff, (iii) an irrevocable proxy and power of attorney dated 6 December 1996 executed by the 1^st Plaintiff in favour of CMB  to confer authority on CMB as his attorney and proxy to vote the shares in Chinaup in the form annexed to the Shares Charge, and (iv) another irrevocable proxy and power of attorney dated the same date and executed by the 2^nd Plaintiff in the same form and upon the same terms as (iii).  Both of these irrevocable proxy and power of attorney recited that

“the Shares have been charged to the Bank by a Share Charge dated 6^th December 1996 …and this Proxy and Power of Attorney is given by way of security and shall remain irrevocable for as long as the Share Charge remain in force.”

22.I gave leave to the relevant Defendants to file and serve this affirmation and adjourned the hearing to enable the Plaintiffs to file evidence in reply.  The Plaintiffs duly filed an affirmation of the 3^rd Plaintiff.  The 3^rd Plaintiff deposed to having contacted the 1^st and 2^nd Plaintiffs before making his affirmation.  The net effect of this evidence is that none of them could locate either the original or a copy of these documents, and their “collective position” is that they “cannot recall the circumstances leading to the signing of the said documents in question”.  Whilst not admitting the authenticity of the documents, they have not denied executing them.

23.In addition to the above, Mr Chan pointed out that the execution of the Shares Charge was a condition precedent to the grant of a loan, and as a matter of commercial reality, it is inconceivable for the 1^st and 2^nd Plaintiffs not to have been aware of the need for the execution of the Share Charge.  There were also two supplemental agreements signed by the 1^st and 2^nd Plaintiffs in which the execution of the Shares Charge was recited.  This again shows that the 1^st and 2^nd Plaintiffs must have known of and approved the execution of the Shares Charge on their bahalf.

24.Mr Chan did not invite me to disbelieve the evidence filed on behalf of the Plaintiffs.  He argued that it did not avail the Plaintiffs to hide behind collective inability to remember as it is trite that a party who makes an ex parte application is under a duty to disclose not only all material facts he knew, but also to make reasonable inquiries and to disclose any material fact or matter which he would have known, had he made all the inquiries which should reasonably have been made prior to the application, see Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350.

25.The difficulty with this submission is that if one proceeds from the premise that the Plaintiffs have no recollection of having executed the powers of attorney, it is not readily apparent that the Court can properly condemn them for their failure to make inquiries; further, if one accepts their assertion that they are unable to locate any copy of the relevant documents, there is no evidence of what it is that the Plaintiffs would have been able to unearth had they made reasonable inquiries.  I do not, therefore, consider that the argument of failure to make reasonable enquiries advances the case of the relevant Defendants.

26.I would make two further points.  As pointed out by Toulson J in MRG (Japan) Ltd v Engelhard Metals Japan [2004] 1 Lloyd’s Rep 731 at 734 [25], materiality depends in every case on the nature of the application and the matters relevant to be known by the judge when hearing it.  Thus, even though the principle requiring full and frank disclosure is the same in the case of an application for the grant of a Mareva injunction or an Anton Piller order as in the case of an application for leave to serve a writ out of the jurisdiction, the context and thus the focus of inquiry is different.  In an application for permission to serve out of the jurisdiction, the Court is concerned with whether it should assume jurisdiction over a dispute.  As I mentioned above, the Court is not concerned with the merits of the case, save that it has to be satisfied that there are serious issues to be tried.  Facts which only go to the strength or weakness of a party’s case do not assume the same significance as in applications for Mareva injunction or Anton Piller orders, see MRG at [26]-[36].  Secondly, in Ellinger v Guinness, Mahon & Co [1939] 4 All ER 16, Morton J declined to set aside an ex parte  order for leave to serve a writ out of the jurisdiction obtained on a material non-disclosure but without any intention to deceive, stating:

“In the absence of any attempt to deceive the court I do not think it would be right for a judge to take this course.  The only result would be to put the applicant to the expense of making a further application under R.S.C. Ord. 11, r.1, which would be bound to succeed.”

This case was cited in Siy Ramon & another v BPI International Finance Ltd [1987] 3 HKC 317 where Liu J indicated that if he were to hold in favour of the plaintiffs, he would consider himself so guided in not discharging the orders under consideration.

27.In the present case, the evidence as to the existence of the powers of attorney goes to the merits of the case, rather than the question of whether the Court should assume jurisdiction.  The relevant Defendants do not suggest that the failure is deliberate.  In these circumstances, there would in any event be reasons for not acceding to the application to discharge even if there has been a failure to make disclosure of matters which the Plaintiffs ought reasonably to have known on inquiry.

Are there serious issues to be tried

28.I turn to the other grounds advanced by Mr Chan.  His main submission was that the Plaintiffs do not have a good arguable case on illegality or want of authority.  I should interpolate here to record that in his opening, Mr Chan proceeded on the basis that the Plaintiffs were required to show a good arguable case on these issues; but accepted in his reply that “good arguable case” is only the degree of proof required to show that the case falls within one of the sub-paragraphs of Order 11 rule 1; and that as to the merits, the Plaintiffs are only required to show that there are serious issues to be tried.

29.The position of the 4^th Defendant and that of the 6^th and 7^th Defendants is different.  It would be convenient to consider them separately.

The 6^th and 7^th Defendants

30.Mr Ng indicated that in so far as the 6^th and 7^th Defendants are concerned, the Plaintiffs relied on Order 11 rule 1(c), i.e. that they are necessary or proper parties in the Plaintiffs’ claim against CMB for setting aside the Shares Charge.

31.Since the validity of the appointment of 6^th and 7^th Defendants as directors of Chinaup depend on the validity of the Shares Charge, it is readily apparent that the 6^th and 7^th Defendants are indeed necessary or proper parties to the action, provided that the Plaintiffs’ case on illegality or lack of authority is sustainable.

32.Mr Chan does not challenge the above proposition.  Instead, he sought to demonstrate that the Plaintiffs do not have a case on illegality or want of authority.  Upon his acceptance that the test is whether there is a serious issue to be tried, the threshold for him to succeed is high.  It would, it seems to me, be necessary for the relevant Defendants to demonstrate that the Amended Statement of Claim ought to be struck out against the relevant Defendants as disclosing no reasonable cause of action, or is frivolous or vexatious or that it may prejudice, embarrass or delay the fair trial of the action, or is otherwise an abuse of the process of the Court.

33.On the question of want of authority, I am satisfied notwithstanding the high threshold, that the relevant Defendants have shown that there is no serious issue to be tried.  The evidence that the 3^rd Plaintiff did have the authority of the 1^st and 2^nd Plaintiffs in executing the relevant documents is overwhelming.  I have already summarized that evidence in the section dealing with the challenge on the ground of material non-disclosure.  To recap, there are powers of attorney executed by the 1^st and 2^nd Plaintiffs before a notary public in Los Angeles authorizing the 3^rd Plaintiff to execute various documents including the Shares Charge.  The Plaintiffs do not deny having executed them.  Mr Chan also pointed to the fact that the execution of the Shares Charge was a condition precedent to the grant of the loans, such that the 1^st and 2^nd Plaintiffs, being directors of the company who enjoyed the benefit of the loan, i.e. Chinaup, could not have been unaware of the execution of the same.  There were also two supplemental agreements extending time for repayment of the loan which were executed by the Plaintiffs, where the execution of the Shares Charge was recited.  There is, on the other hand, not a scintilla of evidence from the Plaintiffs to support the allegation of want of authority.  There was not even an affidavit from the Plaintiffs verifying the contents of the Statement of Claim.

34.The issue of illegality is less straightforward.  Mr Chan’s first submission is that even on the Plaintiffs’ own case, part of the money advanced by the CMB was for general working capital, and would thus fall outside the pleaded case of illegality.  He relied on clause 23.2 of the November 1996 Agreement which provides:

“If any provision of a Financial Document is or subsequently becomes void, unenforceable or illegal, that shall not affect the validity, enforceability or illegality of the other provisions of the Finance document or of the provisions of any other Finance Document.”

35.The illegality alleged by the Plaintiffs relates to the object and purpose of the US$35 million facility (see paragraph 22 of the Statement of Claim).  If illegality exists and would otherwise vitiate the contract, I doubt whether provision such as clause 23.2 which is directed at severance of unenforceable provision can cure the illegality.  Questions of severability are often difficult (per Lord Brightman in Carney v Herbert [1985] AC 301at 309).  In Sadler v Imperial Life Assuance Co of Canada [1988] IRLR 388 at 391-392 and Marshall v NM Financial Management Ltd [1995] 1 WLR 1461 at 1466, the courts laid down certain guides on how the severability test can be applied.  These are (1) The unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains – referred to as the “blue pencil” test.  (2) The remaining terms continue to be supported by adequate consideration.  (3) The removal of the unenforceable provision does not so change the character of the contract that it becomes `not the sort of contract that the parties entered into at all’; and (4) The severance must be consistent with the public policy underlying the avoidance of the offending part.

36.I do not consider the circumstances relied on by the relevant Defendants satisfy those tests, or can be summarily dismissed on the ground of severability.  The pleaded illegality goes not to a provision in the November 1996 agreement which can be severed by the use of a blue pencil.  The objection is to the object and purpose of the agreement.

37.A second argument raised by Mr Chan on illegality is more fundamental.  The November 1996 agreement expressly provided (by clause 24.1) that the proper law of the agreement was Hong Kong law.  The same applies to the Shares Charge: see clause 24.1.  Mr Chan submitted that since the proper law of the contract in question is Hong Kong law, the contract would only be invalid if and insofar as the performance of it was unlawful by the law of the country where the contract was to be performed.  He relied on the judgment of Cheung J in Mobil Oil Hong Kong Ltd v Or Wing Ching [2005] HKEC 367 at para. 200, espousing a principle established in the case called Ralli Brothers v Compania Sota y Aznar [1920] 2 KB 287; see also Dicey & Morris, The Conflict of Laws, 14^th ed., vol. 2 para. 32-144.  Mr Chan further argued that there was nothing in the Amended Statement of Claim which pleaded that the November 1996 Agreement or the Shares Charge required any act to be performed in the PRC which was illegal under PRC laws.  In addition, Mr Chan relied on two judgments of the Guangdong High People’s Court (one in 2004 and the other in 2005).  In appears from these judgments that the 1^st and 2^nd Plaintiffs were defendants in proceedings commenced by CMB and some sort of illegality defence was raised.  Mr Chan submitted that the same illegality defence was raised in the latter case and has been rejected by the Guangdong Higher People’s Court in the judgment delivered in 2005.  He submitted that the Plaintiffs are, by the present proceedings, embarking upon a collateral attack of a foreign judgment.  Such conduct, it is said, amounts to an abuse of the process of the Court.

38.In his submission, Mr Ng relied on an opinion of a lawyer of the China Law Office dated 10 May 2005, and submitted that there is sufficient evidence of foreign law.

39.My task on these applications is to decide whether there are serious issues to be tried.  Mr Chan’s proposition, which sought to rely on the absence of a plea as to the place of performance is, with respect, too narrow.  At common law, a contract is also void for being contrary to public policy if it is apt to jeopardize the friendly relations between the state and any other government which the country is at peace: see Dicey, Morris & Collins, para. 32-239.  In Foster v Driscoll [1929] 1 KB 470 at p. 521, Sankey LJ stated the principle as follows:

“An English contract should and will be held invalid on account of illegality if the real object and intention of the parties necessitates them joining in an endeavour to perform in a foreign and friendly country some act which is illegal by the law of such country notwithstanding the fact that there may be, in a certain event, alternative modes or places of performance which permit the contract to be performed legally.”

See also Toprak v Finagrain [1979] 2 Lloyd’s Rep 98 at 106-7 per Robert Goff J.

40.Although for the purpose of our conflict of laws principles, the laws of the PRC are regarded as foreign law, it would seem to me that this principle of public policy must apply to our relationship with our motherland.  Accepting Sankey LJ’s dictum to represent the law of Hong Kong, I am not prepared to hold that the Amended Statement of Claim is demurrable on this ground.

41.This leaves the argument on abusive collateral challenge.  The principle is sated by Lord Diplock in Hunter v Chief Constable of the West Midlands Police [1982] AC 529 at 541B-C as follows:

“The abuse of process which the instant case exemplifies is the initiation of proceedings in a court of justice for the purpose of mounting a collateral attack upon a final decision against the intending plaintiff which has been made by another court of competent jurisdiction in previous proceedings in which the intending plaintiff had a full opportunity of contesting the decision in the court by which it was made.”

42.As Stone J observed in China North Industries Invesstment Ltd v Ronald Chum [2006] HKEC 731, this principle has been recognized and applied in Hong Kong in widely different circumstances, commenting that it appears to be solidly arguable that it is an abuse of process for a party to raise in subsequent Hong Kong proceedings subject matter that was, or could have been raised, in earlier proceedings.  Most of the cases were concerned with an attempt to re-litigate an issue within the same jurisdiction.  China North was a case which involved an attempt to re-litigate issues which have been extensively canvassed in a foreign jurisdiction (the High Court of Bermuda).  The question arose also in the context of a summons to set aside leave to serve the writ out of jurisdiction.  The Court having reviewed the issues canvassed in the Bermudan Court and the authorities on abusive collateral attack, came to the conclusion that there was a danger that the administration of justice would be brought into disrepute by permitting a party to continue with a claim which has the effect of re-litigating a cause which in substance has already been lost in another court of competent jurisdiction.

43.Mr Ng has not really been able to answer the point on abusive collateral challenge.  He made a general assertion of fraud in the conduct of the proceedings in the Guangdong court, apparently on the basis that the Guangdong court was not aware of the change in membership of Chinaup.  I do not see how this could be an answer to the point when the 1^st and 2^nd Plaintiffs were themselves parties to the proceedings.  The issue which is now sought to be raised by the Plaintiffs is one of illegality under PRC laws.  One would have thought that the proper tribunal to resolve that issue is the court in the PRC and having litigated or having had the chance to litigate that issue in the PRC, it would seem to me to be abuse of the process of the Court for the 1^st and 2^nd Plaintiffs to commence the present proceedings.

44.In Tsang Chin Keung v Employees Compensation Assistance Fund Board (No. 2) [2003] 1 HKC 499, Rogers VP cautioned that the jurisdiction of the court to prevent the continuation of civil proceedings on the grounds of abuse of process must be exercised with extreme caution.  In the present case, the 1^st and 2^nd Plaintiffs have had the opportunity to participate in two sets of proceedings in Guangdong commenced by CMB in respect of the loan agreements in question.  It is apparent from the judgment of the Higher People’s Court of Guangdong in 2005 that the 1^st and 2^nd Plaintiff have raised the defence that the object of the agreement was to evade PRC exchange control laws and that such defence was rejected by the Guangdong Court.  In my judgment, the present proceeding constitutes an attempt by the 1^st and 2^nd Plaintiffs to raise a collateral challenge to the findings of the Guangdong court and would amount to an abuse of process which this Court should prevent.  I shall consider how the Court can prevent abuse after dealing with the remaining issue of fraud.

45.The 3^rd Plaintiff is, however, in a different position.  He was not a party to either set of the Guangdong proceedings.  No reason has been advanced before me as to why he should have been.  His attempt by these proceedings to set aside the Shares Charge and the subsequent transfer of shares, in particular, the 2,000 shares he previously held in Chinaup, cannot be termed an abuse of the process of the Court.

Allegation of fraud

46.As against all the relevant Defendants, the Plaintiffs assert a case of fraud in paragraph 33 of the Amended Statement of Claim.  I have summarized the pleading in paragraphs 14 and 15 above.  The fraud is alleged to have led to loss and damage suffered by the Plaintiffs.  This is pleaded in paragraph 35 which reads:

“Further and/or alternatively, without prejudice to the aforesaid, by reason of the matters pleaded in paragraph 33 hereof, the Plaintiffs have been defrauded of their right (whether in its own name or through Chinaup) to insist, enforce or otherwise cause Golden Pebble to declare such appropriate dividend to be paid out to, inter alia, Chinaup and the Plaintiffs have suffered loss and/or damage.

Particulars of Loss

Pending discovery and/or interrogatories, the Plaintiffs are unable to provide particulars of loss.”

47.There are, as I see it, two major problems with the case as presently pleaded.  The first is that the allegation in paragraph 35 that it was the Plaintiffs’ right to insist, enforce or otherwise cause Golden Pebble to declare dividend is simply unsustainable.  The Plaintiffs do not in law have any right to insist or cause Golden Pebble to declare dividend.  Leaving aside whether it is possible to overcome the doctrine of no reflective loss (see Johnson v Gore Wood [2002] 2 AC 1), the Plaintiffs are not the shareholders of Golden Pebble; they are not even shareholders of Chinaup.  Until and unless the Shares Charge and the transfer of shares can be set aside and they can be reconstituted as shareholders of Chinaup, they are in no position to cause or demand the payment of dividend by Golden Pebble.

48.The second major problem with the claim is that the pleadings wholly failed to plead and particularize any overt act or conduct on the part of any of the three relevant Defendants.  It is trite that allegations of fraud should not be lightly made, and if made, should be supported with utmost particularity: Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & Co Ltd [1994] 2 HKC 264 at 270B-C.  Paragraph 33 of the Amended Statement of Claim blandly asserts that there was a scheme designed by CMB “or” CMB together with the 4^th and 6^th and/or 7^th Defendants to defraud the Plaintiffs.  The use of the disjunctive in such plea is embarrassing.  It suggests that the Plaintiffs are not clear as to whether any of the relevant Defendants has taken part in the alleged fraud.  This is compounded by the absence of any averment in the particulars given of any overt act or conduct on the part of any of the relevant Defendants.  In my judgment, the plea of fraud should not be allowed in this form to proceed against these relevant Defendants.

Orders

49.The result, in light of my conclusions that the plea of want of authority is unsustainable and that the Court should not allow the 1^st and 2^nd Plaintiffs to proceed with the plea of illegality, is that I would order the leave to serve the writ to be set aside.  I do so notwithstanding my conclusion that the 3^rd Plaintiff’s commencement of proceedings cannot be considered an abuse.  This is because the present writ is one in which all three plaintiffs are joined.  The order I make is to be without prejudice to the 3^rd Plaintiff, if so advised, to issue a writ on his own and to obtain leave to serve that writ out of the jurisdiction.

50.Accordingly, I made an order in terms of the two summonses.  I make an order nisi that the costs of the summonses be to the relevant Defendants, to be taxed if not agreed.  Provisionally, I am minded to make an order that the costs of the adjournment reserved at the hearing on 13 December 2006 be to the Plaintiffs.  This is also an order nisi.

Mr Steve Ng, of Messrs Ng & Shum, for the Plaintiffs

Mr Warren Chan, SC and Mr Liu Man Kin, instructed by Messrs Paul, Hastings, Janofsky & Walker, for the 4^th, 6^th and 7^th Defendants