Pacific Electric Wire & Cable Co Ltd v. Texan Management Ltd and Others

CACV 369/2006, CACV 370/2006 AND CACV 371/2006

CACV 369/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 369 of 2006

(on appeal from HCA NO. 2203 of 2004)

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BETWEEN

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CACV 370/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 370 of 2006

(on appeal from HCA NO. 2746 of 2004)

______________________

BETWEEN

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CACV 371/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 371 of 2006

(on appeal from HCA NO. 2763 of 2004)

______________________

BETWEEN

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Before : Hon Rogers VP and Le Pichon JA in Court

Date of Hearing : 17 July 2007

Date of Handing Down Judgment: 31 July 2007

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J U D G M E N T

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Hon Rogers VP:

1.These three appeals were heard together.  The actions involve similar allegations against the defendants.  The appeals were from orders of Mr Recorder A Chan SC following a judgment dated 29 September 2006.  By those orders the recorder had set aside orders for service outside the jurisdiction of the writs against Mr Hu Hung Chiu and his wife Mrs Hu Sun Mar Li and he also dismissed all three actions against those defendants.  At the conclusion of the hearing of this appeal, judgment was reserved.

Background

2.These three actions have been referred to as the PacMos Action, the Shouson Hill Action and the South Horizons Action.

3.The plaintiff is incorporated in Taiwan and until early 2004 was listed on the Taiwan stock exchange.  Mr Hu had in the period between 1978 and October 1999 worked for the plaintiff and he had been, in his time, vice general manager, chief financial officer, a director, executive vice general manager, vice general manager and financial officer.  It is the plaintiff’s case that when Mr Hu controlled the plaintiff’s financial and overseas investments he took advantage of his position and power to divert and use for his own benefit substantial assets of the company.  As a result of a series of manoeuvres the plaintiff’s funds and financial backing were used to make unauthorised investments in Hong Kong in particular the acquisition of more than 224 million shares in PacMos Technologies Holdings Ltd which was a Hong Kong listed company.  Those were never accounted for to the plaintiff.

4.In the South Horizons Action it is said that Mr Hu, together with others, has arranged the purchase of the East and West Blocks of South Horizons Commercial Centre by using funds belonging to the plaintiff and funds borrowed on the plaintiff’s credit.  The purchase was effected in 1992 and 1993.  There was an initial deposit of $420 million with external financing of $700 million.  Although the loan documentation stated that the beneficial owner of the various acquisition vehicles which were used was the plaintiff, the acquisition has never been reported in the plaintiff’s accounts.  Given the fact that Mr Hu was the Chief Financial Officer of the plaintiff it is not difficult to discern the plaintiff’s cause for complaint.  In the action the plaintiff not only seeks to recover the remaining parts of the South Horizons Commercial Centre which have not been sold but seeks an account of the proceeds of sale of that part which has been sold and also of the monies which have been received in rent.  Mrs Hu is a defendant in the action.  She was joined because she was a director of PCL Holdings Ltd, formerly known as Pacific Capital (Holdings) Ltd, which is the holding company of the property owning companies which were used to hold the property.

5.The Shouson Hill Action arose because in 1997 steps had been taken to sell the West Block of the South Horizons Commercial Centre but that sale fell through.  The deposit of $180 million was forfeited and as part of the settlement of the claim against the purchaser 4 houses in Shouson Hill were conveyed to the corporate defendants in that action.

6.Hardly surprisingly, Mr Hu is now the subject of a prosecution in Taiwan.  Although these actions were commenced in 2004 it was not considered necessary immediately to have the proceedings served on Mr and Mrs Hu.  However in May 2005 concern arose because it seemed that Mr Hu was about to be released on bail.  There was grave concern that he might abscond.  In those circumstances it was considered appropriate to apply to serve the writs in the three actions out of the jurisdiction.  Naturally, that application had to be made ex parte.  Application was also made to serve Mrs Hu in respect of the South Horizons Action but that was heard slightly later.

7.The applications to set aside the orders for service were challenged by both Mr and Mrs Hu.  On Mr Hu’s behalf it was said that there had been a failure to make full disclosure because it had not been revealed that civil proceedings ancillary to the criminal proceedings had been filed against Mr Hu in Taiwan in the month before the application had been made.  On that basis it was said that there was material non-disclosure.

8.That matter, of course, only applied to Mr Hu.  Both Mr and Mrs Hu relied on two other matters: first that Hong Kong was not the forum conveniens for trial of the actions and second that there had been ineffective personal service of the proceedings.  Mrs Hu also challenged the order for service of the proceedings on the basis that there was no serious issue to be tried against her.

9.There was no challenge, in this court, to the holding that the existence of the ancillary civil proceedings in Taiwan should have been revealed on the application for service outside the jurisdiction.  The judge appears to have taken a stringent view of the plaintiff’s legal advisers’ failure to disclose those proceedings.  I, for my part, can understand more readily the fact that a mistake in this regard might well be made.  The procedure of ancillary civil proceedings to a criminal prosecution is a procedure which is unknown in Hong Kong and, therefore, would not readily occur to those preparing the material in Hong Kong.  Likewise, the need to reveal the existence of those ancillary civil proceedings may not have been readily apparent to those advising the plaintiff in Taiwan.  Nevertheless, it was a material matter which should have been disclosed and, hence, the order for service outside the jurisdiction fell to be discharged.  What is relevant is what should happen next.

10.The extreme line which was argued, at one stage at any rate, in this court and appeared to find favour with the recorder was that the plaintiff should not be permitted to make any renewed application.  Hence the recorder made the order that the actions should be dismissed.  The recorder said in paragraph 56 of his judgment:

“	At the other end, where the nondisclosure is deliberate, the court normally should not entertain a fresh application so that those who have abused the process of the court would be punished.”

11.I do not, in any way, wish to diminish the importance of the rule that there must be the utmost good faith in respect of any ex parte application.  The case which is often referred to in this regard is The King v The General Commissioners for the purposes of the Income Tax Acts for the District of Kensington ex parte Princess Edmund de Polignac [1917] 1 KB 486.  Lord Cozens-Hardy MR referred to the rule that was strictly applied in relation to applications for injunctions.  At page 504 he referred to the case of Dalglish v Jarvie 2 Mac. & G. 231; he summarised what was said in that case:

“	…if an applicant does not act with uberrima fides and put every material fact before the Court it will not grant him an injunction, even though there might be facts upon which the injunction might be granted, but that he must come again on a fresh application.  Then there is a passage in Lord Langdale’s judgment, 2 Mac. & G. 241 at 243, which is referred to in the head-note.  It is this:
	“	There is, therefore, a question of law, whether having regard to the facts thus appearing, the plaintiffs are entitled to the protection they ask; and there is also a question of practice, whether the facts stated in the answer being material to the determination of the question, and being within the knowledge of the plaintiffs by whom the case was brought forward, and who obtained an ex parte injunction upon their own statement, whether the omission of the statement of these facts in the bill does not constitute a reason why the ex parte injunction so obtained should be dissolved.” ”

12.Lord Cozens-Hardy then went on to consider the application of the principle in relation to cases other than injunctions.  On the following page he said:

“

Then it is said that that rule may be true in cases of injunctions where there is an immediate order granted, which order can be discharged, but that it has no reference at all to a case like a rule nisi for a writ of prohibition, which is nothing more than a notice to the other side that they may attend and explain the matters to the Court.  To so hold would, I think, be to narrow the general rule, which is certainly not limited to cases where an injunction has been granted.  It has been applied by this Court, and certainly by the Courts below, to an application for leave to serve a writ out of the jurisdiction.  If you make a statement which is false or conceal something which is relevant from the Court, the Court will discharge the order and say “You can come again if you like, but we will discharge this order, and we will apply the general rule of the Court to applications like this.”  There are many cases in which the same principle would apply.”

13.It appeared that the application of the rule in the case the court was dealing with caused a harsh result because there was a settled practice, or what was believed to be a settled practice, of the Crown Office, that there could not be a second application for a writ of prohibition.  The Court considered that might be the result in that particular case, but it was a consequence of the Crown Office practice.  What is clear from the 3 judgments in that case is that the rule was to prevent a litigant obtaining an advantage from the order that had been wrongly obtained, which is rather different from the object of punishing the person who obtained the order.  Warrington LJ put the matter at page 509:

“

It is perfectly well settled that a person who makes an ex parte application to the Court - that is to say, in the absence of the person who will be affected by that which the Court is asked to do - is under an obligation to the Court to make the fullest possible disclosure of all material facts within his knowledge, and if he does not make that fullest possible disclosure, then he cannot obtain any advantage from the proceedings, and he will be deprived of any advantage he may have already obtained by means of the order which has thus wrongly been obtained by him.”

14.It was thus in the case of Wo Fung Paper Making Factory Ltd v Sappi Kraft (Pty) Ltd [1988] 2 HKLR 346 that when dealing with the question of non-disclosure in an application for leave to serve outside the jurisdiction Hunter JA said at page 357 I:

“

I turn now to the two principles I conceive to be relevant, in relation to non-disclosure.  First the court’s power to discharge any order obtained ex-parte for material non-disclosure is salutary and necessary.  As one of the earlier cases shows, ex-parte Polignac [1917] 1 KB 486, it is there for the court’s own protection.  It is necessary to prevent its processes being abused.  Secondly, there is another equally significant principle in this jurisdiction.  This is to make sure that the court does not get itself in a position of what might be called “counter-abuse” : where this sort of point is regarded by litigants as “a very present help in trouble”; and where problems arise on the substance to resort to attack as the best method of defence.”

15.After referring to what had been said by Fuad VP in Citibank v Express Ship Management. Service [1987] HKLR 1184 and Macdougall J had said in the court below, he said at page 358 F:

“

I fear that there has been a failure in this case, in the court below, to concentrate upon the material facts, and to appreciate that disputed issues of facts simply go to the need for trial, and are of very very little value indeed in deciding whether a good arguable case has been made but.  Furthermore, it seems to me that the point has to be tested by looking at the substance.  That is why I am proposing to start with the question whether a good arguable case was shown at the inter-partes stage.  That is where I think you should start; not where judge started, and with respect where the argument started here, on the question of non-disclosure.”

16.Following what Hunter JA said in Wo Fung and the other distinguished judges said in ex parte Polignac, it seems to me that there is certainly no absolute bar to a renewed application for service of a writ outside the jurisdiction in cases where there has been nondisclosure of a material fact.  The court must protect its own process by preventing a party that has been at fault from obtaining an advantage.  It is clear that in cases of Mareva for injunctions and Anton Piller orders that consideration may entail the court refusing to reimpose an injunction.  The reason for that is that if an injunction is discharged but immediately reimposed, the advantage obtained when the original injunction was imposed, will be retained.  The rule has never been extended, however, as far as I am aware, to, for example, a court refusing to grant a final injunction even if an interlocutory injunction has been discharged.

17.To punish a party by preventing it from ever obtaining an order for service outside the jurisdiction on the basis that there has been a non-disclosure of a material fact on the first application for service outside the jurisdiction, would be a punishment and not a matter of protection of the court’s own process.  This case might be considered an extreme example of why it would wrong to adopt such a rule.  A litigant might be deprived of the opportunity of recovery in a case where it is said that it has been defrauded of US$450,754,409 and HK$1,801,508,060.  On any footing that would be a punishment which even Draco might have considered excessive for a transgression of the requirement to make full disclosure.  It is not for the court to deprive parties of their property and meet out such punishments.  If the court were to proceed on the footing that it was imposing a punishment, questions would arise as to the scale of punishments and as to who should benefit from them.

18.Finally on this aspect, in so far as it has been suggested in the first instance case of Dallah Albaraka (Ireland) Ltd v Symphony Gems NV & others [2005] 3 HKLRD 703 at paragraph 34, relied upon by Mr Whitehead SC on behalf of Mr Hu, that the court would not entertain a second application to serve proceedings outside the jurisdiction if the first order for service were set aside, the observations made in that case were not grounded on any authority or analysis of the underlying principles and were, indeed, contrary to what was said by this court in the Wo Fung case.

19.Whilst, therefore, the original orders fall to be set aside and the plaintiff would have to bear the costs of the application to set them aside and all the costs thrown away, 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.

20.In this case there can be no doubt that the actions have been properly brought against the various companies which have held and still hold the assets and properties said to have been bought with the funds and financial assistance of the plaintiff.  Since Mr Hu was a major party, if not the mastermind, behind the alleged frauds it is clear to me that he must be a necessary and proper party to these proceedings and, furthermore, that there must be claims in respect of the money which he has obtained and has caused to be used directly and indirectly in the purchase and acquisition of the properties and shares.  The plaintiff would be entitled to accounts both of that money and of rents and dividends received and of the proceeds of sale of the properties and shares that have been sold and of the proceeds of mortgages at the properties which had been mortgaged.

21.Quite apart from the fact that Mr Koo Wellington Li-Hsiung, a partner at in the firm of Formosa Transnational Attorneys at Law, the firm retained by the plaintiff in Taiwan, said in the course of oral evidence that the plaintiff had been unable to find any assets of Mr Hu in Taiwan, it must be more than a mere matter of conjecture, that the plaintiff would be entitled to substantial relief as regards tracing and recovering assets in Hong Kong.  At this stage nothing would be known.  But since the shares and properties which were purchased with the plaintiff’s money and financial assistance are located in Hong Kong, common sense and logic dictate that there must be a considerable amount of bank and other documentation which would lead to the present location assets derived therefrom.

22.One of the major points taken on behalf of the defendants was that there are in the existence civil proceedings ancillary to the criminal proceedings in Taiwan.  It was the plaintiff’s case that these were commenced shortly before the application to serve outside the jurisdiction was made in Hong Kong.  It was said that they were commenced then in order to prevent any time bar acting.  On the defendant’s part it is said that, even when this matter was brought up, the plaintiff did not reveal the fact that the civil proceedings, which were ancillary to the criminal proceedings, could be commenced without payment of court fees whereas separate civil proceedings would require the payment of court fees.  When the amount of the court fees that the plaintiff would have been required to pay had it commenced separate civil proceedings in this case (this court was informed they were in the order of $60 million) is taken into consideration, particularly with the fact that it was the plaintiff’s evidence that they could locate no assets belonging to Mr Hu in Taiwan, I find it difficult to conceive how it could be said that the plaintiff’s chosen course was anything other than the most natural.  It would be absurd to suggest that the plaintiff should pay court fees of $60 million in order to bring civil proceedings in Taiwan when they had no immediate prospects of any recovery should they be successful in the action.

23.Much evidence and debate was focused on the nature of the civil proceedings which are ancillary to the criminal proceedings.  What does appear is that the evidence in the criminal proceedings in Taiwan is evidence in the ancillary civil proceedings and that findings of fact in the criminal proceedings are treated as findings of fact in the civil proceedings.  It is unnecessary, in my view, for this court to analyse in detail exactly the process of the ancillary civil proceedings.  It does seem that no further steps are taken in the civil proceedings until the evidence and argument in the criminal proceedings has been concluded.  Importantly, however, for the purposes of this case the risk of double jeopardy is avoided by the undertaking which has been offered by the plaintiff namely:

“	The Plaintiff will undertake to the court that it will not proceed with the Taiwanese civil proceedings nor seek judgment in Taiwan against Mr Hu for loss relating to the properties forming the subject matter of three Hong Kong actions, while the Hong Kong proceedings are on foot against Mr Hu.”

24.It was said that this undertaking could not be honoured by the plaintiff since it was out of their control to give such an undertaking.  If the plaintiff cannot honour such an undertaking then it would be open to the Mr Hu to make an appropriate application.  Since, however, the plaintiff is confident that it can give that undertaking and honour it, it seems to me that this court should accept it because, on the face of the matter, it would prevent there being any double jeopardy.

25.In relation to Mrs Hu the recorder considered that the case was so insubstantial against her that leave to serve outside the jurisdiction should not have been given.  In my view that cannot be right.  From 1992 until the issue of the writ Mrs Hu was a director of the holding company of the property holding companies which is a proper party to the South Horizons Action.  The property has been purchased with finance wrongfully obtained from the plaintiff.  Quite apart from the fact that that situation is continuing, it is no argument that the distinction between the company and its directors would absolve the directors from responsibility.

26.The recorder said that whilst a company could be imputed with the knowledge of its directors, the converse was not necessarily true.  That, however, overlooks reality and the very purpose and function of directors.  Directors must know where the finance for the assets of the company comes from.  They are the controlling mind of the company.  The directors are responsible for the accounts of the company.  The company can do nothing except under the guidance of the directors.  If a company or its wholly owned subsidiary has, indeed, acquired assets with “stolen” finance, it would take a strange and powerful case on behalf of a director to demonstrate that he or she were not cognizant thereof and an assisting party by reason of the directorship.  In my view, there must be every reason to bring proceedings against all directors of such a company.  Neither can a court blinker itself as regards Mrs Hu being Mr Hu’s wife.

27.There remains the question as to whether the documents which were served were validly served.  In respect of Mr Hu, this seems to me to be, in effect, a sterile and unnecessary argument at this stage.  Since the original order for service outside the jurisdiction has been set aside and that matter remains, it would, on the face of the matter require re-service of the documents in accordance with the order of this court.  In this case, there has already been a sufficient expenditure of costs and since leave to serve outside the jurisdiction is to be granted and Mr and Mrs Hu are represented by solicitors, it is to be hoped that a sensible course will be taken and service will be accepted on behalf of Mr Hu.  Should that hope prove to be in vain application should be made to the master for directions as to how service should be effected.  If the plaintiff is put to the trouble of making such an application it would be at liberty to serve notice on the solicitors who are at present representing Mr and Mrs Hu that such application is to be made and their attendance for the purpose of assisting the court could be requested.

28.In respect of Mrs Hu the order made by the master on 13 June 2005 was that leave was given to issue a concurrent amended writ of summons and serve the same on Mrs Hu at her home address or elsewhere in Taiwan.  There is no dispute that Mrs Hu did, indeed, receive the document in Taiwan.  The question of service of documents in private international law or is the matter of the lex fori: see the notes in the White Book 11/5/1.  In those circumstances the method of service is pre-eminently a procedural matter which would be governed by Hong Kong law.  There seems to have been considerable evidence in the court below as to service of the papers.  It may be that in certain circumstances Taiwan law would not recognize the service of the documents as being good service.  That, however, does not affect the question as to whether Hong Kong law as the lex fori considers the service to be good.

29.The recorder did not decide the matter in any detail.  In paragraph 54 of his judgment he said:

“	In this case, the Writs have been served on Hu and Mrs Hu in Taiwan by personal service.  I prefer the evidence of Hsieh, and if necessary, I would have held that in Taiwan, being a civil law jurisdiction, service of process should be made by court officials.”

30.As already indicated, there may be circumstances under Taiwan law where service may not be recognized but I do not consider that the evidence goes so far as to show that service of documents by personal service is illegal or something which this court should not countenance.  In my view the service of the court documents on Mrs Hu should stand.

31.I would, therefore, allow this appeal to the extent that the orders in respect of Mrs Hu should be set aside.  The orders dismissing the actions against Mr Hu should also be set aside and leave should be given to serve Mr Hu outside the jurisdiction in Taiwan.  In default of agreement between the parties the method of service to be directed by the master.  I would make an order nisi that the costs of this appeal should be to the plaintiff.

Hon Le Pichon JA:

32.I agree.

Mr Anthony Neoh SC & Ms Barbara Wong, instructed by Messrs W.K. To & Co., for the Plaintiff/Appellant

Mr Robert Whitehead SC & Mr Steven Kwan, instructed by Messrs Coudert Brothers, for the 8^th Defendant in CACV 369/2006, the 4^th Defendant in CACV 370/2006 and the 4^th & 21^st Defendants in CACV 371/2006/Respondents