Jose Miranda Da Costa Junior and Another v. Lorenzo Yih and Others

HCA 156/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 156 OF 2010

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REASONS FOR DECISION

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1.This was the hearing of a summons taken out by the 1^st defendant to strike out paragraphs 3 (a) to (e) of the prayer for relief in the amended statement of claim dated 3 February 2012. The application was made pursuant to Order 18, rule 19 (1) (a), (b) and (d) of the Rules of the High Court. At the conclusion of the hearing, the application was dismissed with costs. My reasons appear below.

Background Facts

2.A description of the nature of the action can be found in §§ 2 to 8 of a Decision in these proceedings handed down on 26 March 2013 in relation to the plaintiffs’ application for specific discovery. For ease of reference, they are reproduced below:

“2. The 1^st plaintiff is a Brazilian merchant engaged in the business of supplying high end gemstones and is the founder and owner of the 2nd plaintiff, a Brazilian company. This action arises from the 1^st plaintiff’s claim that in or around September 2003 he and the 1^st defendant orally agreed to jointly set up and operate in partnership a wholesale business of gemstones in Hong Kong through a Hong Kong company to be formed. The 1st plaintiff would manage and develop the business and its goodwill by making use of his expertise and experience and the 1^st defendant would provide financial and local support in Hong Kong including office premises and staff.

3. The 1^st defendant is the major beneficial owner, the Chairman and CEO of LJ International Inc (“LJI”), a NASDAQ listed company engaged in the manufacture and marketing of jewellery.

4. Pursuant to the agreement, the 3^rd defendant was incorporated in Hong Kong on 7 January 2004. Two shares were issued: one was issued to Li Fung Ying, Cam and the other to Wan Po Ming, Flora. They were employees of LJI and held the same on trust for the 1^st plaintiff and the 1^st defendant.

5. On 31 December 2006, the two issued shares in the 3^rd defendant were transferred to a BVI company beneficially owned by the 1^st defendant called Oceandrift Group Ltd (“Oceandrift”) and on 6 November 2008, Oceandrift transferred those shares to the 2^nd defendant. The 1^st plaintiff’s case is that those shares continued to be held on trust for the 1^st plaintiff and the 1^st defendant.

6. The 1^st plaintiff actively participated in the business of the 3^rd defendant from 2004 onwards until his exclusion from the 3^rd defendant’s office on 5 November 2009. The 1^st plaintiff gave instructions to staff who took orders from him and was treated as one of two bosses. He was also a director from August 2007 until 10 November 2009. He and the 1^st defendant were each paid a monthly shareholder’s bonus of $120,000 until December 2008 when the 3^rd defendant’s cash flow situation no longer permitted that.

7. At all material times the 1^st defendant controlled a company called Goldleaves Trading Ltd (“Goldleaves”) which had an office at Unit C, LG/F, Phase 3, Kaiser Estate, 18 Man Lok Street, Hunghom (“the premises”). The 3^rd defendant operated from the premises and staff of Goldleaves was seconded to and placed under the payroll of the 3^rd defendant. Rental for the use of the premises, office furniture and supplies were paid to a subsidiary of LJI at the request of the 1^st defendant.

8. It is the 1^st plaintiff’s case that on 5 November 2009, the 1^st defendant repudiated the agreement.  When the 1^st plaintiff returned from Shenzhen that day he found out that Mr Osorio Mendes Quintino Neto who had worked with the 1^st defendant for many years caused the 3^rd defendant’s office to close and compelled all staff to leave.  The 1^st plaintiff was thus excluded from the 3^rd defendant’s office.  He was also denied access to the 3^rd defendant’s computer system and was no longer able to access his e-mail accounts or the 3^rd defendant’s server.”

3.In a nutshell, the first plaintiff’s case is that in or about September 2003 he and the first defendant orally agreed that they would jointly set up and operate a business in gemstones in Hong Kong. That agreement was implemented through the medium of a Hong Kong company (being the third defendant) set up shortly thereafter.

4.On 5 November 2009, the 1^st plaintiff was wrongfully denied access to the 3^rd defendant's office and computer system and has since that date been wrongfully excluded from the business. Without mincing words, the nub of the 1^st plaintiff's case is that the 1^st defendant has wrongfully usurped and/or appropriated the entire business (including the 1^st plaintiff's half share) to the 1^st defendant’s own use and benefit and to the exclusion of the 1^st plaintiff.

5.It is the 1^st plaintiff's case that two shares in the 3^rd defendant had been issued, one to each of 2 employees of a company owned by the first defendant who held the same on trust for the 1^st plaintiff and the 1^st defendant. Those shares came to be vested in the second defendant, an entity wholly owned or controlled by the 1^st defendant. In those circumstances, those shares must be held upon similar trusts, whether by the 1^st and/ or 2^nd defendant(s).

The relief sought

6.The 1^st plaintiff sought declarations to the effect that

(1)  the 1^st defendant had wrongfully repudiated the agreement on or about 5 November 2009; that such wrongful repudiation had been accepted by the 1^st plaintiff who had thereby lawfully terminated the agreement; that the plaintiff is not liable for anything done by the 1^st defendant respect of the affairs of the 3^rd defendant after 5 November 2009; and

(2)  prior to the 1^st defendant’s wrongful repudiation of the agreement and the plaintiff's acceptance of the same, the 1^st plaintiff and the 1^st defendant were the only equal beneficial owners of the entire shareholding in the 3^rd defendant and that the 2^nd defendant at all material times held one of the two issued shares in the 3^rd defendant on trust for the 1^st plaintiff.

7.In paragraph (3) of the prayer, the 1^st plaintiff also sought the following orders which form the subject matter of the present strike out application:

“(a) An Order that an account be taken of the following (as at 5 November 2009 or at such other appropriate date as this Court may fix):

i.   all the assets and properties (both tangible and intangible) of the 3^rd defendant;

ii.   the fair value of the 1^st plaintiff's 50% shareholding or interest in the third defendant.

(b)  All necessary or consequential directions that are necessary for the purpose of taking the accounts ordered under (3) (a) above.

(c)  An Order that the 1^st defendant to pay to the 1^st plaintiff an amount equal to the fair value of the 1^st plaintiff's 50% shareholding or interest in the 3^rd defendant is found upon the taking of the account ordered under (3) (a) above.

(d)   An Order that the 1^st defendant to pay to the 1^st plaintiff damages for the 1^st defendant is aforesaid wrongful repudiation of the agreement.

(e)  An Order that the 1^st defendant to indemnify the 1^st plaintiff for any and all loss and damage that may be suffered by the 1^st plaintiff as a result of any conduct (including axing emissions) committed by the 1^st defendant in respect of the affairs and/or business of the 3^rd defendant and/or any activities undertaken in the name of the 3^rd defendant on or after 5 November 2009.”

The issue

8.Mr Manzoni SC who appeared for the 1^st defendant submitted that the relief sought in paragraph (3) of the Prayer is unsustainable as a matter of law.

9.That the present application should be made some three and a half years after the commencement of proceedings is surprising to say the least when counsel had been involved from the outset. One would have thought that it is hardly a matter that could have escaped attention for so long, certainly not after the 1^st defendant’s lawyers have filed 4 listing questionnaires and attended 3 case management conferences. Until the letter from the 1^st defendant’s solicitors sent shortly before issuance of the present summons, no suggestion of a strike out had ever been canvassed.

10.Be that as it may, it was said that because the 1^st plaintiff’s claim is one for breach of contract, such a breach (if sustained at trial) would sound in damages only and there would be no question of any account being ordered. Mr Manzoni took particular exception to paragraph 11 of the amended statement of claim. That paragraph reads:

“The 1^st Plaintiff and the 1^st Defendant at all material times remained and still remain the equal beneficial owners of the entire shareholding in the 3^rd Defendant in that:

1. the 1^st Plaintiff repeats paragraph 10(2) above;

2. during the period between 31 December 2006 and 5 November 2008, the only 2 issued shares in the 3^rd Defendant were transferred to Oceandrift Group Limited(a BVI company which was at all material times beneficially owned and controlled by the 1^st Defendant), which held the same on trust in favour of the 1^st Plaintiff and the 1^st Defendant;

3.   on 6 November 2008, the only 2 issued shares of the 3^rd Defendant were transferred by Oceandrift Group Limited to the 2^nd Defendant , who has since then been holding the same on trust for the 1^st Plaintiff and the 1^st Defendant.”

11.Mr Manzoni submitted that while the 1^st plaintiff has renounced any further participation in the business, he has not renounced ownership as such and in fact is positively asserting ownership to a half share in the business. The objection appeared to be grounded on the proposition that if the 1^st plaintiff is still asserting his proprietary right to one of the two issued shares in the 3^rd defendant (that being an accrued right), such a proprietary right does not include a right to payment by the 1^st defendant for the value of that share.

12.It was said that the 1^st plaintiff was effectively seeking double recovery by continuing to assert entitlement to a share in the 3^rd defendant and, at the same time, seeking payment from the 1^st defendant for the value of that share. It was submitted that the present action for payment by the 1^st defendant of the fair value of the 1^st plaintiff’s 50% holding in the 3^rd defendant “smacks of a s 168A action via the back door” which was impermissible.

13.§ 11 of the amended statement of claim explains why the 1^st plaintiff has a present right to one-half of the business notwithstanding the fact that since the 3^rd defendant’s incorporation none of its issued shares has been registered in the name of the 1^st plaintiff. When § 11 is read in the light of the prayer for relief, it becomes clear that all the 1^st plaintiff is saying is that until he obtains his declaratory relief as well as relief under paragraph (3) of the prayer that would compensate him for his loss, he remains the owner of a half share in the business. That follows from the declaratory relief sought. Nowhere does the 1^st plaintiff ask for one of the shares in the 3^rd defendant to be transferred to him.

14.It would appear that the application was prompted by and had its genesis in chance remarks made by G. Lam J in exchanges between bench and bar in the context of a wholly different application by the 3^rd defendant for amendment of the counterclaim that took place in May 2013. That is clear from the following extract of the transcript:

“COURT: The relief pleaded is a little strange. Why do you need an account? You are not asserting equitable rights. You are simply saying there is a breach of the agreement.

MS WONG: Yes.

COURT: You’re not saying you are a shareholder any more.

MS WONG: No.

COURT: And in fact in paragraph 3(d) you say you want damages for wrongful repudiation of the agreement. This is a pure contract claim, right, on that basis?

MS WONG: No, my Lord, it is not, because the primary remedy that we seek is a declaration that we were equal beneficial owners with Lorenzo of the entire shareholdings in D3.

COURT: Yes.

MS WONG: That’s our primary case.

COURT: But you are not asserting your beneficial interest any longer.

MS WONG: No, we do, because at paragraph 2 of the prayers we seek a declaration that the 2nd defendant at all material times held one of the two issued shares on trust for Miranda.

COURT: But only held, being the past tense. As I read your -- not your pleading, but as I read the pleading...

MS WONG: Well, we can see how that impression may arise, but that is certainly not the intention.

COURT: But, Ms Wong, if you assert your beneficial ownership, you get back your half-share. You don’t get an account. If you want to enforce your remedy as an owner, you have to get registered first and then sue under 168A or winding-up or whatever, or derivative action.

MS WONG: My Lord, I stand to be corrected, I appreciate that. We want an account of 50 per cent of the value of MGHK. That’s ultimately...

COURT: You don’t want the share any more.

MS WONG: No, we don’t want the share.

COURT: You want an account because you want to...

MS WONG: We want the value. We want...

COURT: Essentially, what it seems to me, really you want an assessment of damages...

MS WONG: Yes, my Lord.

COURT: ...representing 50 per cent of the value of the shareholding that you say has been denied to you.

MS WONG: My Lord, you are correct. I spoke in haste just now. We want 50 per cent of the value of the company as at 5 November 2009.

COURT: Yes.

MS WONG: The date on which the agreement was breached. My Lord, I stand to be corrected, your Lordship is right. We -- ultimately we want to get 50 per cent of that value at that date.

COURT: And this is simply a contractual claim.

MS WONG: It is, yes.

COURT: The normal remedy would be damages. So the account simply is a mechanism to calculate the damages.

MS WONG: To arrive at the value and therefore damages, yes. I apologise for confusing your Lordship.

COURT:    No, not at all, but just that it’s somewhat odd to seek an account in a normal contractual claim.  I can understand if you say “I want an assessment of damages and I want a split trial for damages to be assessed on the basis of taking a valuation of the 50 per cent shareholding in the company as at a particular date.”

MS WONG: My Lord, I think the intention of the drafter of this pleading is that because of the circumstances in which the partnership agreement was breached, the proper taking of an account is with -- it would be necessary for the court to assess the amount that is due to Miranda arising from his interest in the company.

COURT: Well, I certainly can understand that a calculation would be necessary. Whether or not legally speaking it’s an account is another matter. You’re not suing on the partnership.

MS WONG: No, we’re not.

COURT: And you are not, as I understand it, suing for your beneficial ownership. All right. I don’t think it matters very much for present purposes.

MS WONG: Not for present purposes.

COURT: I suppose an account may be apposite vis-à-vis the 2nd defendant because he’s a trustee, on your case.

MS WONG: Yes.” (Transcript pp. 25P – 27R)

15.When the extract is read in its entirety, it is plain that the remarks made by the judge do not support the 1^st defendant’s case. To the contrary, they explain the relief sought.

16.It should be mentioned that Mr West who acted for the 3^rd defendant made oral representations at the hearing when he had neither filed written submissions nor given notice that he intended to address the court. While the court indulged Mr West, it derived little assistance from his oral submissions which had obviously been made on the spur of the moment. The court was even asked to take the morning adjournment early to enable Mr West to find the authority he wished to cite. Practitioners should take note that such conduct is not to be condoned or encouraged, because it is unfair to the opposite party. In the event, Mr West had little (if anything) to add to what had been submitted by Mr Manzoni.

17.For the reasons stated above, the application to strike out was dismissed.

18.Upon dismissal of the 1^st defendant's application, Mr Manzoni made an immediate application for leave to appeal. Obviously, Mr Manzoni did not consider it necessary to know the Reasons for Decision before making his application.

19.I consider the 1^st defendant's case to be so misconceived and palpably unarguable that I had no hesitation in refusing leave.

Ms Elizabeth Cheng, instructed by Reed Smith Richards Butler, for the 1^st plaintiff

Mr Charles Manzoni SC & Mr Norman Nip, instructed by Laracy & Co, for the 1^st defendant

Mr Mark West of Kennedys, for the 3^rd defendant

Please refer to HCMP2696/2013 for the relevant appeal(s) to the Court of Appeal.