Velatel Global Communications Inc and Another v. Chinacomm Ltd and Others

HCA 1978/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1978 OF 2011

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Before: Hon Chow J in Chambers

Date of Hearing: 7 August 2014

Date of Judgment: 7 August 2014

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J U D G M E N T

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Nature of appeal

1.On 4 November 2013, the defendants took out a summons seeking an order that the plaintiffs do provide security for costs in favour of the defendants in the sum of HK$7.2 million, or such sum as may be fixed by the court, pursuant to Order 23, rule 1 of the Rules of the High Court or the former section 357 of the Companies Ordinance, Cap 32 (now repealed and replaced by section 905 of the Companies Ordinance, Cap 622).

2.On 28 May 2014, the defendants’ application came before Master S Kwang, who dismissed it with costs to the plaintiffs.

3.On 11 June 2014, the defendants lodged an appeal against the aforesaid decision of Master S Kwang. This is the hearing of the defendants’ appeal.

Background facts

4.This action has come before the court on a number of previous occasions.  The underlying facts are of some considerable complexity.  A summary of the background facts relevant to the Mareva injunction applications (more particularly described below) has been set out in the Decision of Au‑Yeung DHCJ (as Madam Justice Au‑Yeung then was) dated 26 October 2012 (“the Decision”) given in these proceedings.  I shall not attempt to summarise those facts in my own words, but am content to refer to and recite below paragraphs 3 to 22 of the Decision for the present purpose:

“3. This action is essentially a dispute between foreign investors (the Plaintiffs) and Mainland domestic entities (the Defendants) over a joint venture investment in D1 which is a Cayman Islands company. P1 is a United States listed company engaging in telecommunication business. It was formerly known as Mortlock Ventures Inc and ChinaTel Group Inc. P2 is a Hong Kong company. Colin Tay was and is president of P1 and authorized representative of the corporate director of P2. He was and is the person in control and ownership of P2. At all material times, he was the central figure in the Plaintiffs’ camp.

4. Qiu Ping [D6] was the central figure in the Defendants’ camp. D1 was used by D6 to D8 as a special purpose company for the implementation of the joint venture between Colin Tay and Qiu Ping’s camps. The relationship of the Defendants is tabulated as follows:

Defendant	Director/officer	Shareholders
D1 (Chinacomm)	D6, D7	D2 &D3 (51%)
D2 (company)	D7	D5 (nominee of D6-8)
D3(company)	Qiu Ping	D5 (nominee of D6-8)
D4 (Smart Channel)	D7	D1
D5 (person)
D6 (Qiu Ping)
D7 (Yuan Yi)
D8 (company) Licence holder	D6 as president; D7 as legal representative and director; D10 as director
D9 (company)	D10 as legal representative	D8 holds 60%
D10 (person)

5. The parties’ relationship originated from negotiations between Colin Tay and Qiu Ping to develop and operate 3.5 GHz spectrum wireless broadband services in 29 major cities in Mainland China (‘the Project’).  It culminated in an agreement, in broad terms, whereby Colin Tay’s camp was to purchase up to 49% equity interest in [D1] at a consideration of US$196 million and then have the shares of D1 floated.  The intention was for Colin Tay’s camp to provide, amongst others, financial resources, and D8 to provide the licences to operate wireless broadband network.

6. Anyway, the intention was for funds from D1 to flow to its wholly owned subsidiary, Smart Channel (D4), and then to Yunji, a Chinese wholly owned foreign invested enterprise (‘WOFIE’) engaging in telecommunication business.  The profits made by D8 (the licence holder) would be indirectly transferred to a WOFIE and further absorbed by Colin Tay’s camp (49%) and Qiu Ping’s camp (51%) through D1.  This indirect method of absorbing profits was used to get round the complicated legal restrictions against foreign investments in the telecommunications industry imposed by the Chinese government and to enable parties to achieve the listing of D1 on a stock exchange as agreed.

7. Initially there was a Build to Suit Agreement (‘BSA’) dated 1 November 2007 setting out the broad terms of the joint venture.  It was made between a company (‘Trussnet Delaware’) from Colin Tay’s camp and D8.  At that time, D8 held 2 licences issued by Ministry of Industry and Information Technology, namely,

(i)   a licence for 5 cities which would expire on 31 December 2008 (‘the 5 Cities Licence’); and

(ii)   a licence for 25 cities which would expire on 29 February 2008 (‘the 25 Cities Licence’). 

Of these, one city (Qingdao) overlapped with the 5 Cities.  Therefore, at the date of the BSA, D8 held licences covering a total of 29 cities in Mainland China.

8. The parties subsequently entered into various agreements to govern the joint venture and the subscription for the shares in D1:

(i)    TDFA: an addendum to the BSA called the framework agreement (‘TDFA’) dated 15 February 2008. It was made between Trussnet Delaware and D8.  The former was to subscribe for 49% equity of D1.

(ii)   TNFA: another framework agreement dated on 7 April 2008 between Trussnet Nevada and D8, to replace the TDFA.

(iii)  GSSA: a Subscription and Shareholders’ Agreement dated 23 May 2008 between Gulfstream Capital Partners Ltd (said to be 100% owned by P1) as investor, D2 and D3 as founders, D1 as the Company, D6 and D7 as guarantors and D8 and D9 as warrantors. 

(iv)  Supplementary Agreement: dated 17 November 2008 made between Trussnet Nevada and D8 to amend the GSSA.

(v)   TCPSSA: another Subscription and Shareholders’ Agreement dated 16 February 2009.  Save that P2 replaced Gulfstream, the other parties to this agreement were the same as those of the GSSA.

(vi)  Addendum to Subscription and Shareholders’ Agreement dated 16 February 2009 between P2 and D8 to supplement the terms of the TCPSSA.

For easy reference, the material terms of these agreements are set out in the Annexure to this Decision, and are in bold print whenever referred to in this Decision.

9. Some features of these agreements concerning the parties, payment structure, signatory rights and timing need to be highlighted.

10. Insofar as parties were concerned, Colin Tay’s camp used various entities (Trussnet Delaware, Trussnet Nevada, Gulfstream, and P2) to enter into those agreements, but P1 never appeared as a party.  P2 only appeared as a party to the TCPSSA and the Addendum. 

11. Insofar as payment structure was concerned, the terms governing the dates of payment and the amount of each tranche of the US$196 million had been changed from agreement to agreement.

12. Insofar as signatory rights were concerned, in Article 1(b) of both the TDFA and TNFA, each of Trussnet and D8 was required to appoint one person as bank signatory of the bank accounts of inter alia D1, Smart Channel (D4) and Yunji after the first US$5 million (‘the First Payment’) had been made to D1.  Article 1 of the Supplementary Agreement likewise contained a term for payment of part of the subscription price to a bank account jointly controlled by the parties.

13. Insofar as timing was concerned, when the TDFA was executed and as all the parties were aware, the 25 Cities Licence would expire in half a month’s time on 29 February 2008.  The TNFA was entered into after expiry of the 25 Cities Licence. 

14. Indisputably, pursuant to the TCPSSA, on 23 February 2009, D1 issued a share certificate to P2 (‘the Share Certificate’), representing 2,450,000,000 (49%) shares of D1, even though a very substantial part of US$191 million remained unpaid.  On the same day, P2 signed 2 notes (‘the 2 Notes’), one to acknowledge that the Share Certificate was borrowed, the other agreeing to pledge to D1 the shares representing the unpaid balance of the subscription price.

15. As background information, the First Payment had been made in tranches in March/April 2008 to Chinacomm Account 2 and by cash, before the GSSA was signed.

THE PLAINTIFFS’ CASE AT THE STAGE OF THE EX PARTE INJUNCTIONS

16. According to Colin Tay, he was allegedly told in early 2010 that D1 was in need of funds to meet government deadlines.  If those deadlines were not met, the licences could be revoked.  So Colin Tay negotiated with Qiu Ping in good faith to find a way to save the Project and the Plaintiffs’ investment. 

17. According to Colin Tay, Qiu Ping’s camp had never satisfactorily accounted for expenditure of the First Payment.  So he, on behalf of the Plaintiffs, and Qiu Ping on behalf of D8, orally agreed for the Plaintiffs to inject ‘another US$5 million in tranches as equity to Chinacomm Limited, with the condition that new bank accounts of Chinacomm Ltd and Smart Channel would be established with the double signature arrangement’.  The money was for the specific purpose of using in the joint venture.  The Plaintiffs were funding the investment ahead of deadline because D8 had not yet renewed the licences for 29 cities as required by Article 3.2(b) of the TCPSSA.

18. It is not in dispute that the Chinacomm Account 1 and Smart Channel Account were first set up in April 2010 and were subject to a double signature arrangement, with Colin Tay and Qiu Ping being the signatories.  Nor is it disputed that the US$4.7 million was paid in tranches in April to June 2010 by Colin Tay’s camp into the Chinacomm Account 1.  What was in dispute was the underlying agreement.  Colin Tay claimed that the 2 Accounts were opened pursuant to the oral agreement.

19. Apart from the US$4.7 million, no other party had put funds into Chinacomm Account 1.

20. In November 2011, Colin Tay learnt from the Bank that he was removed as an authorized signatory of Chinacomm Account 1.

.....

22. It transpired that without notification to the Plaintiffs, Qiu Ping and Yuan Yi (D7) convened a board meeting of D1 on 24 May 2011 and removed Colin Tay’s signatory rights from Chinacomm Account 1.  Less than a month later, on 21 June 2011, Qiu Ping as sole signatory transferred US$4.5 million to the account of Feng (D10) in DBS Bank.”

Procedural history

5.Despite the fact that the proceedings herein were commenced as long ago as November 2011, they have not yet progressed beyond the pleadings stage.  A summary of the procedural history of these proceedings is as follows.

6.On 18 November 2011, the plaintiffs issued the Writ herein and obtained a Mareva injunction against the 1^st, 2^nd, 3^rd, 6^th and 7^th defendants (“the 1^st Injunction Order”) to freeze the amount of US$4.7 million paid by the plaintiffs to the 1^st defendant.  A disclosure order was also made against the 1^st, 6^th and 7^th defendants.

7.On 8 December 2011, the plaintiffs obtained a further Mareva injunction against the 10^th defendant (“the 2^nd Injunction Order”) to freeze his assets up to US$4.5 million. The 10^th defendant was also ordered to disclose by affidavit the purpose of movements of the US$4.5 million.

8.On 27 February 2012, the plaintiffs filed and served a Statement of Claim.  It can be seen from the Statement of Claim that the plaintiffs have raised numerous causes of action against the defendants, including breach of contract, misrepresentation, infringement of copyright, breach of trust, conspiracy, misappropriation and unjust enrichment.  The complaint which the plaintiffs relied upon for the purpose of supporting the applications for Mareva injunction, ie the alleged breach of the “double signature arrangement” and the dissipation of the US$4.7 million paid into the “Chinacomm Account 1” is only one of the many complaints raised in the Statement of Claim.

9.On 23 May 2012, the defendants filed and served their Defence and Counterclaim.  It is a substantial document setting out the defendants’ answers to the plaintiffs’ complaints as raised in the Statement of Claim.  For the purpose of the present appeal, I do not consider it necessary to summarise the contents of the Defence and Counterclaim here.

10.On 30 May 2012, the defendants took out a summons seeking security for their costs of the action from the plaintiffs for the amount of HK$4 million (“the 1^st Application for Security for Costs”).

11.On 1 August 2012, the plaintiffs filed and served a Reply and Defence to Counterclaim.

12.In the meantime, on 19 July 2012, the plaintiffs’ application to continue the 1^st and 2^nd Injunction Orders and the defendants’ application to discharge them on the ground of material non disclosure were heard by Au‑Yeung DHCJ. The learned judge’s decision, ie the Decision, was handed down on 26 October 2012.  It was held that the plaintiffs were guilty of material non‑disclosure on one matter (namely, the 1^st plaintiff’s locus or capacity to sue), but the learned judge exercised her discretion to re‑grant the injunction orders.  The learned judge also made a costs order nisi in favour of the plaintiffs regarding the costs of the plaintiffs’ application to continue the 1^st and 2^nd Injunction Orders and the defendants’ application to discharge them.

13.On 2 November 2012, the 1^st Application for Security for Costs came before Master S Kwang and was dismissed.  As I understand it, the main reason given by the master to dismiss the 1^st Application for Security for Costs was the existence of the defendants’ Counterclaim raising overlapping issues which would also have to be determined in the plaintiffs’ claims against the defendants in the main action.  The master considered that it would not, in those circumstances, be fair to order the plaintiffs to provide security for the costs of the defendants.  For the sake of completeness, I should add that the master also took into account a number of other subsidiary considerations in deciding to dismiss the 1^st Application for Security for Costs.

14.On 9 November 2012, the defendants applied to vary the costs order nisi made by the learned judge and also sought leave to appeal to the Court of Appeal against the Decision.  Those applications came before the learned judge on 26 February 2013.

15.On 8 March 2013, the learned judge varied the aforesaid costs order nisi such that: (i) the 1^st plaintiff was to bear the defendants’ costs to discharge the 1^st and 2^nd Injunction Orders and there be no order as to costs between the 2^nd plaintiff and the defendants on the discharge application, and (ii) the costs of the plaintiffs’ application to continue the 1^st and 2^nd Injunction Orders be the plaintiffs’ costs in the cause.  The learned judge also granted the defendants leave to appeal to the Court of Appeal against the Decision.

16.On 18 April 2013, the defendants filed and served their Notice of Appeal against the Decision as varied on 8 March 2013.

17.The defendants did not, however, proceed to set the appeal down for hearing.  Instead, on 4 November 2013, the defendants made a fresh application seeking security for their costs of the action from the plaintiffs for the amount of HK$7.2 million (“the 2^nd Application for Security for Costs”).

18.The 2^nd Application for Security for Costs came before Master S Kwang for hearing on 28 May 2014.  Apparently, at that hearing, the master expressed the view that, in view of the subsisting Counterclaim raising issues which overlapped with those in the plaintiffs’ claims in the main action it would be unfair to order the plaintiffs to provide security for the defendants’ costs of the action.  In response, the defendants’ counsel, after a short adjournment of the hearing, produced a written undertaking from the defendants’ solicitors confirming that the defendants would withdraw the Counterclaim.  As observed by the master, it is clear that the withdrawal of the Counterclaim was a step taken by the defendants to salvage the application for security for costs.  Notwithstanding this manoeuvre, the master decided to dismiss the 2^nd Application for Security for Costs having regard to (i) the defendants’ conduct (which I shall consider further below), and (ii) the defendants’ pending appeal against the Decision which meant that there would unlikely be any progress in the action while the appeal was still outstanding.

19.As earlier mentioned, the defendants lodged the present appeal to challenge the decision of the master made on 28 May 2014 dismissing the 2^nd Application for Security for Costs.

Applicable principles

20.It is not in dispute that (i) both plaintiffs are ordinarily resident out of the jurisdiction, and (ii) there is reason to believe that neither plaintiff will be able to pay the defendants’ costs should the defendants succeed in their defence.  That being so, the court’s jurisdiction to make an order for security for costs against them under Order 23, rule 1 of the Rules of the High Court or section 905 of the Companies Ordinance, Cap 622 is triggered.  In either situation, the court has a broad discretion whether to order the plaintiffs to provide security depending on the facts and circumstances of the case.

21.I accept that prima facie a plaintiff resident abroad should normally be required to provide security: see The Alpha [1991] 2 Lloyd’s Rep 52 at 54; Lauria v Le Salon Orient (Hong Kong) Ltd [1996] 3 HKC 157 at 160.  However, this is not an inflexible or rigid rule.  The court may order security for costs “if, having regard to all the circumstances of a case, the court thinks it just to do so” under Order 23, rule 1(1) of the Rules of the High Court.

22.The court has a similar, broad, discretion whether to order an impecunious corporate plaintiff to provide security under the former section 357 of the Companies Ordinance, Cap 32, and, in my view, under the current section 905 of the Companies Ordinance, Cap 622 (see Hong Kong Civil Procedure 2014, paragraph 23/3/14).

23.One of the factors which the court may take into account in deciding whether to order a plaintiff to give security is the plaintiff’s prospect of success in the action.  However, unless the prospect of success can be clearly demonstrated one way or another, it is not the function of the court to conduct a detailed examination of the merits of the case, or to conduct a mini‑trial on affidavit evidence: see Sunchase International Group (China) Ltd v Vincor Group of Companies (Investment) Ltd [2004] 1 HKLRD 731 at 733.

Discussion

24.The fact that the defendants will have difficulties in enforcing any costs order which may be made in their favour should they succeed at the trial is a factor which obviously I do take into account in the exercise of my discretion whether to order the plaintiffs to give security in the present case.

25.I do not take into account the merits of the plaintiffs’ claims against the defendants.  From the materials which I have seen, I do not consider that it is possible to reach a clear view on the merits one way or another.  I proceed on the basis that the plaintiffs’ claims have some prospect of success but I am unable to say that the prospect is so clearly established that it becomes a factor against the exercise of my discretion to order security for costs.

26.On the other hand, Mr Chan (for the plaintiffs) submits that the court should take the defendants’ conduct, both in relation to the transactions complained of and in relation to these proceedings, into account in the overall exercise of my discretion.  The following matters are emphasised by Mr Chan:

(1)     The comment of Au‑Yeung DHCJ at paragraph 120 of the Decision that “there has been shameless efforts by Qiu Ping’s camp to remove the US$4.7 million out of the reach of the plaintiffs and to conceal the true picture”.  The learned judge further stated that “[d]issipation was not only a risk but a fact in the present case”.  This strong criticism of the defendants’ conduct was repeated at paragraph 27 of the learned judge’s decision dated 8 March 2013.

(2)     The defendant’s conduct in relation to the withdrawal of the Counterclaim.

(3)     The defendant’s conduct in relation to the abandonment of the appeal against the Decision.

27.In respect of (1), the strong comment was expressed by Au‑Yeung DHCJ after a careful examination of the evidence before her.  I appreciate that this comment was made by the learned judge in the context of the application then before her, ie the plaintiffs’ application to continue the 1^st and 2^nd Injunction Orders where the risk of dissipation of assets is a material consideration, whereas for the purpose of the defendants’ application for security for costs the issue of dissipation of assets is not directly relevant.  The further evidence or material since adduced by the defendants which I have seen but was not before the learned judge does not, it seems to me, undermine the learned judge’s strong comment.  While, as Mr Hui has argued, the learned judge’s comment does not go to the issue of whether the defendants were in fact entitled to “dissipate” the money, it is a matter which I consider I am entitled to take into account in the exercise of my discretion whether to order the plaintiffs to give security for costs.

28.In respect of (2), I have already set out the circumstances leading to the defendants’ withdrawal of the Counterclaim which clearly demonstrate that the withdrawal of the Counterclaim was a tactical step taken to salvage their application for security for costs.  For the sake of completeness, I should mention that in the 4^th Affidavit of Lam Ping Cheung filed by the defendants in support of the 2^nd Application for Security for Costs, the defendants undertook to stay or withdraw their Counterclaim in the event that the main action was stayed or dismissed due to the plaintiffs’ inability to provide security for costs.  I do not, however, give any weight to this undertaking because, it seems to me, the defendants have to make up their mind whether to withdraw the Counterclaim, and cannot expect the court to give weight to an undertaking which is conditional upon the court acceding to their application.

29.In respect of (3), as earlier mentioned, the defendants sought and obtained leave from Au‑Yeung DHCJ to appeal against the Decision to the Court of Appeal and filed and served a Notice of Appeal on 18 April 2013.  Thereafter, the defendants took no further step in the appeal until after the hearing of the 2^nd Application for Security for Costs on 28 May 2014.

30.As observed by the master when giving his ruling in the 2^nd Application for Security for Costs, the outcome of the appeal could affect the plaintiffs’ conduct of the action.  Depending on the Court of Appeal’s decision, the plaintiffs might have to reconsider how they might wish to pursue their claims against the defendants.

31.It was only when the failure of the defendants to prosecute the appeal was raised by Colin Tay in his 11^th Affirmation filed in opposition to the 2^nd Application for Security for Costs (see paragraph 3(b) thereof) that it transpired, from Lam Ping Cheung’s 5^th Affidavit filed on behalf of the defendants on 29 January 2014, that the defendants did not in fact intend to “take the matter [regarding costs] further to the Court of Appeal” because the defendants were of the view that “the cost order absolute made by the learned judge was a correct decision” (see paragraph 20 thereof) and that the defendants “made a tactical decision not to pursue the appeal, in order not to waste further costs and time on dealing with the Injunctions” (see paragraph 21 thereof).

32.It will be recalled that the learned judge made the costs order absolute and granted leave to appeal on 8 March 2013.  The defendants have not stated in their evidence as to when the tactical decision not to pursue the appeal was made.  Whatever might have been the position, it was a decision that could have been made soon after the learned judge gave her decision on 8 March 2013.  Once the defendants had made a decision not to pursue the appeal, the defendants ought to have informed the court and the plaintiffs of the decision.  When asked by the court in the course of the present hearing, Mr Hui (for the defendants) was unable to offer any explanation for the delay.  It may be that the plaintiffs could, as argued by Mr Hui, also have taken some steps to force the defendants to proceed with or abandon the appeal.  However, the defendants, being the appellants, must be primarily responsible for proceeding with the appeal diligently.

33.In his ruling given in relation to the 2^nd Application for Security for Costs, the master took into account the existence of the pending appeal which had not yet been formally abandoned or withdrawn in deciding to dismiss the application.  As it was, it was only on 12 June 2014 that a consent summons for the withdrawal of the appeal was filed.

34.The master considered that the defendants’ application for security for costs was a “tactical move” and not one which addressed “a genuine need in seeking protection” on their costs.  The matters mentioned in (2) and (3) above, in my view, amply support this comment of the master.

35.In view of the foregoing matters, in the overall exercise of my discretion, I decline to order the plaintiffs to provide security for costs.  Accordingly, the defendants’ appeal by Notice of Appeal dated 11 June 2014 is dismissed.

Mr Edward TC Chan, instructed by Lawrence KY Lo & Co, for the plaintiffs

Mr John Hui, instructed by Lam & Co, for the defendants