China Agri-products Exchange Ltd v. Wang Xiu Qun and Another
Read the full judgment text of HCA 1807/2011 on BabelCite. This High Court CFI judgment was delivered on 11 September 2014.
1. This is an application by the plaintiff company (“ P ”) to strike out certain paragraphs of the defence (“ Defence ”), pursuant to Order 18 Rule 19(1) (a) and/or Rule 19(1) (c), and/or the inherent jurisdiction of the court. Alternatively, P seeks an order for trial of a preliminary issue.
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HCA 1807/2011 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1807 OF 2011 ________________________ BETWEEN
______________________ Before: Deputy High Court Judge B Chu in Chambers Dates of Hearing: 7 July 2014 Date of Judgment: 11 September 2014 __________________ J U D G M E N T __________________ Introduction 1.This is an application by the plaintiff company (“P”) to strike out certain paragraphs of the defence (“Defence”), pursuant to Order 18 Rule 19(1) (a) and/or Rule 19(1) (c), and/or the inherent jurisdiction of the court. Alternatively, P seeks an order for trial of a preliminary issue. 2.The main action was commenced by P in October 2011. P’s claims against the 1st defendant (“D1”) and the 2nd defendant (“D2”) were, among other things, for damages for breaches of contractual warranties and damages for fraudulent misrepresentation and under an indemnity clause contained in sale and purchase agreements for P’s acquisition of shares held by the defendants (collectively “Ds”) in a company called Wuhan Baishazhou Agricultural By-Product Grand Market Co Ltd/武漢白沙洲農副産品大市場有限公司[1] (“Company”). Background 3.P, formerly known as China Velocity Group Limited/中國高速(集團)有限公司, was/is a limited company incorporated under the laws of Bermuda and listed on the Main Board of the Stock Exchange of Hong Kong Limited (stock code: 0149). It carried/carries on the business of, among other things, leasing of properties and selling food and beverages in Mainland China (“PRC”). 4.At the material times, the following were the key personnel of P :-
5.The Company was incorporated on 2 December 2003 as a domestic liability company under PRC laws with an address at 中國湖北省武漢市洪山區青菱鄉張家灣特一號. There were initially 6 founding shareholders, which were various PRC companies. 6.Upon its incorporation, the Company was granted the right to operate a market until 1 December 2037 at No 1 Special, Zhangjiawan, Changzheng Village, Qingling Township, Hongshan District, Wuhan, Hubei Province, PRC/中國湖北省武漢市洪山區青菱鄉長征村張家灣特一號with an area of approximately 269,000 sq m (“Market”). 7.After the incorporation of the Company and until 2007, D1 and/or her husband Zhou Jiu Ming/周九明 (“Zhou”) gradually acquired 90% shareholding of the Company, through D1 and/or D2. The remaining 10% of the shareholding in the Company was held by another company called Wuhan Chuangjie Investment Co Ltd/武漢創捷投資有限公司, later called武漢創泰科技有限公司 (“Wuhan Chuangjie”). 8.D1 and Zhou were both PRC nationals at the material times, although D1 is said to be now living in Melbourne in Australia, and so seemed Zhou at one time[3]. 9.D2 was/is a company incorporated on 19 May 2005 under PRC laws. Zhou was a 95% shareholder from incorporation until 25 December 2006, and he was also a director and the legal representative of D2 from incorporation until 17 April 2006. It was P’s case that D2 was at material times controlled by Zhou and D1, through other persons or company. The current PRC legal representative for D2 is Mr Tao Xin (“Tao”). 10.D2 had originally on 26 April 2007 entered into an agreement with Wuhan Chuangjie whereby Wuhan Chaungjie agreed to transfer its 10% shareholding in the Company to D2, upon compliance with all regulations. After the completion of the transfer, D2 would then end up holding 30% shareholding of the Company[4]. 11.To summarise, as at 27 April 2007, the registered shareholding of the Company was as follows:
12.The Board of Directors of the Company, as at 2 May 2007, consisted of 5 directors (“Former Directors”)[5] and among them were Luo Hong (羅洪) (“Luo”), Chairman of the Board and the Company’s PRC legal representative (法人), and also Zhou. 13.P entered the picture on 2 May 2007 (“Agreement Date”). On the Agreement Date, P on one part, and D1 and D2 on the other part, entered into two sale and purchase agreements, as follows :-
14.Thereafter, on 10 May 2007, there had been an amendment agreement relating to the 1st SPA and one relating to the 2nd SPA (the amendment agreements, the 1st and the 2nd SPA collectively referred to as “SPAs”). Each of the 1st SPA and the 2nd SPA was further subsequently supplemented by 5 supplemental agreements (“Supplemental Agreements”). 15.Under the 1st SPA, the consideration of HK$900m was to be paid as follows:
16.Under the amendment agreement to the 2nd SPA, the Shareholding to be acquired by P was only D2’s 20% Shareholding. Thus, the consideration was HK$256m, which was to be postponed and paid, with interest, by way of a “promissory note”. 17.The completion date under the 1st and the 2nd SPA was stated to be the 5th business day after the “conditions precedent” (“Conditions Precedent”) were fulfilled or abandoned or an agreed later date[9], and the “long stop date” was 3 months from the 1st business day after signing of the 1st and the 2nd SPA. According to P, the completion date under the SPAs was 5 December 2007[10]. This was denied by Ds as their case was that the Conditions Precedent were never fulfilled, and there was thus no completion[11]. 18.It was, however, not challenged by Ds that it was clearly stated in the 5th of the Supplemental Agreements dated 2 December 2007 that the agreed “Long Stop Date” was 5 December 2007[12]. This was thus the relevant date for completion and will be referred to as the completion date in this judgment (“Completion Date”). 19.On the Completion Date, P had signed two documents titled承付票據 “promissory notes”[13], as follows:
20.To summarise, the total consideration for the purchase of the 90% of the shareholding of the Company (“90% Shareholding”) was HK $1,156,000,000, the mode of payment was to be as follows:
21.It was P’s case that it entered into the SPAs with the intention to acquire, and it was Ds’ intention to sell, the rights “to dominantly control and operate the Company and the Market” (“Rights”). 22.Further, on 15 June 2007, P and Wuhan Chuangjie had also entered into a Sino-Foreign equity joint venture agreement (“JV Agreement”) whereby P and Wuhan Chuangjie agreed to terms concerning the operation of the Company after transfer of the 90% Shareholding under the SPAs, and the purpose of entering into the JV Agreement was part of the scheme for P to acquire the Rights. 23.It was provided in the JV Agreement that the Board of Directors of the Company was to comprise of 5 directors, 4 of whom to be appointed by P and the remaining 1 by Wuhan Chuangjie. It seemed, however, that on 15 June 2007, there were in fact 6 directors were appointed, of which 5 were the Former Directors, and the additional one being D1[16]. 24.Luo continued to be the Chairman of the board and also the legal representative (法人) of the Company. 25.Further, according to P, on 10 December 2007, an additional director was appointed to the Board of the Company, and this was Yang who, as stated in the Defence, had been an executive director of P since 26 April 2007 and was re-designated as P’s Chief Executive Officer on 29 June 2007 until 8 June 2009. 26.According to Ds, Yang only joined P about a week before the execution of the 1st and the 2nd SPA. Chan had said that Yang was appointed an executive director of P before the scheduled signing of the 1st SPA and the 2nd SPA, as by that time it was understood between Chan Yeung Nam and Zhou that the deal would go through, and that Yang was in fact controlled by and acted at all material times in accordance with instructions of Zhou[17]. This was denied of Ds. 27.It would thus appear that at one stage, there were 7 directors of the Company after the signing of the SPAs. 28.It was Ds’ case that the intended sale of the Company by Ds and the signing of the SPAs was in fact part of a scheme for the reverse takeover of P. According to Ds, it was Yang who introduced them and Zhou to Fu in early 2007, and Fu at that time was planning to attract more capital investment in P by injecting attractive assets into P. It was Ds’ case that Yang was appointed by P to be its executive director in order to represent P to discuss with Zhou and Ds in relation to the acquisition of a stake in the Company, and Zhou’s understanding, and further it was agreed by Chan Yeung Nam, that after injecting the Company and the Market into P, Chan Yeung Nam would relinquish and sell his stake in P to Zhou, so that Zhou and D1 would own the single largest shareholding in P[18]. 29.It was further Ds’ case that the use of the Convertible Note was designed by P’s then investment bank (“Cazenove”) and/or P to avoid contravention of the Takeover Code that was in force at that time in relation to reverse takeover[19]. 30.Ds denied that the JV Agreement was part of a scheme to allow P to gain the Rights, and in fact alleged that the JV Agreement and all other documents related to the JV Agreement submitted to the Ministry of Commerce of PRC (“MOFCOM”) were forgeries[20]. 31.It was Ds’ case that the SPAs were to be subject to a very stringent approval process by MOFCOM before they could become effective under PRC law, and that Yang and Luo, were responsible for preparing the material for the application to MOFCOM. In order to meet the approval process by MOFCOM, another agreement for sale and purchase of the Company’s shares was in fact prepared under Yang’s instructions bearing the date of 2 May 2007, and the consideration for the purchase of the 90% shareholding in this agreement was stated to be RMB89,817,930 (“89.8m Agreement”)[21]. According to Ds, this agreement was forged. 32.The 89.8m Agreement was dated the Agreement Date, ie the same date as the SPAs. There appeared to be, however, at least 5 major areas in the 89.8m Agreement which were different from the SPAs, namely as follows:
33.On 26 November 2007, MOFCOM granted its approval to the transfer of the 90% Shareholding in the Company, based on the 89.8m Agreement[27] (“MOFCOM Approval”), and the Company was granted a licence for a sino foreign equity joint venture company and on 10 December 2007, a new business licence was issued to the Company, and the registered shareholders were P holding the 90% shareholding and Wuhan Chuangjie holding the remaining 10%[28] . 34.According to P, completion then took place on the agreed Completion Date 5 December 2007. This was further evidenced by a public announcement made by P’s board of directors through the Hong Kong Stock Exchange on the same day[29]. 35.Later, on about 31 December 2007, P changed its name from China Velocity Group Limited to its present name China Agri-Products Exchange Limited. 36.Ds alleged that the transfer of the funds through the foreign exchange department by P was according to the approved terms of price and timetable set out in the 89.8 Agreement, and that MOFCOM never approved the SPAs, the Conditions Precedent in Clause 4.1(g) of the 1st SPA and Clause 4.1(e) of the 2nd SPA had never been satisfied, and thus the SPAs were terminated under Clause 4.4. 37.In short, it was Ds’ case that the SPAs had been terminated as the transfer of shares could not be carried out legally in accordance with PRC laws, and the SPAs were void and unenforceable being contrary to public policy. 38.On the other hand, according to P, after the MOFCOM Approval, it had duly paid Ds the consideration in the SPAs by way of :
39.Ds had not denied that it received at that time about HK$270m in cash from P, and later the HK$75m as the refund of the Profit Guarantee, nor did Ds deny having received the Instruments and the Convertible Note, which was converted to 180,000 shares of HK$2 each in P on 8 January 2008. 40.Anyway, D1 became P’s second largest shareholder on 8 January 2008, and it seems, had remained so until 21 April 2010. 41.It would, however, appear, that after Completion Date, the Company and the Market remained under the control and operation of Ds. 42.Some months later, in about October 2008, P discovered that D1 and/or D2 had set up another market under a company called Wuhan Baishazhou Lenglian Food Company Limited 武漢白沙洲冷鏈食品有限公司 (“Leng Lian”), also at 湖北省武漢市洪山區青菱鄉長征村張家灣特一號 (“2nd Market”). 43.Ds did not dispute that in fact on 26 June 2008 a market of the name of the 2nd Market was set up and wholly owned by a company which they said was named雅润公司, but said that this company operated a “Cold Storage Market” which was to engage in the selling and trading of frozen meat and seafood and to provide cold storage facilities, and thus the 2nd Market was not in competition with the Market. Further, according to Ds, the 2nd Market was set up with full endorsement of P, as its then Chief Executive Officer, Fu, had attended the foundation laying ceremony of the 2nd Market on 20 September 2008 on behalf of P. 44.It would seem that after this ceremony, according to P, on 18 November 2008, there was an acid attack on Fu in Shenzhen and that he had suffered severe burns on his face and arms. Chan had alleged that Zhou was behind this attack, and according to Chan, Zhou was a man who would resort to extreme measures to resolve his problems[33]. All this was denied by Ds. 45.As mentioned earlier, on 30 October 2008 PNG had entered into a conditional agreement to acquire Chan Yeung Nam’s 27.14% shareholding in P, and in February 2009, Chan took over from Fu as P’s Chairman of the Board. 46.It would seem that by early 2009, D1 and Zhou were residing in Melbourne, Australia[34]. It was P’s case that at the request of D1, a meeting later took place on 7 March 2009 in a hotel in Melbourne between Chan and P’s senior manager on P’s side, and D1 and Yang on Ds’ side, to try and resolve their disputes regarding the Company and the Market. Thereafter, there seemed to be further meetings between P’s representative/s and Ds’ representative/s in Hong Kong and in Wuhan, but according to P. Ds had continued to refuse to hand over the control and the accounts of the Company. 47.Further, according to P, in about September 2009, it received information that Zhou had earlier set up another company in Wuhan called 武漢白沙洲天恆農産品經營管理有限公司 (“Tian Heng”), and had further arranged for a contract to be entered into by the Company on 15 February 2009 purporting to grant to Tian Heng the right to operate the Market at an annual fee of RMB40m for 10 years, until 14 February 2019[35] (“Assignment Agreement”). 48.To cut the long story shorter, it was P’s case that after the Completion Date, it had experienced considerable difficulties in trying to gain control of the Company and the Market, and that P was further denied access to the financial information and documents of the Company. 49.Eventually on 12 August 2010, it appeared that with the intervention of relevant PRC government authorities, P succeeded in replacing the then directors and the legal representative of the Company. In September 2010, again with the intervention of relevant PRC government authorities, the then chops of the Company were nullified and P was issued with a new set, and P also received, among other things, the business licence of the Company. Finally, on 1 November 2010, the physical control of the Market was handed over to P and/or the Company. 50.It was P’s case that after gaining physical control of the Market and the Company, it reviewed the accounts, books and records of the Company which finally came to its possession, and it discovered that many financial documents were missing. P then instructed investigators to carry out investigations. 51.In the meantime, as a result of a criminal complaint lodged by the Company to the PRC police against the Company’s former management in relation to misappropriation of the Company’s funds, in November 2010, the former general manager of the Company and the former financial controller were both detained by the Wuhan Public Security Bureau, and the Bureau further instructed a PRC accounting firm武漢正浩會計師事務有限公司 to investigate into the financial records and other documents of the Company. A report was later compiled by the accounting firm (“Zheng Hao Reports”) on 20 March 2011 and 11 November 2011[36]. On 29 August 2011, Luo was also detained and later on 20 September 2011 formally arrested[37]. The three of them were all convicted of misappropriating funds at the first trial and were sentenced to 3 years’ imprisonment, suspended for 3 years. They then appealed. In a judgment dated 9 October 2013 handed down by the Wuhan Intermediate People’s Court of Hubei Province[38] (“Criminal Judgment”), their appeal was dismissed and the conviction of the three of them was upheld. 52.Investigations conducted by P into the management accounts and other financial information and documents of the Company allegedly revealed breaches of the warranties given by Ds in the SPAs involving conduct which P alleged amounted to fraud on the part of Ds. In particular, P alleged that the managements accounts annexed to the SPAs, consisting of balance sheets for the years 2005, 2006 to March 2007, and profit and loss accounts for the years 2004, 2005, 2006 to March 2007 (“Management Accounts”) had been manipulated so that the assets and income of the Company had been falsely inflated. 53.The disputes between P and Ds over the control of the Company and operation of the Market then led to various legal actions in PRC and the present action in Hong Kong. 54.Ds had also lodged an administrative complaint to MOFCOM on about 7 September 2011 that the 89.8m Agreement, upon which the MOFCOM Approval was granted, was forged and that the SPAs were the genuine agreements[39] (“Administrative Complaint”). So far, there has been no response to the complaint and no action has been taken by MOFCOM. PRC Actions PRC Action No 1 55.In December 2010, Ds initiated proceedings and on about 4 January 2011, Ds formally commenced a legal action as plaintiffs against P as defendant, in the Higher People’s Court of Hubei Province PRC (“Hubei Court”) with the Company joined as a third party (第三人), namely (2011) 鄂民四初字第1號 (“PRC Action No 1”). The subject matter of PRC Action No 1 was said to be a dispute in relation to share transfer agreement/股權轉讓協議糾紛, and Ds claimed[40]:
56.PRC Action No 1 was first heard by the Hubei Court on 5 June 2012, and a 2nd hearing took place on 10 July 2013. About 3 weeks prior to the present hearing before this court, on 18 June 2014, P received a judgment dated 30 May 2014 from the Hubei Court (“PRC Judgment”)[41]. Ds did not seem to have pursued their claim for loss of distributed profits but in any event Ds’ claims against P and the Company were all dismissed by the Hubei Court, and Ds were ordered to pay court fees. 57.Ds had 15 days from the date of receipt of the PRC Judgment to lodge an appeal, and P had 30 days[42]. This court was informed at the hearing of the present application that Ds had lodged an appeal. 58.There were 3 main issues summarized by the Hubei Court in the PRC Judgment, namely[43]:
59.As for Issue (a), notwithstanding the handwriting forensic report concluded that the purported signatures of D1 and Fu on the 89.8m Agreement were not written by them, the Hubei Court was of the view that such evidence alone could not be sufficient proof that D1 had had no knowledge of the 89.8m Agreement by reason of the following[44]:
60.After analysis of the evidence, the Hubei Court concluded that the 89.8m Agreement was not prepared by P unilaterally, and rejected D1’s case that she had no knowledge of the 89.8m Agreement. Further, the Hubei Court was of the view that even if D1 did not take part personally in the preparation of the 89.8m Agreement, she still had to bear the legal consequences of the conduct of those personnel of the Company who were appointed by her. 61.As for Issue (b), it was P’s and the Company’s case in the PRC Action No 1 that the 89.8m Agreement and the SPAs were of “主從關係” and that both were valid agreements, namely that the 89.8m Agreement was “主協議” or the main agreement, and the SPAs were “從協議”, or subordinate/supplemental agreements[45]. 62.The Hubei Court rejected the case of P and the Company that the 89.8m Agreement and the SPAs were of “主從關係” as it was of the view that both sets of agreements were signed on the same day, and that the 89.8m Agreement was for the purpose of applying for approval, and the SPAs were the agreements parties relied on for the actual implementation of the parties’ obligations[46]. The reasons given were as follows:
63.As for Issue (c), in relation to the validity of the 89.8m Agreement, the Hubei Court analysed as follows:
64.As to the mode of payment of the consideration, according to the PRC Contract Law, if this is not clear, the mode of payment which would facilitate the implementation of the objectives of the agreement may be ascertained in accordance with any supplemental agreement, terms of the relevant agreement, or usual practice of the parties[51]. The Hubei Court then stated that the agreed mode of payment was confirmed and existed in the SPAs, and even though the stated mode of payment in 89.8m Agreement was merely for the purpose of seeking the MOFCOM Approval, the agreed intention therein in relation to the transfer of the 90% Shareholding was still binding[52]. 65.The Hubei Court found that there was agreed intention of the parties to the transfer of the 90% Shareholding, and the MOFCOM Approval had been obtained in relation to the transfer, and only the actual implementation of the transfer was to be in accordance with the terms of the SPAs, and in the circumstances, Ds’ claim for a declaration that the 89.8m Agreement was void and to cancel the entire transaction of the transfer was against the principles of good faith and trust[53], and even though those terms in the 89.8m Agreement regarding consideration, the mode of payment, applicable law and dispute resolute were only for the purpose of seeking the MOFCOM Approval, the entire transaction relating to the transfer of the 90% Shareholding should not declared to be void based on this, and thus the Hubei Court dismissed Ds’ claims[54]. 66.Finally, the Hubei Court stated that whether the parties’ conduct, in setting out those terms in the 89.8m Agreement which were made purely for the purpose of submission for approval to MOFCOM, would affect the MOFCOM Approval would be an administrative matter for MOFCOM and Hubei Court would not deal with this matter[55]. PRC Action No 2 67.In about April 2011, after the issue of PRC Action No 1, P and the Company also commenced a legal action against Ds and 6 other parties including Zhou, Tian Heng, and others who were former Board members of the Company[56] for, among other things, the loss and damage P and the Company had suffered as a result of the Assignment Agreement, namely (2011) 鄂民四初字第2號 (“PRC Action No 2”). 68.The Company and P had claimed against all the defendants, among other things, the following:
69.In PRC Action No 2, D2 had made a Counterclaim (民事反訴狀) dated 2 May 2012 together with an Application for Additional Counterclaim (增加反訴請求申請書) dated 2 July 2012 and an Application for Amendment of Counterclaim (變更反訴請求申請書) dated 25 July 2012. What happened was that D2 initially counterclaimed for an order that the 89.8m Agreement was null and void and that P was to return the Company’s shares, but D2 subsequently applied to withdraw such Counterclaim because the reliefs sought thereunder were already covered by its claims in PRC Action No 1. 70.In September 2012, P and the Company respectively submitted their defence to counterclaim (答辯狀), and subsequently, a hearing took place in the Hubei Court on 12 September 2012. 71.By the time of the hearing before this court, the result of the hearing in PRC Action No 2 was not yet known. Other PRC actions 72.There seemed to be various other PRC actions involving the Company and other PRC companies including Leng Lian, the details of which in my view would not be relevant to the present application, and I do not propose to set them out. Hong Kong Action 73.After the PRC Action No 1 and the PRC Action No 2 had commenced, on 24 October 2011, P issued the writ herein with an endorsed statement of claim. 74.P had obtained leave on 21 December 2011 to issue and serve a concurrent amended writ on Ds out of jurisdiction (“Service Out Order”). After several attempts, P then obtained leave to serve Ds by way of prepaid ordinary post to various addresses in PRC and by newspapers advertisement in PRC, Hong Kong and Australia. Eventually Ds’ solicitors acknowledged service, and subsequent thereto on 3 September 2012, Ds issued a summons to set aside the Service Out Order on the grounds of material non-disclosure and for the present action to be stayed on the ground of forum non conveniens. Their summons was eventually heard by Master Levy in April 2013, and a decision was handed down on 10 May 2013. 75.In her Decision, the Master dismissed Ds’ summons to set aside the Service Out Order and the overseas service, but granted an interim stay for 6 months or until the final outcome of the PRC Action No 1, whichever was the sooner (“Stay Order”). 76.P filed a notice of appeal against the Stay Order, and the appeal was later heard by DHCJ Marlene Ng, who handed down a detailed judgment on 5 November 2013 (“Ng Judgment”). The learned Judge allowed P’s appeal and set aside the Stay Order, and gave further directions. 77.In the meantime, after Ds had issued their summons, on 17 September 2012, P had issued an ex parte summons, and obtained an injunction restraining Ds from negotiating, transferring etc of the 1st Instrument and the 2nd Instrument to any third party upon their falling due on 5 December 2012. Subsequently, on the return date, upon certain undertakings provided by Ds, the injunction was continued until further order, which was eventually discharged on 8 March 2013 without prejudice to the continuing effect of the Ds’ undertakings. 78.On 28 March 2014, P issued the present summons before this court, for orders including certain paragraphs of the Defence be struck out (“Striking Out Summons”)[57]. 79.The Striking Out Summons was directed to two issues raised in the Defence:
80.Further, or in the alternative, P sought an order for trial of a preliminary issue, in relation to issue (ii) above, as to whether disclosure of breaches of various warranties given by Ds as seller to P as buyer of the shares in the Company would amount to a defence to the P’s claims under the indemnity at clause 6.3 of the SPAs[58]. Relevant Clauses in the SPAs 81.I will first set out those clauses in the 1st SPA[59] which are relevant to P’s present applications. There were similar clauses in the 2nd SPA, and the references were stated in the footnotes. 82.Clause 4 was headed “Conditions Precedent”. Clause 4.1(g) of the 1st SPA[60] is the Condition Precedent relied upon by Ds in paragraphs 24 and 25 of the Defence:
83.Clause 6 was headed “Undertakings of the Seller” and provided as follows:
84.Clause 16.2 provided:
General Legal Principles on Striking Out 85.There is no real dispute between the parties on the general legal principles governing applications to strike out. 86.Order 18 Rule 19 of the Rules of the High Court (RHC) state as follows:
87.Further, Ma J (as he then was) summarized the principles in Chuang Yuen Chien Eugene v Ho Yau Kwon Kevin [2002] 4 HKC 245 :
88.Although the above case was before the Civil Justice Reform, there was no dispute between the parties that what was said above has continued to be the approach of the courts. Evidence 89.As set out in Order 18 Rule 19(2), paragraph 18/19/3(4) of the Hong Kong Civil Procedure 2014, Vol 1, and in The Securities and Futures Commission v Young Bik Fung and Others, HCMP 2575 of 2010 (28.10.2013), where the ground for strike out is that there is no reasonable cause of action or that the action is unlikely to succeed under Order 18 rule 19(1) (a), affidavit evidence is inadmissible[69]. 90.Whilst it was accepted by Mr Ambrose Ho, Senior Counsel for P, that evidence was not allowed under Order 18 Rule (1) (a), he submitted that evidence would be admissible for striking out under the court’s inherent jurisdiction, and also the other sub-sections of Order 18 Rule (1). This was not challenged by Mr Chan SC. 91.The Striking Out Summons was supported by Chan’s 4th affidavit on behalf of P[70], and Ds filed Tao’s 3rd affirmation and an affirmation from Ds’ solicitor in opposition, the latter exhibiting a copy of the PRC Judgment and stating the purported effect thereof. 92.According to Mr Ho SC, the purpose of filing Chan’s 4th affirmation was to summarise the factual and procedural background of the case, and that the determination of the Striking Out Summons did not require the court to adjudicate the factual disputes between the parties. Thus, Mr Ho had submitted that the repeated contentions in Tao’s 3rd affirmation that P’s applications were inappropriate due to the factual issues were misconceived. 93.Mr Chan SC, however, contented that the evidence filed in this action was critically important to the issues in the Striking Out Summons. 94.Chan was not a member of P’s board at the time of the negotiation of the acquisition of the shareholding in the Company or when the SPAs were signed. As indicated by Chan, his knowledge concerning the matter was derived from documents and records or information he had received from P’s then company secretary and chief financial officer, a Mr Sin, P but according to Ds, Mr Sin was not the one primarily in charge of the negotiations and did not have first hand knowledge of the negotiations. 95.In any event, apart from those affirmations filed directly in connection with the Striking Out Summons, some of the parties’ earlier affirmations had also been included in the hearing bundles, with only certain relevant exhibits. These were the following:
96.Both sides had also referred to and relied on the PRC Judgment. Striking Out Generally 97.It was P’s case that there had already been much delay in the progress of the present action due to service problems, Ds’ applications to set aside service orders and further for a stay, and although the action was taken out by P in October 2011, it was not until 13 January 2014 that the Defence was eventually filed and served. 98.P’s concern was that it had been cheated out of its money, and it had suffered substantial losses, and the purpose of the Striking Out Summons was to cut through the unsupportable defences raised by Ds and to limit the issues and to reduce the scope of the factual evidence. Paragraph 24 of the Defence 99.Paragraph 24 states:
100.P’s application to strike out Paragraph 24 is made pursuant to Order 18 rule 19(1)(a) and/or Rule 19(1)(c), alternatively under the inherent jurisdiction of the court, on the ground that Paragraph 24 disclosed no reasonable defence and/or tend to prejudice, embarrass or delay the fail trial of the action[71]. 101.Paragraph 24 was under the section headed “Approval From the Ministry of Commerce (“MOFCOM Approval”)” in the Defence (“Approval Section”). Mr Chan SC submitted that the Defence must be read as a whole, and one should start off with paragraph 12 of the Approval Section which set out the relevant terms of the 1st and the 2nd SPA. Further, Mr Chan SC submitted that no part of P’s claims were within the “Surviving Clauses” in Clause 4.4, although the non-completing claims would be one of the Surviving Clauses. Further, Mr Chan pointed out that Clause 4.3 was not an absolute undertaking, and if P were alleging that Ds had not used best endeavours under Clause 4.3, then such should be pleaded. 102.Mr Chan had further said that although the 89.8m Agreement was dated the same date as the SPAs, the court could not assume that the 89.8m Agreement was signed on the same date. On this point, it would seem to this court that there was nothing in the PRC Judgment to indicate that it was Ds’ case that the 89.8m Agreement was signed on a different date. 103.Anyway, briefly, the main defence of Ds under the Approval Section was that :
104.Mr Ho SC broke down D’s case in Paragraph 24 into 4 Steps, being as follows:
Step 1 105.It was Mr Ho’s submission that the Conditions Precedent in Clause 4.1(g) had been satisfied prior to the Completion Date. 106.Mr Chan SC, however, submitted that MOFCOM only granted approval on the basis of, and in relation to the 89.8m Agreement, and never approved the SPAs and these were found in Ds’ favour in the PRC Judgment. 107.From my interpretation of the PRC Judgment, what was found by the Hubei Court was that there was agreed intention between the parties to transfer the 90% Shareholding, and the MOFCOM Approval had been granted to the transfer, although only the 89.8m Agreement was submitted to MOFCOM when seeking approval, and not the SPAs. 108.Mr Chan SC further submitted that the Hubei Court held that the SPAs and the 89.8m Agreement could not “co-exist”[73]. From what can be seen in the PRC Judgment, what the Hubei Court had commented was that having two agreements (namely the 89.8m Agreement and the SPAs) of the same date did not make commercial common sense. 109.In any event, whether the 89.8m Agreement and the SPAs could “co-exist” or not, from my interpretation, as I have said earlier, what the Hubei Court found was that the actual implementation of the terms of the agreed transfer of the 90% Shareholding was to be in accordance with the SPAs, and that the 89.8m Agreement was made for the purpose of seeking approval, and further, what was found by the Hubei Court to be approved by MOFCOM was the matter of the transfer of the 90% Shareholding, which was the agreed intention of the parties. 110.The transfer of the 90% Shareholding of the Company had also been found by the Hubei Court to be the same subject matter in both the 89.8m Agreement and the SPAs, contrary to what had been said by Tao in his 3rd affirmation, namely that “An alternative way of looking at the matter is that the approval given was not the approval of the SPAs or the subject matter of the contract between the Plaintiff and the Defendants”[74]. 111.It was also Ds’ own pleaded case in paragraph 15(a) of the Defence under the Approval Section, that it was the acquisition by a foreign company and/or investment by a foreign company which required approval from MOFCOM. 112.Ds had pleaded and relied on No 10 Document, but did not give particulars as to which provisions they were relying on. There are 6 chapters in No 10 Document. As I could see, clause 6 under Chapter 1 of No 10 Document provided that any foreign company investing/purchasing of a PRC company to set up a “foreign investment company” 外商投資企業 would require the approval of MOFCOM[75], and my understanding is that once approval has been granted, such a “foreign investment company” would receive certain benefits including tax benefits, depending on the percentage of the foreign investment, as seen from Chapter 2[76]. Chapter 3 of the No 10 Document then sets out the procedures for application for approval registration. Chapter 4 is the part relating to the requirements in case of the consideration for the investment/purchase being by way of share rights in the foreign company, including those additional documents which would need to be submitted. Chapter 5 sets out the non-monopoly requirements, and lastly, Chapter 6 sets out the additional provisions in relation to the applicability of No 10 Document. 113.From my reading, the application procedure for the purchase of the 90% Shareholding would be under clause 21 of Chapter 3, and the purchase agreement would be one of at least 10 documents required to be submitted, and clause 22 stipulates that the agreement has to be under PRC law. Further clause 25 then sets out the steps to be taken, after approval has been granted to the foreign investor’s agreed purchase of the PRC company’s shares. Clause 26 further stipulates that the target PRC company should be responsible for the authencity/truthfulness of those documents submitted by the target company at the time of application for registration of the approved “foreign investment company”. So far as I can see, there are no provisions in No 10 Document as to the effect on the approval that if any of the documents submitted turn out to be false. 114.I accept that it is stated in clause 22 of No 10 Document that the applicable law for any agreement for such foreign investment should be PRC law. Also under Chapter 4, if the consideration consists of shares in the foreign company, there will be additional requirements. 115.Based on No 10 Document, the approval from MOFCOM is required for the purchase of the shares in a PRC company by a foreign purchaser in order for the target company to acquire the new status of a “foreign investment company”, so as to be entitled to benefits including tax benefits in its new status. 116.Based on the finding of the Hubei Court, MOFCOM Approval had be granted for the purchase of the 90% Shareholding, the subject matter of the SPAs, prior to the Completion Date. Thus, in my view Conditions Precedent in Clause 4.1(g) would have been satisfied. 117.Even if the Conditions Precedent in Clause 4.1(g) had not been satisfied, in that there had been no MOFCOM Approval, Mr Ho had submitted that the failure to achieve such approval would represent a breach by Ds of their own obligation to use their best endeavours to achieve Clause 4.1(g) under Clause 4.3. In this respect, Mr Ho relied on the “prevention principle”, and referred this court to what was said by Ribiero PJ in Kensland Realty Ltd v Whale View Investment Ltd & Anor (2001) 4 HKCFAR 381, namely the substantive principle that precludes a wrongdoer from taking advantage of his own wrong[77]. 118.Mr Chan SC did not dispute the principle but submitted that Clause 4.3 was not an absolute undertaking on the part of Ds, and further, if the “prevention principle” was applicable, then P was subject to the same principle as P had the obligations to use its reasonable endeavours under Clause 4.3 as well. However, as pointed out by Mr Ho SC, it was Ds who were trying to rely on Clause 4.1(g) not being satisfied. It was also not Ds case that P was in breach of Clause 4.3. 119.Mr Chan SC had further submitted that Ds were precluded from taking advantage of the MOFCOM Approval obtained upon the forged 89.8m agreement prepared under the instructions of P’s then CEO[78]. 120.First of all, on the date of the 89.8m Agreement, P’s then CEO was Fu. In the Defence, Ds had averred that it was Yang on behalf of P, and Luo, who were responsible for preparing the material for the application to MOFCOM, and that the 89.8m Agreement was prepared by under the instructions of Yang[79]. Ds had themselves also stated in the Defence that Yang was appointed as executive director of P from 26 April 2007, namely only about a week before the Agreement Date. 121.As mentioned earlier, it was all along P’s case that Yang was under the control of Ds, and that he was appointed as executive director of P in anticipation of the going ahead of the Company’s share acquisition transaction and the signing of the SPAs. Tao had, however, said that Yang was P’s representative in approaching Ds to discuss the proposed acquisition of the Company, and that Yang was a friend of Fu, and denied that Yang was controlled by Zhou or acted in accordance with Zhou’s instructions[80]. 122.Further, as mentioned earlier, Yang only joined P about a week before the Agreement Date. From the PRC Judgment, it would appear that neither Zhou nor Luo appeared at the trial before the Hubei Court, but Yang had turned up to give evidence, on Ds’ or in relation to Ds’ case/evidence, and was cross examined, and that his evidence that the 89.8m Agreement was prepared for seeking MOFCOM Approval, which was consistent with the statements of Zhou and Luo, was accepted by the Hubei Court[81]. 123.Further, whether Yang was under the control of Zhou or not, at the 2nd hearing before the Hubei Court, D2 had admitted that it had knowledge and had participated in the preparation of the 89.8m Agreement[82]. Also, the Hubei Court rejected D1’s allegation that the preparation of the 89.8m Agreement was with P’s implied consent (默許并認可) or that D1 had no knowledge[83] and further the Hubei Court found that at the time of the preparation of the 89.8m Agreement, namely 2 May 2007, the Company was managed by personnel appointed and sent by Ds, and that thereafter, Ds had continued to operate and manage the Company[84]. 124.Under Clause 4.3, it was stated that “在交易完成日或該日之前，賣方應盡其最大努力促使第 4.1(g), (i) 和 (k) 款中所列的先決條件被滿足，而買方應盡其合理努力促使第 4.1(a)至(h)和(j)款中所列的先決條件在第4.1 條中所列的其他所有先決條件被滿足時實現”. 125.Under Clause 4.3, although P also had the obligation to use its reasonable endeavours to implement Clause 4.1(a) to (h) and (j), its obligation only arose at the time when all the other Conditions Precedent in Clause 4.1, namely Clause 4.1(i) and (k) were satisfied, whereas Ds, as sellers, had the obligation to use their best endeavours to satisfy these Conditions Precedent in Clause 4.1(g), (i) and (k) in the first place. 126.In its Re-Amended Statement of Claim, what P had pleaded was that there had been completion under the SPAs and their claims were made under the SPAs. The issue of the lack of approval, Clause 4.1(g) not satisfied, and the forged 89.8m Agreement were all matters raised by Ds in their Defence. In its reply to the Defence, in particular Paragraph 24, contrary to Mr Chan’s submission, P did plead that if there had been a failure to satisfy Clause 4.1(g), this would represent a breach by Ds of their own obligations to use their best endeavours to achieve Clause 4.1(g)[85]. 127.Having considered all the above, I accept Mr Ho’s submission that if there had been a failure to satisfy Clause 4.1(g), then Ds should not be allowed to benefit from their own failures/breach of contract under the “prevention principle”. Step 2 128.Clause 4.4 referred to termination by reason of the failure to satisfy any of the Conditions Precedent in Clause 4.1, unless waived in accordance with Clause 4.2, prior to the Completion Date, or any agreed later date. 129.As pointed out by Mr Ho SC, Ds had clearly accepted and received the consideration on Completion Date, and further transferred the 90% Shareholding to P. There was no suggestion on the part of Ds on the Completion Date that the relevant Condition Precedent in Clause 4.1(g) had not been satisfied. 130.Mr Chan SC submitted that in the Ng Judgment, it was clear that the learned deputy judge was of the view that both parties’ arguments would be arguable and did not find it possible to form any definitive view on the disputed issues of MOFCOM Approval and the effect of its revocation and the potential outcome of the PRC Actions. 131.First of all, the Ng Judgment was prior to the PRC Judgment. At the time of hearing before DHCJ Ng, Ds’ then case was that the outcome of the PRC Action No 1 would have a material impact on the present action, and that should Ds fail, their then senior counsel had conceded that Ds could hardly re-argue those matters, namely whether or not (a) the 89.8m Agreement was forged; (b) the MOFCOM Approval was valid; and (c) P remained as lawful owner of the shares, due to issue estoppel or res judicata, or at least an abuse of process to re-litigate in substance those same issues as canvassed in the PRC Action No 1[86]. 132.Secondly, to put it in context, the main matter before DHCJ Ng at that time was an application by P to appeal against Master Levy’s order for an interim stay of the present action for 6 months or until the final outcome of the PRC Action No 1, and also costs orders, although DHCJ Ng had also considered Ds’ challenge to the service out order and overseas service orders. As stated by the learned deputy judge, a running theme throughout the hearing before her was whether the subject matter of the PRC Action No 1 (and to a lesser extent PRC Action No 2) was the same as (or similar to) or was different from that of the present action, and whether and if so how the outcome of PRC Actions would impact on the present action. 133.Ds’ then counsel Mr Lam SC had submitted that any finding of the Hubei Court in relation to the invalidation of the MOFCOM Approval and/or reversal of the transfer of the 90% Shareholding by avoiding the 89.8m Agreement would put an end to the present action. It was in those circumstances that DHCJ Ng had said that she was doubtful that even if there were to be a reversal ordered by the Hubei Court, whether a reversal would necessarily put an end to the present action and she was of the view that P’s arguments to be arguable whether such cancellation of the MOFCOM Approval years after completion would fall within the provision of Clause 4.4, and that such cancellation would only affect the future and not past legal effect of the SPAs[87]. 134.As it turned out, there was no cancellation of the MOFCOM Approval by the Hubei Court, nor was there any reversal ordered by the Hubei Court. In fact, on the contrary, the Hubei Court did not declare the 89.8m Agreement invalid, and instead found that the agreed intention to transfer of the 90% Shareholding, which was approved by MOFCOM, was binding on the parties. 135.In any event, I accept Mr Ho SC’s submission that even if the MOFCOM Approval is now cancelled by MOFCOM, this is now almost 7 years after completion, and in my view, Clause 4.4 should not be now applicable. Step 3 136.Even if Clause 4.4 were to be still applicable, as pointed out by Mr Ho SC, it would not mean that P had no rights under the SPAs, as there would be rights, as stated in Clause 4.4, which would survive, out of any prior contravention of the SPAs. This was in fact also pointed out by DHCJ Ng. Step 4 137.Although Ds had pleaded that the transactions under the SPAs should be reversed in accordance with the SPAs, they did not identify which provisions in the SPAs they were referring. As submitted by Mr Ho SC, and which I accept, there were no provisions in the SPAs which dealt with any “reversal”, and that the only remedy was provided by Clause 4.5 in relation to the retention/return of deposit in the event that the parties were not able to complete under Clause 4.4. 138.Further, as reiterated in the Ng Judgment, Ds had accepted the genuineness of the SPAs and the Supplemental Agreements[88]. 139.As I understand, the MOFCOM Approval was an administrative approval in order to effect a change of the status of the target company, for tax benefits, and it may be arguable that any cancellation may affect tax liabilities. So far as I can see, there were no provisions in No 10 Document in relation to any “reversal”, whether any reversal of the transfer of shares and/or repayment of the consideration, in the event of any cancellation of the MOFCOM Approval. 140.Even if MOFCOM Approval were to be cancelled by MOFCOM now on the basis that the 89.8m Agreement was a false agreement, I do not see any reason why the SPAs should now be rescinded, or the transaction should now be reversed, bearing in mind that the SPAs are under Hong Kong law and completion was almost 7 years ago. Conclusion 141.Having considered all the above, I am of the view that Paragraph 24 discloses no reasonable cause of defence, and it may prejudice, embarrass or delay the fair trial of the action, whether under Order 18 rule 19(1) or under inherent jurisdiction. I am satisfied P has established there is a plain and obvious case for Paragraph 24 to be struck out. Paragraph 25 of the Defence 142.Paragraph 25 states that:
143.P’s application to strike out Paragraph 25 is under Order 18 Rule 19 and/or under inherent jurisdiction on the basis that it discloses no reasonable defence. 144.As pointed out by Mr Ho SC, what Ds were seeking in Paragraph 25 was a declaratory relief and yet there was no such claim or counterclaim. 145.In the Defence, Ds did not provide any particulars, or elaborate on their allegation that the SPAs were void or unenforceable contrary to public policy. Mr Chan SC, however, submitted that the 89.8m Agreement involved making a misrepresentation to the PRC authorities and that this must be against public policy. 146.What was pleaded by Ds in Paragraph 25 was (i) the transfer of shares could not be carried out legally; and (ii) in the premises, the SPAs were void and unenforceable as being contrary to public policy. 147.There was nothing in the PRC Judgment to indicate that the transfer of shares could not be carried out legally. As stated earlier, Ds had accepted that the SPAs and all the Supplemental Agreements were genuine. I agree with Mr Ho’s submission that Ds have not established any basis as to why the SPAs should be treated void or unenforceable. 148.In light of the above, I am of the view that Paragraph 25 does not disclose any reasonable cause of defence and should be struck out. Paragraphs 50-55 of the Defence 149.The above paragraphs in the Defence were under the section titled “The Management Accounts-Inflation of Assets or Income in the Management Accounts” (“Management Accounts Section”). 150.P had pleaded in its Re-Amended Statement of Claim (“RASC”) that upon investigations into the Management Accounts, and the Company’s other accounting books and records and/or financial information, it was discovered that the assets of the Company as stated in the Management Accounts had been falsely inflated by reason of the payment of inflated and/or fictitious construction costs to third parties[89] (“Inflated Assets”). 151.P had further pleaded that upon investigations, it was discovered that two incomes of RMB13m and RMB10m as stated in the Management Accounts were not genuine [90] (“Inflated Income”). 152.Thus P’s case was that Ds were in breach of various clauses in the SPAs, and that P had suffered loss and damage in that the value of the Company’s shares was substantially less than what P had contracted for under the SPAs; and further or in the alternative, P was entitled to seek an order for Ds to indemnify P in cash for its loss pursuant to Clause 6.3 of the SPAs. P’s claims were thus two folds, (a) under common law (“Common Law Claim”) and (b) under the indemnity Clause 6.3 (“Indemnity Claim”). 153.Ds made no admission to P’s allegations in relation to the Inflated Assets and Ds had averred that [91]:
154.In short, Ds defence was, if there had been any inflation of the assets or income in the Management Accounts which was not admitted by them, there had been disclosure to P and/or P had knowledge of the same. 155.Mr Ho SC first of all complained about Ds’ bare non-admission in Paragraph 50 in the Defence in response to the detailed allegations set out by P in its RASC in relation to the Inflated Assets and the Inflated Income, and submitted that this was not permissible under Order 18 Rule 13, in particular Rule 13(5). 156.Mr Chan SC, on the other hand, pointed out that it was not in dispute that P had taken control of the Company since 12 August 2010, and that Ds did not have access to the books and records. The Management Accounts only contained the final figures, and Ds had no supporting documents and therefore it was a matter of common sense that it would be impossible for Ds to deal with each of P’s allegations in this respect. 157.Another submission made by Mr Chan SC was that paragraphs 49 to 53 had also been repeated in paragraph 56 of the Defence, in relation to Ds’ defence to P’s alleged fraudulent misrepresentation, and that if paragraphs 50-53 were to be struck out, Ds would not be able to provide any evidence regarding those paragraphs in relation to their defence to P’s allegation of fraud and that there could not be right. 158.In reply to the above, Mr Ho SC submitted that in the event that paragraphs 50-53 under the Inflation Section were to be struck out, then it would be open to Ds to apply to amend their defence to bring those struck out paragraphs back in under its defence to P’s alleged fraudulent misrepresentation. 159.Anyway, the main submission of Mr Ho SC regarding Paragraph 50 sub-paragraphs (a), (b) and (c) and Paragraph 51 of the Defence, being one of disclosure to P and knowledge of P, was that such would not amount to a defence to the P’s Indemnity Claim even if the pleaded facts were established by the Ds[92]. 160.The warranties relied upon for P’s Indemnity Claim were set out in paragraph 49 of the RASC, referring to the list at paragraph 47 from Schedule 3 of each of the 1st and the 2nd SPAs. Clause 16.2 of the 1st SPA (clause 14.2 of the 2nd SPA) confirmed that the SPAs constituted the entire agreement between the parties. As accepted by P, the burden of proof that the relevant warranties were broken in order to bring itself within Clause 6.3 would fall on P. 161.Mr Ho SC, however, submitted that disclosure to or knowledge on the part of the P of the fact that any particular warranty had been broken by the Ds would not, as a matter of law, provide a defence to a claim under Clause 6.3. 162.In this respect, Mr Ho referred to the comments made in Andrew Stilton on Sale of Shares and Businesses (3rd ed.), when comparing an indemnity to a warranty :
163.Mr Ho also referred to Sinclair on Warranties and Indemnities and on Share and Asset Sales (7th ed) where, again on discussing the use of an indemnity as opposed to a warranty, it was stated that :
164.Mr Ho submitted, if necessary, he would also rely on the principle of contractual estoppel to support the true meaning and effect of Clauses 6.1 and 6.2. He referred to DBS Bank (Hong Kong) Ltd v San-Hot HK Industrial Co Ltd [2013] 4 HKC 1 where the legal principles of contractual estoppels had been set out and that such clauses such as Clauses 6.1 and 6.2 would be upheld even if both parties knew that their factual agreement did not reflect reality[95]. 165.Mr Ho also referred to Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland [2011] 1 Lloyd’s Rep 123 where Clarke J had reviewed the authorities on contractual estoppel and their effect, including authorities in which the doctrine has been applied outside of the context of banking relationships[96]. 166.To summarise, it was Mr Ho’s submissions that even if the Ds were to succeed in proving the facts set out in these sub-paragraphs, this defence would still be bound to fail as a defence to the Indemnity Claim. 167.As for Paragraphs 54 and 55, Mr Ho submitted that, insofar as they were relied upon as a defence to the P’s Indemnity Claim under paragraph 54 of the RASC, these paragraphs in the Defence should be struck out for the same reasons as those set out above in relation to Paragraphs 50 and 51 of the Defence. 168.As pointed out by Mr Chan SC, Ds’ case was that the drafts of the Management Accounts were sent over to P prior to the signing of the SPAs, and that certain figures contained in the drafts of the Management Accounts (including those items concerning the construction costs and income of the Company, which are now disputed by P) were in fact amended at the proposal of Fu and Cazenove because P wanted to ensure that the proposed acquisition of the Company would, in turn, be attractive to potential investors in P itself. Thus, Ds’ defence to P’s Indemnity Claim was not simply premised on “disclosure / knowledge/non-reliance” but that it was P which instigated the amendment to the relevant figures. 169.In the above circumstances, Mr Chan submitted that P could not have been misled by those figures and P should be estopped from arguing that the figures were untrue or that the Ds were in breach of the warranties given under the SPA, and further it would be grossly unfair for P to be allowed to do so when it was P itself who requested Ds and obtained Ds’ cooperation to amend those figures in order to satisfy Ps’ own purposes. 170.Mr Chan had referred to those principles which had been set out in Unruh v Seeberger (2007) 10 HKCFAR 31 in relation to estoppel by convention[97]. Mr Chan also referred to the case of Natamon Protpakorn v Citibank N A [2009] 1 HKLRD 455. 171.I note the relevant clause in Natamon relied on by the defendant bank was an “entire agreement clause”, which would be somewhat similar to Clause 16.2 in the SPAs. P’s Indemnity Claim was under Clause 6.3, and not Clause 16.2. Having said this, I accept that what had been pleaded by Ds as a defence was not simply a “disclosure/knowledge/non-reliance”, but that it was on the instigation on P’s side that certain figures in the drafts, which included the construction costs and income were amended after disclosure of all substantively unfavourable facts or issues regarding the Company’s financial or tradition position or prospects by Ds. 172.P had denied what was alleged by Ds, namely that it was P’s side which proposed the amendments in the drafts. 173.Tao had in her 3rd affirmation referred to and relied on a circular dated 8 June 2007 issued by P after the signing of the SPAs in relation its proposed acquisition of the Company (“Circular”)[98], and also the Criminal Judgment to support Ds’ allegations, in that Fu had on two occasions requested the Company’s then CEO to amend the figures in the profits for 2007 and the first half of 2008[99]. 174.Although the two occasions referred to in the Criminal Judgment were after the signing of the SPAs and not relating to the Management Accounts, having considered what was pleaded by Ds in the Defence, I am of the view that Ds’ plea of estoppel is a reasonably arguable defence to the Indemnity Claim, and requires further investigation, and this cannot be resolved in an interlocutory proceeding and should be canvassed at a full hearing at trial, as seen from the Natamon case[100]. Preliminary Hearing 175.Further or alternatively, P had applied for the trial of a preliminary issue of law under Order 33 Rules 3 and 4(2) on the issue whether knowledge by P of a breach of warranty would amount to a defence to P’s claims under Clause 6.2. If this issue were to be decided in favour of P, factual evidence which would otherwise be adduced by Ds to support this defence would be avoided and P would be saved prejudice and delay to the fair trial of this action. 176.The Court of Appeal has summarised the principles governing applications for the determination of preliminary issues in Lee Yiu Kwan v Ting Yin Wah, CACV 311 of 2002 (21.4.2004), as follows:
177.Mr Chan SC also referred to Bank of America NA v Tadjudin Sunny, FAMV 42 of 2010 (20.1.2011), where it was observed by Bokhary PJ at §1: “Even a pure point of law is, at least in general, best resolved in the context of a set of facts found at trial.”[101] 178.As further submitted by Mr Chan SC, separating the issues in a case into different hearings would usually only have the effect of delaying the final outcome, particularly where each hearing could then the subject of further appeals. A single hearing would allow all issues (and appeals) to be decided together, avoiding multiplicity of proceedings and the consequential additional delay and expense[102]. 179.Mr Chan SC also pointed out that both English and Hong Kong courts have strongly protested against the practice of allowing preliminary points of law to be tried before and instead of first finding the facts. Mr Chan had referred to what was said by Lord Wilberforce in Tilling v Whiteman [1980] AC 1 per Lord Wilberforce which was cited with approval by the Court of Appeal in Mai Gou v Mak Chik Lun [2001] 3 HKLRD 248[103] . 180.Mr Chan also referred to Allen v Gulf Oil Refining Ltd [1981] AC 1001, where Lord Roskill urged those whose task it was to decide whether or not the trial of preliminary points should be ordered to be “extremely cautious” before acceding to pleas for the making of such orders as a result of attractively advanced submissions founded upon pleas of supposed economy[104]. 181.Mr Ho SC pointed out that the above cases were all pre-CJR, and that the “knock-out requirement” should no longer be appropriate after the CJR and that one should consider the underlying objectives in Order 1A Rule 1 and also the court’s general powers of management under Order 1B Rule 1(2). 182.I note that those passages in the textbooks referred to by Mr Ho SC were in relation to the comparison between an indemnity and a warranty, and the advantages of an indemnity over a warranty, and it is stated therein that the seller normally has the right to avoid liability under a warranty by making a formal disclosure of circumstances which would otherwise constitute a breach of warranty but will not normally be the case with an indemnity, and that “indemnities will normally be included in the sale and purchase agreement in order to cover specific risks which are of particular concern to the buyer and, in particular, issues arising out of the buyer’s due diligence”. It would appear that whether knowledge and disclosure is a defence to an indemnity clause will still depend on the circumstance of each case. 183.As stated earlier, Ds’ defence to P’s claim is not premised simply on “disclosure/knowledge/non-reliance” but rather that it was P which instigated the amendment to the relevant figures. I accept Mr Chan’s submission that this would require the court to determine as a matter of fact, whether or not P did in fact so instigate and then if so, whether P would then be estopped from making its claim. 184.Further, as submitted by Mr Chan SC, the defence also requires the court to consider whether or not the figures were such as to be in breach of the warranties under the SPAs, and this would require the court to look at all the information that was in fact provided by the Ds to P, both parties’ actions in relation to the amendment to the figures as well as the Management Accounts themselves, and then for the court to consider whether or not in such context, the figures were true, accurate, complete, and/or not substantively misleading, those being the terms of the warranties. 185.In view of the above, I agree with Mr Chan SC, as the defence involves issues of fact which are interwoven with the legal issues raised, this matter is inappropriate for summary determination. 186.I also accept that the reality is any preliminary hearing will tend to increase the cost and time, and is likely to cause further delay to the present action. Having considered the underlying objectives, I am of the view that there should not be a preliminary hearing. Conclusion 187.In the above circumstances, I will only allow the striking out of paragraphs 24 and 25 of the Defence. 188.As for costs, P has not succeeded in full with the Striking Out Summons. I will make an order nisi that P is only entitled to 50% of the costs of the Striking Out Summons and there be certificate for two Counsel. The order nisi shall be made final after 21 days. 189.Lastly, I thank all Counsel for their submissions and assistance to the court.
Mr Ambrose Ho SC and Ms Bonnie Cheng, instructed by DLA Piper Hong Kong, for the plaintiff Mr Edward Chan SC and Ms Chyvette Ip, instructed by David Lo & Partners, for the 1st defendant and 2nd defendant [1] It seems the English name of the Company was also Wuhan Baishazhou Terminal Market CN Ltd, as stated in the JV Agreement subsequently referred to in this judgment [2] Para 3(b), B:85 [3] See paras 19-28, A:130-132 [4] Clause 3, Recital, A:87 [5] B:21 [6] B:2-80 [7] B:84-130 [8] See clause 8.1, B:15, and also clause 4, B:81 [9] See clause 1.1, B:6, and clause 1.1, B:88 [10] Para 16, Re-amended statement of claim, A:16 [11] Para 27, Defence, A:93 [12] Clause 2.1, B:207-1-3; Clause 2.1, B:207-1-7 [13] Notwithstanding the title, these documents may not be promissory notes or bill of exchange in law [14] B:81-82 [15] B:131-132 [16] Para 37, A:158 [17] Paras 38-39, A:158-159, although Chan seemed to think Yang was appointed about one month earlier [18] Para 6, A:86-87 [19] Para 7, A:87-88 [20] Para 10, A: 88 [21] B:208-221 [22] B:141-146 [23] Clause 12.1, B:219“雙方同意，本協議的簽訂、履行、解釋及爭議解決等，均适用中華人民共 和國法律” [24] Clause 17.1, B:19 [25] Clause 12.2, B:220 “凡因簽訂及履行本協議所發生或與本協議有關的一切爭議，… 任何一方可 將爭議提交有管轄權的人民法院通過訴訟解決” [26] Clause 17, 1st SPA, B:19, and Clause 14.5, 2nd SPA, B:98 [27] B:222 [28] Para 1, B:190 [29] B:1-1 [30] Para 35 (1), A:157 [31] Paras 35(2)-(3), A:157-158, and see also the Public Announcement, B:1-2 [32] Para 41, A:159 [33] Para 42, A:137 [34] Paras 19-28, A:130-132 [35] Para 40, A:135; see also B:190 [36] Para 135, A:193, see also B:151 [37] B:148 [38] B:148 -167 [39] B:234-240 [40] B:240-1 to 240-5 [41] B:168-205, and see also P’s public announcement dated 19 June 2014 at B:206 [42] B:204-205 [43] B:194 [44] B:194-195 [45] Para (四), B:173 [46] B:195 [47] Para 1, B:196 [48] B:198 [49] Para 1, B:199 [50] Para 1 -3, B:201-202 [51] B:202-203 [52] B:203 [53] “有違誠實信用原則”, B:204 [54] B:203-203 [55] B:204 [56] Zhou, Luo, Yu, Yang Weiyuan, Yang, and Tien Hang [57] A:122-124 [58] Ibid. [59] Adopting the English translations as set out in P’s skeleton submissions, 2 July 2014, see paragraphs 10-15, but, for consistency, any reference to “article” has been changed to “clause” in this judgment; [60] Clause 4.1(e) in 2nd SPA [61] B:10 [62] Clause 4.3 in 2nd SPA [63] Clause 4.4 , 2nd SPA [64] Clause 6.1, 2nd SPA [65] Clause 6.2, 2nd SPA [66] Clause 6.3, 2nd SPA [67] Clause 14.2, 2nd SPA [68] At 254F-255C [69] See para 29, The Securities and Futures Commission v Young Bik Fung and others [70] A:305 [71] See para 41, P’s skeleton submissions [72] B:207-1 to 207-20 [73] See para 21.3, Ds’ skeleton submissions [74] Para 35, A366 [75] B:207-2 [76] Clauses 9-20, Chapter 2, B:207-3 to 207-7 [77] Paras 96 and 97 [78] Para 25.2, Ds’ skeleton submissions [79] Paras 19-20, Defence, B:91-92 [80] Para 17, A:358 [81] B:180 [82] B:189-1 [83] B:194 [84] B:190 [85] Para 11(4) and (5), A:110-111 [86] Para 86, Ng Judgment, A:417 [87] Para 100, A 425-426 [88] Paras 41, 97 and 98, A:393,422 [89] Para 48, A:34 [90] Para 52, A:36 [91] Para 50, A:96-97 [92] See para 51 of RASC, A:36 [93] See para 10.1.3, pg 168 [94] Para 1-08 , pg 5 [95] At paras 194-206, [96] Paras 230-249, pg 165-169 [97] Paras 129-155, pgs 78-87 [98] B:241-358 [99] Para 2 , B:164 [100] Per Cheung JA, at para 35 [101] At para 1 [102] SeeTheSecurities and Futures Commission v Young Bik Fung and Others, HCMP 2575 of 2010 (28.10.2013)at para 32. [103] At 251 E-F [104] At 1022 D-E |
Cases cited in this judgment
Further hearings and rulings under HCA 1807/2011