Xie, Fortune Favors Holdings Ltd and Shengshi View International Holding Ltd v Xio Gp Ltd and Li

• Jurisdiction: Cayman Islands
• Judge: (Goldring, P., Rix and Moses, JJ.A.)
• Judgment Date: 14 November 2018
• Court: Court of Appeal (Cayman Islands)
• Date: 14 November 2018

XIE, FORTUNE FAVORS HOLDINGS LIMITED and SHENGSHI VIEW INTERNATIONAL HOLDING LIMITED

and

XIO GP LIMITED and LI

(Goldring, P., Rix and Moses, JJ.A.)

Court of Appeal (Cayman Islands)

Companies — derivative action — reflective loss — quia timet injunction sought by shareholder to prevent threatened loss to company not struck out under reflective loss doctrine — serious issue to be tried that injunction falls outside doctrine

Held, dismissing the appeal:

(1) There was an exception to the reflective loss principle when the wrong done to the company made it impossible (legally, not merely factually) for it to pursue its own remedy against the wrongdoer. A decision of the English Court of Appeal had, however, held that the exception only applied if there was a causal connection between the wrongdoing and the impossibility for the company to pursue its own remedy. On the present state of the authorities and subject to anything further from the UK Supreme Court, the present court would accept that claims in respect of any losses the company might already have suffered did not fall within this exception (paras. 39–50; para. 109).

(2) The quia timet injunctions against the defendants to prevent future loss should be maintained until trial, as there was at least a serious issue to be tried that they fell outside the reflective loss doctrine, and it was just that they be maintained. It might also or alternatively be possible to regard Mr. Xie’s action herein as the equivalent of or analogous to a derivative action. In the present state of the jurisprudence relating to the reflective loss doctrine, it would not be just to strike out these proceedings (even if some alteration to the procedural status were to become necessary). The alleged 100% beneficial owner of the company claimed an injunction to prevent harm being done to the company. The court could not see how the claim differed from a derivative action; a claim by Mr. Xie as shareholder on behalf of the company and/or in right of the company to prevent harm, loss and injury to the company (the company of course would not sue because it was at that time controlled by Ms. Li). The reflective loss doctrine had always been propounded as arising in terms of a reflective loss suffered by a company, and an injunction which sought to prevent aloss would seem prima facie to lie outside its ambit. There was no attraction whatsoever in extending the reflective loss doctrine to delegitimize an attempt to prevent a threatened loss, a fortiori threatened dishonestly, from taking place (paras. 66–68; para. 91; para. 109).

(3) The court did not accept the defendants/appellants’ submission that the injunctions should have been refused in the Grand Court as a matter of general principle concerning the grant of injunctions and as a matter of the proper exercise of discretion. There was at least a good arguable case that Mr. Xie was entitled to claim injunctions to prevent the successful exercise of fraud, either in circumstances which lay wholly outside the reflective loss doctrine (since no reflective or any loss had yet been caused but the claim was to prevent any loss) or because the claim could be regarded as, or as equivalent or analogous to, a derivative claim by a shareholder on behalf of a company. The present circumstances fully met the requirement that an interlocutory injunction could be granted, where appropriate, quia timet in support of a legal or equitable claim. The court could find no error to upset Mangatal, J.’s exercise of discretion. There was no sufficient reason (outside the reflective loss doctrine) in a case where there were serious issues of dishonesty and very large assets potentially at stake, for the court to refrain from granting its quia timet protection to the plaintiffs. In relation to the submission that the defendants, through the fund, were well able to meet any claim in damages, and that an injunction was thus unnecessary and inappropriate, it seemed to the court that in essence the present claim was not so much about compensation for loss as it was about prevention of loss (paras. 76–85).

(4) There was no ground for departing from the judge’s decision in relation to the fortification of the plaintiffs’ cross-undertaking in damages. There was no settled principle either in English or Cayman law that where security was awarded it had to be available from an entity or from assets available within the jurisdiction. That might be common practice, but it was not a matter of law or settled principle. It was ultimately a matter of discretion for the court to determine what it considered to be “real security.” In the present case, the Grand Court found that letters of credit issued in favour of the defendant by the Californian bank would provide real security. That was an exercise of discretion, and there was nothing wrong with it as a matter of law. There was evidence before the judge that the enforcement of a Cayman judgment in California was a simple procedure. Moreover, the letters of credit were subject to the non-exclusive jurisdiction of the Cayman courts and governed by Cayman law (paras. 106–108).

Cases cited:

(1)Caribbean Islands Devs. Ltd. v. First Caribbean Intl. Bank, 2014 (2) CILR 220, considered.

(2)Cybervest Fund, In re, 2006 CILR 80, considered.

(3)Day v. Cook, [2001] EWCA Civ 592; [2001] P.N.L.R. 32; [2002] 1 BCLC 1; [2003] BCC 256, dicta of Arden, L.J. considered.

(4)Elliott v. Cayman Islands Health Servs. Auth., 2007 CILR 163, referred to.

(5)Foss v. Harbottle (1843), 2 Hare 461; 67 E.R. 189, referred to.

(6)Garcia v. Marex Financial Ltd., [2018] EWCA Civ 1468; [2018] 3 W.L.R. 1412; [2018] B.P.I.R. 1495, followed.

(7)Gardner v. Parker, [2004] EWCA Civ 781; [2004] 2 BCLC 554; [2005] BCC 46, considered.

(8)Giles v. Rhind, [2002] EWCA Civ 1428; [2003] Ch. 618; [2003] 2 W.L.R. 237; [2002] 4 All E.R. 977; [2003] 1 BCLC 1, applied.

(9)Heron Intl. Ltd. v. Grade (Lord), [1983] BCLC 244, considered.

(10)Humberclyde Fin. Group Ltd. v. Hicks, English High Ct., November 14th, 2001, unreported, considered.

(11)Johnson v. Gore Wood & Co., [2002] 2 A.C. 1; [2001] 2 W.L.R. 72; [2001] 1 All E.R. 481; [2001] 1 BCLC 313, considered.

(12)Kazakhstan Kagazy plc v. Arip, [2014] EWCA Civ 381; [2014] 1 C.L.C. 451, distinguished.

(13)Khorasandjian v. Bush, [1993] Q.B. 727, referred to.

(14)Latin American Invs. Ltd. v. Maroil Trading Inc., [2017] EWHC 1254 (Comm); [2017] 2 C.L.C. 45, considered.

(15)Nurcombe v. Nurcombe, [1985] 1 W.L.R. 370; [1985] 1 All E.R. 65; [1984] BCLC 557; (1984), 1 BCC 99269, dicta of Browne-Wilkinson, L.J. considered.

(16)Peak Hotels & Resorts Ltd. v. Tarek Invs. Ltd., [2015] EWHC 3048 (Ch), considered.

(17)Porzelack K.G. v. Porzelack (U.K.) Ltd., [1987] 1 W.L.R. 420; [1987] 1 All E.R. 1074; [1987] 2 C.M.L.R. 333; [1987] E.C.C. 407; [1987] F.S.R. 353, considered.

(18)Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2), [1982] Ch. 204; [1982] 2 W.L.R. 31; [1982] 1 All E.R. 354; [1981] Com. L.R. 265, followed.

(19)St. Vincent European General Partner Ltd. v. Robinson, [2017] EWHC 3267 (Comm), referred to.

(20)Shaker v. Al-Bedrawi, [2002] EWCA Civ 1452; [2003] Ch. 350; [2003] 2 W.L.R. 922; [2002] 4 All E.R. 835; [2003] 1 BCLC 157; [2003] BCC 465; [2003] WTLR 105; (2002), 5 ITELR 429, considered.

(21)Siskina v. Distos Cia. Naviera S.A. (“The Siskina”), [1979] A.C. 210; [1977] 3 W.L.R. 818; [1977] 3 All E.R. 803; [1978] 1 Lloyd’s Rep. 1; [1978] 1 C.M.L.R. 190, applied.

(22)Versloot Dredging B.V. v. HDI Gerling Industrie Vesicherung A.G., [2013] EWHC 658 (Comm), considered.

The plaintiffs alleged breach of fiduciary duty, dishonest assistance and unlawful means conspiracy, and sought injunctions to prevent dissipation of a company’s assets.

Dorsey Ventures Ltd. (“the company”) was a Cayman limited company. It was the sole limited partner of XiO Fund I LP (“the fund”). The sole registered shareholder of the company (and its sole director until she resigned) was Ms. Li, the third defendant/second appellant in the present proceedings. Ms. Li claimed to be both the legal and the beneficial owner of the company’s shares, but the beneficial ownership was claimed by the first plaintiff/respondent, Mr. Xie, pursuant to an entrustment agreement. Ms. Li denied that she had agreed to hold the shares on bare trust for Mr. Xie and alleged that her signature on the entrustment agreement was a forgery.

The sole general partner of the fund was XiO GP Ltd., the first defendant/appellant. Ms. Li was its sole director. XiO GP Ltd.’s authorized representative was a Mr. Pacini (who was not a party to this appeal). Ms. Li (with Mr. Pacini) effectively controlled the fund. Due to regulations in the People’s Republic of China, an onshore fund was created called Shanghai Li Hong Investment Centre (Limited Partnership), which was controlled by Ms. Li and Mr. Pacini. The fund’s major investments, through Shanghai Li Hong, were in two separate businesses (“the target companies”), amounting to nearly US$800m. The investments were to be held jointly by the fund and Shanghai Li Hong, with share subscription agreements accordingly entered into for each investment which provided for the shares in the target companies to be registered in the name of Shanghai Li Hong.

Following the investments, relations between the parties deteriorated. Ms. Li and Mr. Pacini failed to provide ongoing information or to answer correspondence. A deadline for information set by Mr. Xie was not met.The fund subsequently issued three capital calls on the company, totalling US$65m., and further calls for US$65m. were issued by the general partner of Shanghai Li Hong on the limited partners of Shanghai Li Hong (which Mr. Xie claimed to control). As a result, Mr. Xie wrote to Ms. Li to exercise his rights under the entrustment agreement to require the transfer of his shares in the company to a nominee. His Hong Kong solicitors wrote to XiO GP, Ms. Li and Mr. Pacini seeking confirmation...