Winland Enterprises Group Inc. v Wex Pharmaceuticals Inc. And Another

CACV 154/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 154 OF 2011

(ON APPEAL FROM HCCL 4/2011

Transferred from HCA 1573/2010)

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BETWEEN

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J U D G M E N T

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Hon To J:

Background

1. This is the plaintiff’s (“Winland”) appeal against the order of Reyes J made on 20 July 2011 that the leave granted to Winland to issue a concurrent writ of summons and to serve a sealed copy thereof on the 1^st defendant (“WEX”) out of the jurisdiction be set aside with Winland paying WEX’s costs of the application.

2. Winland is a company incorporated in the British Virgin Islands as a corporate vehicle for a group of investors represented by Margaret Chow (“Chow”) and Timothy Ma (“Ma”).

3. WEX is a listed company incorporated in Canada engaged in the pharmaceutical industry. It has a number of wholly owned subsidiaries, including WEX Medical Limited incorporated in Hong Kong (“WEX HK”), GlobalMed Corporation incorporated in West Indies (“GlobalMed”) and Acro Pharm Corporation incorporated in Barbados (“Acro Pharm”), the 2^nd defendant herein. WEX also has 97% interest in Nanning Maple Leaf Pharmaceutical Company Limited (“Nanning”) incorporated in the People’s Republic of China (“the PRC”).

4. WEX and the above subsidiaries shared some common staff. Frank Shum (“Shum”) was until 16 August 2005 a shareholder, director, president and chief executive officer of WEX; a director and chairman of WEX HK; authorised person and “lawyer at large” of Acro Pharm; and the chairman and legal representative of Nanning.

5. Grace Leong (“Leong”) was a director of WEX; director and deputy manager of WEX HK and Shum’s assistant until 13 March 2006.

6. In about July 2001, Shum and Leong on behalf of WEX discussed with Chow and Ma the possibility of WEX granting exclusive distribution rights in Tetrodin for treatment for opiate withdrawal in Peru to a company to be nominated by Chow and Ma. Tetrodin, also known as Tetrodonin, is extracted from tetrodotoxin (referred to collectively as “TTX”). The discussion resulted in Chow and Ma agreeing to subscribe for shares in WEX through private placement (“Share Purchase Agreement”) and in Winland entering into an agreement with GlobalMed on 5 December 2001 for sole distributorship of Tetrodin in Peru (“GlobalMed Agreement”).

7. In about April 2003, at the request of Shum, the GlobalMed Agreement was cancelled and replaced by an agreement on identical terms between Winland and Acro Pharm (“Acro Pharm Agreement”) on 21 May 2003.

8. On 25 November 2003, Winland entered into an exclusive distributorship agreement for Tetrodin in Peru (“Peru Agreement”) with Forbest Medical International S.A.C. (“Forbest”). On 12 April 2004, the Peru Agreement was transferred from Forbest to Equipos Y Medicinas S.A.C. (“Equipos”).

9. With the documentation provided by WEX, Equipos obtained Sanitary Registry Authorisation from the health authority in Peru on 24 February 2004 which permitted and licensed Equipos to import and sell Tetrodin manufactured by Nanning in Peru. The authorisation commenced on 5 February 2004 and expired on 5 February 2009.

10. In August 2004, WEX, Winland and Equipos jointly arranged clinical testing of the effectiveness of Tetrodin for treatment of opiate withdrawal precipitated by cocaine abuse in Peru. Pursuant to the arrangement, Winland placed a small purchase order with Acro Pharm for Tetrodin on 25 August 2004. The Tetrodin was never delivered. In January 2005, Shum requested to delay the commencement of the Acro Pharm Agreement. Winland agreed.

11. In an e-mail dated 24 April 2010, WEX informed Winland that as the final study report prepared by Ventana Clinical Research Organisation issued on 9 January 2006 concluded that the administration of Tetrodin did not attenuate withdrawal symptoms precipitated by naloxone, WEX discontinued development of Tetrodin for opiate withdrawal. WEX proposed to Winland to terminate the Acro Pharm Agreement and to dissolve Acro Pharm whose only business related to that agreement. Winland considered the e-mail evinced an intention on the part of WEX not to be bound by the Acro Pharm Agreement and to repudiate that agreement. Winland accepted the repudiation by WEX and Acro Pharm by filing a writ of summons with a statement of claim on 19 October 2010.

12. On 25 November 2010, Winland obtained by way of ex parte application leave from Master de Souza pursuant to Order 11 of the Rules of the High Court to issue a concurrent writ of summons in this action and to serve it out of the jurisdiction on WEX in Canada. On 8 February 2011, WEX applied pursuant to Order 12 rule 8 to have the order of Master de Souza discharged. On 20 July 2011, Reyes J set aside the order of Master de Souza with costs against Winland.

13. Winland now appeals against the order of Reyes J. On 30 January 2012, it also applied for leave to adduce new evidence relating to fraudulent concealment by WEX of Nanning’s loss of the intellectual property rights in Tetrodin in the PRC (“the China Patent”).

Winland’s case, grounds for service out on WEX, WEX’s objections and issues raised by this appeal

14. Altogether, Winland filed five versions of the statement of claim. The original version was considered by Master de Souza when granting leave to serve out at the ex parte stage. The third version, ie the re-amended statement of claim amended pursuant to leave granted by Reyes J on 17 March 2011 was considered before the learned judge at the inter parte review. Thereafter, Winland filed two further amended versions.

15. Winland’s case against Acro Pharm as disclosed in the re-amended statement of claim is that Acro Pharm was in anticipatory breach of the Acro Pharm Agreement and that at the time of entry into that agreement Nanning had lost its ownership of the China Patent. Winland also alleged that it was a condition precedent to the Share Purchase Agreement that WEX would grant distribution rights in Tetrodin in Peru to a company to be nominated by Chow and Ma. In the re-re-re-amended statement of claim, Winland introduced a new case of fraudulent concealment of Nanning’s loss of the China Patent.

16. WEX is not a party to the Acro Pharm Agreement. Mr Remedios, counsel for Winland, concedes that Winland has no independent cause of action against WEX. Hence, Winland sought to fix liability on WEX for Acro Pharm’s breach of contract by seeking to lift the corporate veil of Acro Pharm. In very broad terms, Winland’s case against WEX as pleaded in the re-amended statement of claim is that Winland withheld the supply of Tetrodin from Acro Pharm and that Acro Pharm was at all material times and still is the alter ego of WEX and a façade to cloak the fact that in truth the Acro Pharm Agreement and its business was carried on by WEX to evade its legal obligation and liability. In the re-re-re-amended statement of claim, Winland added a new case of fraudulent concealment that at the time of entry into the GlobalMed Agreement and later the Acro Pharm Agreement, WEX fraudulently, deliberately and dishonestly concealed Nanning’s loss of its ownership of the China Patent and that the placement of WEX’s shares to Winland supplied the motive for making the fraudulent concealment. The new evidence sought to be adduced is to support this new case. This is the case based on which Winland appeals the decision of Reyes J.

17. To obtain leave for service out of the jurisdiction on WEX pursuant to Order 11 rule 1(d), Winland has to make out a case that the Acro Pharm Agreement was in effect an agreement between Winland and WEX by lifting the corporate veil of Acro Pharm. Mr Remedios relies on WEX’s fraud, concealment of the loss of the China Patent, its use of Acro Pharm as a façade and that Acro Pharm is WEX’s puppet as grounds for lifting the corporate veil. At the ex parte stage, it also sought leave under Order 11 rule 1(f) by making a claim founded on tort. But that alternative was not pursued at the appeal.

18. WEX’s main ground of objection to the appeal is that in a review under Order 12 rule 8, it is not open to a plaintiff to present a different case on the basis of the new evidence sought to be adduced from that which formed the basis on which leave to serve out was granted by the master or on which the master’s decision was reviewed by the Court of First Instance. For that reason, Mr Carolan, counsel for WEX, argues that leave should not be granted to Winland to adduce the new evidence. WEX’s further grounds of objection are that on the basis of the re-amended statement of claim then before Reyes J, there was no intelligible cause of action against WEX, no serious issues to be tried and no valid ground for lifting the corporate veil of Acro Pharm.

19. The issues raised by this appeal are:

(1) what is the proper approach of the appellate court in a review under Order 12 rule 8;

(2) whether leave should be granted to permit Winland to adduce the new evidence;

(3) what are the legal principles applicable to lifting of the corporate veil;

(4) whether Winland has made out a case that the corporate veil of Acro Pharm should be lifted; and

(5) whether on the evidence available, Winland has satisfied the court that there is a serious issue to be tried in respect of its claim against WEX.

These issues will have to be considered in turn. But before turning to the...