Unique perspective on issue estoppel and unfair preference reliefs

In Yuen Tsz Chun Frank and Chan Hoi Yan, the Joint and Several Liquidators of RZ3262019 Limited (in liquidation) v Zhou Ying Investments Group Limited & Ors [2025] HKCFI 4350, the Court dismissed applications to strike out an unfair preference claim commenced by the Liquidators of RZ3262019 Limited (the Company) (represented by DLA Piper) and explored novel principles on issue estoppel and unfair preference reliefs. The DLA team was led by Harris Chan (Partner), assisted by Sandy Au (Of Counsel) and Carol Chui (Associate).

 

Background

The Company was incorporated for the acquisition of a property development company in Chengdu (the Project Company) by a joint venture consortium from CK Assets Holdings Limited (CK Assets).

The acquisition was completed upon seeking various third-party financing including (i) loans provided by Yuzhou Group Holdings Company Limited (Yuzhou), a listed company in Hong Kong (the Yuzhou Loans); and (ii) a loan advanced by the vendors (the Vendors), namely two wholly-owned subsidiaries of CK Assets (the Vendor Loan).

Unbeknownst to the Vendors, a refinanced loan was advanced by Zhou Ying Investments Group Limited (Zhou Ying) in July 2021 (ZY Loan), merely 4 days after the Vendors declared an event of default on the Vendor Loan. The Yuzhou Loans were also assigned to Zhou Ying in November 2021, once again without the knowledge of the Vendors.

Further, two guarantees (the Guarantees) were entered into to guarantee the Company's liabilities under the ZY Loan and the Yuzhou Loans. 8 days later, demand letters were sent by Zhou Ying in respect of the outstanding indebtedness under the Guarantees, and on the same day, the Project Company was caused to admit liability to repay. The Project Company was subsequently caused not to properly defend proceedings commenced in Mainland China on the enforcement of the Guarantees. Judgments were made by the PRC courts in favour of Zhou Ying, and subsequently enforcement proceedings (the Enforcement Proceedings) were underway.

Attempts were made to apply for a re-trial of the said proceedings. At the re-trial application, allegations of conspiracy between Zhou Ying and Yuzhou to defraud creditors (the Allegation of Conspiracy) and allegations that Zhou Ying was controlled by Yuzhou (the Allegation of Control) were put forth, but the re-trial application was dismissed by the Sichuan Higher People's Court.

Upon the winding-up of the Company in Hong Kong, the Liquidators were appointed and the unfair preference proceedings were commenced against Zhou Ying and Yuzhou.

 

The Decision

The two main grounds put forth by Zhou Ying and Yuzhou in support of their striking out application against the Liquidators' unfair preference claim include (i) issue estoppel; and (ii) the Court does not have jurisdiction to grant a relief that is not restorative in nature.

On the first issue, the Court applied the decision of Alexander Brothers Ltd (Hong Kong SAR) v Alstom Transport SA & Anor [2020] EWHC 1584 (Comm), where Cockerill J held that when determining whether there is identity of issues, the standard of proof is a relevant consideration. There comes a point at which an issue subject to a significantly different standard of proof becomes a different issue. The Courts should also be cautious before concluding that a foreign court made a clear decision on the relevant issue because the procedures of the court may be different and it may not be easy to determine the precise identity of the issues being determined.

When considering whether the PRC courts in dismissing the re-trial application has decided issues on the Allegation of Conspiracy and Allegation of Control, the Court considered the PRC legal opinion adduced, and the fact that the standard of proof applicable in a trial proper in respect of malicious conspiracy (beyond reasonable doubt) appears to be different from the test applicable in an unfair preference claim (balance of probabilities). As such, the Court cannot come to any definitive view at the interlocutory stage whether the issues are plainly and obviously identical for issue estoppel to be triggered.

In relation to the second issue, the Court considered that whilst the relief sought by the Liquidators required Zhou Ying and Yuzhou to pay funds received from the Enforcement Proceedings to the Company, and not the Project Company which suffered the actual loss, the Court applied the decision of Johnson v Arden [2019] 2 BCLC 215 and considered that the Court is entitled to make orders which in substance achieve the result of restoration but achieve it in a different way.

In this respect, the Court considered that there were exceptional circumstances in the present case for payments to be provided to the Liquidators of the Company instead of the Project Company in view of the inability of the Company to control the Project Company (which was still controlled by Zhou Ying and Yuzhou). Further, the Liquidators could be directed as to how to apply the payment received so as to ensure that any interest of the Project Company and its creditors would be properly taken care of.

In view of the above, the Court dismissed the striking-out applications taken out by Zhou Ying and Yuzhou.

 

Key Takeaways

This is the first time the Court has considered the issue of standard of proof in respect of issue estoppel and the decision serves as a reminder that even if an issue has arguably been considered by a foreign court, the Hong Kong court would also consider the relevant standard of proof when considering the identity of issues involved. The Court would also take a cautious approach in relation to foreign judgments when concluding whether a decision has been made in respect of the relevant issue in view of the differences in procedures between jurisdictions.

The Court has also affirmed the pragmatic approach adopted in Johnson v Arden, whereby the Court should task itself to fashion the most appropriate remedy with a view to restoring the position as it would have been in if the debtor had not entered into the transaction in unfair preference cases, despite the doctrine of separate legal personality between parent and subsidiary companies.

For the full decision, please see: YUEN TSZ CHUN FRANK AND CHAN HOI YAN, THE JOINT AND SEVERAL LIQUIDATORS OF RZ3262019 LTD (IN LIQUIDATION) V. ZHOU YING INVESTMENTS GROUP LTD AND OTHERS | [2025] HKCFI 4350 | HKLII