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Civil Action2007

PARON GLOVES INTERNATIONAL LTD v. WU WAI KIT

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88365-EN-2013-07-25

PARON GLOVES INTERNATIONAL LTD v. WU WAI KIT

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HCA 1357/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1357 OF 2007

________________________

 

BETWEEN

 PARON GLOVES INTERNATIONAL LIMITEDPlaintiff
 and
 WU WAI KITDefendant

________________________

Before: Mr Registrar K.W. Lung in Chambers (Open to the public)
Date of Hearing: 25 July 2013
Date of Decision: 25 July 2013

_______________________________

DECISION

_______________________________

 

INTRODUCTION

1.  On 10 March 2010, leave was granted to the plaintiff to set the matter down for a 5-day trial. The case was not set down up till now. In May 2012, Madam Leung Yuk Chun applied to join as a defendant in this action.  On 6 September 2012, an order was made for her to join in.  On appeal, this order was set aside by Madam M. Chan J., who delivered her Decision on 10 January 2013.  The plaintiff therefore applies for extension of time to set the matter down for trial.  The defendant has also taken out two summonses for altogether six applications.  These applications are set out in counsel’s written submissions. For convenience, I shall copy the introduction of these applications from Ms. E. Yang’s written submissions.  Ms. Yang and Mr. T. Chow, counsel act for the plaintiff and Mr. K. Chan and Mr. H. Leung, counsel act for the defendant. The applications are:

“(a) Plaintiff’s summons dated 26.3.2013 for extension of time to set this action down for trial pursuant to the Order of Mr Registrar Lung dated 10.3.2010 (“P’s Summons”) [A/47];

 (b) Defendant’s summons dated 5.4.2013 to apply for inter alia:-

i. P to provide D photocopy of the documents specified in Annex I thereto [A/53] (“Discovery Application”);

ii. Leave to D to amend the Amended Defence as per the draft Re-Amended Defence (“Old RAD”) annexed thereto [A/54] (“Amendment Application”);

iii. Leave to D to file and serve supplemental witness statement of D, witness statement of Leung Yuk Chun (“LYC”) and witness statement of He Shuqin (“HSQ”) (“Supplemental Witness Statements Application”);

iv. Leave to D to file and serve expert report by Mr. Doman Wong (“Expert Evidence Application”);

(c) D be at liberty to call Doman Wong as expert witness at trial. (altogether “D’s Summons”) [A/50]

(d) D’s summons dated 18.7.2013 to apply for leave to withdraw the Old RAD annexed to D’s Summons and replace the same with a new draft Re-Amended Defence and Counterclaim (“New RADCC”) (“Replacement Application”).”

2.  The plaintiff also complains the following acts of the defendant.

a. On 18.7.2013, D filed (without leave) the supplemental witness statement of D, and the witness statements of LYC and HSQ (altogether “the Purported Statements”);

b. On 19.7.2013, D sent a draft expert report to P, a belated one.

3.  It is not necessary to deal with the Discovery Application as the parties have made the arrangements themselves.[1]  Mr. Chan has also fairly agreed to abandon his Replacement Application.

4.  Mr. Chan submits that he would plead section 358 of Companies Ordinance as a defence rather than as a counterclaim.  He would therefore delete the counterclaim, leaving the paragraph thereunder as part of the Re-Amended Defence.  Ms. Yang has no objection to this proposal.  Leave is given to the defendant to make the amendments as proposed and re-submit the rectified one, under the title of Re-Amended Defence for filing and service if leave is granted.

5.  As to the plaintiff’s application for extension of time for setting down for trial, the defendant says that in view of the defendant’s outstanding matters, the matter is not yet ready to be set down for trial.

6.  As to the defendant’s applications, Ms. Yang submits that, on procedural grounds and on merits, they should be dismissed.

THE FACTUAL BACKGROUND

7.  For the factual background of this action, I gratefully adopt the summary of the facts set out in Madam Justice M. Chan’s Decision delivered on 10 January 2013 for Madam Leung’s application for joining as a defendant.  The learned judge summarized the facts as follows:

“1. The plaintiff (“Company”) is a limited company incorporated in Hong Kong in July 1986.  In these proceedings, it makes claims against the defendant (“WK”), a director of the Company until December 2006, for alleged misappropriation of funds of the Company totaling $44,266,315.31 (“Misappropriated Funds”).  The Writ was issued in August 2007, and the claim made against WK is for an account of the Misappropriated Funds, alternatively damages in the sum of $44,266,315.31, alternatively damages to be assessed.  … …

6. The pleadings filed in this case are not complex.  The Company claims that WK had, during the time when she was a director of the Company and between 1995 and 2004, issued 340 cheques in her own favour and withdrawn the Misappropriated Funds from the Company’s bank accounts.  Despite the cheques being marked in the Company’s records to have been for the expenditure of Lifeng Factory and Liqiang Factory (“Factories”), in which the Company had interests as a joint venture partner in Mainland China, the Company claims that in truth, the Misappropriated Funds had been used for WK’s own benefit.  The Company thus claims that WK had acted in breach of her fiduciary duty and duty of good faith owed to the Company as its director, and that the Misappropriated Funds are held by WK on constructive trust for the Company. 

7. By its prayer in the Re-Amended Statement of Claim, the Company seeks from WK an account of the Misappropriated Funds, and damages, whether represented by the Misappropriated Funds or to be assessed.

8. By way of defence, WK claims that the alleged Misappropriated Funds had been utilized for the payment of the expenses of the Factory (paragragh 22 of the Amended Defence).  WK claims that the drawing of the cheques was all done under the direction of and advice by Wu Kwok Kwong (“KK”), the registered holder of 45% of the shares of the Company, who is also her brother and another director of the Company.  The balance of the shares are held as to 20% by WK, 15% by Leung and 20% by KK’s wife.

9. On the basis of the matters summarized in paragraph 8 above, WK denies that she had misappropriated any funds of the Company, and further denies that the Misappropriated Funds were held by her on trust, as alleged.”

8.  The learned judge had considered the facts of the case, and having heard submissions from counsel of respective parties, she commented in her Decision that it is a relatively simple case as she said:

“17. Having considered the pleadings, I agree that the issue in dispute for determination at trial is simply whether WK had misappropriated funds of the Company, such that she should be liable to the Company.

18. The relief or remedy claimed in this action is an account or payment by WK of the Misappropriated Funds of the Company.  The question or issue which arises out of or relates to or is connected with the relief or remedy claimed is whether the Misappropriated Funds were used for the purposes of the Company, namely for the expenses of the Factories as WK claims in the Amended Defence.  If, as WK claims, the Misappropriated Funds had been used for the legitimate purposes of the Company, by paying for the expenses of the Factories, then she is not liable to the Company for the relief sought.”

THE APPLICATIONS

9.  For convenience, I shall first deal with the defendant’s applications before I deal with the plaintiff’s application for extension of time for setting down for trial.

AMENDMENT APPLICATION

10.  Mr. Chan submits that the present Amended Defence is not complete and the defendant should be allowed to amend her defence in view of the further witness statements and that there is no prejudice to the plaintiff.

11.  Ms. Yang argues that this is a late application.  The defendant had, in the Listing Questionnaire filed on 2 March 2010, said there would be no application for amendment of the Amended Defence and the plaintiff had not changed its case.  To allow the defendant to amend the defence would inevitably delay the proceedings further.

12.  The legal principles on amendment are trite. The plaintiff relies upon the following authorities, which I consider relevant in opposition to this application:

a. The general principles that amendment should be allowed if it causes no prejudice to the other party: Hong Kong Civil Procedure 2013, Vol 1, 20/8/6;

b. Pure undue delay is not sufficient to bar the application.  Application for amendment may be refused if the application could have been made earlier and such application would cause other interlocutory applications before trial.  Hesson Development Ltd v Tang Ki Fan Tso (unreported, HCA 5584/1998, 30.9.2003)

13.  However, I would like to add another authority to the list above, which bears similarity to this application and in which the learned Judge had set out the proper approach for the consideration of the application.  In VSC Building Products Company Limited v. Kono Insurance Limited HCA947/2005, 9 September 2009, (unreported) by Mr. Justice A. Cheung (as he then was), the defendant made an application to amend the Defence in less than 3 months before trial, a milestone date as the CJR had already commenced on 2 April 2009.  It sought to raise formally the defence that the plaintiff had, in breach of a condition in the policy, failed to notify the insurer of the accident in time.  Knowledge of the plaintiff of the accident therefore became a crucial matter.  The learned judge set out the court’s approach to the application.  At paragraph 19 of the Decision, he said:

“19. The primary considerations in this type of late application are first, the merit of the proposed amendment, which I have just dealt with, and secondly, and maybe more importantly, the presence or absence of any real prejudice to the other.

22. Absent any real prejudice, the case must be decided upon the general principle that a court of law seeks to adjudicate on the real issues and disputes between the parties and, if possible, technical and procedural rules should not stand in the way of allowing the parties to raise their real claims or defences before the court for adjudication.”

14.  In Mr. Chan’s written submissions, he set out the purposes for the proposed amendments.  They are added to clarify the various bank accounts in which the defendant had deposited the money allegedly misappropriated by her, update the information as to where and when she had deposited the cheques.[2]  Ms. Yang does not dispute this in her written submissions.

15.  As mentioned in the factual background, this case is a relatively simple case where the plaintiff has built up a prima facie strong case against the defendant, who had allegedly deposited 340 cheques into her account or otherwise had misappropriated the money.  It will be for the defendant to give a full account of explanation for the deposits and use of the money for her defence.  Ms. Yang does not argue that the proposed amendments are relevant to her defence.  I consider that they are crucial for the defendant’s defence.  To deprive her of the opportunity of stating her case clearly in the pleadings would be unfair to the defendant.  As Mr. Chan has rightly pointed out, the allegations raised by the plaintiff in this Action carry criminal liability against the defendant.  The matter has not been set down for trial.  No doubt, there will be some delay in the corresponding procedural steps caused by the proposed amendments.  However, Ms. Yang has not shown to me the prejudice that cannot be compensated by costs.  She submits that the amendment would cause other interlocutory applications such as further discovery. That may be so. However, Mr. Chan has confirmed today that there will not be any application for further discovery because of the amendments.

16.  Accordingly, I allow the defendant’s application for amendment in terms of paragraph 4 supra.

SUPPLEMENTAL WITNESS STATEMENTS APPLICATION

17.  The defendant seeks leave to file and serve her supplemental witness statement, witness statement of Leung Yuk Chun (“LYC”) and witness statement of He Shuqin (“HSQ”).  I shall deal with each of the proposed supplemental witness statement and the further witness statements separately.

Supplemental witness statement of the defendant

18.  The plaintiff opposes this supplemental witness statement on the ground that it is, in fact, not a supplemental witness statement, but a fresh witness statement de novo.  In her written submissions, Ms. Yang has also set out the objectionable paragraphs with reasons[3]:

a. Paragraphs 11 to 36 because D merely offers observations, comments and speculations to P’s documents;

b. Paragraph 51 where the last sentence makes submissions on the merits;

c. Paragraph 55 where the last 2 paragraphs are speculations and beliefs of D;

d. Paragraph 65 where the 2nd last sentence is merely an opinion/submission on the merits;

e. Paragraph 81 because it is wholly irrelevant and also contains speculations and adverse comments;

f. Paragraphs 89 to 96 because they are legal submissions, opinions and speculation;

g. Paragraphs 122 to 124 because they are statements of belief;

h. Paragraph 130 because it is speculation and opinion;

i. Paragraph 132 because it offers D’s guess;

j. Paragraph 140 because it is speculation;

k. Paragraph 144 because it refers to another proceedings and is irrelevant;

l. Paragraph 147 because it is irrelevant and speculative;

m. Paragraph 148 because it is comment and irrelevant;

n. Paragraph 156 because it is legal submission;

o. Paragraph 158 to 166 because it is wholly irrelevant;

p. Paragraph 169 because it is irrelevant and seeks to introduce irrelevant document;

q. Paragraph 170 is speculation.

19.  Mr. Chan submits that the supplemental witness statement of the defendant is not given de novo. It will serve the purpose of giving more particulars to the defendant’s defences.  The comments made by Ms. Yang are unwarranted because the comments or opinions of the defendant are supported by the facts stated in her statement or they are necessary conclusions because of the facts stated in her statement.  Some of them may be technically objectionable.  But to dwell on such technical details will not assist the proceedings.  I agree.  If such technical transgressions of the witness statement are not prejudicial to the other party, it will not be necessary to waste time and costs to deal with them.

20.  I note that the witnesses who have given their witness statements are not allowed to change their witness statements inconsistent with their previous statements.  See §10 of Commerzbank Aktiengesellschaft (Hong Kong) v Peregrine Fixed Income (in Liquidation)CACV296/2002 (unreported) 10 September 2002.  Today, Ms. Yang has admitted that the supplemental witness statement of the defendant is not outside the scope of her original witness statement.  If her supplemental witness statement were served as the original witness statement, the plaintiff would have no objection to it.  The reasons for the plaintiff’s objection is that it is late and the plaintiff was given insufficient time to consider it.

21.  I shall give leave to the defendant to serve her supplemental witness statement.

Witness statement of LYC

22.  The plaintiff’s objection to this witness statement is based on the reasons that her witness statement will only cover the background facts and she had no direct or only had limited knowledge of how the cheques had been used.  Her witness statement would only expand the issues and prolong the proceedings.

23.  The legal principles relating to witness statements are set out in my Decision in Talent Weaving Dyeing & Printing Limited v Able Billion Textiles Limited [2013] 2 HKLRD 479, the relevant parts of which are as follows:

a. evidence that bears no relevance to the pleaded issues in dispute is scandalous and is inadmissible and liable to be struck out;

b. evidence that is beyond the ambit of the pleaded issues is scandalous and should be struck out: John Simpson Warham v Cathay Pacific Airways Ltd (unreported) HCMP4400/2001, 10 December 2008 by Reyes J.

24.  Ms. Yang relies upon Parsad v Great Wealthy Eng. Co Ltd, [2012] 3 HKLRD 705, Bharwaney J, in which the learned Judge referred to Chung Hiu Bun, the administrator of the estate of Chung Chun Kong, deceased v. Yeung Yiu Sing and anor., HCPI 123/2012, 28 July 2011, which said that the Court might refuse application for introduction of new evidence at a late stage of the proceedings and “the probative value of such new evidence is low and of marginal relevance”.

25.  As I have already allowed the proposed amendments to the Amended Defence, I will take into consideration those proposed amendments.  Having considered the amended pleadings, it is quite obvious that in the amended paragraph 18A of the Re-Amended Defence, the defendant pleaded that for cheques No. 86 and 87, Madam Leung was the drawee and in paragraph 28(b), the defendant pleaded that the practice of depositing the cheques of the company into the Joint Name Account and the HK Account was made under the directions of Wu Kwok Kwong, a director and shareholder of the plaintiff and this practice was made known to Madam Leung.

26.  The plaintiff may prefer to have a simple factual scenario that the defendant had misappropriated the cheques for her own use and it is for the defendant to account for the use of those cheques and the money.  The defendant has already admitted that she had drawn the 340 cheques except for Nos. 86, 87, 309 and 310 as defined in Annex 1 to the Re-Amended Statement of Claim.[4]  The burden is clearly upon the defendant to account for the money of those cheques.  Otherwise, she will be liable to account the money to the plaintiff.  However, the defendant has pleaded her case in such a way that there had been agreement between Mr. Wu Kwok Kwong and herself that the cheques could be deposited in the Joint Name Account and the HK Account.  I consider that to deny the defendant the opportunity of adducing Madam Leung’s evidence in support of her defence at this stage would be unfair to her.

27.  I have no idea how the plaintiff would plead to the proposed amendments by way of a reply.  For interlocutory application, the Court will not go into the details of the evidence, which is matter for the trial.  On the materials before me, I consider that Madam Leung’s supplemental witness statement is relevant to the amended pleadings and it should be allowed into evidence.  So I do.

Witness statement of HSQ

28.  The plaintiff’s objection to this witness’s statement is based on the reason that no explanation has been given as to why HSQ was not engaged earlier and the following paragraphs in her witness statement are objectionable.

a. Paragraph 28.2 because it merely deposes HSQ’s belief;

b. Paragraph 29.1 because it is opinion and submissions;

c. Paragraph 29.2 because it is opinion and submissions; 

d. Paragraph 29.3 because it is opinion and submissions; and

e. Paragraph 30 because it is opinion.

29.  Mr. Chan makes the similar observations to those comments as he has done to the defendant’s supplemental witness statement.

30.  This witness is certainly important for the defendant to advance her defences.  Her evidence is relevant to the issues in dispute.  I grant leave for the defendant to serve this witness’s statement.

EXPERT EVIDENCE APPLICATION

31.  The defendant intends to adduce expert evidence of Mr. Doman Wong, Director of Risk Advisory Department of Baker Tilly Hong Kong Risk Assurance Limited.  The defendant applies for expert directions of:-

a. Filing of expert report authored by Mr. Doman Wong;

b. Calling Mr. Doman Wong as an expert witness at trial.

32.  The plaintiff opposes this application on procedural grounds and on merits.

33.  On procedural grounds, the plaintiff says that the defendant’s application is late and she has not complied with paragraph 20 of Practice Direction 5.2; that she has taken away the Court’s power of appointing a single joint expert.

34.  On the merits, the plaintiff says that the matching and tracing exercise of the cheques into various bank accounts do not require any specialized knowledge and do not call for expert testimony.

35.  In Wong Hoi Fung v. American International Assurance Company (Bermuda) Limited & Another [2002] 3 HKLRD 507, the court set out the two-stage test for determining admissibility of expert evidence:

“12. In deciding whether certain proposed expert evidence should be received, the relevant test has been stated to be a two‑stage one.  Firstly, the evidence has to be admissible as “expert evidence” for the purpose of section 58 of the Evidence Ordinance, Cap.8.  Secondly, the evidence must be relevant, in the sense that it is helpful to the court in arriving at its decision on one or more of the issues to be resolved : Barings plc (in Liquidation) & Anor v. Coopers and Lybrand & Ors, Lexis Transcript, 9 February 2001, Evans‑Lombe J at paras.44‑45”

36.  Since the plaintiff argues that the matching and tracing exercise done by Mr. Doman Wong does not require specialized knowledge and hence, does not call for expert testimony, it will be helpful to make reference to the case of Barings plc (in liquidation) and another v Coopers & Lybrand (a firm) and others Barings Futures (Singapore) Pte Lye (inliquidation) v Mattar and others [2001] All ER (D) 110 by Evans-Lombe J., where the court directed the parties to adduce expert evidence on banking management and there was an extensive discussion on the issue of what was the proper subject matter of expert opinion.  The ground of objection to the defendants’ expert report was that the subject matter was not properly the subject of expert evidence, being directed to generalised management failings by Barings where criticism was not based on any objective standards but only upon Mr Giannotti's own experience.  The head-notes of the law report summarize the learned judge’s decisions as follows: 

“It was established that expert evidence was admissible under s 3 of the Civil Evidence Act 1972 (the same provisions under s.58(3) of the Evidence Ordinance, Cap. 8) added by me, in any case where the court accepted that there existed a recognised expertise governed by recognised standards and rules of conduct capable of influencing the court's decision on any of the issues which it had to decide and the witness to be called satisfied the court that he had a sufficient familiarity with and knowledge of the expertise in question to render his opinion potentially of value in resolving any of those issues. However, evidence meeting that test could still be excluded if the court took the view that calling it would not be helpful to the court in resolving any issue in the case justly. Such evidence would not be helpful where the issue to be decided was one of law or was otherwise one on which the court was able to come to a fully informed decision without hearing such evidence.”

37.  Mr. Wong has submitted his draft report for the Court’s consideration.  In his report, Mr. Wong has set out his professional qualifications and the factual basis on which he made the matching and tracing of the cheques as alleged in the pleadings.  By looking at this report briefly, one can see immediately that the exercise takes a professional accountant to make the matching and tracing in order to make a finding on the way cheques were treated through the various accounts.

38.  It will be enlightening to find the following results during the relevant period in question between 1 May 1995 and 31 December 2004 after Mr. Wong’s matching and tracing exercise:

a. $5,150,432.93 were transferred to the plaintiff’s bank account from the joint name account (page 11)

b. $2,764,202.62 were remitted to Lifeng and Liqiang from the defendant’s account (page 14)

c. Overall, $12,793,499.10 were withdrawn from the joint name accounts of the defendant and Wu Kwok Kwong and the single name savings and current account of the defendant in connection with the purposes of payment to third parties, transfer to the plaintiff’s account, payment to Wu Kwok Kwong and overseas remittances to Lifeng and Ligiang. (page 16).

39.  Ms. Yang has fairly admits that the above information would be relevant to the issues at the trial.  She only argues that these matters do not require an expert to handle.  She submits the trial judge will be able to look at the accounts and entries to obtain the information in the draft expert report.  With respect to her, I have to admit that if I were the trial judge myself, I might have difficulty in understanding the various accounting entries, tracing the flow of money and doing the matching myself.

40.  Furthermore, as the burden is on the defendant to account for the cheques, which she had admitted to have drawn, it is at least reasonable to allow her to obtain the assistance of an accountant to present comprehensive and logical accounts to defend herself at the trial.  Such expert report, in my view, will certainly assist the trial judge to understand the evidence of the defendant.  It will save time and costs for the trial than otherwise having the accountants to explain the matching and tracing of the accounts in court.

41.  I am satisfied that the defendant has passed the two-stage test and Mr. Doman Wong’s expert report should be given leave to be adduced as evidence at trial.

42.  Once I have come to this conclusion, the plaintiff’s argument on the procedural grounds will fall away.  Practice Direction 5.2 is not applicable as the defendant has already obtained a draft expert report.  This draft expert report was prepared before the court has granted leave to the defendant to adduce it as evidence.  The defendant therefore prepared this expert report at her own risk that if the court refuses to grant her leave, she has to bear the cost for the expert report herself.  It will be for the plaintiff to consider whether it will call an expert to respond to the defendant’s expert opinions.

43.  As to the court’s power of appointing a single joint expert, this power cannot be taken away.  However, it is quite apparent that a single joint expert, though convenient and costs-saving, would not be practicable for this matter.  If the plaintiff is minded to have a single joint expert, it may consider agreeing to adopt Mr. Wong’s report, in which event, it will save time and costs for the trial.  But this is entirely a matter for the plaintiff’s legal advisors.

44.  I will therefore grant leave to the defendant to call Mr. Doman Wong as the expert for the defence and leave is granted to the defendant to adduce the expert report within 28 days from the date hereof.  The plaintiff is at liberty to serve its own expert report in response to Mr. Wong’s expert report within 56 days from the date of service of the defendant’s expert report.  The defendant is at liberty to serve an expert report in reply within 21 days thereafter.  The costs of the expert reports should be in the cause of the Action.

THE PLAINTIFF’S APPLICATION

45.  As I have granted leave to the defendant to amend the Amended Defence, to serve the witness statement and the supplemental witness statements and to serve the expert report, there must be time for the plaintiff to take the corresponding steps in response to these changes.  I agree with Mr. Chan that in those circumstances, the plaintiff’s application should not be considered until all outstanding interlocutory matters have been cleared.

46.  I shall therefore adjourn the plaintiff’s summons, returnable on 12:00 noon on 11 December 2013 for the next Case Management Conference before myself.

COSTS

47.  As to the costs of the defendant’s applications, the plaintiff submits that it agrees that the costs for the summons and the costs of and occasioned by the application for amendment be to the plaintiff and the costs for today’s hearing on amendment be to the defendant, who has succeeded.  Mr. Chan has no objection to this proposal.  I shall make an order as proposed. As to the costs for the witness statements and the expert report, the same basis will apply, that the costs of the application be to the plaintiff but the costs for today’s argument will be dealt with separately.  What follow is the costs for today’s hearing.  The plaintiff asks for costs on the basis that the defendant has only served the witness statements and draft expert report on the plaintiff late, causing this hearing inevitable.  The defendant argues that if the plaintiff considers that it cannot have sufficient time to consider the defendant’s witness statement and expert report, the plaintiff should apply for an adjournment and the costs for the adjournment will be dealt with accordingly.  However, since the plaintiff has elected to argue the case before the court today and it has failed, the costs for the argument should follow the event and must be given to the defendant.  I agree.  Costs is a matter at the discretion of the court.  In considering the costs, the court has to take into consideration the factors under Order 62 rule 5, one of which is the parties’ conduct.  Having taken into consideration of the circumstances, I consider that the costs for the defendant’s application relating to the witness statements and the expert report should be given to the defendant.  But because of the conduct of the defendant in serving the materials late, the defendant’s costs for the witness statements and expert report applications be reduced by 20%.  Since the defendant has not prepared the schedule of costs and the plaintiff’s schedule of costs may have to be amended because of the order here, I shall direct the parties to submit their schedules  of costs (in revised form by the plaintiff) within 14 days from the date hereof. I shall then consider whether the summary assessment be made on paper or by way of oral hearing on a date to be fixed.  On the question of two counsel as proposed by Mr. Chan, I consider that although there are a number of items in dispute, the legal arguments involved do not warrant the service of two counsel, with no disrespect to counsel for both parties, for whose assistance I am grateful.

ORDER

48.  I shall make an order in terms as follows:

a. As per paragraphs 16, 21, 27, 30 and 44 supra.;

b. Costs as per paragraph 47.

(K.W. Lung)
Registrar, High Court

Ms. Elizabeth Yang and Mr. Tony Chow, instructed by C.L. Chow & Macksion Chan, for the plaintiff

Mr. Kenneth Chan and Mr. Herbert Leung, instructed by Cheung, Fung & Hui, for the defendant



[1] §81 of Mr. Chan’s written submissions

[2] §39 of written submissions

[3] §42 of written submissions

[4] §18A of the proposed Re-Amended Defence

85185-EN-2013-01-10

PARON GLOVES INTERNATIONAL LTD v. WU WAI KIT AND ANOTHER

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HCA 1357/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1357 OF 2007

____________

BETWEEN

 PARON GLOVES INTERNATIONAL LIMITEDPlaintiff

and

 WU WAI KITDefendant
 LEUNG YUK CHUNApplicant
____________
Before: Hon Mimmie Chan J
Date of Hearing: 20 December 2012
Date of Handing Down Decision: 10 January 2013

_____________

D E C I S I O N

_____________

 

Background

1. The plaintiff (“Company”) is a limited company incorporated in Hong Kong in July 1986.  In these proceedings, it makes claims against the defendant (“WK”), a director of the Company until December 2006, for alleged misappropriation of funds of the Company totaling $44,266,315.31 (“Misappropriated Funds”).  The Writ was issued in August 2007, and the claim made against WK is for an account of the Misappropriated Funds, alternatively damages in the sum of $44,266,315.31, alternatively damages to be assessed. 

2. On 12 September 2007, a Defence was filed by WK.  Further pleadings were filed, and amendments were made to the pleadings, in the course of 2007 and 2008.  Witness statements were exchanged in May 2009.  As early as March 2010, an order was made by the Master that the case was ready to be set down for trial, but not much progress was made until May 2012, when Madam Leung Yuk Chun (“Leung”) applied to intervene in the action and to be joined as a defendant.  On 6 September 2012, the Master made an order granting leave for the joinder.  By Notice filed on 10 September 2012, the Company appeals against the Master’s decision.  On 23 November 2012, the Company further applied for leave to amend the Re-Amended Statement of Claim.

3. The appeal against the Master’s decision operates as a hearing de novo of Leung’s application to intervene in the action to be joined as a defendant. Such application was made under Order 15 rule 6 RHC.  Order 15 rule 6(2)(b) provides for the power of the court to order the joinder of:

“(i) party who ought to have been joined as a party or whose presence before the Court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, or

(ii)  any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.”

4. It is clear from the authorities that a person may be added as a party if he is directly affected, either legally or financially, by any order which may be made in the action (see the cases cited under paragraph 17/6/7 of Hong Kong Civil Procedure).  A person who is not a party to the action is entitled to intervene and be joined as a party, if he has some interest which is directly related or connected with the subject matter of the action (Wong Chun Loong Tony v Ada Ltd [1991] 1 HKC 86).  The interest of the intervenor must raise an existing issue, and not merely a contingent one (see Spelling Goldberg Productions Inc v BPC Publishing Ltd [1981] RPC 280).

5. In considering the “matters in dispute in the cause or matter”, and the “question or issue” arising out of or connected with the relief or remedy claimed in the cause or matter, as referred to in Order 15 rule 6(2)(b), one has to look at the pleadings in order to ascertain the issues to be determined by the Court at trial.  This is particularly important in the aftermath of the Civil Justice Reform, when the Court has to bear in mind the underlying objectives of the Rules of the High Court when exercising its discretion under the Rules and in the application of the Rules.  The relief and remedy sought by the parties in the action should always be defined by, and confined to, the pleadings, as the Court will not be furthering the underlying objectives of dealing with cases expeditiously, promoting reasonable proportion and procedural economy, ensuring fairness between the parties and the fair distribution of the resources of the Court, if parties should be permitted to raise at trial, or to introduce at a late stage in the proceedings when the parties are about to set the case down for trial, issues which may have been alluded to in witness statements but have never been properly pleaded.

The pleadings

6. The pleadings filed in this case are not complex.  The Company claims that WK had, during the time when she was a director of the Company and between 1995 and 2004, issued 340 cheques in her own favour and withdrawn the Misappropriated Funds from the Company’s bank accounts.  Despite the cheques being marked in the Company’s records to have been for the expenditure of Lifeng Factory and Liqiang Factory (“Factories”), in which the Company had interests as a joint venture partner in Mainland China, the Company claims that in truth, the Misappropriated Funds had been used for WK’s own benefit.  The Company thus claims that WK had acted in breach of her fiduciary duty and duty of good faith owed to the Company as its director, and that the Misappropriated Funds are held by WK on constructive trust for the Company. 

7. By its prayer in the Re-Amended Statement of Claim, the Company seeks from WK an account of the Misappropriated Funds, and damages, whether represented by the Misappropriated Funds or to be assessed.

8. By way of defence, WK claims that the alleged Misapropriated Funds had been utilized for the payment of the expenses of the Factory (paragragh 22 of the Amended Defence).  WK claims that the drawing of the cheques was all done under the direction of and advice by Wu Kwok Kwong (“KK”), the registered holder of 45% of the shares of the Company, who is also her brother and another director of the Company.  The balance of the shares are held as to 20% by WK, 15% by Leung and 20% by KK’s wife.

9. On the basis of the matters summarized in paragraph 8 above, WK denies that she had misappropriated any funds of the Company, and further denies that the Misappropriated Funds were held by her on trust, as alleged. 

10. Unfortunately, various other allegations were made by the parties in the pleadings which were not directly related to, but had distracted the attention of the parties from, the relief sought and as identified in the pleadings.  For example, WK claims in paragraph 20 (d) of the Amended Defence that a small part of the alleged Misappropriated Funds was for reimbursement of her business expenses or salary, and she counterclaims for unpaid salary or damages to be assessed. Her counterclaim for allegedly unpaid salary due from the Company was struck out by the Master on 30 November 2011.

11. As Leading Counsel for the Company acknowledges at the hearing on 20 December 2012, unnecessary references had been made in the Re-Amended Statement of Claim to the businesses of Paron International in Hong Kong (“HK Paron”), and Huizhou Paron in Mainland China (“Huizhou Paron”).  It is claimed that WK had used the Misappropriated Funds to set up Huizhou Paron as the wholly owned business of HK Paron.  Despite the fact that the Statement of Claim had been filed as early as August 2007, with amendments last made in February 2008, no claim has been made by the Company against WK, in respect of HK Paron or Huizhou Paron.  Nor has the Company made any claim against Leung, as the proprietor of HK Paron, in relation to either Huizhou Paron or the Misappropriated Funds.  The Company’s application to further amend the Re-Amended Statement of Claim is, in fact, to delete the paragraphs containing these references to HK Paron and Huizhou Paron, as well as to delete paragraph 18 of the Re-Amended Statement of Claim, in which the Company pleads that it “reserves the right to join HK Paron and Huizhou Paron as co-defendants in this action upon further investigation and discovery”.

12. In her Amended Defence, WK pleads that Leung, who is mother to WK and KK, had set up HK Paron in January 1985 to carry on the business of manufacturing labour gloves.  KK had assisted Leung in the management of the business of HK Paron.  The Company was incorporated with limited liability in July 1986, the shares of which were registered in the names of Leung, WK, KK and KK’s wife.  WK’s pleaded case is that Leung had provided the capital for the Company, and that after the setting up of the Company, the business hitherto carried on by HK Paron had been transferred and diverted to the Company.  According to WK, Lifeng Factory was owned by HK Paron, and Liqiang Factory was a joint venture partner of the Company.  Money had to be remitted by the Company and HK Paron to the Factories for their expenses, and WK claims that the alleged Misappropriated Funds were transferred from the bank account of the Company, to WK’s account, or to the joint account of WK and KK, all in accordance with the established practice and the knowledge of KK.

13. In its Reply to the Defence and Counterclaim, the Company claims that it had taken over the business of KK’s prior unincorporated company known as Paron International (which has the same English name as HK Paron), and not Leung’s business of HK Paron as WK claims.  The Company claims that HK Paron had in fact never operated any business at all.  The capital of the Company is claimed to have been provided by KK/Paron International, and not by Leung.  The Company further claims that WK had used the Misappropriated Funds from the Company to set up Huizhou Paron and to acquire land for Huizhou Paron in Mainland China.

14. In her affirmation filed to support the application to be joined as a party, Leung alleges that the material issue in dispute is whether the Company is beneficially owned by her, as she claims, or by her son KK, as he asserts.  Leung claims that as the beneficial owner of the Company, she holds a “direct and substantial proprietary interest” in these proceedings.  She sets out in her affirmation the history of how the businesses of HK Paron, the Factories and the Company were set up, and how she had financed these businesses by mortgaging her properties to the banks.  Leung claims that the shareholding in the Company does not reflect the beneficial interests in the Company, as she had provided all the capital of the Company, none of WK, KK or KK’s wife had paid for their shares, and the assets and business of the Company were all sourced or transferred from her business, HK Paron.

15. Notwithstanding the matters referred to in the witness statements of KK and WK, and in Leung’s affirmation, the fact remains that the only claim made by the Company and the only relief sought by the Company in these proceedings is that WK, as the only defendant named, holds the alleged Misappropriated Funds on trust for the Company, and that she should give an account of the Misappropriated Funds and alternatively, repay the Misappropriated Funds or pay damages to the Company.  WK has not asserted in her Amended Defence and Counterclaim any positive case (as she is required under Order 18 rule 13(5) to do) that the Misappropriated Funds belong to, or are or were at any time held on trust for, any party other than the Company.  There is a mere denial of the claim that WK had misappropriated the Misappropriated Funds, said to be the property of the Company and held on constructive trust for the Company.  Nor has Leung, in her affirmation, asserted any claims against the Company, or against WK as the defendant named, or against KK.  In response to this Court’s queries, counsel for Leung stated in court that it was Leung’s intention to make “some claim” in these proceedings, but these claims have not been identified.

16. At this late stage, when the parties had affirmed to the Court as early as in March 2010 that the case was ready to be set down for trial, the Court will not be sympathetic should the Company make a last minute application to raise claims against HK Paron, Leung or Huizhou Paron despite the earlier “reservation” of its rights to do so.  Leading Counsel for the Company made it clear at the hearing that the Company does not in fact wish to make these claims against Leung, as is evidenced by the Company’s application to delete paragraphs 13 to 18 of the Re-Amended Statement of Claim, as being irrelevant to the issues in dispute.

The question or issue in dispute in the cause or matter

17. Having considered the pleadings, I agree that the issue in dispute for determination at trial is simply whether WK had misappropriated funds of the Company, such that she should be liable to the Company. 

18. The relief or remedy claimed in this action is an account or payment by WK of the Misappropriated Funds of the Company.  The question or issue which arises out of or relates to or is connected with the relief or remedy claimed is whether the Misappropriated Funds were used for the purposes of the Company, namely for the expenses of the Factories as WK claims in the Amended Defence.  If, as WK claims, the Misappropriated Funds had been used for the legitimate purposes of the Company, by paying for the expenses of the Factories, then she is not liable to the Company for the relief sought.

19. Notwithstanding the assertions made by the parties as to the provision of capital for the Company, and the setting up of the businesses of the Company, the beneficial ownership of the Company or of the shares in the Company are not the issues for determination on the relief sought by the Company against WK in these proceedings.  I agree with Leading Counsel for the Company that it is not a defence for WK to simply claim that the Misappropriated Funds had been paid to or utilized in accordance with the instructions of the alleged beneficial owner of the Company, if there was indeed a breach of WK’s duties as a director of the Company in the use of the Misappropriated Funds.

Whether joinder should be allowed

20. Even if Leung’s claims, of being the beneficial owner of 100% of the shares in the Company, are accepted, she has no direct interest in the subject matter of these proceedings, namely the Misappropriated Funds.  They are the property of the Company, a separate legal entity, and not of Leung or any other party claiming to be the shareholder of the Company.  Leading Counsel for the Company has referred to well-established principles, as summarized in the judgment of Clough JA in Terrain Ltd v Oriental Peer Co Ltd, CACV 23/1987, unreported 30 July 1987:

“As the English Court of Appeal emphasized in Prudential Assurance Co Ltd v Newman Industries Ltd at p 223A-B, shares are merely a right of participation in the company on the terms of the articles of association. The same point was made by Lord Buckmaster in Macaura v Northern Assurance Co Ltd at p 626 where he indicated that the shareholder has no right to any item of the company’s property, but is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up.”

21. If the Company succeeds in its claims against WK in these proceedings, in proving that the Misappropriated Funds are funds of the Company and had been misappropriated, it is for WK to give the account and/or to pay the Misappropriated Funds to the Company.  Leung has not shown how she will be affected, directly or indirectly, by WK’s payment or account.  Nor will Leung be liable to satisfy any judgment that may be made against WK. 

22. On the pleadings as they now stand, the Court will not be deciding, at trial, issues as to whether WK holds the Misappropriated Funds on trust for Leung.  Further, and as analyzed in the earlier parts of this Decision, there is no pleaded claim that HK Paron, Huizhou Paron, or any of their assets are held on trust for the Company.  I fail to see how Leung can be affected or bound in any way by any judgment or findings that may be made on the pleaded issues in these proceedings.

23. On any view, Leung is not a person whose presence is necessary, as a party, for the matters in dispute in this cause or matter to be effectually and completely determined, or between whom and the parties to this action there exists a question or issue arising out of or relating to or connected with any relief or remedy claimed in this cause or matter.  She can be called as a witness to give evidence, if necessary, but there is simply no issue between Leung and the Company or WK which arises out of or relates to the subject matter of this action, which should be determined with the issues to be decided in this action between the Company and WK.

24. It was also argued on behalf of Leung that she, as the sole beneficial owner of the Company, had never given consent or authorization for the institution of these proceedings by the Company.  It was claimed that the proceedings may be liable to be struck out for want of authority.

25. It is trite that questions of a plaintiff’s authority to sue should be raised at an early stage of the proceedings.  It should not be raised by way of defence to dispute the authority, nor can a defendant dispute such authority only at trial (paragraph 18/19/24 Hong Kong Civil Procedure).  Despite the claims made by WK, as early as in May 2008, as to the businesses of HK Paron and of the Company and as to the shareholding of the Company, she has never raised questions as to the Company’s authority to commence these proceedings against her.  On WK’s own pleaded case (paragraph 5(c) of the Amended Defence), KK was the remaining director on the board of the Company, after Leung and WK resigned in December 2006, which was before the Company’s commencement of these proceedings.  The Company’s authority to sue WK is not an issue for determination in this action.

Conclusion

26. For all the above reasons, I refuse leave for Leung to intervene and to be joined as a defendant in these proceedings, and allow the Company’s appeal, with costs, including certificate for counsel.

27. I see no reason why the Company’s application to further amend the Re-Amended Statement of Claim should not be allowed.  The Company’s claims against WK remain the same after the deletion of paragraphs 13 to 18 of the pleading, and the amendment in fact clarifies the claims made and the relief sought.  I will accordingly grant leave to the Company, in terms of the Company’s summons issued on 23 November 2012, which provides for the costs of and occasioned by the application for amendment be to WK.  I will grant leave to WK to file a Re-Amended Defence, if so required.

 (Mimmie Chan)
 Judge of the Court of First Instance
High Court

Ms Audrey Eu SC & Mr Tony Chow, instructed by C L Chow & Macksion Chan, for the plaintiff

Mr Herbert Leung, instructed by Cheung Fung & Hui, for the defendant

Mr Kenneth C L Chan, instructed by S Cheng & Yeung, for the applicant