SUN FOCUS INVESTMENT LTD v. TANG SHING BOR AND ANOTHER

HCA 538/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 538 OF 2007

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JUDGMENT
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1. The present dispute arose out of a sino-foreign joint investment project in Shanghai (“the Project”) to redevelop a piece of land into a multi-storey building (“the Building”) to be used for office and retail purposes.

Background

2. The Mainland side of the Project was a company called Shanghai Kong Tung Cheong (“SKTC”)

3. In or about early 1992, one Mr Kwong Pui (“Mr Kwong”) first introduced the Project to the 2nd defendant.  In the months following the initial discussion between Mr Kwong and the 2nd defendant, they approached the 1st defendant, who expressed interest in joining the Project in or about April 1992.

4. At the 1st defendant’s suggestion, a shelf company, namely Master Kingdom Company Ltd (“Master Kingdom”), was acquired as the vehicle of investment.  On or about 6 May 1992, the 1st defendant and Mr Kwong became the first directors of Master Kingdom.  Mr Kwong also became the secretary of the company on the same day.

5. At that time, the 1st and 2nd defendants and Mr Kwong were the only investors who were committed to investing in the Project.  Pending the formal allotment of shares, it was agreed between them that while the 1st defendant was to hold 1/2 shares in Master Kingdom, the 2nd defendant and Mr Kwong were to take up the remaining half of the shares.  Further, the 2nd defendant and Mr Kwong could, if necessary, invite other people to share their 1/2 interest in Master kingdom.

6. On or about 8 May 1992, Mr Kwong on behalf of Master Kingdom signed a letter of intent with SKTC, which provided that: (i) Master Kingdom and SKTC would form a sino-foreign joint venture company (“the JVC”); and (ii) Master Kingdom would hold 60% and SKTC 40% of the Project.  On or about 7 July 1992, Master Kingdom opened a bank account with the Kwangtung Provincial Bank for the Project.  On 23 July 1992, Mr Kwong on behalf of Master Kingdom informed SKTC that the terms of co-operation between SKTC and Master Kingdom were generally agreed.

7. As one can see from the above, as of July 1992, the mode of investing in the Project on the Hong Kong side was decided (ie through Master Kingdom which would in turn hold 60% interest in the JVC).

8. In or about November 1992, the 2nd defendant invited Mr Tang Ngai Piu (“Mr NP Tang”) and Mr Eddy Yau to consider investing in the Project.  According to the defendants’ case, the 2nd defendant told Mr NP Tang the investment corporate structure, and if he was to invest in the Project, he would need to join Master Kingdom as a shareholder and his initial contribution to Master Kingdom would be HK$1,5000,000.

9. On or about 23 November 1992, the 2nd defendant faxed a copy of the draft agreement between Master Kingdom and SKTC together with Master Kingdom’s bank account number to Mr NP Tang.

10. Before Mr NP Tang made his decision to participate, on or about 28 December 1992, Master Kingdom and SKTC entered into an agreement for the establishment of the JVC.  Subsequently, on or about 15 May 1993, Master Kingdom and SKTC formally signed the joint venture agreement and the Articles of Association whereby the JVC was set up.  The 1st and 2nd defendants and Mr Kwong were appointed to the board of the JVC on behalf of Master Kingdom on or about 1 June 1993.  SKTC appointed the remaining 2 board directors of JVC.

11. In or about mid-1993, Mr Eddy Yau and Mr NP Tang finally expressed interest to invest in the Project.

12. In or about July 1993, the 2nd defendant decided to hold his shares in Master Kingdom through another company called Long Goal Limited (“Long Goal”), which was incorporated on 23 February 1993. It is the defendants’ case that, at about the same time, Mr NP Tang also informed the 2nd defendant that he intended to hold his shares in Master Kingdom through the plaintiff, which was incorporated on 16 March 1993.  Mr Eddy Yau, on the other hand, told the 2nd defendant that he preferred to hold the shares of Master Kingdom in his own name.

13. It is the defendants’ case that after further discussion (with the 2nd defendant acting as the liaison person between the 1st defendant of the one part and the other investors of the other), it was agreed that the shares in Master Kingdom would be held in the following manner (“the Master Kingdom Agreement”):

(1)  The 1st defendant would hold 50 shares in his personal name;

(2)  The 2nd defendant would hold 25 shares through Long Goal;

(3)  Mr Kwong would hold 10 shares in his personal name;

(4)  Mr NP Tang would hold 10 shares through the plaintiff; and

(5)  Mr Eddy Yau would hold 5 shares in his personal name.

14. It was also agreed that the 5 investors above would make respective contributions to Master Kingdom in accordance with their respective shareholdings.

15. On or about 14 September 1993, the shares of Master Kingdom were allotted to the 5 said investors accordingly.

16. On the other hand, the plaintiff disputes that it was a shareholder of Master Kingdom.  Instead, the plaintiff claims that it invested in the Project through a personal co-operation agreement made with the defendants.

17. From June to August 1993, the JVC obtained the relevant business approval, certificate and the land use certificate from the Mainland authorities.

18. Afterwards, the 5 said investors started to inject funding into the Project.  So far as the plaintiff was concerned, it contributed a total amount of HK$3,183,600 from 12 July 1993 to 1 May 1995.

19. The Project however did not go smoothly.  In or about 1997, the Asian financial crisis took place.  The sluggish economy in the Mainland and worldwide in the following years caused difficulties for the JVC to find further funding for the Project.

20. In around 2000, the Project was in a state of halt and SKTC wished to withdraw from the Project.  As a result, a meeting between Master Kingdom and SKTC was held on 1 August 2000 in Shanghai, which was attended by, among others, the 2nd defendant, Mr Kwong, Mr Ng Sun Po (the JVC’s financial manager) and Mr NP Tang himself.  It was agreed in the meeting that SKTC would transfer its 40% shareholding in the JVC to Master Kingdom.

21. Mr NP Tang disputes that he attended the meeting himself.  At the trial, Mr NP Tang avers for the first time that the minutes of the meeting on 1 August 2000 was a forgery.

22. On or about 9 May 2001, Master Kingdom and SKTC entered into the share transfer agreement, whereby SKTC’s 40% shareholding was transferred to Master Kingdom for a consideration of US$1,730,400 (ie around RMB13,843,200 at the exchange rate of 1:8).  From then onward, Master Kingdom became the 100% shareholder of the Project.

23. As SKTC had injected around RMB23,440,000 by that time, this means that it only managed to recover less than 60% of its investment.

24. In or about 2002, the Project was yet to complete.  Its financial difficulties however continued.  The JVC started to find a purchaser of the Project in the hope that the purchaser would be able to provide further funding for the completion of the Project.

25. In or about April 2002, Mr NP Tang introduced to the JVC a potential purchaser for the Project who offered to pay RMB80 million.  The offer was not acceptable to the JVC as the price was considered too low.

26. In or about May 2002, through the effort of Mr Kwong, a company called Fuk Hei Investment Holding Limited (“Fuk Hei”) offered to purchase the Project at the price of RMB115,000,000.  The JVC accepted the offer and signed the pre-sale agreement on or about 31 July 2002. The Building was completed in around the end of 2002.

27. It is the defendants’ case that, at that point of time and even before the preparation of any detailed account, it was clear to all investors that given the difficulties experienced by the Project, the JVC was making a substantial loss rather than any profit.

28. After the sale of the Project to Fuk Hei, the JVC had no other substantial business.  It was therefore considered that a final account should be prepared as soon as possible so that the remaining money in the JVC could be distributed back to Master Kingdom and the 5 investors without waiting for the ultimate dissolution of the JVC.

29. Accordingly, the JVC instructed Shanghai Haijia Certified Public Accountants Co Ltd (“Haijia”) to carry out an audit of the JVC’s account as of 31 January 2003.  Haijia produced its audited report on or about 12 February 2003 (“the Haijia Report”) which showed that the JVC suffered a loss of RMB12,375,863.41 as of that date.

30. Following the production of the Haijia Report, on or about 19 February 2003, Master Kingdom calculated its own profit and loss in the Project taking into account its other expenses.  The final assessment was that Master Kingdom suffered a total loss of HK$20,220,907 (or 49.85% of its investment).

31. No one, including the plaintiff, has complained or challenged the timing used for calculating distribution (ie as of 31 January 2003) or Master Kingdom’s other expenses.

32. Afterwards, the 2nd defendant met Mr NP Tang in Hong Kong.  During the said meeting, the 2nd defendant delivered, among others, Master Kingdom’s profit and loss table and the Haijia Report to Mr NP Tang for his consideration.  According to the calculation, as the plaintiff only injected HK$3,183,600 into Master Kingdom and the Project (which suffered a loss of 49.85%), the total amount of money that should be returned to the plaintiff was HK$3,183,600 x (1–49.85%) = HK$1,596,575).

33. On or about 17 March 2003, the 2nd defendant met Mr NP Tang again.  On that occasion, the 2nd defendant delivered 2 cheques in the total amount of HK$1,596,575 to Mr NP Tang as the net return of the plaintiff’s investment.

34. In or about June 2003, the JVC formally applied to the relevant Shanghai authorities for cessation of business and dissolution of the company.  For the purpose of such application, the JVC published openly its cessation in a local newspaper in Shanghai for 3 consecutive days from 25 to 27 June 2003 and instructed Shanghai Xing Zhong Certified Public Accountants Co Ltd (“Xing Zhong”) to produce a cessation audit report for the JVC as of 3 December 2003 (“the Xing Zhong Report”).  The application was eventually approved on or about 18 March 2004.

35. According to the Xing Zhong Report, the JVC suffered a loss of RMB10,919,832.83 as of 3 December 2003.  It is the defendants’ case that the difference between the Haijia Report and Xing Zhong Report was mainly due to (1) the further operation costs of the JVC between 31 January 2003 and 3 December 2003; and (2) RMB exchange rate fluctuation.  The plaintiff has again not complained or challenged the aforesaid 2 matters.

36. After the dissolution of the JVC on or about 18 March 2004, none of the other investors such as Mr Kwong or Mr Eddy Yau had made any complaint against the 1st or 2nd defendant.  Indeed, even the plaintiff’s 2 other shareholders, Mr SS Cheung and Mr KC Yau, accepted and agreed with the final amount they received from the Project.

37. The plaintiff, or more accurately Mr NP Tang himself, was at all material times the only party who made various allegations against the defendants.  However, Mr NP Tang’s allegations have changed drastically over the years.

38. In or about early 2005, Mr NP Tang on behalf of the plaintiff instructed Messrs George Y C Mok & Co and prepared a draft winding-up petition against Master Kingdom and its shareholders.

39. Mr NP Tang’s case at that time was that:

(i)  The plaintiff joined as a minority shareholder of Master Kingdom in or about July 1993 holding 10% of the total issued shares and the defendants and Mr Kwong invited the plaintiff to invest in the Project by becoming a shareholder of Master Kingdom.  There was no mention of any “Partnership Agreement” or “Co-operation Agreement”.

(ii)  The plaintiff generally complained of failure to pay dividends, expropriation of the plaintiff’s properties, lack of transparency of company affairs, denial of access to the books of account of the JVC and diversion of assets.  There was no complaint in respect of the Haijia Report or the Xing Zhong Report.

(iii)  The plaintiff principally asked for winding-up of Master Kingdom, or alternatively a compulsory buy-out of the plaintiff’s shares in Master Kingdom.

40. The winding-up petition had not been filed with the court.  Mr NP Tang complains that the allegations included in the draft petition were made up by the solicitors without first consulting him.

41. In or about March 2007, the plaintiff commenced this High Court action, instead of a petition, against the 1st and 2nd defendants only.  In its then Amended Statement of Claim, the plaintiff’s case was that:

(1)  In or about 1993, the 1st and 2nd defendants and Mr NP Tang on behalf of the plaintiff entered into a “Partnership Agreement”.

(2)  The presently alleged Management Fee Loss and Macho Loan Loss (as defined below) were not found therein.  On the contrary, it was pleaded that the JVC had not lent the sum of RMB22,110,842.75 to Macho Company Limited (“Macho”).

(3)  The plaintiff asked for damages in the sum of RMB16,790,998.30 (instead of RMB3,070,147.26 as now claimed).

42. On or about 5 October 2009, however, the plaintiff’s original Amended Statement of Claim was struck out by Mr Recorder Paul Shieh SC, although the action was not dismissed.

43. After its original Amended Statement of Claim was struck out in October 2009, Mr NP Tang reformulated his case again and came back with the present Statement of Claim only in August 2013.

44. According to the plaintiff’s latest formulation of the claim, in or about July 1993, the 1st and 2nd defendants and Mr NP Tang on behalf of the plaintiff entered into a “Co-operation Agreement” in personam whereby the plaintiff invested in the development of the Project.  The 1st and 2nd defendants personally agreed that upon injection of the money by the plaintiff, the 1st and 2nd defendants would, in their personal capacity, pay to the plaintiff its profit return based on the percentage share of the plaintiff in the Project worked out by reference to the amount of money paid by the plaintiff.  Mr NP Tang specifically denies that the plaintiff was a shareholder of Master Kingdom, and alleges that he was not aware that the plaintiff was recorded as a shareholder of Master Kingdom in the Companies Registry until April 2004.

45. There are 2 complaints in the present claim. 

46. Firstly, it is alleged that the defendants caused Master Kingdom to overcharge the JVC for its management fee without the plaintiff’s knowledge and consent (“the Management Fee Loss”). 

47. Secondly, it is also alleged that the JVC had lent a sum of RMB22,219,453.22 to Macho without the plaintiff’s knowledge and consent and subsequently abandoned the collection of the said loan (“the Macho Loan Loss”). 

48. By overcharging the management fee and causing the making of the Macho Loan, the plaintiff complains that the defendant had failed to take necessary step to protect the interest of the plaintiff or to act in good faith towards the plaintiff, thereby in breach of the implied terms of the “Co-operation Agreement”.  The plaintiff drastically reduces the amount of the claim to RMB3,070,147.26.   

49. The issues before the court are therefore:

(i)  Whether the plaintiff’s investment was made in the form of the “Co-operation Agreement” as alleged by the plaintiff or in the form of the Master Kingdom Agreement as alleged by the defendants?

(ii)  Whether the Project had suffered the Management Fee Loss as alleged by the plaintiff? and

(iii)  Whether the Project had suffered the Macho Loan Loss as alleged by the plaintiff?

50. I will deal with these issues in turn.

Form of investment

51. The form of investment would have an important bearing on the relief claimed by the plaintiff.  If the plaintiff invested in the Project as a shareholder of Master Kingdom, the plaintiff would have suffered no Management Fee Loss (even if such claim can be established) because the management fee would have been received by Master Kingdom.  In such circumstances, the plaintiff should have asked Master Kingdom to account to it for the management fee received from the JVC.  The same also applies to the Macho Loan Loss.  If the JVC had indeed advanced the loan to Macho, the plaintiff, as one who invested in the Project, can then take the appropriate action against the JVC or Macho through Master Kingdom.  It cannot pursue a personal claim against the 1st or 2nd defendant.

52. Mr Sze, counsel for the plaintiff, concedes that if the plaintiff’s investment was made in the form of the Master Kingdom Agreement and not the “Co-operation Agreement”, the plaintiff’s claim must fail.

53. Having considered all the evidence in the present case, I prefer to accept the defendants’ case relating to the form of the investment on the balance of probabilities.

54. Firstly, the nature of the plaintiff’s claim has drastically changed throughout the year.  Although the draft petition had not been presented to the court, it was pleaded therein that the plaintiff was a shareholder of Master Kingdom.  Mr NP Tang denies knowledge of the contents in the draft petition, but the shifting nature of the plaintiff’s claim certainly undermines the credibility of the claim.

55. Secondly, if the plaintiff was not investing in the Project through Master Kingdom, there was simply no need for the defendants to cause the allotment of the shares of Master Kingdom to the plaintiff back in 1993, as the “Co-operation Agreement” alleged by the plaintiff was only a personal agreement made between the plaintiff and the two defendants.

56. Thirdly, if what the plaintiff alleged were the truth, it would virtually mean that the 1st and the 2nd defendants made a private agreement with the plaintiff without involving the other investors of the Project including SKTC.  According to the plaintiff, the defendants agreed to pay to the plaintiff its profit return based on the percentage share of the plaintiff in the Project worked out by reference to the amount of money paid by the plaintiff.  However, what happened if the other investors did not agree to such arrangement.  In my judgment, it would be against any business sense for the 1st and 2nd defendants to make such kind of personal agreement with the plaintiff without involving the other investors. In fact, there was existing agreement with SKTC, with Master Kingdom holding 60% and SKTC holding 40% of the interests of the Project.  Under such circumstances, it would make much more business sense for the Hong Kong investors to invest in the Project through Master Kingdom.  All the Hong Kong investors could then hold the shares of Master Kingdom in the same proportion as their contributions for the development of the Project.

57. Fourthly, I find the defendants’ witnesses to be more reliable as compared with Mr NP Tang for the plaintiff. In my observation, Mr NP Tang is evasive when he is asked about the contents of the documents prepared by the plaintiff’s solicitors.  He simply denies responsibility and shifts all the blame to his lawyers.  At the trial, he raises for the first time that the minutes of the meeting on 1 August 2000 was a forgery.  In my judgment, Mr NP Tang is the kind of person who is prepared to say anything to suit his own purposes. On the other hand, I find the 2nd defendant to be an impressive witness.  Although he is now 78 years of age, he provides straightforward answers to the questions posed to him without any evasion.  The same applies to the 1st defendant.  Although he is 82 years old now, he provides clear answers to all the questions posed to him.  Their evidence is also consistent with the documentary evidence and has remained unshaken during cross-examination.  I find them to be honest and truthful witnesses.

58. Mr Sze attacks the defendants’ evidence relating to the Master Kingdom Agreement because there was no share certificate issued to the plaintiff for the allotment of shares, no board resolutions passing the allotment of shares, no evidence of the plaintiff’s representative attending the board or the general meetings of Master Kingdom, no buy-out of the plaintiff’s shares in Master Kingdom after the distribution of payments. On the other hand, according to the 2 documents of the JVC dated 20 February 2004 signed by the 1st and 2nd defendants, they confirmed that the shareholders of Master Kingdom were only the defendants and Mr Kwong.

59. In my judgment, none of these arguments would undermine the creditability of the defendants’ case.  It is common ground that Master Kingdom was only a vehicle for the Hong Kong investors to invest in the Project.  No one would expect the parties to comply with all the formal requirements of the company law in Hong Kong.  What is important here is that Master Kingdom had filed the return in the Companies Registry showing that the plaintiff was one of the shareholders of Master Kingdom.  Furthermore, after the distribution of the money to the various investors, Master Kingdom would cease to become the investment vehicle for the Hong Kong investors, and so it would be natural for the JVC to refer the defendants and Mr Kwong as the only remaining shareholders, as they were the ones responsible to close down the business of the JVC.

60. Based on such findings, the plaintiff’s claim must fail.  However, I also proceed to find that the plaintiff’s claims on the Management Fee Loss and the Macho Loan Loss are also without merit.

The Management Fee Loss

61. Mr NP Tang’s allegation is that:

(1)  The Haijia Report disclosed that the JVC paid a total sum of RMB11,417,018.40 as management fee to Master Kingdom.

(2)  The Xing Zhong Report disclosed that the JVC paid a total sum of RMB8,286,556.92 again as management fee to Master Kingdom.

(3)  The said sums were excessive and must have exceeded 1% of the construction expenses of the plaintiff which was prohibited under the alleged “Co-operation Agreement”.

62. As explained by the JVC’s financial manager at that time, Mr Ng Sun Po, Mr NP Tang’s allegation is simply wrong because:

(1)  Master Kingdom was merely a shareholder of the JVC.  The management of the Project was not carried out by Master Kingdom but by the JVC’s staff.

(2)  The JVC did not pay any management fee to Master Kingdom, whether it was RMB11,417,018.40 or RMB8,286,556.92.

(3)  Those management fees were paid for the JVC’s own management expenses.  As recorded in the JVC’s financial statement as of 31 December 1997, such management expenses (recorded as “開辦費”) had accumulated to RMB7,917,847.64.

63. Mr Ng Sun Po has left the JVC after 2005, he has no further business relationship with the defendants.  He is an independent witness who has no financial interest in the outcome of the litigation.  There is no reason for the court to doubt the reliability of his evidence.  Further, the plaintiff has not asked for the inspection of the JVC’s accounts prior to this trial, and hence the plaintiff cannot produce anything before the court which casts doubt on the evidence of Mr Ng Sun Po.  In fact, the plaintiff has not challenged the explanation given by Mr Ng Sun Po at the trial.  In such circumstances, the plaintiff’s claim on the Management Fee Loss must fail.

The Macho Loan Loss

64. Mr NP Tang’s allegation is that:

(1)  The Xing Zhong Report disclosed that as at 3 December 2003, the JVC had lent a sum of RMB22,219,453.22 to Macho, of which the 2nd defendant was a director and shareholder.

(2)  On 20 February 2004, the 1st and 2nd defendants passed a board resolution in the JVC abandoning the collection of the Macho Loan.

65. As explained by Mr Ng Sun Po, Mr NP Tang’s allegation is misconceived because:

(i)  After the production of the Haijia Report on or about 12 February 2003, all investors in the Project intended that the JVC should make distribution as soon as possible according to the Haijia Report.

(ii)  As the JVC was still a going concern, it could not directly return its capital to its investors.  As a result, the JVC advanced a temporary loan in the amount of RMB22,219,453.22 to Macho which was owned by the 1st and 2nd defendants.

(iii)  After Macho received the said amount of RMB22,219,453.22, the 1st and 2nd defendants started to make distributions to all the investors, including the plaintiff, Mr Kwong and Mr Eddy Yau.  In particular, Mr NP Tang received the distribution of HK$1,596,575 based on the Haijia Report on or about 17 March 2003.

(iv)  In short, the Macho Loan was a means of distribution avoiding the contravention of the rule against return of capital, with the 1st and 2nd defendants bearing any risk of repayment back to the JVC.

(v)  By around mid-March 2003, the 1st and 2nd defendants had effectively bought out the 3 other investors’ interests in Master Kingdom and the JVC, including the plaintiff’s interests.  The 1st and 2nd defendants thereby became the only real owners of Master Kingdom and the JVC.

(vi)  In around February 2004, the JVC was about to cease its business.  As Master Kingdom, the JVC and Macho were then all, in real terms, owned by the 1st and 2nd defendants, instead of asking Macho to transfer RMB22,219,453.22 back to the JVC who would in turn transfer again the sum (together with remaining operation costs in the amount of RMB191,389.53) to Master Kingdom:

(a)  On or about 20 February 2004, the JVC passed a resolution and entered into an agreement with Master Kingdom that its entitlement to RMB22,410,842.75 (ie RMB22,219,453.22 + RMB191,389.53) would be transferred to Master Kingdom.  This completed the return of capital from Master Kingdom to the JVC.

(b)  After the aforesaid resolution and agreement, Macho technically owed RMB22,219,453.22 to Master Kingdom.  However, as both Macho and Master Kingdom were owned by the 1st and 2nd defendants by that time, the debt was agreed to be regarded as set-off and repaid.

66. The 1st and 2nd defendants also confirm that the so-called Macho Loan was made for the purpose of making the distributions to the various investors of the Project including the plaintiff.

67. Again, without inspecting the accounts before the trial, the plaintiff cannot produce anything before the court to doubt the explanation given by the defendants.  Furthermore, the plaintiff had actually received the distribution itself.  Where did that money come from?  I therefore have every reason to believe that the Macho Loan was made for the purpose of the making the distributions to the various investors.

68. Mr Sze attacks the defendants’ case on the Macho Loan Loss by raising queries as to why the Macho Loan had not been included in the Haijia Report, and the “different account” relating to the sum of RMB32,000,000 given by the 2nd defendant in his 2nd affirmation filed on 3 August 2009.

69. Again, there is no merit in such argument.  It is clear that the Haijai Report and the Xing Zhong Report served 2 different purposes:  the first one showing the financial position of the JVC as at 3 December 2003 and the second one for the dissolution of the JVC.  Apart from the 2 different purposes, there is some uncertainty as to the exact time when the Macho Loan was made for the distribution of the money to the various investors, and so it would not be surprising to find that the Macho Loan did not appear in the Haijai Report.  Furthermore, the sum of RMB32,000,000 was an amount owed by the 1st defendant to the 2nd defendant personally, and the 2nd defendant took that amount into account in distributing the money from the Project to the 1st defendant.  In such circumstances, the sum of RMB32,000,000 is not a matter which is directly relevant to the issues in the present case.  What is most important is that the Macho Loan was made for the purpose of making distributions of the remaining capital to the various investors, which to me, is a very logical explanation for the making of the loan.

70. For the above reasons, the claim for the Macho Loan Loss must also fail.

Miscellaneous Matters

71. Before leaving this judgment, I have to deal with 2 remaining matters.

72. Firstly, there is a factual dispute relating to the exact amount paid by the plaintiff for the investment of the Project.  Apart from the money paid by the Mr NP Tang through the plaintiff, Mr NP Tang also claims that the 2 other shareholders of the plaintiff had advanced a total of sum of $450,000 to the Project.  However, Mr NP Tang personally has no knowledge about the making of such payment.  Mr NP Tang did not bother to ask for any bank remittance slip or other documentary evidence to support the payment, and Master Kingdom’s bank statements did not disclose the making of such payment.  Hence, I reject the evidence of Mr NP Tang and find as a matter of fact that the plaintiff had not made the additional payment of $450,000 whether to Master Kingdom or to the defendants.

73. Secondly, the defendants apply for leave to file a supplemental list of documents shortly before the trial.  Some of these additional documents were in possession of Master Kingdom and the defendants seek to rely on these documents to show that the plaintiff was involved in the operation of Master Kingdom.  However, as the plaintiff disputes the authenticity of these documents, their late production would necessitate an adjournment of the trial.  Hence, except for the documents with no objection from the plaintiff, I refuse the late production of these additional documents.

74. For the above reasons, I dismiss the plaintiff’s claim and I now listen to the parties’ submissions on the issue of costs.

HCA 538/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 538 OF 2007

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J U D G M E N T

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1.  This is the trial of a preliminary issue, namely, whether the plaintiff (“SF”) had proper authority to sue in this action (see defendants’ (“Ds”) Summons dated 10 April 2013).

2.  This court has given a number of decisions in this case.  The background to this dispute and a glimpse of its long litigation history can be seen in a Judgment dated 22 January 2013.  The basis of this preliminary challenge by Ds can be seen in the Reasons for Decision dated 20 August 2013 (“Decision”). 

3.  In a nutshell, Ds are contending that this action has not been authorized by validly appointed directors of SF.  The lynchpin of Ds’ case is the allegation that a sale in respect of 50% of the issued shares of SF (“Sale”) which took place in October 2003 is a fraudulent one and, consequently, much of what took place thereafter in respect of SF is invalid. 

4.  Quite fairly (and rightly), Mr Cheuk, who appears for Ds, has accepted from the outset that there is documentary evidence before the court in the form of, inter alia, company records (annual returns) of SF and a set of transfer documents in respect of the Sale which are on their face regular and therefore prima facie suggest that there is no irregularity in SF’s authority to sue.  The evidential burden is on Ds, so accepted by Mr Cheuk, to establish the alleged fraud.  Accordingly, with the agreement of their counsel, this trial was opened by Ds.

5.  There is no argument that fraud must be proved by cogent evidence.

6.  Let me say at the outset that there is no merit whatsoever in Ds’ challenge.  This trial is a lamentable waste of scarce resources.  In the Decision, this court had expressed concern over the long delay to bring this action to trial and the endless procedural skirmishes which had taken place.  Para 3 of the Decision stated as follows:

“The time must have come for the court to keep a firm control over this action. From now on, any unnecessary or unmeritorious interlocutory argument will be heavily penalised on costs, and the parties are to focus their energy on bringing this action to trial.”

7.  On the day the Decision was handed down, there was another judgment from the Court of Appeal in respect of an interlocutory appeal by Ds.  Para 11 of that judgment stated as follows:

“Lastly, now that the issues relating to the pleadings have been settled, the parties should take prompt action to finalize the preparation of the case for trial. In our view, the trial of this action has been put off for too long. The parties and those advising them should be mindful of their duties under Order 1A Rule 3. They should not lose sight that one of the underlying objectives of the Rules is, as stated in Order 1A Rule 1(b), to ensure that a case is dealt with as expeditiously as is reasonably practicable.”

8.  I turn to the documentary and the undisputed evidence.  SF was incorporated in Hong Kong on 16 March 1993.  Investment of the company’s assets is one of the objects for which that company was established.

9.  As at the date of the Annual Return dated 25 March 1994, the shareholding of SF was as follows :

10.  On 25 April 2002, Tang transferred his shares in SF to his son, Mr Tang Kwan Ching (“KC Tang”).  As at the date of the Annual Return dated 16 March 2003, the shareholding of Sun Focus was:

11.  In respect of the Sale which, on the face of the documents, took place on 15 October 2003, it is evidenced by the following:

a. The stamped Instrument of Transfer and Bought and Sold Notes regarding the sale of 2,500 shares of SF by Cheung to Ms Tang Kwan Yee (“Ms Tang”) dated 15 October 2003.  There is no dispute that Ms Tang is the daughter of Tang.

b. The stamped Instrument of Transfer and Bought and Sold Notes regarding the sale of 2,500 shares of SF by Yau to Ms Tang dated 15 October 2003.

c. A letter dated 15 October 2003 from Cheung and Yau to the Commissioner of Inland Revenue stating that there was no agreement for sale and purchase regarding the transfer of the 5,000 shares.

12.  Further, there is a set of minutes dated 15 October 2003 which evidence a meeting of SF’s board of directors (“Board”), consisting of Tang, Cheung and Yau.  During that meeting, it was resolved, inter alia, that :

a. The share transfers from Cheung and Yau to Ms Tang be approved subject to stamping, and the original share certificates be cancelled.

b. The affixing of SF’ common seal to the new share certificates in the name of Ms Tang be approved.

13.  By two letters dated 20 April 2004 from respectively Cheung and Yau to the Board, they tendered their resignation as directors with immediately effect.  It appears that those letters were sent on their behalf by their solicitors.  It is right to point out that the resignation by Cheung and Yau not long after the disposal of their shares go some way to support the genuineness of the Sale.

14.  I turn to the other company records.  As reflected in SF’s Annual Return dated 16 March 2005, the shareholding of SF was:

15.  It can be seen from the Annual Returns filed for the subsequent years:

16 March 2006

	a. KC Tang, director and secretary:	5,000 shares
	b. Ms Tang, director:	5,000 shares

16 March 2007

	c. KC Tang, director and secretary:	5,000 shares
	d. Ms Tang, director:	5,000 shares

2008

e. Certificate of No Change as of 16 March 2007

2009

f. Certificate of No Change as of 16 March 2007

16.  This action was commenced in March 2007.  There is no need to refer to the later company records.

17.  On 11 September 2007, pursuant to certain enquiry (the details of which are not important), a set of the documents in respect of the Sale (see paras 11 and 12 above) was produced by Messrs Louis Lai and Luk (“LLL”) which was at all material times SF’s accountants and, until 2004, its company secretary (the secretariat service was provided by a company associated with LLL).  This piece of evidence demonstrates that the relevant documents for the Sale or copies thereof, which were probably prepared by LLL, were kept by the professionals.  This goes some way to militate against the proposition that the Sale was a fraud. 

18.  Regrettably, Ds are not satisfied and one of the partners of LLL, Mr Luk, was subpoenaed to give evidence in this trial by them.  Mr Luk duly confirmed that all Sale documents and others mentioned above were routine documentation which LLL or its secretariat arm provided to their corporate clients as part of their service. 

19.  Despite Mr Cheuk’s valiant attempts to make various forensic points, eg, whether meetings as stated in minutes were in fact held, I am unable to see any merit in the exercise.  Mr Luk’s evidence plainly supports the veracity of the documentary evidence. 

20.  Mr Luk is the only witness in this case.  The only evidence in support of the allegation of fraud is consisted of two affirmations from respectively Cheung and Yau (“Affirmations”).  The affirmation of Yau merely confirmed that of Cheung.  Yau had since passed away and Cheung was not called to give evidence.  Therefore, the evidence is at best entirely hearsay. 

21.  For the present purpose, I shall put aside the question whether Ds are entitled to rely upon the Affirmations in light of the failure to comply with this court’s direction that all the deponents are to attend this trial for cross-examination: see Hong Kong Civil Procedure 2014, vol 1, rubric 38/2/5. 

22.  With respect, I am unable to see how it can be argued that the clear and, on its face, cogent documentary evidence in respect of the Sale and the corporate information of SF can be displaced by hearsay evidence.  There is nothing compelling or convincing in the Affirmations such that weight should to be given to them without having the makers called for the evidence to be tested.

23.  For completeness, I should mention that it is accepted by Mr Cheuk that in the absence of a valid challenge to the Sale the Board is in a position to ratify this action even if there were irregularity in the existing approval of the same.

24.  Unsurprisingly, Mr Ma, who appears for SF, made a submission that there is no case to answer.  I agreed and I dismiss this challenge by Ds. 

25.  I shall hear the parties on costs.

[Submissions as to costs of the trial of preliminary issue]

26.  There is no argument that SF should be entitled to the costs of this trial.  However, Mr Ma has asked for the costs of SF to be assessed on full indemnity basis.  This court is certainly unhappy with the failure of Ds to take any effective step to verify the allegations of Cheung and Yau, and their failure to withdraw their challenge once it was ascertained that Cheung would not be giving evidence in this trial. 

27.  On the other hand, Mr Cheuk has made a valid point that SF had not, by itself or through Ms Tang, responded to the allegations concerning the Sale until the filing of its evidence in August 2013 and it can be said that SF has, to some extent, brought suspicion upon itself.  Further, I accept that those instructing Mr Cheuk had been trying to secure the attendance of Cheung and that the hope for securing his attendance was only extinguished shortly before trial.  This court may be unduly lenient to Ds but on a fine balance this application of SF is declined. 

28.  Costs of this trial is awarded to SF to be assessed on party and party basis.  Such costs are summarily assessed at HK$200,000.

HCA538/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 538 OF 2007

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D E C I S I O N

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1.  This is an application by the defendants for leave to appeal against the judgment of this court dated 22 January 2013 (“Judgment”) by which it was held that a new cause of action advanced by the plaintiff based upon an alleged agreement was, despite the expiry of the relevant limitation period, permissible under O.20, r.5(5) of the Rules of the High Court (“the Rule”).

2.  In this application, Mr Cheuk, who appeared for the defendants, has no quarrel with the approach taken by this court under the Rule – see paras 17 and 18 of the Judgment.  However, with respect, there is an inconsistency between the agreed approach and the analysis advocated on behalf of the defendants.  The analysis advanced is a narrow one based upon a technical analysis of the components of the relevant causes of actions. 

3.  I agree with Mr Ma, who appeared for the plaintiff, that Mr Cheuk’s argument that the similarity between the old cause of action and the new cause of action must cover every component of the old cause of action undermines the very purpose of the Rule.  If that contention were correct, no new cause of action will be permitted, save where as a matter of law the facts alleged give rise to more than one cause of action.  Further, the contention has the effect of stripping the words “or substantially the same facts” from the Rule.  With respect, I agree with the analysis set out in Arta Properties Ltd v Li Fu Yat Tso & Ors, HCA 2741/98 at paras 26-32. 

4.  What lies at the heart of both the old and the new causes of action is whether the JVC (defined in para 4 of the Judgment) was profitable.  Thus, the substance of the plaintiff’s case has not been changed. Mr Cheuk submitted that the plaintiff was required to properly particularise its complaint and, for illustration, it should not be allowed to complain against items C and D in the new cause of action if items A and B were the subject matter of the old cause of action.  I believe that such a restrictive analysis is not consistent with the correct approach.  The court had dealt with this point in paras 20 to 22 of the Judgment.  Further, as noted in para 6 of the Judgment, the plaintiff had little knowledge of the details of the Project (defined in para 4 of the Judgment).  The defendants have expressed no disagreement in this regard.  The lack of knowledge explains the inconsistency in the plaintiff’s pleaded case.

5.  Finally, the defendants have placed considerable reliance upon the facts of Moulin Global Eyecare Holdings Ltd (in liquidation) v Olivia Lee Sin Mei, CACV 155 & 161/12, to illustrate how the law is to be applied.  I do not see that the exercise assists the defendants.  It is clear from that judgment that the new causes of action were based upon “different factual circumstances” – see p 29P-Q, 30F-J and 38G-K.

6.  I am unable to agree that there is a reasonable prospect of success in the intended appeal.  Accordingly, I dismiss this application with costs to the plaintiff.

HCA538/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 538 OF 2007

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JUDGMENT

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1. This is an application of the plaintiff for leave to file a fresh statement of claim in this action. There is a chequered history to this action. There are no less than 3 judgments concerning the propriety of the statement of claim (“SOC”). This is the fourth.

Background

2. This action was commenced in March 2007.  The SOC was amended in January 2008 (“ASOC”).  Consequential amendments to the Defence and Reply were filed in February 2008.  By November 2008, witness statements had been filed by the parties.  In July 2009, the defendants applied to strike out the ASOC in its entirety.  The application was upheld pursuant to the Judgment of Recorder Shieh, SC dated 5 October 2009.  However, the action was not dismissed and the plaintiff was allowed to apply to file a fresh SOC. 

3. This the plaintiff duly did by Summons dated 15 October 2009 (“Summons”) and the application was heard before Mr Justice Chung who granted leave to the plaintiff to file a fresh SOC (“New SOC”) pursuant to a Judgment dated 10 September 2010.  Dissatisfied with the result, an appeal was lodged by the defendants against the Order of Chung J.  By a Judgment dated 23 December 2011, the Court of Appeal allowed the appeal and set aside the said Order.  Further, the Summons was remitted back to the court of first instance for determination of issues in relation to the Limitation Ordinance, Cap 347 (“Cap 347”).  Pursuant to the directions of Deputy High Court Judge Mimie Chan (as she then was), the court is to deal firstly with the arguments in connection with Order 25, Rule 5(5) (“O25, r5(5)”). 

ASOC

4. The dispute between the parties arose from a business venture in developing a piece of land in Shanghai for sale (“Project”). In a nutshell, the plaintiff’s complaint is that it had put up over HK$3.6 million as its contribution in the Project but was only repaid about HK$1.6 million.  It was wrongly told by the defendants that the Project was a loss-making one.  Two causes of action were pleaded in the ASOC.  The first one was based on a partnership agreement between the plaintiff and the defendants to invest in the Project via a joint venture company (“JVC”).  The parties behind the JVC were Shanghai Kong Tung Cheong Company, a Mainland company, the plaintiff and the defendants.  The second cause of action was based on misrepresentation, namely, the statement that “the JVC was operated at a loss of HK$20,220,907”. 

5. With respect, the ASOC was a poor piece of work.  The causes of action were not properly conceived, which is underscored by the fact that it was struck out.  However, in the course of the strike out application, it was clarified by the plaintiff (see para 10 of Judgment dated 5 October 2009) that its principal cause of action should in fact be :

“the nature of the plaintiff’s case is that the plaintiff was not intending to be a shareholder in the Joint Venture Company and it was simply relying on a contract, in personam, with D1 and D2 to the effect that, upon injection of monies by the plaintiff, D1 and D2 would, in their personal capacity, pay to the plaintiff its return based on the percentage share of the plaintiff in the whole project worked out by reference to the amount of money the plaintiff has paid.”

6. For purpose which will become apparent, I need to go a little further into the details of the ASOC.  Despite the absence of an express plea, it is clear from the substance of the averments in the ASOC that the plaintiff had little knowledge as to the details of the Project and it was acting upon the information given to it by the defendants who became directors of the JVC.  In particular, it was given two documents by the defendants which showed that the JVC had suffered a loss, namely, a profit and loss account of the JVC prepared by the 2^nd defendant (“D2 Account”) and an accountant’s report prepared by Shanghai Haijia CPA Co Ltd (“Haijia Report”). However, it was subsequently discovered by the plaintiff with the aid of its Mainland lawyers that the information contained in those documents was inconsistent with the contents of another accountant’s report prepared by Shanghai Xing Zhong CPA Co Ltd (“Xing Zhong Report”) which had been submitted to the Shanghai City Industrial and Commercial Administration Management Department for purpose of dissolution of the JVC.

7. The claim under the ASOC was based upon the information contained in the Xing Zhong Report.  According to such information, the JVC was profitable and the plaintiff was entitled to a share of the same with a balance of about RMB 16.8 million owed to it. 

New SOC

8. The New SOC is largely based upon the factual averments which were deployed in the ASOC.  The new pleading seeks to advance two causes of action.  Firstly, an oral cooperation agreement (“Agreement”) made between the plaintiff and the defendants in July 1993, along the line alluded to in para 5 above.  Two breaches of the Agreement are relied upon :

(a)  over-charging the JVC in respect of project management fees in favour of a company controlled by the defendants, Master Kingdom Co Ltd (“Master Kingdon”);

(b)  abandoning a loan (“Loan”) which was advanced by the JVC to a company controlled by the defendants, Macho Co Ltd (“Macho”).

9. It is alleged that based on the Xing Zhong Report and adding back the losses from the breaches of the Agreement, the plaintiff is entitled to a balance of just over RMB 3 million which represents its entitlement under the Agreement.  In the alternative, the plaintiff seeks an account of its entitlement under the Agreement and damages to be assessed.  The proper plea should be one of payment of the sum found due upon taking the account but nothing turns on this technicality.

10. The second cause of action found in the New SOC is breach of fiduciary duty arising from the relationship of principal and agent.  It is alleged that the defendants were acting as the plaintiff’s agent in respect of the Project.  In gist, it is alleged that the defendant had failed to protect the plaintiff’s interest in the Project and failed to act in good faith towards it. 

11. I have some difficulties with the plea of agency. In the New SOC it is alleged that there was an express term in respect of the agency.  It is formulated in rather unusual terms :

“8. The Cooperation Agreement contains inter alia the following express terms:-

…

(g)  There existed principal and agency relationship that the 1^st and 2^nd Defendants should act as the Plaintiff’s agent for its investment in the Shanghai Project.”

12. As an alternative, it is alleged that the agency was premised upon an implied term :

“10. Further or alternatively, by conduct and/or by reason of business efficacy and/or by giving effect to the unexpressed intention of the parties, there is an implied term of the Cooperation Agreement that the 1^st and 2^nd Defendants should act as the Plaintiff’s agent for its investment in the Shanghai Project.”

13. I have serious doubt whether the agency has been properly or adequately pleaded in the New SOC.  Mr Ma, who appeared for the plaintiff, did not seek to defend the inadequacy.  However, it appears that in recognition of the inadequacy Mr Ma has tried to remedy the same by advancing a plea of agency in the Reply as follows :

“10. The Plaintiff further avers that at all material times:-

(a) The 1^st and 2^nd Defendants had previous property development experiences in the PRC, and they were experienced investors and/or speculators in the PRC prior to the Shanghai Project.

(b) The 1^st and 2^nd Defendants intended to be (and were) responsible for the project management of the Shanghai Project via Master Kingdom.

(c) Further, the 1^st and 2^nd Defendants intended to be (and were) responsible for the management of the Joint Venture Company.

(d) The 1^st and 2^nd Defendants were responsible for the communications, contact and/or liaison activities with other investors from the PRC side.

(e) The Plaintiff relied upon the 1^st and 2^nd Defendants’ experiences and expertise to look after and/or protect its investment interest in the Shanghai Project.

(f)  By reason of the matters pleaded in the foresaid, there existed principal and agency relationship that the 1^st and 2^nd Defendants should act as the Plaintiff’s agent for the Plaintiff’s investment in the Shanghai project.”

14. It is not disputed that these new causes of action are, prima facie, time-barred in accordance with the provisions of Cap 347 by the time the Summons was issued.

Applicable law

15. For leave to amend to be granted in these circumstances, this court must abide by O25, r5(5), which in turn reflects the provisions of section 35(5) and (6) of Cap 347. O25, r5(5) provides :

“An amendment may be allowed under paragraph (2) notwithstanding that the effect of the amendment will be to add or substitute a new cause of action if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment.”

16. For the present purpose, this court has to compare the ASOC with the New SOC to determine if the new causes of action arose out of the same or substantially the same facts. 

17. There is a recent court of appeal authority in which the law in this area has been considered – Moulin Global Eyecare Holdings Ltd (in liquidation) v Olivia Lee Sin Mei, CACV 155 & 161/12, p 23R-25T and 28N-Q :

“…[counsel] reminded the court of the dictum of Litton VP (as he then was) in Leung Kin Fook & Ors v Eastern Worldwide Co Ltd(No 2) [1997] 1 HKC 524 at 528C to D: ‘The words in O 20 r 5(5) are not to be narrowly construed: they should be given a broad and liberal interpretation in order to attain the objective of the rules.’ The policy of the statutory provisions was described by Hobhouse LJ in Lloyds Bank plc v Rogers, Court of Appeal (Civil Division) Transcript No 1904 of 1996 in these terms:

‘Section 35 contemplates that the introduced cause of action will be time barred. The policy of the section is that, if factual issues are in any event going to be litigated between the parties, the parties should be able to rely upon any cause of action which substantially arises from the same facts. There is no indication in the drafting of the Act that there should be a further limitation on section 35. If there is any relevant prejudice to the party opposing the amendment, it can and should be had regard to on the exercise of the court’s discretion whether or not to allow the amendment.’

47. Colman J discussed what could be relevant prejudice in this context in these decisions: Goode v Martin [2001] 3 All E R 562 at 566g to h⁹; P & 0 Nedlloyd B V v Arab Metals Co [2005] 1WLR 3733 at para 42¹⁰; and BP plc v Aon Ltd [2006] 1 Lloyd’s Rep 549 paras 52 to 55. I quote from the relevant passages in the last two cases:

‘42. ... The concept involved in ‘substantially the same’ in CPR r 17.4(2) must, in my judgment, involve something going no further than minor differences likely to be the subject of inquiry but not involving any major investigation and/or differences merely collateral to the main substance of the new claim, proof of which would not necessarily be essential to its success.’ (P & 0 Nedlloyd B V v Arab Metals Co)

‘52. At first instance in Goode v Martin [2001] 3 All E R 562 I considered the purpose of section 35(5) in the following passage:

‘Whether one factual basis is ‘substantially the same’ as another factual basis obviously involves a value judgment, but the relevant criteria must clearly have regard to the main purpose for which the qualification to the power to give permission to amend is introduced. That purpose is to avoid placing a defendant in the position where if the amendment is allowed he will be obliged after expiration of the limitation period to investigate facts and obtain evidence of matters which are completely outside the ambit of, and unrelated to those facts which he could reasonably be assumed to have investigated for the purpose of defending the unamended claim.’

…

54. The substance of the purpose of the exception in subsection (5) is thus based on the assumption that the party against whom the proposed amendment is directed will not be prejudiced because that party will, for the purposes of the pre-existing matters [in] issue, already have had to investigate the same or substantially the same facts.

55. It follows that if that party would not previously have had to investigate the same or substantially the same facts for the purposes of a pre-existing claim because he never had been party to such a claim, the prejudice which the exception assumes not to exist does indeed exist. If the amendment is allowed that party has to embark upon investigating a claim against him which arises out of facts which he would not previously have been concerned to investigate. Accordingly, in my judgment neither CPR 17.4(2) nor section 35(5) can be construed to have as wide a scope as that contended for by the Claimants. ... ’ (BP plc v Aon Ltd)

48. Thus, in considering whether the Share Repurchases Claim and the Convertible Notes Claim arose out of the same or substantially the same facts as a cause of action in respect of which relief has been claimed, I should consider whether the new facts required for these new causes of action would go no further than introducing ‘minor differences likely to be the subject of inquiry’ and would not involve any ‘major investigation’ which would not already have been undertaken in respect of the Dividends Claim.

…

56.  [counsel] submitted whether the new cause of action arose out of substantially the same facts as that already pleaded is ‘substantially a matter of impression’ (Welsh Development Agency v Redpath Dorman Long Ltd [1994] 1 WLR 1409 at 1418D).  I would respectfully agree with Millett LJ (as he then was) in Paragon Finance plc v D B Thakerar & Co at 418g to h this may be so in borderline cases. In others, it must be a question of analysis.”

18. It is suggested by Mr Ma that there is a tension between the two court of appeal decisions of Leung Kin Fook and Moulin Global.  Mr Ma is concerned that the adoption of the “question of analysis” approach is more restrictive than the “broad and liberal interpretation [of the rules]”.  I do not believe that such concern is well-founded.  The court of appeal in Moulin Global did not see any inconsistency between the judgment of Leung Kin Fook, which was referred to in its judgment, and the “question of analysis” approach.  I believe that in the analysis to be carried out here, the court should not be over technical or restrictive so as to give effect to the dicta in Leung Kin Fook.

Analysis

19. I deal firstly with the Agreement.  One sees from a comparison between the ASOC and the New SOC that this claim replaces the one based on a partnership agreement.  On any reasonable analysis, this cause of action is very much founded upon the facts previously pleaded in the ASOC. This is well demonstrated by a helpful table of comparison annexed to Mr Ma’s skeleton submissions.  Mr Cheuk has, quite fairly, not tried to argue otherwise. 

20. However, Mr Cheuk argued that in the ASOC there was no claim in respect of the project management fee or the Loan.  Indeed, the allegations there were that the management fee was not in fact paid to Master Kingdom and that the JVC had not granted the Loan to Macho (see paras 16(c) and 25(g) of the ASOC).  Therefore, it cannot be said that the new cause of action based on the Agreement arises out of the same or substantially the same facts as pleaded in the ASOC. 

21. I believe there are two answers to Mr Cheuk’s contention. Firstly, in an exercise of the present nature, it is not unusual that the pre-amendment pleading is unsatisfactory and therefore taking too technical or restrictive an approach would mean that amendment is rarely permissible.  Such an approach is not consistent with the law set out above. 

22. Secondly, the substance of the plaintiff’s claim in the ASOC is that the JVC had made a profit and it is entitled to a share in it.  In order to adjudicate on the claim, the court will have to consider, inter alia, the D2 Account, Haijia Report and Xing Zhong Report.  The management fee and the Loan were covered in those materials.  Hence, it is inevitable that the court will have to consider those items in order to come a conclusion whether the JVC had made a profit.  Plainly, the defendants are alive to the need to deal with the finance of the JVC in these proceedings (see, eg, paras 11(a) and 16(e) of the old Amended Defence filed on 16 February 2008). 

23. In these circumstances, I hold that the amendments in respect of the new cause of action based on the Agreement is permissible under O20, r5(5).

24. For completeness, I should mention that it has been submitted by Mr Ma that the plaintiff is entitled to rely upon the defendants’ pleading for purpose of overcoming the O20, r5(5) hurdle.  He relied upon Limitation Periods by McGee, 6^th edn, para 23.022 (it appears that para 23.012 is also relevant).  However, I do not believe that the defendants’ pleading adds very much to the picture for the present purpose. 

25. I turn to consider the new cause of action based on agency.  This is a different kettle of fish.  As distinct from the case of action based on the Agreement, one cannot say that this is a reformulation of a claim based upon substantially the same facts. 

26. The alleged agency is one arose out of the circumstances pleaded in para 10 of the Reply.  For the present purpose, I am prepared to overlook the technical deficiency in that the plea should have been advanced in the New SOC instead of the Reply.  Mr Cheuk has not made any objection in that regard.  Further, I accept that the matters pleaded in paras 10(a) to (c) can be found in the ASOC.  The same cannot be said in respect of sub-paragraphs (d) and (e). 

27. In respect of sub-paragraph (d), as noted in para 6 above it may be implicit from the substance of the ASOC that the plaintiff had little knowledge of what went on with the Project and it was acting on the information supplied by the defendants.  Such a state of affairs might have been a matter of choice on the part of the plaintiff.  It is a quantum leap to allege that the defendants were responsible for the communication with the Mainland investors. 

28. As regards the reliance on the defendants by the plaintiff pleaded in sub-paragraph (e), there is simply no such allegation found in the ASOC and I cannot accept that it is a “minor difference likely to be the subject of inquiry”.  It is a key allegation which underpins the agency claim. 

29. For these reasons, I am of the view that sub-paragraphs (d) and (e) cannot withstand the O20, r5(5) test. 

30. I have considered Mr Ma’s submission that the court can blue-pencil the impermissible part of the New SOC.  I do not believe that in the absence of sub-paragraphs (d) and (e), the agency claim is viable. It is wrong for the court to exercise its exercise to allow an amendment which advances an unsustainable cause of action. 

Conclusions

31. For the reasons stated above, I hold that the new cause of action based on the Agreement is permissible under O20, r5(5) but not the one based on agency.  If required, I would give leave to amend accordingly. 

32. Regrettably, this may not be the end of the argument because the plaintiff is in a position to advance the latter cause of action if it succeeds on the argument based on section 26 of Cap 347 – concealment. 

33. How these matters should go forward is something which the plaintiff will have to consider after studying this judgment.  I believe that the appropriate order to be made is to give the parties liberty to apply.  I make an order nisi that the costs be reserved because the court will likely have a better picture once the section 26 point is dealt with.

HCA 538/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 538 OF 2007

____________

_____________

D E C I S I O N

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Background

1. This action has had a chequered history of interlocutory skirmishes.  The writ was issued in March 2007.  The defence was filed in April 2007, and witness statements have been filed.  In January 2008, the plaintiff filed an Amended Statement of Claim, and after filing an Amended Defence, the defendants issued an application on 2 June 2009 for security for costs and, at about the same time, applied for the Amended Statement of Claim to be struck out.  As early as in October 2009, Mr Recorder Shieh SC made an order to strike out the Amended Statement of Claim in its entirety, but he allowed the plaintiff to apply to the Court for leave to file a fresh Statement of Claim.  On 15 October 2009, the plaintiff issued a summons for leave to file a fresh Statement of Claim (hereinafter referred to simply as the “Amendment Application”), and in December 2009, the defendants issued a second summons to seek security for costs.

2. On 10 September 2010, Chung J gave leave on the Amendment Application for the plaintiff to file a fresh Statement of Claim (“Chung Order”).   In April 2011, the defendants obtained leave from the Court of Appeal to appeal against the Chung Order (“Appeal”), and by agreement, the defendants’ application for security for costs was adjourned to be heard only after the determination of the Appeal. 

3. On 23 December 2011, the Court of Appeal set aside the Chung Order and, inter alia, directed a rehearing of the Amendment Application, to deal with the plaintiff’s reliance on section 26 of the Limitation Ordinance.  The defendants obtained an order for the costs of the Appeal (including the costs of the application for leave to appeal) to be paid by the plaintiff.  These costs were ordered to be taxed forthwith and to be paid forthwith.  They were subsequently taxed and allowed at $604,492.  The Allocators were issued on 10 September 2012.  These costs remain unpaid by the plaintiff.

4. The defendants’ application for security for costs was only restored in January 2012, and was heard on 5 June 2012.  Mr Recorder A Chow SC ordered the plaintiffs to provide security in the sum of $360,000, limited to the costs which may be incurred by the defendants in relation to the defendants’ applications for security for costs and the Amendment Application. 

5. On 2 February 2012, the defendants issued a summons to join Tang Ngai Piu (“NP”), Tang Kwan Ching (“KC”) and Tang Kwan Yee (“KY”) as parties to the action for the purpose of costs only (“Joinder Application”). This is pursuant to section 52A of the High Court Ordinance (“Ordinance”) and Order 62 rule 6A RHC.  The summons for the Joinder Application was served on the plaintiff as well as on the parties sought to be joined. 

6. NP was the shareholder and director of the plaintiff until he was adjudged bankrupt in December 2004.  After he was discharged from his bankruptcy in December 2008, NP became a director of the plaintiff again.  KC and KY are respectively the son and daughter of NP, and were shareholders and directors of the plaintiff at the material time of the Appeal.  It is admitted that the plaintiff company is impecunious, and that KC and KY were the financial backers of the plaintiff since the commencement of the proceedings.

7. The issue for determination is whether the court should, in exercising its power under section 52A of the Ordinance and pursuant to Order 62 rule 6A, join NP, KC and KY as parties to these proceedings and award the defendants’ costs of the Appeal against them.

Applicable legal principles

8. As the Court of Final Appeal recognizes in The Liberty Container [2007] 2 HKLRD 507, section 52A of the Ordinance confers a wide discretion on the court.  Under section 52A (1), the costs of and incidental to all proceedings in the Court of First Instance “shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent costs are to be paid”.  Section 52A (2) goes on to provide as follows:

“Without prejudice to the generality of subsection (1), the Court of Appeal or the Court of First Instance may, in accordance with the rules of court, make an order awarding costs against a person who is not a party to the relevant proceedings, if the Court of Appeal or the Court of First Instance, as the case may be, is satisfied that it is in the interests of justice to do so.”

9. Under Order 62 rule 6A (1):

“Where the Court is considering whether to exercise its power under section 52A or 52B of the Ordinance to make a costs order in favor of or against a person who is not a party to the relevant proceedings-

(a) that person must be joined as a party to the proceedings for the purposes of costs only; and

(b) that person must be given a reasonable opportunity to attend a hearing at which the Court shall consider the matter further.”

10. The provisions of the English equivalent of our Order 62 rule 6A (ie CPR 48.2 (1)) were intended to provide a formal procedural framework for a non-party against whom a costs order is sought to be joined in the proceedings, or at least be given an opportunity of applying to be joined in the proceedings, to be given protection conferred on a party by the rules of court, for example, as to the framing of issues by statements of case, disclosure of documents, payment into court, and an early knowledge of the issues (see paragraph 41 of the judgment of  Etherton J in Anstalt & others v Hayek & others [2005] EWHC 2435 (Ch)). 

11. The courts have emphasized in cases such as Symphony Group plc v Hodgson [1994] 1 QB 179, Robertson Research International Ltd v ABG Exploration BV, unreported, 7 October 1999 and Anstalt & others v Hayek & others that an application for an order under Order 62 rule 6A (“Non-Party Costs Order”) is a summary procedure, appropriate only for plain and straightforward cases. 

12. Order 62 rule 6A contemplates a two-stage process.  The court first considers whether the party should be joined for the purposes of costs, and then, give that party a reasonable opportunity to attend a hearing, for the court to “consider the matter further”.

13. In Robertson Research International Ltd v ABG Exploration BV, Laddie J considered the approach to be adopted in an application for a Non-Party Costs Order, as contrasted with an application for a wasted costs order, and indicated that for the former:

“All that is required is that the court should exercise its considerable administrative powers to ensure that the application should be dealt with as speedily and inexpensively as possible consistent with fairness to both sides. For example in many cases cross-examination will not be permitted, although sometimes it will… As the Court of Appeal stated in Symphony Group plc v Hodgson, an order for the payment of costs by a non-party will always be exceptional and the judge should treat any application for such an order with considerable caution. The simple rule that costs follow the event does not apply when it is sought to obtain a costs order against a non-party. The hurdle is much higher. If the judge can see that the claimant is almost bound to fail to negotiate that hurdle or that …the claim is merely speculative, he should dismiss it summarily. But if there is a good arguable case, he should allow the claim and to proceed with it, at risk as to costs.”(Emphasis added)

14. In Anstalt v Hayek, Etherton J explained this further in his judgment:

“Indeed, as I have said, it is common ground that the court will refuse joinder if it is clear that the application for a costs order against a non-party under section 51 (3) (of the English Supreme Court Act 1981) would be an abuse of process, whether on the ground of delay or other misconduct on the part of the Applicant or because the application is manifestly so fundamentally misconceived as to amount to an abuse of process.

I do not agree with (counsel’s) proposition, however, that it is always open to the non-party to challenge the application for joinder on the ground that the application for the costs order has no real prospect of success.” (Emphasis added)

15. After highlighting that the procedure for determination of an application for costs against a non-party is a summary procedure, Etherton J went on to state, as follows:

“ …the possibility of a preliminary hearing on the merits in those circumstances in order to see whether the application should go forward for a determination which is itself to be conducted summarily does not strike me as sensible or efficient. Contrary to the philosophy of a summary process, such a possibility is likely to encourage a proliferation of such preliminary hearings leading, in the case of failed challenges on the merits, to the airing of issues twice, delay, and the expenditure of more time, costs and resources both of the court and to the parties. Those adverse consequences would be magnified by any appeal from the initial position on joinder.”

16. It was emphasized by His Lordship in Anstalt that a preliminary assessment of the merits at the joinder stage is contrary to the philosophy of a summary process which underlies the jurisdiction to order costs against a non-party, and inconsistent with the overriding objective of the English rules.  His Lordship stated in paragraph 51 of his judgment:

“I do not see…a significant policy justification for subjecting the winning party (and the court) to the time and cost of a preliminary hearing on the merits (over and above an abuse of process argument) in what is supposed to be a speedy and summary process. …Nor do I see any merit in (counsel’s) alternative position of a threshold of an “arguable” case at the joinder stage, in so far as that is something different from an abuse of process threshold. (Counsel) was not able to refer me to any other area of practice and procedure in which such an “arguability” test is imposed. Bearing in mind the tests of “serious issue to be tried”, “good arguable case” and “real prospect of success” can all be satisfied by something less than a 50% prospect of success, it is difficult to understand precisely what a test of “arguability” would require over and above the abuse of process. For all those reasons, I am satisfied that it is not open to (the non-party) to challenge the applications for joinder before me on the ground that, even if the applications are not an abuse of process, they have no real prospect of success.”(Emphases added)

17. In the case of PR Records Ltd v Vinyl 2000 Ltd & Owlett [2007] EWHC 1721 (Ch), Morgan J examined in detail the nature of the inquiry which the court should undertake on an application to join a non-party for the purpose of seeking a costs order.  In paragraph 34 of his judgment, Morgan J states:

“However, in my judgment, it is reasonably clear how the court would normally react to an application to join a party. An applicant for such an order would normally be expected to explain the nature of the claim which the applicant had against the intended party and the purpose to be served by joining that party. If the applicant was not able to explain its claim against the intended party and/or was not able to say what purpose was served by joining the intended party, then the court might very well dismiss the application. If, for some reason, it was clear that a joinder of the intended party was an abuse of process of the court then again the court would be expected to dismiss the application. Of course, it will often arise that the intended party should be added as a party so that he can then defend the claim. Such a defence might take the form of the added party applying for summary judgment under Part 24. Even where it is clear at the time of adding the further party that that party intends to apply under Part 24, that would not generally be a reason for refusing to add that party. It still makes good procedural sense for the party to be added and then for the matter to proceed under Part 24, if appropriate, or with the case being defended in some other way. However, I can conceive of a case where it is so clear that a Part 24 application by the added party would succeed that the court might be prepared to refuse to add that party in the first instance.”

18. After considering Anstalt v Hayek, His Lordship adopted Etherton J’s approach, agreeing on “the inappropriateness of having a preliminary assessment at the first stage, followed by a summary assessment at the second stage”.

19. I respectfully and wholeheartedly agree with the observations made by Etherton J and Morgan J in Anstalt and PR Records, and consider that the duplication of arguments on the merits at the first and then the subsequent hearings of an application for a Non-party Costs Order, and the proliferation of preliminary hearings, would be entirely contradictory to the underlying objectives of the Civil Justice Reform.  At the first stage of the hearing, when the court considers whether to join a non-party in the proceedings, the court should refuse the joinder only if it is plain and obvious that the application amounts to an abuse of process, by reason of delay or other misconduct on the part of the applicant, or because the application can be seen to be manifestly and fundamentally misconceived as to be an abuse by the applicant.  Arguments and documents for the first stage of the hearing should be limited to those which are considered to be necessary to enable the court to determine whether non-parties should be joined in the proceedings.  It is only at the second stage that the court considers whether the costs order should be made against the non-party, the overall consideration always being whether it would be in the interests of justice to do so pursuant to section 52A of the Ordinance.

The principles applied to the present case

20. The question to be asked at this first stage of the Joinder Application is accordingly: whether the defendants’ application to join NP, KC and KY can be clearly seen to be an abuse of process, or fundamentally misconceived or doomed to fail such that the joinder should be refused. 

21. The defendants’ summons for the Joinder Application issued on 2 February 2012 was served on the plaintiff, as well as the parties sought to be joined.  It was ultimately fixed for argument on 8 October 2012, with half a day reserved. Counsel for the defendants, counsel for the plaintiff and counsel for KC and KY filed detailed Skeleton Arguments for the first hearing, with the plaintiff, NP, KC and KY opposing the application.  In an attempt to save costs and to avoid proliferation of interlocutory hearings, I sought clarification from the parties before the day of the hearing as to whether there was consent to the joinder, and whether the hearing could be treated as the substantive hearing of whether a Non-party Costs Order should be made.  The parties reverted to confirm that the plaintiff, NP, KC and KY opposed the proposed joinder, and that there was no agreement that the hearing should be treated as the substantive hearing of whether a Non-party Costs Order should be made.  The defendants also indicated at the hearing that they need to file further evidence for the second stage of the Joinder Application, as to whether it would be just to make the Non-party Costs Order. 

22. It was argued on behalf of the plaintiff, NP, KC and KY that the court has no jurisdiction to make the Non-party Costs Order at this stage of the proceedings before trial, when the costs orders made in favor of the defendants relate only to the Appeal.  It was argued that the application under section 52A was premature, as it should only be made after the trial of the action, when the merits of the claims and the defence and the propriety or bona fides of the parties’ conduct have been determined.  It was also argued that it was an abuse to seek a costs order against the non-parties at this early stage before trial, to cover costs to be incurred by the defendants for the entire action.

23. Section 52A confers a wide discretion on the court, giving it full power to determine “by whom and to what extent” costs of and incidental to all proceedings before the court are to be paid.  The court only has to be satisfied, in the exercise of its discretion, that it is in the interests of justice to make an order to award costs against a person who is not a party to the relevant proceedings.  There is no restriction as to the stage at which the order can or should be made, or the costs to which it relates.  As the court explained in Anstalt v Hayek, the intention of the English equivalent of our Order 62 rule 6A is to enable the party who is not already named in the action, and against whom the costs order is sought, to be joined first, so as to give such party the protection afforded by the rules to a party in the action, by the framing of issues, discovery and payment into court if appropriate, such that the party can properly consider its position at an early stage and safeguard its risks as to costs. 

24. On the state of development of this case, I do not agree that it is clearly an abuse for the defendants to apply for a Non-party Costs Order at this stage of the action before trial, but when the Appeal has been finally determined on discrete issues, and costs orders have been made in favor of the defendants, and taxed, in relation to the Appeal.  Whether or not it would be just to make the Non-party Costs Order in all the circumstances, and whether it would be fair to have the Non-party Costs Order made at the interlocutory stage, should be determined at the second stage of the application under Order 62 rule 6A.

25. The availability of an order for security for costs at an early stage of the litigation would, in many situations, be a strong argument for refusing to exercise a discretion to order costs against a non-party, but as the court explained in Knight v FP Special Assets Ltd [1992] 174 CLR 178, discretion must be distinguished from jurisdiction. 

26. On the facts of this case, the defendants did make application for security for costs at an early stage of the proceedings in June 2009, but that application was not pursued when the Amendment Application was pending and the parties took the view that the issue of security would be academic if the Amendment Application resulted in the striking out of the entire action.  The defendants sought to pursue the security application before Recorder Shieh in October 2009, but did not succeed.  The security ordered by Recorder Chow in June 2012 only related to the further conduct of the Amendment Application.  In these circumstances, I do not regard the defendants’ application for the Non-party Costs Order to be an abuse.  It is not a case of their abusing the application for a Non-party Costs Order when security against the plaintiff was available as an option but was not pursued.

27. Nor can it be said that it is plain and obvious that the defendants have no basis to ask for a Non-party Costs Order against NP, KC and KY, or that their application for such an order is bound to fail.  It is admitted that KC and KY were the funders of the action and the Appeal.  The defendants’ case shows that it is NP, KC and KY who will, together,  benefit from the action, as the plaintiff has no other business, purpose or activity save as to hold the interests in the venture which is the subject matter of these proceedings for which damages are sought.  According to the defendants, the proceeds of the litigation will only be distributed to the shareholders, including NP, KC and KY.  The authorities (eg The Liberty Container [2007] 2 HKLRD 507, Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2005] 4 All ER 195) all show that a Non-party Costs Order can be made against a director who had the management of the litigation on behalf of the company, and who funded proceedings of the insolvent company for his own financial benefit.  Impropriety on the director’s part is not a pre-condition to the exercise of the court’s power to make the Non-party Costs Order (Gina Gardiner v Fx Music Ltd (In Liquidation) (Chancery Division) unreported, 27 March 2000, Goodwood Recoveries Ltd v Breen [2006] 2 All ER 533).  Whether or not the court’s discretion should be exercised on the facts of each case to make the Non-party Costs Order against the particular director, for example when he had pursued a bona fide claim or defence, or when he was a “pure funder” who had no personal interest and did not seek to benefit from the litigation, are matters for consideration at the second stage of the application under Order 62 rule 6A.

28. Having considered all matters, I am not satisfied that the defendants’ application for the Non-party Costs Order against NP, KC and KY is an abuse of the process of the court, or otherwise misconceived. 

Orders

29. I will accordingly order that NP, KC and KY be joined as parties to the action for the purposes only of the orders for costs made against the plaintiff on the Appeal.  It is within the power and discretion of the court to limit such an order for joinder to the costs of the Appeal, on which the parties’ arguments have been focused. 

30. The parties are directed to agree on, and to jointly submit in writing within 14 days of the handing down of this Decision, directions for the further hearing on whether an order should be made that NP, KC and KY bear the costs of the Appeal.  Since the plaintiff has already made submissions at the hearing on 8 October 2012 as to why NP, KC and KY should not be joined, I see no necessity for the plaintiff to make further submissions as to whether NP, KC and KY should be ordered to bear the costs.  To repeat and duplicate arguments at the further hearing would be totally inconsistent with the objectives of procedural economy and proportionality under the Civil Justice Reform, and against the summary nature of applications for Non-party Costs Orders, which should be determined as speedily and inexpensively as possible.

31. I will make an order nisi that the costs of the hearings on 8 October 2012 and 14 June 2012 should be in the cause of the Summons for the Non-party Costs Order.

HCA 538/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 538 OF 2007

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BETWEEN

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D E C I S I O N

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Applications

1.  I have before me two summonses taken out by the defendants dated 10 December 2009 and 29 May 2012 respectively (the “1^st Summons” and “2^nd Summons” respectively, and the “Summonses” collectively) seeking an order that the plaintiff provides security for the defendants’ costs in this action.  The bases of the applications, as appear from the Summonses, are Order 23, rule 1 of the Rules of the High Court and Section 357 of the Companies Ordinance and the inherent jurisdiction of the court.

2.  At the hearing this morning, Mr Calvin Cheuk for the defendants confirmed that the 2^nd Summons effectively superseded the 1^st Summons, and thus this Court should focus on the 2^nd Summons.

Background

3.  These proceedings have a long history, the Writ having been issued on 16 March 2007.  The detailed history of these proceedings is set out in the written Judgment of the Court of Appeal handed down on 23 December 2011 and I shall not repeat the same in this Decision save to mention a few facts which are relevant for the present purposes.

4.  The original Statement of Claim was dated 16 March 2007, and it was amended on 18 January 2008.  The Amended Defence was dated 15 February 2008.

5.  On 2 June 2009, the defendants applied by summons for an order for security for costs against the plaintiff.

6.  On 10 July 2009, the defendants applied to strike out various parts of the Amended Statement of Claim, and the application was amended on 16 July 2009 to seek to strike out the whole, or alternatively parts, of the Amended Statement of Claim.

7.  The security for costs and strike out applications came before Mr Recorder Shieh, SC on 5 October 2009.  By an order made on the same date, the learned Recorder struck out the whole of the Amended Statement of Claim, but did not dismiss the action in order to give the plaintiff an opportunity to get its house in order by applying for leave to file a fresh statement of claim.

8.  The learned Recorder also decided to make no order on the summons for security for costs in view of the fact that he had decided to strike out the whole Amended Statement of Claim.  Nevertheless, the learned Recorder made it clear in his Judgment dated 5 October 2009 that he would have been minded to order the plaintiff to give security for costs in the amount of HK$1.1 million had he not decided to strike out the Amended Statement of Claim.

9.  Subsequently, the plaintiff applied by summons dated 15 October 2009 (the “Amendment Summons”) for leave to put in a fresh statement of claim (the “Fresh Statement of Claim”).  That application, as well as the defendants’ further application for security for costs under the 1^st Summons, came before Chung J on 27 April 2010.  The security for costs application was adjourned by the learned Judge, and the application for leave to file the Fresh Statement of Claim was eventually allowed by the learned Judge on 10 September 2010.

10.  The order of Chung J to allow the plaintiff to file the Fresh Statement of Claim was set aside by the Court of Appeal on 23 December 2011 on a point relating to limitation.  For the present purposes, it is not necessary for me to go into the details of the reasons of the Court of Appeal for its decision, save to point out that what the Court of Appeal did was to remit the plaintiff’s application to a Judge of the Court of First Instance, with the issue of the plaintiff’s reliance on section 26 of the Limitation Ordinance (the “s.26 point”) to be tried as an issue in the Amendment Summons.  As identified in the Judgment of the Court of Appeal, there is also an issue as to whether the plaintiff is entitled to amend the statement of claim by reliance upon Order 20, rule 5(5) of the Rules of High Court (the “Order 20 Rule 5(5) point”).

11.  The hearing date of the Amendment Summons has not yet been fixed.  At the hearing of the Case Management Summons taken out by the plaintiff pursuant to the directions of the Court of Appeal which took place on 3 February 2012, Deputy High Court Judge Mimmie Chan gave the following directions regarding the further conduct of the Amendment Summons and the 1^st and 2^nd Summonses:

(1) the 1^st and 2^nd Summonses be heard first;

(2) the plaintiff’s Amendment Summons insofar as it relates to the Order 20, rule 5(5) point be adjourned to a date to be fixed for argument after the disposal of the security for costs applications with 3 hours reserved;

(3) the plaintiff’s Amendment Summons insofar as it relates to the s.26 point be adjourned to a date to be fixed for argument after the disposal of the security for costs applications and the Order 20, rule 5(5) point with 2 days reserved.  I am told by Mr Calvin Cheuk for the defendants that it is envisaged that there will be cross examination of witnesses at that hearing.

12.  It is not in dispute that if the plaintiff should succeed in his amendment application in reliance on the Order 20, rule 5(5) point, it will not be necessary for the plaintiff to pursue the s.26 point and the action will proceed on the basis of the Fresh Statement of Claim.  On the other hand, if the plaintiff should fail in its amendment application in relation to the Order 20, rule 5(5) point, the second part of the hearing of the Amendment Summons in relation to the s.26 point will have to be proceeded with.  If the plaintiff should fail in both the Order 20, rule 5(5) and s.26 points, the present action will effectively come to an end and there will be no trial of the action.  This is a consideration which will be relevant to the question of what, if any, security for costs should be given by the plaintiff at this stage.

The defendants are in principle entitled to security for costs

13.  As earlier mentioned, the defendants rely on, inter alia, Section 357 of the Companies Ordinance in support of their applications for security for costs.  That section states as follows:

“Where a limited company is plaintiff in any action or other legal proceedings, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given.”

14.  It is not disputed by Mr Ma that the plaintiff is a company within the meaning of Section 357, nor is it in dispute that there is reason to believe that the plaintiff will be unable to pay the costs of the defendants if they are successful in their defence.

15.  Mr Ma submits, however, that security for costs should not be given for a number of reasons.

16.  First, it is said that the defendants’ applications are premature in that the present action is without any pleading / statement of claim at the moment, and that any application for security for costs should only be dealt with or ordered after the plaintiff has been granted leave to file its Fresh Statement of Claim.

17.  In support of this submission, Mr Ma relies on certain observations previously made by the learned Recorder and also by the Court of Appeal.

18.  As earlier mentioned, the learned Recorder declined to make any order for security for costs in favour of the defendants in his Judgment dated 5 October 2009.  The defendants sought leave to appeal against, inter alia, that part of the decision. The application for leave to appeal was rejected by the learned Recorder.  At paragraphs 20 to 29 of the Judgment dated 22 October 2009 given by the learned Recorder, the following was stated:

“20. I confess that I had great difficulties in understanding why it is said that the Defendants would ‘suffer’ in not having an order for security for costs. As I had tested with Mr Cheuk, had I dismissed the entire action on 5 October, then no doubt the Defendants would have got all their costs in the action incurred so far, but they would then be unprotected completely by security. That is a consequence of their not having applied for security for costs earlier.

21. Secondly, under my order, if the Plaintiff had applied successfully for leave to file a fresh statement of claim, the Defendants would then be at liberty to issue a fresh application for security, and if it is able to substantiate the grounds for security under the newly cast statement of claim, then it will get security and it will then be protected, and it will then not ‘suffer’.

22. So the question arises as to how it is said to be suffering. The only possible gap, or lacuna, which I can think of, but which actually is not seriously pursued by Mr Cheuk, is this: if the Plaintiff were to issue a summons to issue a fresh statement of claim and then the Defendants were to oppose it, and successfully oppose it, then it may well be said that the Defendants’ costs in opposing the Plaintiff’s application for leave to issue a fresh statement of claim would be unprotected by any security for costs.

23. But those costs, if any, may or may not be covered by a self-standing application for security for costs. I am not saying that there is necessarily jurisdiction to apply for security for costs for the application to issue a fresh statement of claim. All I am saying is that the application for security for costs before me is for security for costs for the entire action, not for covering the Defendants’ costs in opposing the application to issue a fresh statement of claim.

24. But as I said, this is really not the suffering which Mr Cheuk had impressed upon me. The suffering that Mr Cheuk had impressed upon me is that the Defendants should not be put into a position of having to apply again for security for costs if the Plaintiff managed to successfully file a fresh statement of claim.

25. I confess that I cannot see how the Defendants can be said to ‘suffer’ in having to apply for fresh security. The old application for security is premised upon the pleadings as they then stood. Those pleadings have gone as a result of my decision to strike out. It would be entirely academic for me to make an order for security for costs based on issues, or supposed issues, on pleadings which are no longer in existence. …

…

29.     What Mr Cheuk is now impressing upon me is that, even though everyone knows full well that the pleading is gone and there is no longer any issue on the court file that could sustain any order for security, I should pretend that the old pleading, which I had just struck out, continues to be in place and give an order for security which everyone knows to be completely fictitious and which everyone knows does not reflect the state of the court file.”

19.  The defendants’ renewed application for leave to appeal was also rejected by Rogers VP, sitting as a single Judge of the Court of Appeal.  At paragraph 4 of his Decision dated 24 November 2009, the learned Vice President said this:

“Given the issues involved, the recorder was perfectly entitled to consider that the question of security for costs should be left over until it can be seen what, if any action, can be pleaded against the defendants. In those circumstances, leave to appeal is refused.”

20.  Mr Ma also relies upon the following observation of Fok JA in the Court of Appeal’s Decision on Costs handed down on 18 January 2012:

“The security for costs application relates to the costs of the action as a whole, assuming it is to proceed. It will only proceed if the plaintiff is successful in obtaining leave to amend the statement of claim. If leave is not granted, security for costs will not be required.”

21.  Mr Cheuk says that this observation was made in the context of the defendants’ application to vary a costs order nisi previously made by the Court of Appeal, and there was no argument on whether the defendants ought to be entitled to security for costs.  That may be so, but it seems to me that the observation of Fok JA makes perfect good sense and is, with respect, correct as a matter of principle.

22.  The present state of the proceedings is, in my view, materially the same as it was before the learned Recorder, Rogers VP and Fok JA, and I agree with their observations recited above.  At this stage, it is unknown whether the plaintiff will succeed in its application to file the Fresh Statement of Claim and thus it is unknown whether there will be any trial of the action.  Also, it is, in my view, inappropriate to make any order for security for costs at this stage which would put the defendants in a better or more secured position than would be the case had the defendants been successful in having the plaintiff’s action dismissed by the learned Recorder in October 2009. I recognise that the defendants have incurred some further costs since that time but the defendants have also been awarded costs of the appeal to the Court of Appeal which I believe should make up a significant part of those further costs incurred by the defendants.  In the exercise of my discretion, I decline to make any order for security for costs except in so far as they relate to the costs which may be incurred by the defendants in relation to the current applications for security for costs and also the Amendment Summons.  In respect of all other costs which may already have been be incurred by the defendants in this action or which may be incurred by the defendants in future should the plaintiff succeed in its Amendment Summons, it would be up to the defendants to make a fresh application for security for costs after the result of the Amendment Summons is known.  It would not be appropriate for me to say anything further about the merits of such application should one be made.

23.  Mr Ma’s second argument is that there is serious doubt on whether the Court has jurisdiction to make any order for security for costs covering the entire action “when there is no pleading at the moment”.  No authority has been cited in support of his argument and in any event, as indicated above, I am not minded to make any order for security for costs covering the entire action.  I see no reason, however, why the Court would have no jurisdiction to make an order for security for costs covering the current applications under the 1^st and 2^nd Summonses and the Amendment Summons.

24.  Mr Ma’s third argument is that the plaintiff’s claims have a high probability of success. This argument was not seriously pursued by Mr Ma at the hearing.  The authorities also clearly establish that the Court should only take into account the merits of the claim when determining an application for security for costs where the merits can readily be demonstrated one way or another.  I agree with the submissions made by Mr Cheuk regarding the merits of the claim, and do not consider that the plaintiff has demonstrated that its claims have a high probability of success.  I do not consider that this is an appropriate case to place weight on this factor.

25.  Mr Ma’s fourth argument is that the order sought will stifle the plaintiff’s claims and that the plaintiff’s impecuniosity was caused by the defendants.  These arguments were considered and rejected by the learned Recorder in his Judgment dated 5 October 2009.  The plaintiff has filed a further affirmation, namely, the 3^rd Affirmation of Tang Ngai Pui on 30 December 2009 in response to the 1^st Summons, but it does not take the matter any further.  For the reasons given by the learned Recorder with which I agree, I do not consider that there are merits in this argument.

26.  Lastly, Mr Ma argues that there has been delay in the present applications.  Again the argument on delay was considered and rejected by the learned Recorder.  No new facts or matters are relied upon by the plaintiff.  I do not consider that the complaint of delay is made out.  Indeed, as observed by the learned Recorder, the defendants’ legal advisers have been writing to the plaintiff to ask for security for costs since 14 December 2007.  It is unfortunate that much time has elapsed since the order of the learned Recorder striking out the Amended Statement of Claim and that the question of whether the plaintiff may have leave to file the Fresh Statement of Claim is still unresolved at this stage, but I would not attribute fault to either party in respect of such delay.

27.  In all, I consider that at this stage, justice would be served by making an order for security for costs in the defendants’ favour limited to the costs which may be incurred by the defendants in relation to the current applications for security for costs and the Amendment Summons.

Quantum of security

28.  The defendants have prepared a draft Bill of Costs.  Sub‑headings 4, 5, 8 and 9 of that Bill relate to the estimated costs which may be incurred by the defendants in respect of the current applications for security for costs and the Amendment Summons.  They come to a total of $192,000 by way of profits costs and $330,000 by way of disbursements.  Mr Ma’s only specific comment in respect of those costs is that leading counsel’s fees should not be allowed in respect of the second part of the hearing of the Amendment Summons relating to the s.26 point.  That part of the hearing is not, it seems to me, straight forward, and I do not think it would be unreasonable for the defendants to instruct leading counsel for that part of the hearing if that is their wish.

29.  I would make an order in terms of paragraphs 1 to 3 of the 2^nd Summons, and fix the amount of the security at $360,000.  The stay of proceedings shall not, however, affect the defendants’ joinder application by summons dated 2 February 2012 or any proceedings for the enforcement of any orders or judgments previously made in this action.

HCA 538/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 538 OF 2007

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BETWEEN

____________

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D E C I S I O N

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Introduction

1.  This is the plaintiff’s application for leave to file and serve a fresh statement of claim.  This application became necessary following the striking out of the amended statement of claim earlier on 5 October 2009.

2.  This action was commenced in March 2007.  It is common ground the parties were interested in jointly developing a piece of real property in Shanghai for sale.  According to the amended statement of claim, the plaintiff contributed about $3.6 million into the project (equivalent to 15% of the joint venture business).  But apart from about $1.6 million, the defendants failed to pay other sums to the plaintiff.

3.  The plaintiff’s claim, which amounted to about RMB16.8 million, was originally based on the following principal causes of action:-

(a)    a partnership agreement;

(b)    misrepresentation.

4.  However, during the hearing of the striking out application, the plaintiff clarified that its principal cause of action should in fact be:-

“... a contract, in personam, [between the plaintiff and the defendants] to the effect that, upon injection of monies by the plaintiff, [the defendants] would, in their personal capacity, pay to the plaintiff its return based on the percentage share of the plaintiff in the whole project worked out by reference to the amount of money the plaintiff has paid” (para. 10, judgment dated 5 October 2009).

The references to a partnership agreement and misrepresentation were therefore linguistic mistakes.

5.  The defendants oppose this application, contending that the re-formulated claim has no prospect of success.  The contention is premised on:-

(1)    the Limitation Ordinance (Cap. 347);

(2)    the claim is nothing more than the reflective loss of the joint venture company;

(3)    the “personal” contract averment is inconsistent with the contemporaneous documents.

Time Limitation

6.  The fresh statement of claim avers, among other things, an oral agreement which was made in July 1993.  Two breaches have been pleaded:-

(a)   over-charging the joint venture company for management fees in favour of a company controlled by the defendants;

(b)    abandoning a loan which was advanced to a company controlled by the defendants.

The amount claimed is now about RMB3 million (instead of the former RMB16.8 million or so).

7.  The defendants argue that the claim is not raised until after the 6-year period for making it has already expired and is therefore time-barred; according to the fresh statement of claim, the over-charging took place before February 2003, alternatively, December 2003, and the loan was abandoned in February 2004.

8.  S. 35(1)(b), Cap. 347 provides however:-

“For the purposes of this Ordinance, any new claim made in the course of any action shall be deemed to be a separate action and to have been commenced ... in the case of any other new claim, on the same date as the original action” (emphasis supplied).

S. 35(2)(a), Cap. 347 defines “new claim” to mean:-

“... any claim by way of set-off or counterclaim, and any claim involving either ... the addition or substitution of a new cause of action”.

9.  The defence submits that, by reason of the operation of s. 35(1)(b), Cap. 347, it will be prejudiced if the new claim can be made “out of time”.  It also contends that, before the plaintiff is permitted to make a new claim, the court should require the plaintiff to show that the defence will have no reasonably arguable defence of limitation to the new claim, or that the plaintiff can bring the new claim within ss. 35(5) and (6), Cap. 347 and RHC Ord. 20 r. 5(5).

10.  In short, those statutory provisions require the new cause of action to arise:-

“... out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment”: s. 35(6)(a), Cap. 347.

11.  The material averments when pleading a cause of action in breach of contract are: the particulars pertaining to the making of the contract, the relevant contract terms, the breach(es) and the loss caused by the breach(es): see, for example, Hong Kong Civil Procedure 2010, Vol. 1, para. 18/7/7, 18/12/3 and 18/12/10.

12.  In this application, the defence argues that at least:-

(1)    the oral agreement;

(2)    the two breaches summarised in para. 6 above,

have not been pleaded in the struck out amended statement of claim.  Thus, at least insofar as those matters are concerned, the plaintiff cannot bring itself within s. 35(5) or (6), Cap. 347 or Ord. 20 r. 5(5).

13.  In relation to the oral agreement, the struck out amended statement of claim already referred to an agreement made in 1993 (albeit called therein a “partnership agreement” at the time).  The gist of the terms set out in the amended statement of claim is similar to those set out in the draft fresh statement of claim.  It is therefore wrong to think that the agreement is only raised now.  The plaintiff may be able to establish at trial that this aspect falls within s. 35(5) or (6), Cap. 347 or Ord. 20 r. 5(5).

14.  In relation to the breaches of agreement, the plaintiff relies on s. 26(1)(b), Cap. 347:-

“...where in the case of any action for which a period of limitation is prescribed by this Ordinance, ... any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant ... the period of limitation shall not begin to run until the plaintiff has discovered the ... concealment ... or could with reasonable diligence have discovered it”.

15.  In this connection, the plaintiff avers that there has been deliberate concealment; the over-charging and the loan abandonment only came to its knowledge in about June 2004: para. 30 to 31, draft fresh statement of claim.

16.  In short, I agree with the plaintiff. Accordingly, I conclude that the claims made in the fresh statement of claim may be found at trial to fall within ss. 26(1)(b), Cap. 347.

Reflective Loss

17.  During the striking out application, the defence put forth the argument (among others) that the claim fell within the rule against claiming reflective loss.  This is summarised in Anthony Eric Ryan Hotung v. Ho Yuen Ki and Others [2010] 2 HKLRD 304 as follows:-

“In company law, the rule against recovery of reflective loss debars a shareholder from suing to recover a loss which is merely a reflection of the loss suffered by the company of which he is a shareholder: Johnson v. Gore Wood & Co (No 1) [2002] 2 AC 1; Landune International Ltd v. Cheung Chung Leung [2006] 1 HKLRD 39” (para. 16).

The argument was rejected by the court in the judgment dated 5 October 2009 (see para. 33 thereof).

18.  As the parties correctly accept, the propriety of the over-charging and the loan abandonment has not been challenged by the plaintiff in the context of the affairs of the joint venture company.  Because of the lack of such a challenge, it cannot be said that the joint venture company has suffered loss as a consequence.

19.  However, that the plaintiff has not raised such challenge does not mean it cannot raise a complaint against the defendants in their personal capacity.  For example, the plaintiff may complain that the defendants have breached the duty of conflict of interest and/or the “self-dealing” rule in their capacity as agents: Bowstead and Reynolds on Agency (2006) 18^th Ed., para. 6-063 to 6-074.

20.  By virtue of the matters set out in para. 18 and 19 above, I agree with the plaintiff it is highly arguable the loss pleaded in the draft fresh statement of claim is not reflective loss.

Oral Agreement Inconsistent with Contemporaneous Documents

21.  This argument has again been raised during the striking out application.  The defence refers to various documents which tend to show that the plaintiff was fully aware that the joint venture was undertaken through a corporate vehicle, and knew of its participation in the joint venture as a shareholder thereof.

22.  On the other hand, while it is common for businesses to be carried on by way of a corporate vehicle (at least as-between the corporation and third parties), this does not necessarily preclude the joint venture “partners” from establishing that, among themselves, the corporate business is in truth a partnership.  Winding-up petitions based on ss. 168A and/or 177(1)(f), Companies Ordinance (Cap. 32) are well-known examples of such instances.

23.  I therefore agree with the judgment dated 5 October 2009 that the contemporaneous documents are not such as should “drive the plaintiff from the judgment seat” (see para. 34 thereof).

Conclusion

24.  Consequently, leave is given to the plaintiff to file and serve the draft fresh statement of claim.

25.  If necessary, I shall hear the parties regarding the time for filing and serving amended pleadings.  Unless they do so within 3 days, the defence shall be at liberty to file and serve an amended defence within 21 days and the plaintiff shall be at liberty to file and serve an amended reply within 14 days thereafter.

Costs Order

26.  The parties agree the following costs orders. In relation to the costs incurred and thrown away by the fresh statement of claim (for the avoidance of doubt, these should include the costs of all the wasted pleadings) and the costs of any consequent amendment, these should be paid by the plaintiff.  In relation to the costs of the hearing on 2 September 2010, these should follow the event.  In other words, these costs should be paid by the defendants to the plaintiff.

27.  I consider summary assessment of the above costs to be appropriate.  For this purpose:-

(a)    the plaintiff be at liberty to lodge with court and serve a statement of costs in relation to the costs of the said hearing within 7 days;

(b)    the defence be at liberty to lodge with court and serve a statement of objections within 7 days thereafter;

(c)   similar to sub-para. (a) above, the defence be at liberty to lodge with court and serve a statement of costs in relation to the costs of the wasted pleadings and the consequent amendment within 7 days of the filing of the amended defence;

(d)    the plaintiff be at liberty to lodge with court and serve a statement of objection within 7 days thereafter.

Defendant's appeal to Court of Appeal allowed. Please refer to CACV82/2011 dated 23 December 2011

HCA538/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 538 OF 2007

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J U D G M E N T

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1.  There are two summonses before me today.  Both are issued by the defendants.  The first one is a summons for security for costs, dated 2 June 2009 and the second one is an amended summons to strike out the plaintiff’s Amended Statement of Claim.  The summons to strike out was originally dated 10 July 2009 and it was amended on 16 July 2009.

2.  At the conclusion of the hearing I have decided that I should give an ex tempore judgment instead of reserving because I think it is in the best interests of all parties that a speedy decision be given so that the matter can move on instead of for me to try to work on a reserved judgment.  So with the shortness of time, if there is any infelicity in expression, the fault is entirely mine.

3.  The Statement of Claim in this action was dated 16 March 2007.  It was amended on 18 January 2008.  I shall set out the entirety of the Amended Statement of Claim in an annexure to this judgment with the additions and deletions all marked up for ease of reference.

4.  In the original summons to strike out, the defendants only sought to strike out paragraphs 10 to 18 and paragraphs 21 to 27 of the Amended Statement of Claim.  Then by amendment, the summons was amended to seek to strike out the entire Amended Statement of Claim with an alternative prayer to strike out paragraphs 10 to 18 and 21 to 27.  All grounds under Order 18, rule 19, as well as the inherent jurisdiction, are relied on.

5.  The Amended Statement of Claim is not an entirely easy document to read.  Evidence and immaterial averments were liberally pleaded.  One blatant example can be found in paragraphs 23 to 27 of the Amended Statement of Claim where matters relating to an investigation by a PRC lawyer retained by the plaintiff were pleaded and also matters relating to a report by the plaintiff to the relevant PRC law-enforcement departments were pleaded.  For my part, I can see no relevance or materiality to these matters because I cannot think of any cause of action to which the fact of a report to a foreign law-enforcement agency could be relevant; certainly not in the present context.

6.  Mr Chan, in fairness, did not positively seek to uphold the materiality of the matters pleaded in these paragraphs.  He suggested, for example, that insofar as the investigation by the Mainland authorities result in conviction, that it could well be that the convictions would be relevant.  But the immediate answer to that is that this does not justify pleading the fact that the matter has been reported to the relevant departments.  If and when any convictions are to materialise, and subject to whether any foreign conviction can be relied upon in the Hong Kong courts, the pleading can then be amended accordingly.  I am expressing no views on whether or not any foreign conviction is a matter that can properly be relied on in the courts of Hong Kong because I have not heard any submissions on this.  This point was really floated by way of exchange between the Bar and the Bench and I doubt whether or not any mature thought has come into it when Mr Chan put forward the suggestion.

7.  Another example of evidence and immaterial matters being pleaded can be found in paragraph 15 of the Amended Statement of Claim when certain results of a search conducted in the Shanghai City Industrial and Commercial Administration Management Department were pleaded.  The plaintiffs may wish to rely on the content of certain search results to prove certain material facts which it wishes to rely on but it is certainly not good pleading practice to plead that a search has been conducted and, according to the search result, it showed this, that and the other.  The fact that they seek to prove should be pleaded but not the way or the underlying materials by which the plaintiff wishes to prove it.

8.  The above “defects” in the Amended Statement of Claim, however, fade into insignificance when one addresses the more fundamental problem of the Amended Statement of Claim, which is that it does not fairly tell the reader the nature of the plaintiff’s claim.  In paragraph 3 of the Amended Statement of Claim, the pleader pleaded a Partnership Agreement and then defined it as such using capital letters “P” and “A”. 

9.  Now, under the law of Hong Kong when one refers to a partnership, the immediate reaction is that one is referring to a partnership in the technical and legal sense.  In paragraph 3(c) of the Amended Statement of Claim, the pleader pleaded that it was agreed as part of the Partnership Agreement that the plaintiff and the 1^st and 2^nd defendants would enter into a joint venture agreement with a Shanghai company and they would form a company in China, which was referred to as the Joint Venture Company.

10.  However, Mr Chan informed me during the course of his submissions that it is not the plaintiff’s case that it and the two defendants had entered into a partnership in the technical sense of the word and he asked me to disregard the “label” attached to the relationship.  He further submitted that one could regard the relationship pleaded in the Amended Statement of Claim as being one of an investment agreement or something of that nature.  Mr Chan further informed me, and submitted, that the nature of the plaintiff’s case is that the plaintiff was not intending to be a shareholder in the Joint Venture Company and it was simply relying on a contract, in personam, with D1 and D2 to the effect that, upon injection of monies by the plaintiff, D1 and D2 would, in their personal capacity, pay to the plaintiff its return based on the percentage share of the plaintiff in the whole project worked out by reference to the amount of money the plaintiff has paid.

11.  In fact, Mr Chan further submitted that it is not the plaintiff’s case that it intended to be a shareholder of a company called Master Kingdom either.  Now, at this juncture, I should explain the significance of Master Kingdom.  The corporate structure of the various entities in this case show that the Joint Venture Company had two shareholders—one was the Shanghai company and the other one is a company called Master Kingdom.  Master Kingdom, in turn, had a number of different shareholders, one of which was the plaintiff itself.  This prompted Mr Calvin Cheuk, for the defendants, to mount a series of arguments based on reflective loss.

12.  However, as I said earlier, it is the plaintiff’s case, as relayed to me by Mr Kenneth Chan, that the plaintiff did not intend or expect to become a shareholder of Master Kingdom.  He prayed in aid the fact that there was no documentation showing that the plaintiff had even got any share certificates of Master Kingdom.  All in all, the plaintiff’s case was that its role in the investment was that of a contracting counterparty with D1 and D2.  Certainly, as the pleading now stands, he is not suggesting or asserting any entitlement to become a shareholder in either Master Kingdom or the Joint Venture Company.

13.  This is one area where, on counsel’s own acknowledgment, the Amended Statement of Claim does not truly reflect the nature of the plaintiff’s case.  What is pleaded as a Partnership Agreement is not really a Partnership Agreement in the legal sense of the term.

14.  Another area where the Statement of Claim is problematic is the plea of misrepresentation.  Paragraph 10 of the Statement of Claim pleaded in no uncertain terms a representation made by the 2^nd defendant to the plaintiff that the Joint Venture Company had operated at a loss of a particular figure.  It was even defined as “the said Representation”.  It gives the impression to the reader that the claim is based on the content of the representation, leading onto a plea that the representation is false.  That is, indeed, the case because if one reads on in paragraph 13 of the Amended Statement of Claim, the pleader pleaded that they did discover, later, that the representation was false and untrue and then a number of particulars of falsity were pleaded. 

15.  Then in paragraph 16 the pleader went further and put it beyond doubt that he is, indeed, pleading a misrepresentation, in the legal sense of the word, because it went on to actually plead that the representation was made fraudulently, either well knowing that they were false and untrue or recklessly not caring whether they were true or false, which are standard phrases utilised by pleaders to indicate that a fraudulent misrepresentation is being relied upon.  Then at paragraph 21, the pleader went on to plead, “By reason of the said representation the plaintiff has suffered loss and damage,” in a particular amount.

16.  Reading the plea of misrepresentation, the clear message sent by the pleader is that he is relying on the fact that a representation has been made, that it was incorrect and that loss and damage has been caused by the making of the misrepresentation.  Curiously, there is no express plea that the plaintiff has done anything in reliance upon the alleged misrepresentation.  The only act of reliance that was pleaded in the pleading was an act of reliance by the 2^nd defendant, which is found in paragraph 12. 

17.  When one reads the particulars of loss and damage caused by the misrepresentation, one could not conceivably link those particulars to anything which could be caused by anyone acting in reliance on the representation that was pleaded in the Amended Statement of Claim.  One could well understand their claim for misrepresentation if it is pleaded as the plaintiff having done something in reliance on the representation, for example, having paid money or having done something and then going on to plead that had the truth been known he would not have acted in the way he did or he would not have paid the money that he has been asked to pay and therefore he had suffered loss and damage; loss and damage being the difference between (i) the position that he was in, having acted in reliance on the representation, and (ii) the position that he would have been in had he not acted in reliance on the misrepresentation.

18.  But the Statement of Claim, as I said, reflected nothing of this sought.  Therefore, on its face, there is a complete mismatch between the plea of misrepresentation and the plea of loss and damage contained in paragraph 21 and the pleading is bad insofar as it attempts to plead a claim for misrepresentation.

19.  However, before me, Mr Kenneth Chan said that the plaintiff’s real case is not misrepresentation and, again, I could disregard the “label” of misrepresentation.  What the plaintiff’s real case is, according to Mr Chan, is that the plaintiff is relying on his right, in personam, against the two defendants to be distributed or paid his due share of his returns by looking at the figures and by looking at the amount of profits that had been made by the development, multiplied by the relevant percentage of his share as a “partner” in the venture.  On this basis, all the averments in the Amended Statement of Claim about the conflicting contents of the reports, which initially formed a prominent part of the plea of misrepresentation, simply became matters of evidence as to how the accounts of the joint venture company might not have been entirely accurate and that the plaintiff might not have received its due share of its returns under the joint venture.

20.  In this regard, I should pause and observe there is a degree of cherry-picking, at least on the face of the pleading, by the plaintiff because the plaintiff has pleaded, among other things, two accountants’ reports.  One is known as the Xing Zhong Report and the other known as the Haijia Report.  Sometimes the plaintiff relied on the contents of the Xing Zhong Report in support of his case.  For example, at paragraph 15(d) of the Amended Statement of Claim, the plaintiff relied on a figure of 35.26 million, which, I believe, was taken from the Xing Zhong Report as representing the total construction cost, including the land price, for the project.

21.  But on the other hand, on some other occasions, the plaintiff positively pleaded that the contents of the Xing Zhong Report were incorrect.  For example, in paragraph 15(c) of the Amended Statement of Claim the plaintiff referred to the Xing Zhong Report’s content to the effect that a sum of Renminbi 22 million-odd has been lent to a company called Macho Company Limited, but then immediately in the next paragraph it pleaded that the joint venture company had in fact not lent the sum of 20-odd million Renminbi to Macho. 

22.  Be that as it may, that is the nature of the plaintiff’s case as relayed to me by Mr Kenneth Chan.

23.  Also on the above basis, paragraph 19 of the Amended Statement of Claim, which claims the making of secret commission by various individuals, is no longer a self-standing claim for relief by the plaintiff, which, as the pleading now stands, is a self-standing prayer for relief, at paragraph 2 of the prayer together with paragraph 3.  According to Mr Chan, he accepts that the significance of paragraph 19 is simply that certain expenditure contained in the accountants’ reports were not legitimate items of expenditure that could be properly deducted as part of the expenses of the project.  In other words, paragraph 19 simply serves the purpose of negating any suggestion that a sum of 12 million-odd has to be deducted as part of the expenditure of the project.  It is not a self-standing claim for account of secret profits.

24.  Mr Chan submitted to me that I should disregard the labels of misrepresentation and partnership and I should also overlook all the immaterial averments contained in the Amended Statement of Claim and that as long as there are references to some material facts in the pleading, which, if true, could sustain a legal cause of action, then I should not strike out the Amended Statement of Claim, especially given the late stage in the proceedings. 

25.  I have thought long and hard about this matter.  The application was no doubt taken out late but, in my judgment, although lateness of an application is always frowned upon by the court, in terms of an application to strike out I do not believe that the delay is a self-standing ground for denying a striking-out order if the grounds for strike out are otherwise established.  This is because if a pleading is susceptible to be struck out, it should be struck out.  The fact that the application was made late does not mean that the pleading is not defective.  Certainly, it makes no sense to proceed a case to trial on the basis of a defective pleading which is known to all parties to be defective, simply on the ground that the application to strike out has not been made early enough.

26.  On the facts of this case, I had considered whether or not there remain enough references to some substratum of material facts so that one could effectively apply a blue pencil to delete or remove any offending words or phrases and retain just enough words or phrases or sentences or paragraphs to proceed to trial.  I note, in this regard, that although Mr Chan has told me that there is an intention, in any event, to amend the Statement of Claim in due course, he was not able to give me any undertaking; nor was I able to order any amendment summons be taken out.

27.  At the end of the day, I do not think that the pleading can be saved by applying a blue pencil or by salvaging enough material facts from the mass of words that had been used in the pleading.  As I said earlier, there is a complete mismatch between the plea of misrepresentation in the body of the Amended Statement of Claim, on the one hand, and the particulars of loss and damage alleged in paragraph 21.  Those particulars proceed not on the basis of anything done or incurred by the plaintiff in reliance on the correctness of the misrepresentation.  Those particulars proceeded on the assumption that profits had been distributed correctly, as per some of the terms of the Partnership Agreement, as pleaded.

28.  Mr Chan urged upon me the fact that the Partnership Agreement was pleaded, the contents were pleaded and that there was a plea that the profit and loss of the joint venture company would be shared by the plaintiff and the 1^st and 2^nd defendants in accordance with their respective share mentioned above.  This, together with the contents of paragraph 21, he submitted, would be enough to sustain a plea based on a breach of an obligation under the Partnership Agreement to distribute to the plaintiff his due share of returns.  I have considered this point with care and in my judgment I do not believe that one could salvage the pleading in this way.

29.  Sometimes it may be possible to salvage a pleading by applying a blue pencil, for example, by sensibly removing offensive paragraphs insofar as they could be readily isolated from permissible parts.  It is all a matter of degree.  But on the facts of the present case, the impermissible words and pleas are inextricably linked with matters which could conceivably be relevant and permissible in a pleading.  For example, in paragraph 21, the particulars under that paragraph are plainly pleaded as matters of loss and damage caused by reason of a misrepresentation.  It is not my task to insert new words for the plaintiff, the plaintiff has not proffered any new words, and I cannot see how paragraph 21 can be said to be reflective of the plaintiff’s case as Mr Chan has informed me.

30.  More importantly, the reader is supposed to disregard the label and look at what Mr Chan tells me to be the real case.  As things now stand this is only a matter of counsel’s say-so in front of me.  Cases are dealt with by reference to pleadings.  No one knows how a case is going to develop in future.  Legal representation may change.  Pleadings will not change and will remain on record.  The only way where a future court and the trial court is able to identify the real issues in the case is by looking at the pleadings, not by calling up the digital recording system and looking at what Mr Chan had said on 5 October to me.  One wonders if the true case is not really reflected by the pleadings, why there is a reluctance to immediately seek leave to amend the pleadings to bring it in line with what the true case is.

31.  We are not concerned with a pleading by a lay person who has pleaded a mass of underlying facts, which, with some intelligence, could be picked upon to form a legible cause of action.  In this case, the pleading is pleaded by legal advisers who had utilised legal terms of art carrying a particular and specific connotation in the eyes of lawyers.  Read in this way, to allow a pleading containing particular legal terminologies to remain on record when the party has explicitly abandoned that particular meaning, in my judgment, simply leads to embarrassment and would delay the fair trial of the action.

32.  The question, then, is whether or not the pleading should be struck out and the action dismissed or whether or not the plaintiff should be given a chance to salvage the matter by being given a chance to file an amended pleading or to apply for leave to file an amended pleading.

33.  It is well known that from time to time the courts strike out a pleading without dismissing the action because from the mass of materials filed the court can see that although the original pleading did not perhaps disclose a reasonable cause of action, there could just be enough underlying facts disclosed in the evidence to enable a pleader to plead a proper pleading.  If that is the case in our present action, then the proper course to take would be to strike out the action, not to dismiss the claim, but to give a short timeframe for the plaintiff to apply to amend the Statement of Claim again.  Mr Calvin Cheuk, for the defendants, submitted that the pleading is so bad inherently that it is bound to fail, that I should not even allow the plaintiff any further chance.  He submitted first that the action is covered by the rule against claiming reflective loss, as laid down by cases such as Prudential Insurance and Johnson v Gore Wood.  In my judgment, because of the way Mr Chan has now reformulated his case, and because of the way in which the plaintiff actually disclaims any intention of being a shareholder and the fact that it is in fact not suing as a shareholder, I do not believe that the point about reflective loss has much force. 

34.  Next, Mr Cheuk submitted that the plaintiff’s claim is incredible and is contrary to the contemporaneous documents.  He referred me to a number of documents in the hearing bundle.  For example, he referred me to a document which showed that the plaintiff’s plea, at paragraph 15(d) to the effect that the total construction cost, including the price to purchase the land, was 35,260,000 Renminbi as being based on a distorted reading of a document.  He also referred me to a number of documents sent to or emanating from Mr Tang, of the plaintiff, with a view to showing that Mr Tang knew full well that he was participating as a shareholder in either Master Kingdom or the joint venture company.  While all these matters could well be legitimate matters of comment when the matter comes to trial, I do not believe that they are so conclusive as to drive a plaintiff from the judgment seat.  Thirdly, Mr Cheuk submitted that there is a lack of particulars in the pleading but, in my judgment, it is trite that lack of particulars is not a ground for applying to strike out.  If need be, particulars can be sought and supplied.

35.  The Statement of Claim in its entirety is, therefore, struck out but I am not dismissing the action.  I will give the plaintiff one opportunity to cure the defect in the Statement of Claim.  As discussed with counsel during the course of the argument there is going to be a case management conference on 5 November this year.  The Order that I propose to make on the application to strike-out is that the Amended Statement of Claim be struck out in its entirety.  Then unless the plaintiff issues a summons for leave to file a fresh Statement of Claim within 14 days from the date hereof, the action shall stand dismissed with costs.  The rationale of this course of action is that the matter can then be allowed to take its own course. 

36.  The plaintiff would be expected to issue a summons with a draft fresh Statement of Claim attached with, hopefully, enough time for the defendants to consider the content and to consider whether or not, in the light of what I have said earlier and in the light of the redrafted pleading, whether or not the defendants wished to oppose the filing of the fresh Statement of Claim under the summons, which, for the benefit of the tribunal hearing the application, should be treated as an attempt to amend.  So amendment principles would apply to whether or not leave should be granted to file the fresh Statement of Claim.  If the defendants do not wish to resist the filing of that fresh Statement of Claim, then the matter can proceed swiftly with the filing of defence and reply.  If the defendants wish to resist leave being granted for the filing of that pleading, then the matter can be argued out and the matter can then take its own course.

37.  Technically, there is then no need for me to deal with the security for costs summons and any new pleading filed would probably attract a fresh security for costs application, which would be dealt with as and when that arises.  However, I would go on to deal with the security for costs summons for three reasons:  one, obviously, is that in case I am wrong and the matter is taken further the Court of Appeal should have the benefit of my reasons on the security for costs application; secondly, there are matters of principle, such as stifling of the action, which would be of relevance in this case even in the case of a fresh security for costs application based on the fresh Statement of Claim; thirdly, some of the work done in this case could well be of use even when the Statement of Claim is being revamped and therefore any ruling on my part on the question of quantum could well be of some assistance in the event of a new application for security for costs based on the new pleading.

38.  In the present case, the application is based on section 357 of the Companies Ordinance.  Impecuniosity of the plaintiff is not in issue.  Several grounds are relied upon in resisting security for costs.  First, it is said that an order for security would stifle the action.  I do not propose to rehearse the well-known authorities in this regard, including the case of Keary and the Hong Kong Court of Appeal decision of Wing Hing v Hanjin. 

39.  To cut a very long argument short, in the present case the action is obviously funded by backers behind the plaintiff.  There is no evidence as to who those backers are or as to the financial resources of those backers or as to whether or not those backers are prepared to fund the provision of any security for costs to be provided for the defendants’ costs and if not, why not.  Therefore, on this basis, in my judgment, I would not refuse to make an order for security for costs on the ground that to do so would stifle the plaintiff’s action.

40.  Next, it is said that the plaintiff’s impecuniosity is caused by the defendants’ conduct.  In this regard, I propose to follow the Court of Appeal’s decision in Sunchase International Group (China) Ltd & Ors v Vincor Group of Companies (Investment) Limited & Ors [2004] 1 HKLRD 731, to the effect that usually argument to this effect would be circular because it would involve a finding that the plaintiff’s impecuniosity was caused by the defendants’ conduct. 

41.  The plaintiff relied on Burrell J’s judgment in the case of Tri-Tech Metals Company Limited v YKK AP Hong Kong Limited HCCT60/2004.  Mr Chan submitted that in applying the concept of “Plaintiff’s impecuniosity caused by the Defendants’ conduct,” one should simply apply the causal test without regard to any question of blame.  However, in my judgment, the case of Tri-Tech was concerned with a rather different set of facts and one cannot extrapolate a universal rule out of that judgment.  In that case, the plaintiff was a subcontractor of the defendant.  The plaintiff was not paid.  As Burrell J found in that case, in paragraph 15 of the judgment, all the plaintiff’s eggs were in one basket, so one has the stark fact that the plaintiff relied upon the defendants’ payment as its life blood.  One is confronted with the stark fact that the plaintiff has, in fact, not been paid and therefore one could see that, in fact, the plaintiff’s impecuniosity was caused by the fact of the defendants’ non-payment without having to go down the route of assessing who was in the right and who was in the wrong.

42.  However, on the facts of our case, one cannot readily apply this causal test because if one were to find that the plaintiff’s impecuniosity was caused by the defendants’ conduct, one would necessarily have to find what conduct and one would necessarily have to go on to make findings that the defendant has been guilty of the alleged misconduct complained of by the plaintiff.  Therefore, the present case is more in the Sunchase territory than in the Tri-Tech territory. 

43.  In any event, even if there could be said to be two parallel rules about refusing security for costs in operation; one about preventing the stifling of the plaintiff’s claim and the other one concerning with whether or not the plaintiff’s impecuniosity is caused by the defendants’ conduct, I do not regard these as mechanical rules which one should apply so that if one factor is found to exist, it should invariably lead to a refusal of security.  Therefore, even if I am wrong in my analysis of the Tri-Tech case and even if one could say that on the facts of this case the plaintiff’s impecuniosity was factually caused by the defendants’ conduct, I do not regard that as pointing invariably to a dismissal of the security for costs application.  The fact remains that there are backers behind the plaintiff.  Those backers would be able to take the benefit of a successful action and they should not be able to take the benefit of a successful action without at the same time “putting their money where their mouth is” by putting up security.  Therefore, even if the plaintiff’s impecuniosity is caused by the defendants’ conduct, in the exercise of my discretion I do not regard that as sufficiently weighty, on the facts of the present case, to persuade me to decline an order for security.

44.  Lastly, there is an argument that the application was made late.  I can deal with it very briefly.  It was not made most promptly immediately after the filing of defence or immediately upon close of discovery.  On the other hand, there is evidence that the defendants’ legal advisers have been writing to the plaintiff to ask for security for costs on 14 December 2007.  That was after the close of the original pleadings and after discovery but before witness statements were exchanged and before the Statement of Claim has been amended.  Therefore, although it was not made at the earliest possible opportunity, such as after close of pleadings, any lapse of time was not too great.  The plaintiff was certainly put on notice that the defendant intends to raise an issue of security for costs in December 2007.  In any event, Mr Chan does not press the point that lateness amounts to a reason for refusing completely to order security.  He only said that it is a factor to be taken into account in deciding upon quantum and the period to be covered by any order for security for costs.  I have taken that into account in the exercise of my discretion.

45.  As usual, in terms of quantum, figures are put forward by way of skeleton bill of costs, arguments are raised as to the excessive nature, or otherwise, of various items and one just has a particularly broad-brush view of the quantum.  The defendant asked for $1.624 million as security for costs from commencement of action up to judgment.  Having considered the bill of costs and the plaintiff’s objection and in the exercise of my discretion, having taken into account the timing of the application, I would have ordered security in the amount of HK$1.1 million had I not decided to strike out the Amended Statement of Claim.

[Submissions re costs]

46.  Having considered the arguments of counsel on costs, in the exercise of my discretion in costs I make the following cost orders:  First, the cost of and occasioned by the application to strike out be to the defendants, to be taxed if not agreed.  In relation to the security for costs summons, in the exercise of my discretion I order that to be the defendants’ costs in the cause.  All other costs of and occasioned by the Statement of Claim and the Amended Statement of Claim be reserved to the trial judge if the action is not otherwise dismissed pursuant to my earlier order.