SIBERIAN MINING GROUP CO LTD v. CHEUNG KENG CHING AND OTHERS

HCA 706/2010

[2024] HKCFI 616

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 706 OF 2010

________________________

BETWEEN

	E & P GLOBAL HOLDINGS LIMITED (formerly known as SIBERIAN MINING GROUP COMPANY LIMITED)	Plaintiff
	and
	CHEUNG KENG CHING	1st Defendant
	CHOU MEI	2nd Defendant
	LAU KA MAN KEVIN	3rd Defendant

________________________

Before:

Hon Lok J in Chambers

Dates of Written Submissions:	10 October, 29 November & 20 December 2023
Date of Decision on Costs:	28 February 2024

________________________

DECISION ON COSTS

________________________

1.  This is the paper application to vary the costs order nisi made by me after the trial of this action.

2.  The background of this case and my reasons for dismissing the Plaintiff’s claims have been fully set out in my Judgment handed down on 18 July 2023 (“the Judgment”)  and I do not repeat the same here.  For the purpose of this Decision, I will adopt the same abbreviations that I used in the Judgment.

3.  Despite the dismissal of the claim, I made a costs order nisi that there be no order as to costs of this action.

4.  The 1^st and 2^nd Defendants apply to vary the order on the following grounds:

(i)  As the 1^st and 2^nd Defendants are the successful parties in this case, costs should follow the event.

(ii)  The Plaintiff’s counsel agreed that costs should follow the event when he was asked to address the issue of costs in the end of the trial.

(iii)  The Plaintiff had been conducting the proceedings in an unreasonable and oppressive manner.  The Plaintiff’s case on fraud was without legal or evidential foundation and was bound to fail. Further, the Plaintiff only abandoned the negligence claims against the Defendants in the middle of the trial and it relied on a number of unpleaded matters in the trial.

(iv)  The 1^st and 2^nd Defendants had written to the Plaintiff on 25 June 2012, asking the latter to withdraw the claims in view of the weakness of its case.  The 1^st and 2^nd Defendants also offered to pay the Plaintiff $3,750,000 together with costs to settle the claim, and yet the Plaintiff failed to reply to such Calderbank offer.  Subsequently, the 1^st and 2^nd Defendants wrote to the Plaintiff on 24 June 2020 inviting it to discontinue the claims with no order as to costs.  Again the Plaintiff ignored the request.  Later on 18 November 2021, the 1^st and 2^nd Defendants wrote to the Plaintiff again, offering to pay a sum of $3,750,000 (inclusive of interest and no order be sought on costs)  to settle the claims.  The Plaintiff rejected such offer by its letter dated 3 December 2021.

5.  I deal with the first two arguments.

6.  The court has a certain discretion to deal with the issue of costs, though such discretion has to be exercised judiciously and on fixed principles.  Generally, the successfully party should get the costs of the proceedings, and there must be good reason if the court were to order otherwise.

7.  I have also perused the transcript of the proceedings.  It is true that the court had invited the parties to make submissions on costs, and by that time the Plaintiff’s counsel agreed that costs should follow the event after trial.  Despite such indication, there was no binding agreement between the parties.  By making a costs order nisi in the Judgment, the court was of the view that there may be other reasons to depart from the general rule.  The effect of the order nisi is that the court is inviting the parties to make further submissions on costs.  Hence, this court should have the liberty to reconsider the matter after hearing further submissions from the parties.

8.  In making the order nisi that there be no order as to costs of these proceedings, the court has taken into account the following factors:

(i)  This action was commenced pursuant to DHCJ Burrell’s Order, which involved a petition by the SFC against the Plaintiff and the Defendants under s 214 of the Securities and Futures Ordinance, Cap. 571.  That means that there was some prima facie evidence to show that the Defendants were guilty of some improper conducts in conducting the affairs of the Plaintiff.

(ii)  There were a lot of mistakes and confusion in the contents of the ROIs previously given by the Defendants and in the transaction documents (such as the board minutes and Bought and Sold Notes for the Grandtop Investment), which required the clarifications of the 1^st Defendant in the trial. Further, there were certain dubious features in respect of the various investments made by the Defendants on behalf of the Plaintiff, which brought suspicion upon the Defendants themselves in conduct of the affairs of the Plaintiff.

9.  In my judgment, these factors are still good reasons as to why the court should consider making a costs order departing from the general rule of costs following the events.  However, having considered the further submissions from the parties, I consider that it is still the Plaintiff’s duty to assess the merits of the claims after the commencement of the proceedings.  Serious consideration should be made as to what sort of evidence was required in order to substantiate the claims against the Defendants, whether they were based on fraud or negligence.  Further, the 1^st and 2^nd Defendants made a Calderbank offer on 25 June 2012, which then placed a burden on the Plaintiff to assess the merits of the claims.  Though such offer was made in the early stage of the proceedings, the Plaintiff could ask the Defendants to provide further necessary materials for them to assess the merits.  Unfortunately, the Plaintiff ignored the offer resulting in the prolongation of the proceedings.  The Plaintiff just proceeded with the claims without having seriously considered the merits of the claims and the evidence that was required to substantiate the claims.  The Plaintiff also failed to give any reasons as to why it considered that the offer of $3,750,000 was not reasonable or acceptable in light of the then available evidence.  Under such circumstances, even if the present proceedings were commenced pursuant to DHCJ Burrell’s Order and after the investigation by the SFC, the Plaintiff should pay the costs of the 1^st and 2^nd Defendants after the making of the Calderbank offer on 25 June 2012.

10.  In trying to justify why the Plaintiff did not accept the Calderbank offers, Mr Park, counsel for the Plaintiff, refers me to a purported settlement agreement made by the parties in July 2010 shortly after the issuance of the writ in this action.  Mr Park submits that:

(i)  A mediation meeting was held on 15 May 2010, following which the parties continued to negotiate for settlement.

(ii)  After the Plaintiff obtained advice from two separate counsel on the proposed settlement, the parties reached an agreement to settle the Plaintiff’s claims in the sum of $10,500,000 subject to the approval of the court.

(iii)  The parties entered into a consent summons for approval of the settlement by the court returnable on 27 July 2010.  In that hearing, the application was adjourned for the Plaintiff’s counsel to supplement his advice.

(iv)  The Plaintiff duly obtained further advice from counsel on 17 August 2010 which supported the approval of the settlement.  The consent summons was then restored and a hearing was fixed on 29 September 2010.  In the resumed hearing, Master Hui did not agree with the opinion of the Plaintiff’s counsel and took the view that there was an overwhelming case of fraud against the Defendants.  The consent summons was adjourned sine die.

(v)  The subsequent Calderbank offers came nowhere near the sum of $10,500,000 as originally agreed in July 2010, and so it would be unreasonable for the Plaintiff to have agreed to the Calderbank offers.

11.  In my judgment, the purported settlement agreement in July 2010 does not disturb my view that the Plaintiff should be responsible for the 1^st and 2^nd Defendants’ costs after the making of the Calderbank offer in June 2012.  Only the evidence of the Plaintiff had been placed before Master Hui, and so he did not have the opportunity to review all the merits of the case.  The Plaintiff should have properly reviewed its case at the later stage of the proceedings when there were more materials and evidence available by that time.  The Plaintiff should have reviewed the available evidence (both from the Plaintiff and the Defendants)  to assess whether the more onerous case of fraud could be substantiated, and to consider what sort of evidence would be needed to substantiate the case of fraud or the alternative case of negligence.  Without a proper analysis of these matters and the quality of the evidence in June 2012, the Plaintiff cannot simply rely on the subsequent lesser settlement sum proposed in the Calderbank offers to justify why it could fight the case all the way to the end.  Hence, I maintain the view that the Plaintiff should pay the costs of the 1^st and 2^nd Defendants after the making of the first Calderbank offer in June 2012.

12.  I therefore set aside the costs order nisi and order that, save that the costs of the action incurred after 9 July 2012 (i.e. 14 days after the making of the Calderbank offer on 25 June 2012)  be paid by the Plaintiff to the 1^st and 2^nd Defendants with certificate for counsel, there be no order as to costs of this action.  I also make a costs order nisi that the Plaintiff has to pay the 1^st and 2^nd Defendants two-thirds of their costs of this costs variation application which shall be made absolute 14 days after the date of the handing down of this Decision.

	(David Lok)
	Judge of the Court of First Instance High Court

Mr Moses Park, instructed by Georgiou Payne Stewien LLP, for the Plaintiff

Ms Kelly Cheng, instructed by Cheung & Yip, for the 1^st and 2^nd Defendants

HCA 706/2010

[2023] HKCFI 1847

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 706 OF 2010

_____________

BETWEEN
	E & P GLOBAL HOLDINGS LIMITED (formerly known as SIBERIAN MINING GROUP COMPANY)	Plaintiff
	and
	CHEUNG KENG CHING	1st Defendant
	CHOU MEI	2nd Defendant
	LAU KA MAN KEVIN	3rd Defendant

_____________

Before:

Hon Lok J in Court

Dates of Trial:	5, 11, 12 & 19 July 2022
Date of Judgment:	18 July 2023

____________________

JUDGMENT

____________________

1.  This is a claim for directors’ fraudulent breaches of fiduciary duties or trust owed to the Plaintiff, Siberian Mining Group Company Limited, which is a listed company in Hong Kong.

2.  The Plaintiff was listed on the Hong Kong Stock Exchange (“HKSE”) on 8 November 2002. The 1^st to 3^rd Defendants were the only directors of the Plaintiff at the material times.

3.  This action was commenced pursuant to the Order of Deputy High Court Judge Burrell dated 18 March 2010 under HCMP 1869/2008 (“DHCJ Burrell’s Order”), which involved a petition by the Securities and Futures Commission (“SFC”) against the Plaintiff and the Defendants under s 214 of the Securities and Futures Ordinance, Cap. 571.

4.  The Plaintiff complains that the Defendants were in breach of fiduciary duties owed to the Plaintiff by making wrong investment decisions in the following 3 transactions:

(i)  It was wrong for the Defendants to cause the Plaintiff to acquire 2,200,000 shares of Grandtop International Holdings Limited (“Grandtop”), which was also a limited company listed on HKSE, at the price of HK$6,600,000 (HK$3.00 per share). It is alleged that the actual purchase price was higher than the purchase price set out in the bought and sold notes and the board minutes. The Plaintiff claims that the transaction was fraudulent and was not in the interests of the Plaintiff. Such act of the Defendants constituted misfeasance, misconduct or defalcation in relation to the Plaintiff’s business and affairs, and was a fraudulent breach of trust on the part of the Plaintiff. For easy reference, I will refer this investment as “the Grandtop Investment”.

(ii)  It was wrong for the Defendants to cause the Plaintiff to acquire share option of Macau Asia Investments Limited (“MAIL”) which was a company incorporated in the United States engaging in the information and technology (“IT”) business. It is alleged that the Defendants acted in breach of duties and failed to act in the best interests of the Plaintiff by failing to carry out due diligence exercise, to study the mechanism to sell or realise the value of the shares, to make disclosure in respect of the exercise of its option to acquire 10 million shares, which constituted a fraudulent breach of trust on the part of the Defendants. For easy reference, I will refer this investment as “the MAIL Investment”.

(iii)  It was wrong for the Defendants to cause the Plaintiff to invest in or make a loan to a company incorporated in the Mainland known as “北京吉嘉諾服裝有限公司” (Beijing Kut Ka Lok Fashion Apparels Limited)(“KKL”). It is alleged that the Defendants acted in breach of duties and failed to act in the interests of the Plaintiff by failing to carry out due diligence exercise and to seek recovery of the investment or the loan, which constituted a fraudulent breach of trust on the part of the Plaintiff. For easy reference, I will refer this investment (including the making of the loan) as “the KKL Investment”.

5.  It is clear from the Plaintiff’s case as formulated above that the claim is one based on fraudulent or reckless breach of trust, which has been confirmed by Mr Park, counsel for the Plaintiff, at the trial. The allegations made in respect of the Grandtop Investment are based on deliberate and intentional fraud, whereas the allegations in respect of the latter two investments are based on recklessness on the part of the Defendants.

6.  Both Mr Park and Mr Lui, counsel for the 1^st and 2^nd Defendants, have signed an agreed list of issues (“the List of Issues”). For the purpose of this Judgment, I do not find it necessary to refer to the exact terms of the List of Issues. As I see it, the main issue in this case is whether the Defendants were fraudulently in breach of trust in conducting the affairs relating to the 3 subject investments.

7.  The 3^rd Defendant was absent at the trial. Despite his absence, the Plaintiff is still required to prove its case against him.

EVIDENCE AT THE TRIAL

8.  Paragraph 3 of DHCJ Burrell’s Order provides that the parties are, for the purposes of this action, at liberty to rely on or refer to all or any affirmations, statements, records of interview (“ROI”) and other document filed or otherwise disclosed by the parties in HCMP 1869/2008.

9.  All the witness statements of the Plaintiff’s witnesses were admitted at the trial without cross-examination. The Plaintiff’s witnesses were:

(i)  Mr Hong Sang Joon, the Plaintiff’s former director, whose witness statement gives a summary of the SFC investigation in relation to the 3 subject transactions;

(ii)  Madam Leung So Ching, Associate Director of Enforcement Division of the SFC, who carried out an inquiry into the 3 subject transactions and deposed to the 4 affirmations under HCMP 1869/2008;

(iii)  Mr Ngai Cheung Kin David, Senior Director of Enforcement Division of the SFC, who carried out an inquiry into the 3 subject transactions and interviewed, inter alias, the Defendants; and

(iv)  Mr Tjang Huy Gien Andrew, Senior Director of Enforcement Division of the SFC, who carried out an inquiry into the 3 subjections and interviewed the 1^st Defendant.

10.  The 1^st Defendant was the only witness who testified on behalf of the case of the 1^st and 2^nd Defendants. The 1^st Defendant provided the backgrounds for the subject transactions and the reasons for making the various investment decisions which are the subjects of complaint by the Plaintiff.

11.  The 1^st Defendant had been subject to vigorous cross-examination by Mr Park. As further elaborated in the latter part of this Judgment, there is no sufficient basis for the court to reject his explanations for conducting the affairs relating to the subject investments. It is fair to say that his evidence had remained unshaken after cross-examination.

PROBLEMS WITH THE PLAINTIFF’S CLAIM

12.  Before I deal with the 3 subject investments, Mr Lui has referred me to a pleading point.

13.  As mentioned in §5 above, the Plaintiff’s claim is one based on fraudulent or reckless breach of duties. The Plaintiff has also confirmed through its counsel that its negligence claims are abandoned, and it will confine its case to fraudulent or reckless breach of fiduciary duties. The Plaintiff might have to adopt such course in order to avoid the limitation issue raised by the Defendants, but that is now the basis of the Plaintiff’s claim.

14.  The problem is that the Plaintiff relied on certain “negligence” allegations in the course of the trial with a view to prove fraud. These negligence allegations have never been pleaded in support of the Plaintiff’s fraud claims. Indeed, Issues 4, 9 and 14 of the List of Issues involve the claim on fraud, and specific paragraphs in the Amended Statement of Claim were identified in support of such claim on fraud. As further elaborated in the latter part of this Judgment, most of the allegations now relied on by the Plaintiff are not pleaded or referred to in the List of Issues.

15.  Further, I agree with Mr Lui that the court cannot “infer” fraudulent intent or recklessness just because the impugned investments did not turn out to be as profitable as expected. Given the trite proposition that the fact that an investment turns out to be unprofitable is not evidence, by itself, of negligence or lack of proper care and breach of duty[1], it is a fortiori when the allegation is of fraud.

16.  The premise of the Plaintiff’s fraud speculation is that so long as there were losses flowing from the impugned investments, such losses must have been intended by the Defendants (or one could presume this to be the case). However, there is no evidence that the Defendants (i) knew the investments would fail, or (ii) desired them to fail, or (iii) knew there were high risks of failure.

17.  The question this court has to determine is whether the Defendants honesty believed that the subject investments were made in the Plaintiff’s interests.[2]Indeed, the 1^st and 2^nd Defendants were at all material times the Plaintiff’s majority beneficial shareholders and would suffer the most if the investments failed. There was no reason or incentive for them to cause the Plaintiff to make the investments knowing or not caring whether they would harm the Plaintiff (and indirectly themselves). Mr Park submits that the 1^st Defendant simply treated the Plaintiff as his own company, but the lack of the said incentive would be a very relevant factor for the court in determining the states of mind of the Defendants at the relevant times. As further elaborated in the latter part of this Judgment, there were justifications for the Defendants to cause the Plaintiff to make the subject investments. They genuinely believed that it would be in the interests of the Plaintiff to do so.

18.  This case was commenced more than 10 years ago following the investigation of the Plaintiff’s affairs by the SFC. However, it seems that the litigation has lost its steam over the years. Apart from relying on the statements made by the investigating officers and one of the former Plaintiff’s directors, the Plaintiff has not obtained other evidence to prove fraud or recklessness on the part of the Defendants. Apart from the explanations given by the 1^st Defendant relating to the making of the subject investments, there is little rebuttal evidence to contradict the Defendants’ case. All the Plaintiff can do is to raise some dubious features about these investments, and that is not sufficient to substantiate fraud or recklessness on the part of the Defendants.

19.  Fraud is a serious allegation. Full particulars should be pleaded in order to give the opposing party a fair opportunity to defend the fraudulent allegations. As I will further elaborate below, the Defendants are not given such opportunity to deal with some new allegations raised by the Plaintiff either in cross-examination or in its submissions. Further, even if the Plaintiff were to be allowed to rely on the negligence allegations (which I disagree in view of the reasons given in the preceding paragraphs), there is no evidence to show that the due diligence works caused to be carried out fell below the acceptable standards.

THE RELEVANCE OF THE PROCEEDINGS IN HCMP 1869/2008

20.  It is common ground that the documents in the HCMP 1869/2008 proceedings can be referred to in this case.

21.  There was no trial in HCMP 1869/2008. Those proceedings were disposed of by way of the Carecraft procedure against the 3^rd Defendant. For the 1^st and 2^nd Defendants, they did not proceed by way of the same summary procedure but agreed to a disposal of the SFC’s claims on the basis that the facts alleged against them were “not challenged” therein. It may be the case that the 1^st Defendant decided to give more evidence in this action explaining their decision-making in the subject investments, but such factor should not be taken against the Defendants for the 1^st Defendant might have decided not to give further evidence in HCMP 1869/2008 for strategic considerations.

22.  In disposing of HCMP 1869/2008, DHCJ Burrell made orders of disqualification against the 1^st to 3^rd Defendants and ordered the Plaintiff to bring this civil action against them. It is important to note that the SFC did not pursue any fraud claims and DHCJ Burrell did not find any fraud on the part of the Defendants. Hence, the “findings” made in HCMP 1869/2008 are of little relevance to the present case where the claim is one based on fraudulent or reckless breach of duties.

23.  With these observations in mind, I turn to deal with the 3 subject investments.

THE GRANDTOP INVESTMENT

(i)  The background and the explanations given by the 1^st Defendant

24.  The Grandtop Investment had caused a loss to the Plaintiff. The share price of Grandtop dropped gradually from around HK$3.00 per share in June 2003 to around HK$2.00 per share in December 2003 and further to HK$0.16 per share in December 2005. Furthermore, no dividends were declared by Grandtop between March 2003 and March 2005.

25.  The explanations given by the 1^st Defendant for making the Grandtop Investment have been succinctly summarised in the closing submissions of Mr Lui and the Amended Defence of the 1^st and 2^nd Defendants (“the Amended Defence”):

(i)  In June 2003, the 1^st Defendant met Mr Edmund Siu (“Edmund Siu”) and his father Mr Garry Siu (“Garry Siu”) who was the then Chairman of Grandtop. The 1^st Defendant was then optimistic about Grandtop’s prospect in its trading of garment products to the United States after relaxation of the quota restrictions. The 1^st Defendant and Garry Siu discussed and intended to develop a long-term and naturally beneficial co-operation between the Rontex Group (of which the Plaintiff was a member) and the Grandtop Group. The business of the Rontex Group up to that point had focused on trading garments to South America (constituting as much as 99% of its turnover for the year ended 31 March 2002, as stated in the prospectus). It was critical to the Rontex Group’s continued profitability that this established trading business be sustained. To meet the strong demand for garment products in the South American markets and to reduce dependence on sourcing its products from third party vendors, the Rontex Group in December 2001 started its own manufacturing operations through Rontex Co. Ltd. (寧波朗迪紡織品有限公司) (wholly foreign-owned enterprise in the Mainland) with a manufacturing facility in Ningbo. However, it still could not produce all the garments which the Rontex Group had required for sale to South America, so it continued to regularly source garments from other manufacturers in the Mainland. The 1^st Defendant thus found Grandtop’s extensive connections with garment manufacturers in the Mainland useful and beneficial to the Rontex Group’s businesses. In addition, the 1^st Defendant took the view that Grandtop’s experience in and knowledge about the United States market (with quota restrictions) would be beneficial to the development of the Rontex Group’s business in terms of future expansion from the South American markets (without quota restrictions) to the United States market, as the Rontex Group was by then not experienced or knowledgeable about the United States market. For the purpose of such expansion, the Rontex Group would have to tap into Grandtop’s connections and knowledge through cooperation. On the other hand, the Rontex Group’s manufacturing facility in Ningbo and its connections with other garment manufacturers in the Mainland and the South American markets were considered beneficial to Grandtop.

(ii)  The 1^st Defendant was told by Garry Siu that Grandtop already held over HK$10 million shares in the Plaintiff; and he would introduce some shareholders of Grandtop who would want to sell their shares off the market to the Rontex Group. The 1^st Defendant agreed to acquire shares in Grandtop since he thought it was a good chance for the Rontex Group to build a long-term relationship with Grandtop. After discussion, the 1^st Defendant, through the making of an agreement in June 2003 (“the June 2003 Agreement”), agreed to purchase 2.2 million shares in Grandtop at HK$2.90 per share.

(iii)  In June 2003, the market price of the Grandtop shares fluctuated but was around HK$3.00 per share and not HK$2.00 per share. In order to establish a long-term operational synergy considered to be mutually beneficial to each other, the Plaintiff agreed to acquire Grandtop’s shares at HK$2.90 per share.

(iv)  The 1^st Defendant told the 3^rd Defendant about the June 2003 Agreement and asked him to follow up, including to analyse and investigate the performance of Grandtop, study its annual reports and gather other relevant information. The 3^rd Defendant orally reported to the 1^st Defendant that Grandtop’s profitability and rate of return were not bad. This report is supported by objective evidence: Grandtop’s Annual Results as at 31 March 2003 and 31 March 2004 show that its turnover and net profit had been on the rise up to that point in time.

(v)  Pursuant to the June 2003 Agreement, the Plaintiff through Keen Choice Technology Limited (one of the wholly-owned subsidiaries of the Plaintiff within the Group)(“Keen Choice”) acquired 1,400,000 shares in Grandtop from one Madam Chan Jenny Chun Nei (“Chan”) and 800,000 shares in Grandtop from one Mr Lau Pak Lun (“Lau”); and paid HK$6,380,000 (at HK$2.9 per share). The share transfers were done via Ever-Long Securities Company Limited (“Ever-Long”). The evidence suggests that though the purchases were from Chan and Lau, Lau was indeed merely a nominee lending his securities account for Chan’s use.

(vi)  The 3^rd Defendant was the person designated with the administrative task of implementing the Grandtop Investment. Chan and Lau were introduced to the 3^rd Defendant by Edmund Siu, and neither the 1^st nor 2^nd Defendant had any past relationship with Chan or Lau.

(vii)  The 2^nd Defendant relied on the 1^st and 3^rd Defendants in regard to the June 2003 Agreement and its execution, and was not herself involved in those matters. As the 1^st and 2^nd Defendants delegated the execution of the June 2003 Agreement to the 3^rd Defendant, they did not know the details of the execution of the Grandtop transaction. The 1^st and 2^nd Defendants signed the relevant board minutes of Keen Choice dated 22 December 2003, whereas the 3^rd Defendant signed the relevant bought and sold notes (“the Bought and Sold Notes”).

(viii)  In January 2004, the 1^st Defendant decided and delegated the task to the 3^rd Defendant to procure the Plaintiff to further acquire 1,170,000 shares and 250,000 shares in Grandtop. With these purchases intended to be from the market, the 1^st Defendant simply gave a price range to the 3^rd Defendant and left it to the 3^rd Defendant to procure the further purchases. Neither the SFC in HCMP 1869/2008 nor the Plaintiff in this action has alleged that these further purchases were not in the Plaintiff’s interests.

26.  It is true that the Grandtop Investment was not successful resulting in loss to the Plaintiff. However, businessmen may make mistakes in investment decisions, and so bad investment decision per sec is not actionable. Further, as mentioned above, the claim in respect of the Grandtop Investment is one based on intentional or deliberate fraud, and so the Plaintiff needs to prove such fraud to substantiate its claim.

27.  The Plaintiff is relying on the following two matters to prove fraud on the part of the Defendants:

(i)  the June 2003 Agreement is a fabrication;

(ii)  the Defendants had concealed the true purchase price for the acquisition of the Grandtop shares.

28.  I will deal with each allegation in turn.

(ii)  Allegation that the June 2003 Agreement is a fabrication

29.  For the fabrication point, I agree with Mr Lui that the Plaintiff is not entitled to run this argument on the ground that it is not pleaded. As further elaborated below, the raising of this serious allegation only at the trial deprives the Defendants a fair opportunity in preparing a proper defence in answer to the allegation. In particular, the SFC did not pursue any fraud claims and the DHCJ Burrell did not find any fraud on the part of the Defendants in HCMP 1869/2008.

30.  In any event, there is no substance to such complaint.

31.  Apparently, there is an issue as to when the 1^st Defendant made the agreement to acquire the Grandtop’s shares on behalf of the Plaintiff. As the share price fluctuated from time to time, the timing for the making of such agreement may affect whether the purchase price agreed by the 1^st Defendant was reasonable.

32.  According to the testimony of the 1^st Defendant, the agreement was made in June 2003. By that time, the share price of Grandtop was about HK$3.00, and that was why the purchase price was agreed at HK$2.90 per share. However, the Plaintiff attacks the credibility of the 1^st Defendant’s evidence in this regard on the ground that he only mentioned the June 2003 Agreement for the first time in his oral testimony. If such agreement were to exist, he should have mentioned it earlier in the 7 interviews he had with the SFC. But this is not quite correct.

33.  First, the 1^st Defendant did say in in his first interview by the SFC on 29 June 2005 that he had met with top management of Grandtop in 2003. In the statement, he referred to a meeting with Edmund Siu in 2003.[3] Whilst he did not specifically refer to the contents of the discussion in that meeting, it is misleading and inaccurate for the Plaintiff to suggest that the 1^st Defendant only mentioned his meeting with those persons in 2003 for the first time in his testimony.

34.  Second, there is some indication that the 1^st Defendant was providing the same account about the June 2003 Agreement in HCMP 1869/2008. As shown in §§8-11 of the 2^nd affirmation of Madam Leung So Ching, who was then a SFC’s officer, the SFC’s evidence in reply indicates that the 1^st Defendant already gave the evidence in HCMP 1869/2008 that he had decided to acquire shares in Grandtop at HK$2.90 per share “in or about June 2003”.

35.  The Plaintiff has failed to disclose or include in the trial bundles the 1^st Defendant’s affirmation filed in HCMP 1869/2008. Neither the 1^st Defendant nor his solicitors in this action can now locate a copy of that affirmation which, according to the SFC’s evidence filed in reply, should have been filed in opposition on 17 December 2008. This actually highlights the problem of raising a new serious and unpleaded allegation at such a late stage. When being faced with such new allegation first raised in cross-examination, the 1^st Defendant could only admit that he had not taken the interview seriously.

36.  In any event and more importantly, as pointed out by Mr Lui, the making of a decision to acquire 2,200,000 shares in Grandtop before December 2003 is clearly substantiated by the contemporaneous records. In fact, those records put it beyond doubt that the acquisition was done and considered to have been done before September 2003, and therefore reported publicly to the Plaintiff’s shareholders in its 2003 Interim Report. In that report, it was recorded that the Plaintiff had “Investments securities” in the sum of HK$7,200,000 as at 30 September 2003 and HK$600,000 as at 31 March 2003. The latter was clearly referring to an investment in Ningbo. As submitted by Mr Lui, these records show that in the period from 1 April 2003 to 30 September 2003, the Plaintiff had further invested HK$6,600,000 in securities. Though the actual purchase price was HK$2.90 per share, it is likely that such investment refers to the acquisition of 2,200,000 shares in Grandtop. In fact, the figures in the 2003 Interim Report also tally with the internal records kept by the Plaintiff.

37.  Further, the 3^rd Defendant also told the SFC that the purchase of 2,200,000 shares in Grandtop had probably been completed with the shares received prior to 30 September 2003, such that it had already been reported in the 2003 Interim Report.[4]

38.  In his final submissions, Mr Park has pointed out certain “inconsistencies” between the oral testimony of the 1^st Defendant and what he told the SFC in the previous 7 interviews. However, the only inconsistency that was specifically put to the 1^st Defendant in cross-examination was that he told the SFC he had given the 3^rd Defendant a price range without mentioning HK$2.90. In response, the 1^st Defendant admitted “when [he] attended the interview with the SFC, [he] didn’t deal with the interview very seriously”. In re-examination, he further explained:

“Because at that time, in those years, I worked very seriously and worked very hard for the company. So I have never thought of being sued so when SFC interviewed me, so I did not deal with that seriously. So in the hindsight, had I dealt with it seriously at that time, perhaps today I would not have been sued.”

39.  I accept such explanation as a genuine one. Indeed, the 1^st Defendant repeated the answer when being asked why he had not talked about the June 2003 Agreement with Garry Siu in SFC’s interviews. One must not assume that everything the 1^st Defendant said earlier was perfectly accurate or complete, or that the 1^st Defendant could not have made mistakes. What is most important is that there is no indication of fraud in the transaction itself.

40.  For these reasons, there is insufficient basis to establish the serious allegation that the June 2003 Agreement is a fabrication.

41.  There is also a suggestion by the Plaintiff that, even if the June 2003 Agreement were to exist, the Defendants should have renegotiated for a lower purchase price as the share price dropped to about HK$2.00 in December 2003. However, the 1^st Defendant explained that, as a responsible businessman, he would not do so as the parties had made an agreement in June 2003. On the contrary, he would not have agreed to pay more if the share price were to increase after the making of the June 2003 Agreement. After all, businessmen like him would treasure integrity and one would not go back on the agreement once made. Furthermore, the 1^st Defendant held a positive view about the long-term prospect of the Grandtop’s shares. Coupled with the benefit that might be obtained from the mutual cooperation of the two groups of companies, he was not concerned about short-term fluctuation in the share price. Under such circumstances, he did not ask for a renegotiation of the purchase price.

42.  Again there is no basis for the court to doubt the genuineness of such explanation. After all, the 1^st Defendant had substantial interests in the Plaintiff by that time, any agreement to pay a higher price for the Grandtop’s shares would hurt the 1^st Defendant’s own interests. Unless there is any evidence to show that the share acquisition or the June 2003 Agreement was a fraudulent transaction, which there is none, there is no basis for the court to doubt the genuineness of the 1^st Defendant’s evidence.

(iii)  Allegation about the concealment of the true purchase price

43.  The second allegation in support of fraud is the purported concealment of the true purchase price for the Grandtop’s shares. Apart from the fact that there is no causation between such alleged concealment and the loss pleaded in the sum of HK$1.98 million, the evidence does not support such serious allegation.

44.  First, the acquisition of the Grandtop Shares was fully and properly disclosed in the Plaintiff’s 2004 and 2005 Annual Reports. It seems that the Plaintiff is only complaining about the lack of particulars as to the identity of the company invested in and the specific price per share. Yet, the Plaintiff’s Amended Statement of Claim itself refers to those two annual reports as plainly “corresponding” to, and only to, an acquisition price of HK$2.90 per share.[5] Further, for the purpose of making public announcements through annual reports, the internal records relating to these transactions must have been and were actually provided to the auditor of the Plaintiff’s Group, HLB Hodgson Impey Cheng (“HLB”), for audit. Such internal records unequivocally specified an acquisition price of HK$2.90 per share. Hence, the Plaintiff’s complaint has no merit at all.

45.  I agree with the Plaintiff that there is some doubt in the transaction as the price of HK$2.00 per share was stated in some of the transaction documents. The 1^st Defendant explained that it was a mistake.

46.  About the board minutes, the 1^st Defendant said it was the 3^rd Defendant who had arranged it and he had overlooked the price incorrectly specified. To a certain extent, his evidence was corroborated by the 3^rd Defendant who told the SFC that the minutes had been prepared by his colleague who probably had written HK$4.4 million based on the Bought and Sold Notes, and he had not reviewed the draft minutes before giving it to the 1^st Defendant for signing since he was busy at work by that time and did not find it necessary to check.[6] The 3^rd Defendant also said the minutes had been drafted after signing of the Bought and Sold Notes.[7]

47.  About the Bought and Sold Notes, the 1^st Defendant said that he “did not know exactly the reason” why HK$2.00 per share was stated. On the other hand, the 3^rd Defendant, being the signatory, said he did not notice HK$2.00 per share had been written in, and he only checked whether the quantity was correct.[8] The documents were prepared by Ever-Long mainly for stamp duty purposes. This unfortunate mistake may also explain why the 3^rd Defendant made a mistake about the purchase price in his 3^rd interview with the SFC on 27 September 2005, only to be clarified in the subsequent interview on 18 October 2005.

48.  I accept that these mistakes raise some suspicion about the transaction itself. This is also the basis of the Plaintiff’s complaint about the concealment of the purchase price. Yet human errors, even obvious ones, may sometimes occur. After all, there is nothing to indicate that the relevant parties put down the wrong figures in these documents fraudulently for some improper purposes. Coupled with the fact that the true purchase price was revealed in the official documents such as the Interim Reports, I accept the 1^st Defendant’s explanation as a genuine one.

(iv)  Conclusion in respect of the Grandtop Investment

49.  In my judgment, the 1^st Defendant has provided a credible explanation as to why he honestly believed that it would be in the best interests of the Plaintiff to invest in the Grandtop’s shares at the price of HK$2.90 per share. The acquisition price was in line with the market value of the shares at the relevant time, and there is insufficient evidence for the court to conclude that the June 2003 Agreement is a fabrication. As I have mentioned above, unless there is anything to show that the transaction was a fraudulent one, which there is none, it would not have been in the interests of the 1^st Defendant, or indeed any Defendants, to acquire the Grandtop shares at a higher price. The unfortunate mistakes in the purchase price as stated in the board minutes and the Bought and Sold Notes have been clarified, and the evidence falls short of establishing fraud which is the basis of the claim in respect of the Grandtop Investment. Hence the relevant claim should be dismissed.

THE MAIL INVESTMENT

(i)  Background and the explanations given by the 1^st Defendant

50.  I then turn to the MAIL Investment. Though the Plaintiff also relies on fraud, its main contention is that the Defendants were recklessly indifferent as to whether the making of such investment was contrary to the interests of the Plaintiff for the following reasons:

(i)  the Defendants caused the Plaintiff to spend all of its “idle cash” in the amount of HK$15 million into purchasing the MAIL share option with no due diligence conducted and without relying on professional opinion; and

(ii)  the Defendants failed not only to mitigate potential losses, but even wrote off the investment with no explanation.

51.  Again the explanations given by the 1^st Defendant relating to this investment have been succinctly summarised in the closing submissions of Mr Lui and the Amended Defence:

(i)  In about early 2003, Edmund Siu told the 1^st Defendant that there was an opportunity to acquire an option for the shares in MAIL; and that MAIL was an information technology company at the time that sought to be listed as a Pink-Sheet stock. The 1^st Defendant trusted Edmund Siu (who was a listing advisor to the Rontex Group) and asked the 3^rd Defendant to further investigate, study and verify the prospect of investing in MAIL through acquiring that option.

(ii)  Later, in about March 2003, the 3^rd Defendant reported to the 1^st Defendant that he had studied MAIL’s financial data and the prospect of its business with Mr Kevin Welch (“Welch”), including profitability, debt ratio, liquidity and development prospects etc. The 1^st Defendant understood from the 3^rd Defendant that: (a) the investment opportunity was a sound one and would bring good return to the Group and the Plaintiff; and (ii) the Plaintiff back then had idle cash of about HK$15 million that could be used to invest. The 1^st Defendant relied on the advice of the 3^rd Defendant.

(iii)  On about 2 April 2003, the board of the Plaintiff resolved to approve the acquisition of an option to acquire an equity interest in MAIL at the price of HK$15 million. The 1^st and 2^nd Defendants delegated to the 3^rd Defendant the work on the detailed arrangement for the acquisition of MAIL’s share option. The arrangement was as follows:

(a)  The Plaintiff used a new company to acquire the shares in MAIL, and one Madam Shu Oi Yung (舒愛容)(“Shu”) would be authorised to sign the agreement with Emerging Growth Partners, Inc (“EGP”) for the acquisition.

(b)  On 2 January 2004, Shu was appointed by the Plaintiff to sign the agreement with EGP.

(c)  On 7 January 2004, Shu on behalf of the Plaintiff signed a share purchase agreement with Mr Wong Tak Chi (王德志)(“Wong”).

(d)  Over a period of 9 months from 12 April 2003 to 21 January 2004, the Plaintiff paid HK$15 million in total to Wong (as instructed by Welch) for the acquisition. On 21 March 2004, Wong duly acknowledged the receipt of such sum of monies.

(e)  Such investment was disclosed in the Plaintiff’s 2004 Annual Report and Interim Report as “Option to acquire an equity interest of a company”.

(iv)  In around April or May 2004, MAIL was in fact listed as a Pink-Sheet stock.

(v)  All along after the acquisition, the 1^st and 2^nd Defendants relied on the 3^rd Defendant to monitor the price. The 3^rd Defendant and the auditor of the Plaintiff’s group (i.e. HLB) never advised the 1^st or 2^nd Defendant that there was problem with that investment. As recorded in notes of HLB, HLB had met with Welch to gather full information on the investment and verify the information provided; and advised that the MAIL investment was reasonable.

(vi)  On 5 April 2005, the Plaintiff exercised MAIL’s share option and acquired 10 million shares in MAIL. Emails in early May 2005 show that Mr Alex Hon (senior manager of HLB) had been involved in the following up work about delivery of share certificate. The relevant share certificate was duly signed by Mr Matthew Wong (solicitors from Messrs Preston Gates acting for MAIL) and Madam Pamela Gray (transfer agent of Atlas Stock Transfer), and received by the Plaintiff in late 2005.

(vii)  The value of the MAIL shares was written off in due course and disclosed in its 2005 Interim Report. The 1^st Defendant explained in SFC’s interview on 21 February 2006 that the write-off was pursuant to the advice from the Plaintiff’s new financial controller.[9]

52.  Having summarised the evidence of 1^st Defendant in respect of the MAIL Investment, I then deal with each of the 2 allegations of the Plaintiff in turn. As mentioned above, the Plaintiff’s claim is one based on recklessness.

(ii)  Allegation that no due diligence was done

53.  The first allegation is that the Defendants had failed to conduct due diligence exercise or to obtain professional advice as to whether it would be in the interests of the Plaintiff to make the MAIL Investment. Again such allegation is unpleaded and so the Plaintiff should not be allowed to advance such argument at the trial. In any event, such allegation has no merit at all.

54.  First, the basis for the Plaintiff’s complaint is quite confusing. The Plaintiff seems to suggest that the 1^st Defendant had not stated clearly when the Plaintiff investigated and verified the MAIL Investment. However, according to the evidence of the 1^st Defendant, the 1^st Defendant did ask the 3^rd Defendant to conduct due diligence before making the investment, and similar work was also done after the board’s resolution in April 2003. In the absence of any rebuttal evidence or any basis for the court to doubt the 1^st Defendant’s evidence in this regard, I accept that the Defendants had caused the Plaintiff to carry out some form of due diligence work before making the MAIL Investment.

55.  The Plaintiff then seems to argue, again without being pleaded, that the 3^rd Defendant and HLB had no expertise to advise on the MAIL Investment. However, there is no basis to support such complaint. In fact, the 3^rd Defendant and HLB had investigated the matter and provided useful information for the 1^st Defendant’s consideration, and the latter, being the main decision-maker, had considered such information.

56.  In his oral testimony, the 1^st Defendant explained that he made the decision to invest because of the boom in the IT sector at that time, and he trusted Welch because of his previous track record of successful investments and the introduction by Edmund Siu. He knew that MAIL was engaged in computer business solution and also e-commerce solution, and the company had concrete assets and business. In fact, the notes by HLB confirm that HLB had verified the investment, and the 1^st Defendant testified that the Plaintiff’s board relied on the advice of Edmund Siu and HLB in making the MAIL Investment. The then independent non-executive directors of the Plaintiff, Mr Chow Chi Kit and Mr To Yan Ming Edmond, also confirmed in their interviews with the SFC that HLB had done the investigation and they had accepted its report in making the resolution for the investment.[10]

57.  The Plaintiff has not pleaded or adduced any evidence to show what other due diligence work should have been done, or what other professional advice should have been obtained, before deciding whether to make the MAIL Investment.

58.  The Plaintiff argues that there is confusion in the evidence as to whether HLB had given its advice before the Plaintiff’s board resolved to make the MAIL Investment in April 2003 when the HLB’s notes was only dated July 2004. However, the 1^st Defendant has testified that the due diligence exercise was a continuous one with some of the works done before the making of the board’s resolution and some after. The fact that there were written notes dated July 2004 does not necessary mean that there was no due diligence works done before that. Most importantly, HLB had studied the target investment and was of the view that the making of such investment was reasonable in the circumstances.

59.  On this particular subject, the Plaintiff relies on some “inconsistencies” between the 1^st Defendant’s evidence and the answers given by others in the SFC’s interviews. However, most of those points were not even put to the 1^st Defendant in cross-examination. In the absence of a fair opportunity given to the 1^st Defendant to deal with the alleged “inconsistencies”, it is not right for the court to reject his evidence or explanations about the conduct of the due diligence exercise.

60.  In support of its claim, the Plaintiff also complains that the MAIL Investment was made in breach of the Listing Rules relating to discloseable transaction under Chapter 14. Though it was stated in 2004 Annual Report that the MAIL option was acquired by “piece-meal” method, the consideration ratio was 7.5% as calculated by Mr Park. That would be substantial enough to be a discloseable transaction under the Listing Rules.

61.  However, this point is again unpleaded and so the issue is irrelevant for the purpose of the present claim. In any event, there is no serious dispute that the 3^rd Defendant was the officer in charge of compliance matters. He told the SFC that he had in fact considered the question of compliance with the Listing Rules and whether the MAIL Investment was discloseable; and after his calculations based on the Plaintiff’s interim accounts for 2003, he considered it unnecessary to make any disclosure.[11] I agree with Mr Lui that this point is important: the situation was not that the Defendants ignored the issue of compliance or deliberately avoided disclosure so as to conceal matters as the Plaintiff alleges. Hence, there is no basis for any complaint of intentional fraud or recklessness. Apart from that, there is doubt as to whether there is any causation between the non-disclosure and the loss pleaded by the Plaintiff. There is therefore no merit in such complaint.

62.  In his closing submissions, Mr Park complains about the failure on the part of the 1^st and 2^nd Defendants to produce documents such as the option agreement signed by the 1^st Defendant and Welch referred to in the notes made by HLB. Nevertheless, the absence of these documents is not sufficient for the court to draw any adverse inferences against the Defendants. There may be a lot of reasons why such documents are not available at this stage. In fact, in his interview with the SFC, the 3^rd Defendant said that he had kept all not-so-frequently-used documents in the Rontex Group’s Mainland office including those from Welch on the MAIL Investment, but those documents could no longer be retrieved.[12]

63.  The Plaintiff also seems to make a point about using all the idle cash of the Plaintiff in making the MAIL Investment. However, apart from the fact that such complaint has not been pleaded, the 3^rd Defendant had already explained to the SFC that he had discussed with Welch, who had provided documents to him showing the calculation of the HK$15 million price for the MAIL option.[13] Hence, it was not because there was HK$15 million cash that the 1^st Defendant decided to spend it all. Instead, the price was derived from actual calculations justified by information and documents from Welch, and the 3^rd Defendant had considered the basis for that price.

64.  The Plaintiff also queries why the simple transaction had to involve persons like Shu and Wong. In this regard, the 1^st Defendant had already explained that such arrangement had been agreed by the 3^rd Defendant and Welch. In his interviews with the SFC, the 3^rd Defendant did provide an account as to the involvement of these two persons:

(i)  As for Shu’s involvement, she was the person who signed the Share Purchase Agreement because she had been personally involved in discussions with Welch earlier;[14] and since the Plaintiff had tax issue concern (that capital gain was taxable and would be considered as profit), Shu as a Mainland citizen had been asked to assist in order to achieve tax savings.[15]

(ii)  As for Wong’s involvement, Welch also had tax issue concerns and specifically requested that the purchase monies be first paid to Wong for onward transfer to Welch himself.[16] Hence, Wong was a party to the Share Purchase Agreement and the person issuing receipt of monies.

65.  Having considered all the evidence in the present case, I accept that the Defendants had undertaken due diligence investigation about the MAIL Investment which was considered by them as adequate in the circumstances. Though the Defendants may be criticised for having placed too much trust on Welch, they had been advised by HLB that the investment was a reasonable one. There is no evidence to show that HLB, though it was the auditor of the Plaintiff’s Group, was in any way not qualified to give the advice on the proposed investment. Under such circumstances, there is insufficient evidence to substantiate the Plaintiff’s complaint that the Defendants were reckless in making the decision to invest in the MAIL option.

(iii)  Allegation about failure to mitigate the loss

66.  The second complaint is about the failure to mitigate the loss. According to the Plaintiff, there is no commercial justification as to why the Plaintiff paid HK$15 million up front, only to wait for a year later to exercise the option, meanwhile MAIL was never listed on the American Stock Exchange (“AMSE”) because otherwise it would not be difficult to dispose of the shares on the public market. Further, MAIL was not listed on AMSE. MAIL even ceased trading as a Pink Sheet stock by 19 May 2007. Despite HLB’s reminder, the 1^st Defendant was not aware of or did not monitor MAIL’s financial status, but claimed to have simply handed the matter over to the 3^rd Defendant to handle. Instead of demanding any part of refund from anyone, in the interim account as at 30 September 2005, write-off had been made in regard to the MAIL Investment. The Plaintiff complains that such conducts on the part of the Defendants amount to fraudulent or reckless breach of trust.

67.  First, there is an issue as to whether the agreement to acquire the option was made on the basis that MAIL would be listed on the AMSE or the Pink Sheet. In this regard, it is clearly stated in Clause 5.3 of the Share Purchase Agreement that “[Wong] undertakes to take appropriate steps to arrange that [MAIL] will be quoted on the Pink Sheets as soon as practicable with 120 days Business days after the issue of the shares of [MAIL]”. The 1^st Defendant in his evidence also confirmed that obtaining listing status as a Pink-Sheet stock was the intention at all material times. The Plaintiff’s counsel had not challenged the 1^st Defendant’s evidence about such intention, and indeed there is no factual basis to support the Plaintiff’s allegation that the intention of the parties was only to get listed on AMSE.

68.  Further, there is also no allegation or evidence to suggest that, in making the agreement to acquire the MAIL option, the Defendants should have insisted for a refund in the case that MAIL could not be listed on the AMSE. After all, if the Plaintiff is running such line of argument, there must be some evidence on the costs-and-benefit analysis about the difference between listing on the AMSE and the Pink Sheet, of which there is none in the present case.

69.  It is true that the minutes of the Plaintiff’s board dated 2 April 2003 did record the aspiration for MAIL to be listed on AMSE. However, even if the Plaintiff’s management and Welch at the time did intend that MAIL would obtain a listing status on AMSE in future, they could still adopt the Pink-Sheet listing status as the operative basis for the refund guarantee. There was nothing unusual or dubious about such arrangement, and there is also no basis for the Plaintiff to enforce the guarantee recorded in Recital (C) of the Share Purchase Agreement. There is simply no evidence to show that the terms agreed in the Sale and Purchase Agreement were unreasonable in the circumstances.

70.  Being that the condition was only to list MAIL on the Pink Sheet, the Plaintiff then complains that the Defendants had not given any thought about the subsequent disposal of the shares, as only stocks listed on AMSE could be traded freely in the market. Though the 1^st Defendant admitted that he did not personally check or tell anyone to check with Welch or anyone else the prevailing market value of MAIL, the 1^st Defendant said the “follow-up was handed to [the 3^rd Defendant] for him to handle”; whereas the 3^rd Defendant said Welch had explained how to sell MAIL shares, although he had forgotten the details, and the 3^rd Defendant himself knew Welch could arrange for future disposal.[17]

71.  Based on such evidence, the Defendants may be criticised for placing too much on Welch, but there is not enough evidence to substantiate the allegation that the Defendants were recklessly indifferent as to the possible future disposal of the shares. After all, the parties might be prepared to take some risk associated with the disposal of the shares. Whether the deal was reasonable would have to be evaluated holistically, and there are simply insufficient materials before the court to show that the whole deal was unreasonable in the circumstances.

72.  It seems that the Plaintiff is also complaining that the Defendants should not have written off the MAIL Investment as there might be other ways to recoup the loss. In his closing submissions, Mr Park submits that the “real reason” for write-off could not have been the advice from the Plaintiff’s new financial controller because there could be “other methods” to calculate the fair value of the shares.

73.  I am not quite sure about the exact nature of such complaint: is the Plaintiff suggesting that they might be other ways to recoup the loss, or is it suggesting that book value of the investment should not be zero because there were other methods to calculate the fair value of the investment? No matter what is the exact basis, there is no evidence to show what might be the other ways to recoup the loss. For the failure to assess a fair value, there is again no evidence to show what other methods were available to the Plaintiff’s management at the time. Further, since the Plaintiff’s claim is based on fraudulent or reckless breach of trust, there is nothing to show that the Plaintiff’s management by that time knew that there were other ways to recoup the loss or other methods to calculate the fair value of the investment. According to the 1^st Defendant, he was upset by the investment and had instructed the 3^rd Defendant to see if there were other ways to mitigate the loss, but in the end nothing could be done. Again, there is nothing to doubt the 1^st Defendant’s evidence in this regard.

(iv)  Conclusion in respect of the MAIL Investment

74.  I agree that the MAIL Investment may look dubious. After all, the investment did not go well within a short period of time and the Plaintiff lost HK$15 million as a result. The Defendants may be criticized for placing too much trust on Welch. Welch might have exaggerated the potential of the investment, and there might be inadequate consideration as to how to dispose of the shares in the case of the exit of the investment. Under such circumstances, one would certainly query whether adequate due diligence had been carried out. But as I have repeated many times in this Judgment, it is the burden of the Plaintiff to prove its pleaded case against the Defendants. The Defendants had given evidence as to how the investment decision was made, and there is nothing to doubt the genuineness of such explanation. After all, both the 1^st and 2^nd Defendants had substantial interests in the Plaintiff at the material times, and they were the ones who would suffer the most in the case of an unsuccessful investment. The Defendants did carry out the due diligence investigation they considered adequate in the circumstances, and the auditor of the Plaintiff’s was involved in the exercise. Based on the evidence available at this stage, the Defendants cannot be considered as reckless in making the investment decision. After all, a lot of investors lost money because of the dot-com IT boom. So long as the Defendants had caused the carrying out of due diligence work that they genuinely believed to be adequate in the circumstances, there is no basis for the Plaintiff’s complaint on fraudulent or reckless breach of duties.

75.  For the above reasons, the Plaintiff’s claim in respect of the MAIL Investment must fail.

THE KKL INVESTMENT

(i)  Background and the evidence of the 1^st Defendant

76.  I then turn to final investment, i.e. the KKL Investment. The background of this investment has been succinctly summarised in the closing submissions of Mr Lui and the Amended Defence:

(i)  In around mid-June 2004, Mr Hon Shum Kwun (“Hon”) introduced to the 1^st Defendant the opportunity of investing in KKL which specialized in the retail business of men’s suits in Beijing. Hon was one of the shareholders of Rontex (Beijing), in which the Plaintiff held 40% shareholding.

(ii)  The 1^st Defendant considered that the opportunity was beneficial to the Rontex Group, in that Rontex (Beijing) manufactured woven wear including men’s suits, and with various sales outlets in Beijing, KKL would facilitate and enhance the sales.

(iii)  The 1^st Defendant did not only rely on his years of experience in the garment industry but also communicated with each shareholder (including Mr Sek Zin Bing (“Sek”) who was responsible for KKL’s operations); and studied the setup, equipment and location of the same type of company for valuation purposes. By that time, Sek had been running 4 shops in Beijing under KKL’s operation.

(iv)  On 13 October 2004, the Plaintiff’s board resolved to approve the KKL Investment and authorised one Madam Zhou Ying Chun (周迎春) to hold the equity interest in KKL on behalf of the Plaintiff in compliance with the legal requirements of the Mainland. From October to December 2004, the Plaintiff invested about HK$8.5 million, with RMB1.25 million as the registered share capital and the balance being shareholder’s loans. In return, the Plaintiff held 62.5% shareholding in KKL (total registered share capital of RMB¥2 million).

(v)  3 more shops were opened after the making of the KKL Investment.

(vi)  At all material times, the 1^st Defendant attended meetings and participated in the management of KKL. Nevertheless, in early 2005, disagreement arose amongst the shareholders of KKL under the following circumstances:

(a)  In January 2005, a client introduced by the 1^st Defendant cancelled an order placed with KKL. The amount of the order was about HK$6 million. The other shareholders considered that the cancellation was the result of the 1^st Defendant’s fault and requested a deduction of the amount of the cancelled order from the Plaintiff’s HK$8.5 million investment. The 1^st Defendant considered the request unfair.

(b)  At that time, the other shareholders requested additional capital injection into KKL for the purpose of expansion of its retail operation in Beijing. The 1^st Defendant saw a great uncertainty in the intended expansion and refused to cause the Plaintiff to inject additional funds into KKL.

(c)  Despite the disagreement above, the 1^st Defendant confirmed in his evidence that KKL was developing and expanding amidst the disagreement; and the break-down of relationship had nothing to do with any poor business performance.

(vii)  Due to the disagreement, the 1^st Defendant decided to back out from KKL. The 1^st Defendant tried to recoup the Plaintiff’s investment in full but to no avail at first. Owing to the 1^st Defendant’s effort, in about February 2005, the Plaintiff recovered some stock of garment products and sold them for RMB6,912,296 (i.e. HK$6,521,000). The loss on such investment was disclosed in the Plaintiff’s 2005 Annual Report.

77.  The Plaintiff’s complaint in respect of this investment is basically two-fold:

(i)  The Defendants did not care about the KKL Investment and they did not carry out due diligence investigation before making the KKL Investment.

(ii)  The Defendants had caused the Plaintiff to exit the KKL Investment abruptly and failed to seek full recovery of the investment and the loans.

78.  Both allegations involve recklessness rather than intentional or deliberate fraud. I will deal with each allegation in turn.

(ii)  The justification for making the KKL Investment and the due diligence work conducted

79.  As I have mentioned above, the Plaintiff’s claim is based on reckless breach of duty. Negligence by itself is not sufficient to establish the claim. Yet the evidence falls far short of establishing the recklessness as alleged by the Plaintiff.

80.  First, when the 1^st Defendant was asked about the nature of the HK$8.5 million with RMB1.25 million being initial investment, he gave the unshaken evidence that the balance was a loan, which is supported by the receipt issued by KKL. Although he admitted there had been no discussion on repayment schedule or interest rate, the 1^st Defendant denied that he did not expect its repayment. Mr Park argues the 1^st Defendant did not know the “exact purpose of the fund”, but there is nothing unusual about such arrangement, as the 1^st Defendant said it was for future development and there was nothing wrong with a degree of uncertainty in the precise use of reserved operating capital.

81.  Second, the Plaintiff complains that the 1^st Defendant did not review KKL’s business plan and had no business target at the time. However, the 1^st Defendant’s unchallenged evidence is that he had analysed and determined the investment amount with his Beijing factory partners, viz. Hon and Sek. It was understandable for the 1^st Defendant to have reposed trust and confidence in Hon, who was not a stranger to him but had been his “Beijing factory partner” and “very good/close friend” with whom he had worked for years before the KKL Investment. The 1^st Defendant also said he had studied the setup, equipment and location of the same type of company before deciding to invest in KKL; and he could not look at financial statements or sale history or business plan or conduct any other due diligence investigation as KKL was a new company.

82.  Third, there is also no evidential basis to support the Plaintiff’s unpleaded allegation that it was the failure “to ascertain what KKL’s business plan was” that resulted in the disagreement amongst shareholders only 3 months into the investment.

83.  Hence, there is no merit in the first allegation.

(iii)  The allegation of abrupt exit and failure to seek full recovery

84.  The second complaint relates to abrupt exist and failure to seek recovery. There is again no merit in such allegation.

85.  First, there is no reason for the court to doubt the 1^st Defendant’s explanation as to why the Plaintiff would have to exit the investment by that time.

86.  Second, the Plaintiff had recovered a substantial portion of its investment following the disagreement between different partners of KKL. It seems that the only point that the Plaintiff is now complaining is that the 1^st Defendant failed to accept the “exit” proposal from KKL described as “option 2” in a letter dated 21 March 2005.

87.  However, the 1^st Defendant has clearly explained that he refused the proposal initially pursuant to legal advice. When he later accepted the proposal, KKL then never made the proposed payments. During his oral testimony, there is no challenge by the Plaintiff that the 1^st Defendant was lying in this regard, and so it is not open to Mr Park to argue in his final submissions that “it is more likely than not that [the 1^st Defendant rejected the proposal”. Indeed, the 1^st Defendant frankly admitted that he rejected the proposal initially, but there was nothing unusual that he later decided to accept the proposal instead.

(iv)  Conclusion in respect of the KKL Investment

88.  To me, there is no suspicion about the KKL Investment at all. There were good reasons for the Plaintiff to make the investment in the first place. After the making of the modest investment, the business did expand, and it was only because of the subsequent disagreement between the partners which caused the Plaintiff to exit the investment. Even then, the Plaintiff was able to recover a substantial part of the investment. Hence, there is no substance in any of the complaints in respect of the KKL Investment.

THE FINAL ORDER AND THE CLAIM AGAINST THE 3^RD DEFENDANT

89.  Though the 3^rd Defendant was absent at the trial, the Plaintiff still has to prove its case against the 3^rd Defendant. In my judgment, though the 1^st and 2^nd Defendants try to shift the responsibility to the 3^rd Defendant by saying that he was responsible for carrying out the due diligence works and the execution of some of the transactions involving the 3 subject investments, the Plaintiff has failed to satisfy the court that the 3^rd Defendant was involved in any fraudulent conducts. For the reckless claim relating to the MAIL Investment, it is clear that HLB was involved in evaluating the prospect of the investment. As there is nothing to show why the 3^rd Defendant should not have relied on the advice of HLB or any other things that the 3^rd Defendant should have done for the due diligence investigation, it cannot be said that the 3^rd Defendant was reckless in the conduct of such diligence exercise. Hence, the Plaintiff has failed to prove its case against the 3^rd Defendant.

90.  For the above reasons, the Plaintiffs’ claim is dismissed.

91.  Since this action was commenced pursuant to DHCJ Burrell’s Order, and there are a lot of mistakes and confusion in the contents of the ROIs previously given by the Defendants and in the transaction documents (such as the board minutes and Bought and Sold Notes for the Grandtop Investment) which require the clarifications of the 1^st Defendant in this action and the trial, I make an order nisi that there be no order as to costs of this action which shall be made absolute 14 days after the date of the handing down of this Judgment.

(David Lok) Judge of the Court of First Instance High Court

  

Mr Moses Park, instructed by Georgiou Payne Stewien LLP, for the Plaintiff

Mr Mike Lui and Ms Kelly Cheng, instructed by Cheung & Yip, for the 1^st and 2^nd Defendants

The 3^rd Defendant, absent

  

HCA 706/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 706 OF 2010

____________________

BETWEEN
	SIBERIAN MINING GROUP COMPANY LIMITED	Plaintiff
	(formerly known as Rontex International Holdings Limited)
	(西伯利亞礦業集團有限公司)
	and
	CHEUNG KENG CHING (張鏡清)	1st Defendant
	CHOU MEI (周梅)	2nd Defendant
	LAU KA MAN KEVIN (劉嘉文)	3rd Defendant

____________________

Before: Deputy High Court Judge Lee in Chambers

Date of Hearing: 8 March 2017

Date of Ruling: 17 March 2017

____________________

R U L I N G

____________________

Introduction

1.  This is the application of the 1^st and the 2^nd defendants (“D1 & D2”) for leave to appeal against my ruling handed down on 10 February 2017 (“the Ruling”) allowing the plaintiff (“P”) to amend its Indorsement of Claim (“IC”) and Statement of Claim (“SC”) against the defendants.  The background of the case, the details of the amendments and the reasons for my ruling can be found in the Ruling which I am not going to repeat. 

2.  Written and oral submissions for the present application have been received from both sides, for all of which I am grateful.

3.  Shortly stated, the proposed grounds of appeal put forward by Mr Hui, counsel for the defendants, boil down to the following complaints:

i) As regards the amendments relating to the allegation of fraud/fraudulent breach of trust:

(1) this court erred in allowing the amendments in circumstances where (i) no sufficient particulars are pleaded in the original SC in support of P’s plea of fraud or dishonesty and (ii) the pleaded facts are consistent with innocence;

(2) this court failed to have regard to the requirement that P has to set forth separately the acts complained of in respect of each of the defendants and not simply clump them together in vague allegations;

(3) this court, in exercising the discretion to allow the amendments, erred in finding that the lack of particulars could be remedied by the defendants seeking further and better particulars;

(4) as the allegation of fraud/dishonesty had not been sufficiently particularised in SC, this court erred in holding that the corresponding amendments to IC are merely to regularise the claim already made in SC;

ii) As regards the new cause of action of “fraudulent concealment” allowed to be added:

(5) this court erred in applying s 20(1)(a), the Limitation Ordinance (Cap 347) to the new cause of action which does not contain sufficient particulars to amount to an allegation of fraud/fraudulent breach of trust;  

(6) further or alternatively, the new cause of action is tantamount to an allegation of deceit rather than a fraudulent breach of trust and as such it is still subject to a time limitation of six years;

(7) further or alternatively, this court erred in holding that the new cause of action arises out of the same or substantially the same facts of the allegation of fraud/fraudulent breach of trust;

(8) as the new cause of action does not arise from the same or substantially the same set of facts, this court also erred in allowing the corresponding amendments to IC.

TEST FOR GRANTING LEAVE

4.  The test for granting leave to appeal is well settled and not in dispute.  Leave to appeal shall not be granted unless (a) the appeal has a reasonable prospect of success; or (b) there is some other reason in the interests of justice why the appeal should be heard: s 14AA(4), the High Court Ordinance (Cap 4).   It is well‑established that reasonable prospect for this purpose involves the notion that the prospects of succeeding must be reasonable, and therefore more than fanciful, without having to be probable: Wynn Resorts (Macau) SA v Mong Henry.[1]  

5.  In case a ground of appeal is levelled at the exercise of the court’s discretion, the well‑known principles in Hadmor Productions Ltd v Hamilton[2] would apply.  See also Wong Luen Hang & Anor v Chan Yuk Lung & Ors.[3] 

6.  Even if the court takes the view that there is a reasonable prospect of success, it still retains a discretion as to whether to grant leave, although the fact that there is, ex hypothesi, a reasonable prospect of success would heavily influence the court’s exercise of discretion: see Ho Yuen Ki Winnie & Anor v Ho Hung Sun Stanley & Ors.[4]          

7.  Further, in deciding whether or not, as a matter of discretion, leave should be granted for an interlocutory appeal, one relevant consideration would be whether allowing the interlocutory appeal would only serve to increase costs and delay the adjudication of the litigation.  It is relevant to bear in mind that the leave requirement was introduced largely to address satellite litigation on interlocutory issues which almost invariably gives rise to major delay and expense: Ho Yuen Ki Winnie & Anor v Ho Hung Sun Stanley & Ors (CA).[5]

CONSIDERATION

As to Ground (1): Sufficient of particulars for fraud

8.  With respect, this ground is a re‑run of the argument which had already been advanced on behalf of D1 and D2 when they opposed P’s application for amendments. 

9.  As regards the pleading of fraud/fraudulent breach of trust, the relevant legal principles are summarised at §§13‑20 of the Ruling.  I note that the case authorities relied upon by Mr Hui now, as well as then, including Three Rivers District Council & Ors v Bank of England (No 3),[6]Peconic Industrial Development Ltd v Lau Kwok Fai[7] and ADS v Wheelock Marden & Co Ltd[8] have already been duly considered in the Ruling. 

10.  In my humble view, the present complaint does not involve any question of law at all but is really about how the relevant legal principles are applied in the present case.  As regards whether P’s original case as pleaded in the unamended SC had already included or implied in it a distinctly alleged cause of action based on fraud or fraudulent breach of trust, the court adopted the approach taken in Darlington Building Society & Anor v O’Rourke James Scourfield & McCarthy,[9] applied in Bank of China (Hong Kong) Ltd v Leong Mei Yong,[10] by looking at and comparing CS in its original form and the relevant amendments.  Mr Hui does not complain that that is not the correct approach.

11.  At §22 of the Ruling, detailed reasons have already been given as to why this court came to the view that SC in its originally form had already included or implied in it a distinct case of fraud or fraudulent breach of trust against the defendants and that sufficient particulars had been provided.  At §22(b) of the Ruling, this court commented that “what constitute sufficient particulars is a matter of degree and must necessarily be case-specific”.  Mr Hui does not gainsay this.  

12.  As regards the mental elements of the tort, this court pointed out at §17 of the Ruling that whether a person’s conduct was accompanied by a certain state of mind (eg dishonesty) is essentially a question of fact.  In the absence of an admission from the person concerned, that fact is usually proved inferentially by circumstantial evidence including what he said and done prior to and after the conduct in question.  Mr Hui does not seem to disagree with that proposition.  Specifically, the court pointed out at §22(f) of the Ruling that P had explicitly pleaded (in the original SC) that the defendants “either knew … or did not honestly believe … or were recklessly indifferent as to whether” it was contrary to P’s interests to acquire the Grandtop shares.  That assertion follows closely the formulation of mental element of “fraud” approved by Millett LJ in Armitage v Nurse.[11]

13.  With respect, I can see no reasonable prospect of success in this ground.

As to Ground (2): Acts of each defendant

14.  As pointed out by the written submission of Mr Kong (and with him, Ms Chan), this ground has not taken into account the fact that P’s case against the defendants is that they had acted collectively in the tort.  In other words, P is asking the court to infer from the pleaded facts that there existed a common design between the defendants.  The nature of a “common design” was explained by Mustill LJ in his oft‑quoted judgment in Unilever v Gillette,[12] which is recently affirmed by the UK Supreme Court in Sea Shepherd UK v Fish & Fish Ltd[13], as follows:

“I use the words ‘common design’ because they are readily to hand, but there are other expressions in the cases, such ‘concerted action’ or ‘agreed on common action’ which will serve just as well. The words are not to be construed as if they formed part of a statute. They all convey the same idea. This idea does not, as it seems to me, call for any finding that the secondary party has explicitly mapped out a plan with the primary offender. Theirtacitagreement will be sufficient. Nor, as it seems to me, is there any need for a common design to infringe. Itis enough if the parties combine to secure the doing ofwhich in the event prove to be infringements.” (Emphasis supplied]

15.  In the present case, the basic facts pleaded and relied upon by P for the inference of a “common design” are set out at §12 of the Ruling. In my view those facts are capable of giving rise to an inference of “common design”.  Whether that inference should be drawn, however, is a matter for the trial judge to decide after considering all the evidence adduced.

16.  With respect, this ground is not reasonably arguable.  

As to Ground (3): Further and better particulars

17.  As pointed out by Mr Kong in his written submissions, there was no finding by this court that “the lack of particulars can be remedied by the defendants seeking further and better particulars”.  As aforesaid, it was the ruling of this court, at §22 of the Ruling, that P had already pleaded a distinct case of fraud or fraudulent breach of trust by the defendants. What this court said at §44 of the Ruling is as follows:

“However, if D1 and D2 consider that there is a need for further and better particulars, it is a matter for them to consider making the relevant application.”

18.  With respect, this ground is misconceived.

As to Ground (4): Corresponding amendment to IC relating to fraud

19.  This ground stands or falls with (i) above.  This court has adequately dealt with the point raised at §§38‑42 of the Ruling. 

As to Grounds (5) & (6): limitation defence re “fraudulent concealment”

20.  These grounds, which can be conveniently dealt with together, are about items (i) and (ii) listed at §23 of the Ruling, which this court ruled at §31 that they raise a new cause of action of “fraudulent concealment” which is an aspect of “breach of fiduciary duty” not covered by P’s original cause of action about the defendants’ misappropriation of P’s fund in the acquisition of the Grandtop shares.

21.  Ground 5 is based on the premise that the new claim does not contain adequate particulars to constitute an allegation of “fraud/fraudulent breach of trust” and therefore s 20(1)(a), Limitation Ordinance is not applicable.  However, the premise is false.  Mr Hui has not identified in what ways the new cause of action, which is one of omission rather than commission, is inadequately pleaded. 

22.  As regards Ground 6, it is important to pay attention to the reasons given by this court as to why the alleged concealment is actionable, instead of taking what was said at §30 of the Ruling out of context.  Firstly, based on the alleged facts, the defendants as directors owed a “trustee‑like responsibilities” to P and therefore it is trite law (which needs not be pleaded) that they owed the duty to make full and frank disclosure to P in relation with their dealings with P’s property.  Secondly, this court was saying that the alleged breach duty of fiduciary duty was not innocent but fraudulent in that it is “tantamount to a deceit”.  It was for this limited purpose that reference was made to Conlon & Anor v Simms,[14] which, I note, was not about breach of fiduciary duty by a trustee.  It was not the ruling of this court that the new cause of action forms “only” a personal claim for damages, as Mr Hui seems to suggest.  Thirdly, the concealment in question was about the defendants’ alleged misappropriation of P’s funds in the acquisition of the Grandtop shares contrary to P’s interest.  As such, the new cause is also a claim of “fraud/fraudulent breach of trust” in respect of P’s property (company funds) which falls square within s 20(1)(a), the Limitation Ordinance.  Fourthly, this court held that this cause of action based on “fraudulent concealment” is a new one because that is an aspect of fraud/fraudulent breach of trust different from the original allegation based only on misappropriation of company funds.  It is in the above context that this court distinguished Cia de Seguros Imperios v Heath (REBX) Ltd[15] and said, at §20 of the Ruling,

“I note that in Cia de Seguros Imperios v Heath (REBX) Ltd, a case relied upon by Mr Hui, it was held that a claim for damages against a dishonest breach of fiduciary duty is still subject to time limitation by analogy with a claim of damages for breach of contract or a breach of duty in tort. I note, however, that that case is not about trustee or directors and is not a case on the English equivalent of s 20(1) of the Limitation Ordinance.”

Lastly, based on the above and relying on Akai Holdings Ltd (in comp liq) v Everwin Dynasty Ltd,[16] this court ruled that even though the relevant parts of the amendments in question raise a new cause of action, it would not involve any risk of depriving the defendants of an arguable accrued limitation defence.

23.  Therefore, these grounds are based on a misreading of the relevant parts of the Ruling and are not reasonably arguable.

24.  For the sake of argument, if it were reasonably arguable that the new cause of action does not amount to “fraud/fraudulent breach of trust”, in my humble view there would be reasons why, as a matter of discretion, leave to apply should not be granted in the circumstances of the present case:

(i) At the hearing of P’s application for amendment, the foci of the submissions of the parties were on whether the amendments in question were just “particulars added to the original pleaded case of fraud on the basis of the available evidence that makes P’s case more complete”; if they did raise a new claim, whether they could still be allowed pursuant to O 20 r 5(5), RHC; and whether the new claim was “self‑contradictory” and “bound to fail”: see §§6‑7 of the Ruling.  Very little, if any, was then argued on behalf of the parties specifically as to whether the new claim would have been time-barred even at the time when the writ was issued.

(ii) The effect of the Ruling is to allow the new claim (“fraudulent concealment”) to be added to SC pursuant to s 35(5), the Limitation Ordinance and O 20 r 5(5), RHC, so that it would be deemed to have been commenced on the day the writ was issued: see §§33, 37 & 47.  This is a ruling in an interlocutory proceeding rather than a final determination of an issue giving rise to a res judicata: Chu Hung Ching v Chan Kam Ming & Ors.[17] If the new claim of “fraudulent concealment” is, as D1 & D2 now contend, not a “fraud by trustees” or a “fraudulent breach of trust”, then there is nothing to prevent them from pleading time limitation vis-à-vis the new claim in their amended defence, which is yet to be filed.  The doctrine of “relation back” would not cause any injustice to the defence because of the addition of the new cause of action, as the defendants would not be deprived of any accrued limitation defence.  On this basis, Global Bridge Assets Ltd v Sun Hung Kai Securities Ltd[18] is distinguishable.

(iii) The original claim based on misappropriation and the new claim based on fraudulent concealment are two closely related facets of the same share transaction.  As such, they would not result in P being compensated twice for the same transaction. 

(iv) Whether or not the new cause of action is to be included in SC, the evidence of the concealment would still be relevant and admissible to show the state of mind of the defendants at the time when they caused P to acquire the Grandtop shares.

(v) The incidents which are the subject matters of the action happened between 2003 and 2005 and the writ was taken out in 2010. In my view, the granting of leave for an interlocutory appeal would only cause further delay to the adjudication of the litigation.

Based on the above, even if it were reasonably arguable that the new cause of action is not covered s 20(1)(a), the Limitation Ordinance, I would exercise my discretion not to grant leave for the interlocutory appeal on this ground.

As to Ground (7): Same or substantially the same facts

25.  The relevant part of the Ruling is at §§34‑37.  Mr Hui has not identified in what ways, if any, this court has erred in the law or its application.  With respect, the allegations about defendants’ misappropriation of P’s money in the acquisition of Grandtop shares and the subsequent “fraudulent concealment” of their own wrongdoings are plainly based on the same or substantially the same facts.

As to Ground (8): Corresponding amendments to IC re “fraudulent concealment”

26.  This ground stands or falls with Grounds (5)–(7) above.  I note that Mr Hui does not take issue with the legal principles stated at §§41-42 of the Ruling.

27.  Based on the discussion above, this ground is also not reasonably arguable.

CONCLUSION

28.  Having considered submissions of the parties, with respect, the proposed grounds of appeal, whether taken individually or collectively, have no merits and are not reasonable arguable.  As such, D1 and D2’s application for leave to appeal is dismissed. 

29.  I make an order nisi that D1 and D2 pay P’s costs of this application, to be taxed if not agreed. 

	(Alex Lee)
	Deputy High Court Judge

Mr Hatten Kong and Ms Candy Chan instructed by M M Wong & Co, for the plaintiff

Mr John Hui instructed by Cheung & Yip, for the 1^st and 2^nd defendants

  

HCA 706/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 706 OF 2010

________________________

BETWEEN
	SIBERIAN MINING GROUP COMPANY LIMITED	Plaintiff
	(formerly known as Rontex International Holdings Limited)
	and
	CHEUNG KENG CHING	1st Defendant
	CHOU MEI	2nd Defendant
	LAU KA MAN KEVIN	3rd Defendant

________________________

Before: Deputy High Court Judge Lee in Chambers

Date of Hearing: 26 January 2017

Date of Ruling: 10 February 2017

________________________

R U L I N G

________________________

Introduction

1.  This is the application by the plaintiff (“P”) for leave to amend its Indorsement of Claim (“IS”)[1] and Statement of Claim (“SC”)[2] against the defendants (respectively “D1‑D3”). 

2.  P’s action against D1‑D3, who were its former directors, relates to three of its transactions which took place not long after it became publicly listed in October 2002.  They are referred to in SC as: (1) the Acquisition of Grandtop Shares in December 2003; (2) the Acquisition of the MAIL’s Share Option in 2004; and (3) the Investment and Advancement of Loan to KKL Fashion in 2004 and 2005, all of which eventually resulted in substantial losses.  During the material period of time, D1‑D3 were P’s only executive directors.  P alleges that the defendants are accountable for the losses it sustained.

3.  P’s Writ of Summons (accompanied by IS) was taken out on 15 May 2010.[3]  Subsequently, SC (dated 11 July 2011) was served.  The Summons for application for leave to amend now under consideration, however, was only taken out on 5 July 2016.[4]  Eventually, the application for leave was listed and heard before me on 26 January 2017.

4.  The proposed amendments concern all of the three aforesaid transactions.  However, for present purposes D1 and D2 only object to the proposed amendments relating to Transaction 1 (“the relevant amendments),[5] whilst D3 does not object to any of the proposed amendments.

CONTENTION OF THE PARTIES

5.  As can be seen from the various dates given above, a major problem facing P in the present application is one of time limitation.  The 6‑year time limitation under s 20(2), Limitation Ordinance (Cap 347) would apply, directly or by analogy, unless excluded by s 20(1)(a) or (b) of the Ordinance:[6] see Gwembe Valley Development Co Ltd v Koshy.[7] However, by the time the Writ of Summons was taken out, more than 6 years had elapsed since Transaction 1 was done. 

6.  P’s primary contention is that the relevant part of CS in its original form regarding Transaction 1 includes a case of fraud or fraudulent breach of trust for which there is no time limitation: see s 20(1)(a), Limitation Ordinance.  The relevant amendments are just “particulars added to the original pleaded case of fraud on the basis of the available evidence that makes P’s case more complete”. Alternatively, if the relevant amendments do raise a new cause of action which has not previously been pleaded, then they can still be allowed pursuant to O 20 r 5(5), Rules of the High Court (“RHC”)[8] on the basis that they arise out of the same or substantially the same facts as the original one.

7.  On the other hand, it is the contention of D1 & D2 that the plaintiff’s claim regarding Transaction 1 had already been time barred when the Writ of Summons was taken out.  It is because, D1 and D2 contend, that the claim, whether in its original form or after the relevant amendments, is not distinct enough to amount to an allegation of fraud or fraudulent breach of trust.  It is also submitted that the relevant amendments actually raise a new cause of action which does not arise out of the same or substantially the same facts as the original one.  In particulars, it is submitted that the original cause of action does not contain any allegation of deliberate and dishonest concealment.  It is also submitted that the new claim of dishonest concealment is “self‑contradictory” and “bound to fail”.  Lastly, it is submitted that the relevant amendments to CS are not permissible as IS in its original form does not contain a specific plea of fraud or fraudulent breach of trust.

THE APPROACH TO GRANTING OF LEAVE TO AMEND

8.  It is a guiding principle of cardinal importance on the question of amendment that, generally speaking, all such amendments ought to be made “for the purpose of determining the real question in controversy between the parties to any proceedings or of correcting any defect or error in any proceedings”: see G L Baker Ltd v Medway Building & Supplies Ltd[9]; and generally Hong Kong Civil Procedure 2017 (“HKCP”), at §20/8/6.

9.  Mr Hui, and with him Mr Chan, counsel for D1 and D2, relying on Global Bridge Assets Ltd v Sun Hung Kai Financial Ltd,[10] submit that the correct approach to a leave application in a situation like the present one is to refuse leave to amend unless the plaintiff can show that the defendant does not have a reasonably arguable case on limitation, or can bring itself within O 20 r 5(5), RHC.  But in the latter case, the Court still retains a discretion whether or not to allow the amendments.  It is submitted that it is open to P, if it has an arguable case on the new cause of action, to take out separate proceedings and have a separate trial.

10.  With respect, I am unable to accept Mr Hui’s submission above and I am of the view that Global Bridge’s case does not in fact support his proposition.  My reasons are as follows:

(a)  Global Bridge was not a case on s 20(1) but on s 26(1) of the Limitation Ordinance.[11]  In that case, the original claim was based on contract and the plaintiffs sought to add a new cause of fraud by way of amendment.  By the time the plaintiffs applied for leave to amend, however, that new cause of fraud would have already been time barred unless the exception provided in s 26(1) was applicable.[12]  The plaintiffs contended that the new cause of fraud was based on new facts known to them only subsequently and that time did not start to run against them in respect of the fraud until after the new facts were discovered.  The judge who heard the plaintiffs’ application granted them leave to amend on the basis that they had an “arguable case” that the new cause of fraud had not been time barred and that the dispute as to the time of discovery of fraud would remain “live” and would be contested at trial.  It was in the above context that the Court of Appeal said that leave to amend should not be given if its effect would be to deprive the defendant of an accrued limitation defence, which would be lost as a result of the operation of the relation back rule in s 35(1)(b).  Moreover, as the plaintiffs asserted that the new cause of action was based on new facts, the Court of Appeal said that the right course was to refuse the amendment and to let the question of whether s 26 applied to be determined in a fresh action.

(b)  In the present case, however, if P were right that CS in its original form has already included or implied a cause of action based on fraud or fraudulent breach of trust, then that cause of action would have never been subject to any time limitation by virtue of s 20(1)(a).  As such, it is not the case, if leave to amend were to be granted, that the defendants would be deprived of any accrued limitation defence, as none would have ever been available to them.

(c)  Alternatively, if the relevant amendments did raise a new cause of fraud or fraudulent breach of trust and if the relevant amendments were to be allowed pursuant to O 20 r 5(5), the defendants would also not be deprived of any accrued limitation defence in respect of the new cause of action.  This is because the new cause of action would also not be subject to any time limitation by virtue of s 20(1)(a).

(d)  Therefore, the present case is similar to the situation in Akai Holdings Ltd (in comp liq) v Everwin Dynasty Ltd[13]where Court of Appeal held that the defendant X, being a director of the claimant, was to be regarded for the purposes of s 20(1), Limitation Ordinance as a trustee in respect of the claimant’s property so that a claim by the claimant against him for fraud or fraudulent breach of trust was not subject to any limitation period.  Thus, granting leave to amend would not involve any risk of depriving him of an arguable accrued limitation defence.

MAJOR ISSUES

11.  Based on the above, the pertinent question to ask in the present application is not whether P can show at this stage that D1 and D2 do not have a reasonably arguable case on limitation as contended by Mr Hui. Nor does the court concern with the issue as to when P could with reasonable diligence have discovered the alleged fraudulent acts.  Instead, the disposal of the present application would depend on the resolution of the following issues:

(1)  whether P’s original case relating to Transaction 1 has already included or implied in it a distinctly alleged cause of action based on fraud or fraudulent breach of trust: see HKCP, at §18/8/15;

(2)  whether the relevant amendments are simply further particulars which seek to clarify P’s case and narrow down the issues or whether they raise a new cause of action;

(3)  if the relevant amendments raise a new cause of action, whether it arises out of the same facts or substantial the same facts as the original one;

(4)  if so, whether the relevant amendments to SC should still be rejected on the basis that IS in its original form does not contain a distinct reference to fraud or fraudulent breach of trust; and

(5)  if not, whether there is any reason to exercise the court’s discretion to refuse leave.

The resolution of issues (1) to (3) above requires the court to look at and compare CS in its original form and the relevant amendments: see Darlington Building Society & Anor v O’Rourke James Scourfield & McCarthy,[14] applied in Bank of China (Hong Kong) Ltd v Leong Mei Yong.[15]

THE ORIGINAL CASE AS REGARDS TRANSACTION 1

12.  Before I go on to consider the issues, it would be convenient for me to summarise the relevant part of P’s case as originally pleaded:[16]

(a)  At all material times including the period between November 2002 and November 2005, the defendants were the only executive directors of P since the listing of it on the SEHK.[17]

(b)  As such, each of the defendants owed to P a “fiduciary duty to act in good faith and in the best interests” of P.[18]

(c)  On or about 22 December 2003, P acquired 2.2 million shares in Grandtop through private channels,[19] the bought and sold notes of which were signed by D3 and the price was stated to be $2 per share.[20]  The board minute authorising the transaction at that price, on the other hand, was signed by D1 and D2.[21]  That stated price of $2 per share was also the then prevailing market price.[22]

(d)  However, the aforesaid shares were in fact purchased by P at a price of $2.9 per share as shown in an undated internal accounting records prepared by D3.[23]  The price of $2.9 per share also conformed to the information contained in P’s annual report for the year 2004/2005.[24]

(e)  The acquisition of the Grandtop shares at the price of $2.9 per share was not in the interests of P since the prevailing market price was around $2 per share trading on the SEHK.[25]

(f)  Causing P to acquire the Grandtop shares at such a high price through private channels was “not justifiable and could not be justified on any good or sound commercial reasons at all”.  Therefore it was not and could not be in the interests of P to do so.[26]

(g)  In addition, at the material times the trading price of Grandtop shares was trending downwards on SEHK from around $3 per share in June 2003 to around $2 per share in December 2003 and Grandtop declared no dividend at all between March 2003 and March 2005.[27]

(h)  The said acquisition by P caused by the defendants constituted “misfeasance, misconduct and/or defalcation” in relation to the business and affairs of P.[28]

(i)  Based on the matters pleaded above, the defendants at the material time “either knew that it was contrary to the interests of P to acquire the Grandtop shares or did not honestly believe that the acquisition of the Grandtop shares was in the interests of P or were recklessly indifferent as to whether it was contrary to P’s interests to do so”. In the premises, “causing or procuring of P to enter into Transaction 1 was a fraud and/or fraudulent breach of the fiduciary duty” owed to P. Further, it was also a “fraudulent breach of trust” on the part of the defendants.[29]

AS TO (1): WHETHER FRAUD HAS BEEN PLEADED

Relevant legal principles

13.  I start by considering what a cause of action means.  As per the following dictum of Diplock LJ (as he then was) in the oft-quoted case of Letang v Cooper,[30]

“A cause of action is simply a factual situation the existence of which entitles one person to obtain from the court a remedy against another person.”

In Paragon Finance plc v DB Thakerar & Co,[31] Millett LJ (as he then was) said,

“The classic definition of a cause of action was given by Brett J in Cooke v Gill (1873) LR 8 CP 107 at 116: ‘“Cause of action” has been held from the earliest time to mean every fact which is material to be proved to entitle the plaintiff to succeed, - every fact which the defendant would have a right to traverse.’ (my emphasis) ... I do not think that Diplock LJ [in Letang v Cooper] was intending a different definition from that of Brett J.”[32]

14.  It is well‑established that a cause of action based on fraud has to be distinctly alleged and distinctly proved.  Therefore, if the facts pleaded are consistent with innocence it is not open to the Court to find fraud.  An allegation that the defendant “knew or ought to have known” is not a clear and unequivocal allegation of actual knowledge and will not support a finding of fraud even if the Court is satisfied that there was actual knowledge.  An allegation that the defendant had actual knowledge of the existence of a fraud perpetrated by others and failed to disclose the fact to the victim is consistent with an inadvertent failure to make disclosure and is not a charge of fraud.  It will not support a finding of fraud even if the Court is satisfied that the failure to disclose was deliberate and dishonest.  Where it is expressly alleged that such failure was negligent and in breach of a contractual obligation of disclosure, but not that it was deliberate and dishonest, there is no room for treating it as an allegation of fraud.  See Paragon Finance plc v D B Thakerar & Co.[33]  For the rationale behind this rule, see ADS v Wheelock Marden & Co Ltd.[34]

15.  In order to engage s 20(1)(a) of the Limitation Ordinance, there has to be a cause of action based on fraud or fraudulent breach of trust to which the trustee was a party or privy.  For that purpose, the expressions “trust” and “trustee” include “constructive trust” and “constructive trustee”.  However, it is noted by Millett LJ in Paragon Finance that the expressions “constructive trust” and “constructive trustee” have been used by equity lawyers to describe two entirely different situations:

(i)     The first covers those cases where the defendant, though not expressly appointed as trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the plaintiff.

(ii)    The second covers those cases where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff.

It was held that s 20(1)(a) applies to (i) above but not (ii).  The judgment of Millett LJ in Paragon Finance was explained in Secretary for Justice v Hon Kam Wing & Ors[35] where Deputy Judge Barma (as he then was) said the distinction between the two classes should bear some relation to the reasoning for denying trustees the benefit of limitation periods, in that the trustee was never in possession of a right of his own but rather for and on behalf of the beneficiaries.  Thus, it is important to consider whether or not the alleged constructive trustee was someone who held the property for the benefit of some other person, in whom the equitable ownership of the property vested.

16.  As to what constitutes a fraudulent breach of trust, Millett LJ in Armitage v Nurse[36] noted that a deliberate breach of trust is not necessarily fraudulent.  As regards the expression “actual fraud”, his Lordship said,

“I accept the formulation put forward by Mr Hill on behalf of the Respondents which (as I have slightly modified it) is that it

‘connotes at the minimum an intention on the part of the trustee to pursue a particular course of action, either knowing that it is contrary to the interests of the beneficiaries or being recklessly indifferent whether it is contrary to their interests or not.’

It is the duty of a trustee to manage the trust property and deal with it in the interests of the beneficiaries. If he acts in a way which he does not honestly believe is in their interests then he is acting dishonestly. It does not matter whether he stands or thinks he stands to gain personally from his actions. A trustee who acts with the intention of benefiting persons who are not the objects of the trust is not the less dishonest because he does not intend to benefit himself.” (Emphasis supplied)

Furthermore, his Lordship added,

“In order to allege fraud it is not sufficient to sprinkle a pleading with words like “willfully” and “recklessly” (but not “fraudulently” or “dishonestly”).”[37]

17.  It has to be noted that whether a person’s conduct was accompanied by a certain state of mind (e g dishonesty) is essentially a question of fact.  In the absence of an admission from the person concerned, that fact is usually proved inferentially by circumstantial evidence including what he said and done prior to and after the conduct in question.  It is not necessary for a claimant to use the word “fraud” or “dishonesty if the facts which make the conduct complained of fraudulent are pleaded.[38]  What is important is that the defendant is distinctly informed by the claimant’s pleadings that he is being alleged of fraudulent or dishonest conduct.  Thus, Lord Millett said in Three Rivers District Council & Ors v Bank of England (No 3):[39]

“As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference.”

However, it is also important to note “a more subtle point” made by Lord Hope who was in the majority in Three Rivers District Council:[40]

“Of course, the allegation of fraud, dishonesty or bad faith must be supported by particulars. The other party is entitled to notice of the particulars on which the allegations is based. If they are not capable of supporting the allegation, the allegation itself may be struck out. But it is not a proper ground for striking out the allegation that the particulars may be found, after trial, to amount not to fraud, dishonesty or bad faith but to negligence.”

18.  It is well‑settled that directors are to be regarded, for the purpose of s 20(1) of the Limitation Ordinance as trustees in respect of the property of the companies of which they are directors, and as such, claims against them by the company for fraud or fraudulent breach of trust are not subject to any limitation period.  In Paragon Finance, in the course of explaining why, historically, trustees were not able to assert any period of limitation against their beneficiaries, Millett LJ pointed out that: [41]

“The rule did not depend upon the nature of the trustee’s appointment, and it was applied to trustees de son tort and to directors and other fiduciaries who, though not strictly trustees, were in an analogous position and who abused the trust and confidence reposed in them to obtain their principal’s property for themselves. Such persons are properly described as constructive trustees.”

19.  Thus, in Peconic Industrial Development Ltd v Lau Kwok Fai,[42] Lord Hoffman NPJ said:

“18. The terms “trust” and “trustee” are defined to extend to constructive trusts: s.2(1) and s.2 of the Trustee Ordinance (Cap. 29). It is accepted that, within this extended definition, a director of a company is a trustee in relation to its assets. So the action against Chio was an action by a beneficiary in respect of his fraudulent breach of trust and no limitation period applied. ...” (Emphasis supplied)

This is because a director had “trustee‑like responsibilities” in the exercise of the powers of management of the property of the company and in dealing with the application of its property for the purposes, and in the interests, of the company and of all its members.  Accordingly, the claim for an account, if it was based on a failure in the exercise of those responsibilities, was within the scope of s 20 and subject to a six‑year time-limit unless it was excluded under s 20(1)(a) and (b): see Gwembe Valley Development Co Ltd (in receivership) and Anor v Koshy & Ors (No 3).[43]  See also Akai Holdings Ltd (in comp liq) v Everwin Dynasty Ltd.[44]

20.  I note that in Cia de Seguros Imperios v Heath (REBX) Ltd,[45] a case relied upon by Mr Hui, it was held that a claim for damages against a dishonest breach of fiduciary duty is still subject to time limitation by analogy with a claim of damages for breach of contract or a breach of duty in tort.  I note, however, that that case is not about trustee or directors and is not a case on the English equivalent of s 20(1) of the Limitation Ordinance.

Applying to the present case

21.  Mr Hui submitted that the facts relied upon by P listed above are also consistent with the defendants being incompetent or negligent, so that the allegation in CS in its unamended form is not distinct enough to constitute a plea of fraud or fraudulent breach of trust.  Mr Hui also submitted that there is no assertion that D1 and D2 were aware of the prevailing market price of Grandtop at the time.

22.  With respect, I am unable to accept the above submissions.  Applying the aforesaid legal principles to the present case, in my judgment CS in its originally form has already included or implied in it a distinct case of fraud or fraudulent breach of trust against D1-D3.  My reasons are as follows:

(a)  there is an explicit assertion that the defendants, as P’s only executive directors, owed to it a fiduciary duty;

(b)  there is also an explicit allegation of fraud and/or fraudulent breach of the fiduciary duty” as well as an explicit allegation of “fraudulent breach of trust” against the defendants.  I am alive to the principle that a mere allegation of “fraud” without sufficient particulars will not do: see Three Rivers DC v Bank of England.[46] However, what constitute sufficient particulars in a particular case is a matter of degree and must necessarily be case-specific;

(c)  the aforesaid allegations are preceded by a set of alleged facts, namely that D1 and D2 had caused P to acquire from private channels the 2.2 million Grandtop shares, at a price which was grossly in excess of the prevailing market price then trading on SEHK and in circumstances where there was no likelihood of a rebound of the market price and without any justifications for the transaction;

(d)  have not ignored the fact that references are made in SC to what the defendants said when they were interviewed by the Securities and Futures Commission (“SFC”) back in 2005.  I note in particular that D1 had said he did not know about the difference in price of the Grandtop shares set out above.  As regards D2, I note that she told SFC that her practice was just to append her signature to whatever D1 had signed without asking anything.  However, it is obvious that P is only recounting what D1 and D2 had told the SFC without accepting the truth of what they said at face value.  Otherwise, P would not have said that:

“based on the matter pleaded hereinabove, the 1^st, 2^nd and 3^rd Defendants at the material time either knew ... or did not honestly believe ... or being recklessly indifferent ... [as to] whether it was contrary to the Plaintiff’s interest to do so”;

(e)  on the other hand, one would expect that the defendants, having been P’s executive directors for many years, would have known that they owed to P a fiduciary duty to act in its best interests.  Hence, a plain and ordinary reading of the allegation in quote above carries with it the obvious imputation that the defendants were at the very least aware of the serious risk that the shares they were then causing P to acquire would not be worth the amount what P was going to pay and yet they went ahead regardless; 

(f)  the assertion that the defendants “either knew ... or did not honestly believe ... or were recklessly indifferent” as to whether it was contrary to P’s interests to acquire the Grandtop shares[47] follows closely the formulation of “fraud” approved by Millett LJ in Armitage v Nurse;

(g)  applying Peconic Industrial Development Ltd v Lau Kwok Fai, as a matter of law the defendants, as the only executive directors of P at the material period of time, were treated as trustees in respect of P’s property; and

(h)  thus, reading the original pleadings relating to Transaction 1 as a whole and following the decision of the majority in Three Rivers DC v Bank of England,[48] I am satisfied that there is an unequivocal plea that the defendants had acted fraudulently and that sufficient particulars have been provided in support which are capable of proving the fraud or fraudulent breach of trust alleged.  In my view, the allegations in SC in its original form are not consistent with innocence, negligence or even gross negligence.  Any question as to whether the evidence points to innocence or negligence rather than to fraud is a matter which has to be judged not on the pleadings, but on the evidence, which is a matter for decision by the trial judge.

AS TO (2): THE RELEVANT AMENDMENTS

23.  It is noted that many of the proposed amendments are cosmetic in nature.  The more substantial parts of the relevant amendments, however, are as follows:

(i) at §10(a),

" ... and that that information was deliberately and dishonestly concealed from the Plaintiff and its members";

(ii) at §10(d),

“The Plaintiff asserts that the bought and sold notes evidencing the acquisition of the shares by the Plaintiff and the minutes of the Board of Directors Meeting dated 22^nd December 2003 falsely and deliberately concealed from the Plaintiff and its members the true purchase price of the 2,200,000 Grandtop shares, because those two documents indicated a purchase price of HK$2.00 per share, when the actual purchase price was HK$2.90 per share";

(iii) at the new §12

“(a) The Plaintiff repeats paragraph 3(d) pleaded hereinabove and alleged that the acquisition of the Grandtop shares was not consistent with and in fact was contrary to the representations in the Prospectus that the investment portfolio of the Plaintiff should be balanced and investments should be in high‑quality listed equity securities from the worldwide stock markets.

(b) The Plaintiff’s investment in Grandtop shares represented about 99%of its investment portfolio in listed equity securities up to 31^st March 2006.”

(iv) at the new §13(a),

“ ... was fraudulent and was”;

(v) at the new §13(c),

" ... and by inter alia, the preparation of (i) false bought and sold notes which falsely indicated that the purchase price of the shares was HK$2.00 per share, and (ii) minutes of a Board of Directors meeting dated 22^nd December 2003, which also indicated that the purchase price of the shares was HK$2.00 per share, ... and was patently misleading and in the circumstances amounted to dishonesty"; and

(vi) at the new 13(f),

“as each of the 1^st, 2^nd and 3^rd Defendants was regarded as a trustee or otherwise their positions were analogous to positions of trustees in relation to the assets of the Plaintiff as pleaded in paragraph 5(a)[49] above”

24.  It is Mr Hui’s submission that the above proposed amendments raise a new claim of fraud, in particular a new claim of “fraudulent and dishonest concealment” which has not been pleaded before.  It is also submitted that the new claim is self‑contradictory and therefore “bound to fail”.  This is because, according to P’s own case, the actual purchase price of the Grandtop shares had actually been disclosed in an undated internal accounting records prepared by D3 and in its annual report. It is submitted, therefore, that leave to amend should not be granted.

25.  Having considered Mr Hui’s submission, in my view item (iii) is not objectionable as it only serves to provide further particulars to support P’s original case that the defendants had acted dishonestly in the share acquisition.  This is because a trier of fact may draw an inference of dishonesty if he finds that the defendants must have been aware of P’s published policy on investment and they had deliberately departed from that policy in the transaction in question which was apparently a major investment.

26.  As regards item (iv) above, since I have already ruled that CS in its original form has already included or implied in it a case of fraud or fraudulent breach of trust by the defendants, I can see no valid objection to add the word “fraudulent” to that paragraph so as to make the allegation more explicit.

27.  As regards items (vi), it is just an application of the statement of law in Gwembe Valley Development Co Ltd (in receivership) and Anor v Koshy & Ors (No 3).

28.  More problematic, however, is whether the other items concerning “dishonest concealment” do raise a new cause of action or whether they are no more than adding new particulars to the fraud or fraudulent breach of trust already been pleaded.  In Chan Sik Pan v Wylam’s Services Ltd (CA),[50] which was about an industrial accident, the plaintiff’s original cause of action was that the defendants were in breach of their duty as employer and negligent in failing to provide and maintain safe tools.  After the time limitation had expired, the plaintiff sought to add two new allegations, namely failure to provide a safe work place and breach of statutory duty.  The Court of Appeal held that the new allegation of failure to provide a safe work place was no more than adding new particulars to the breach of employer's duty and negligence already alleged in the statement of claim and therefore the question of limitation did not arise.  However, the allegation of a breach of the statutory duty was different in that it was a new cause of action, the limitation period for which had long expired before the trial started and therefore the trial judge was wrong in allowing the plaintiff to add by way of amendment that cause of action.  However, he was right in so far as he allowed the amendment relating to the duty of care of an employer at common law.

29.  In the present case, as discussed above the original case regarding Transaction 1 is that the defendants had caused P to acquire through private channels the Grandtop shares at a price which was grossly in excess of the prevailing market price then trading on HKSE and in circumstances which rendered it dishonest on the part of the defendants to do so.  If the factual allegations relating to the making of misleading and false documents are just further particulars provided in support of the original case that the defendants had acted dishonestly in the share acquisition, then I can see no valid objection to their inclusion in CS.  On this limited basis, I would allow item (v).

30.  However, in my view items (i) and (ii) go further than just supporting P’s original case of dishonesty.  This is because in P’s Supplemental Skeleton Submissions, Ms Chan says:[51]

“In causing the Plaintiff to pay more than the market price, not informing the shareholders, and deliberately and fraudulently concealing the fact from the shareholders, it is the Plaintiff’s case that the Ds have committed, inter alia, both a fraudulent breach of trust and fraud.”

Thus, P is saying that the allegation of “fraudulent/dishonest concealment” as contained in items (i) and (ii) is not just evidence of the defendants’ dishonesty but is an aspect of their fraudulent breach of fiduciary duty and fraud.  It is well-established that in case of fraudulent concealment of a material fact by a fiduciary, the party to whom the duty of disclosure is owed and suffered loss by reasons of the breach may recover damages for that loss in the tort of deceit: Conlon & Anor v Simms.[52] As such, the allegation of “fraudulent/dishonest concealment” in question is tantamount to an allegation of deceit which entitles P to damages. 

31.  However, the allegation of “fraudulent/dishonest concealment” as a form of deceit has been patently absent from P’s original pleaded case of fraud or fraudulent breach trust, the essence of which is only that the defendants had dishonestly misapplied P’s money in the acquisition of Grandtop shares.  Therefore, in my view items (i) and (ii) do raise a new cause of action.

32.  As regards Mr Hui’s contention that the new cause of action of “fraudulent/dishonest concealment” is “bound to fail” as being self‑contradictory, however, with respect I am unable to agree.  This is because:

(a)  whether or not the new claim of “concealment” is in fact inconsistent with the revelation of the undated internal accounting records of P[53] depends on how the latter had come into existence, how it had been kept and what use, if any, had been made of it by the defendants, all these depends on a consideration of the relevant evidence which is a matter for the trial judge;

(b)  although the total amount of P’s investment in securities was reported in its annual report, the annual report did not indicate the names of the company or companies and the prices at which the securities were purchased;[54] and

(c)  the material already available to P provides reasonable ground for thinking that they may be able to advance their case by the cross-examination of the defendants.[55]

In short, the strength of the new claim of “fraudulent/dishonest concealment” would depend on the evidence and therefore is not a matter that this court can decide at this stage.  The fact that fraud had not been pleaded in CarecraftProcedure,[56] which was disposed of summarily based on an agreed schedule of facts, is neither here nor there. 

33.  Based on the above, in my ruling the allegation of “fraudulent/dishonest concealment” as contained in (i) and (ii) above does raise a new cause of action.  Therefore, they should not be permitted unless they fall within O 20, r 5(5), RHC.

AS TO (3): ARISING OUT OF SAME FACTS OR SUBSTANTIALLY THE SAME FACTS

34.  In Welsh Development Agency v Redpath Dorman Long Ltd,[57] it is said that:

“whether or not the new cause of action arises out of substantially the same facts as that already pleaded is substantially a matter of impression.”

35.  With respect, a perhaps more instructive approach can be found in Ng Kam Chuen v Attorney General.[58]  In that case, Deputy Judge Patrick Chan (as he then was), following Grewal v National Hospital for Nervous Diseases & Anor (CA)[59] and Sayer v Kingston & Esher Health Authority (CA),[60] held that the court in determining the issue should consider what facts would have to be investigated on the original statement of claim and what facts would have to be investigated on the amended statement of claim.  Having obtained two series of facts from these two considerations, the court should ask itself whether the two were the same or substantially the same.

36.  Applying Ng Kam Chuen’scase to the present case, I am satisfied that P’s original cause of action (one of dishonest misapplication of company property) and the new cause of action (fraudulent/dishonest concealment of the misapplication of company property) arise out of the same or substantial the same facts.  My reasons are as follows:

(a)  the two causes of action have the same factual origin and are about the same transaction of P;

(b)  potential witnesses of the original cause of action would inevitably give evidence on the bought and sold notes, the minutes of the Board of Directors authorising the purchase, the undated internal accounting records and the relevant part of the annual report about P’s investment on securities, which are also the subject documents of the new cause of action; and

(c)  as aforesaid, the fact (if proved) that the defendants had attempted to conceal the actual purchase price of the Grandtop shares from the shareholders would be relevant to and in fact an important piece of evidence of them having acted dishonestly in the transaction.

37.  I conclude therefore that the condition in O 20 r 5(5), RHC is met in the present case in that the new cause of action (fraudulent/dishonest concealment by directors of their own dishonest conduct) arises out of the same or substantially the same facts as the original one (fraud or fraudulent breach of trust by directors as trustees).

AS TO (4): ABSENCE OF ALLEGATION OF FRAUD IN IS

38.  In IS, P has only pleaded the following causes of action:

(a)  misfeasance, misconduct and defalcation[61] in relation to the business and affairs of the Company;

(b)  mismanagement of the Company money;

(c)  breach of fiduciary duties; and

(d)  breach of duty of care.

39.  Corresponding to the proposed amendments to SC, P now also seeks to amend IS by:

(1)  adding

“deliberate concealment by them of the facts concerning the Company’s investments, from the Company and its members”

(2)  changing “breach of fiduciary duties” to

“fraudulent breach of fiduciary duties owed by them to the Company and because their position as executive directors were analogous to that of trustees, constituting fraudulent breach of trust”

40.  Mr Hui submitted that the relevant amendments to SC should not be allowed as they have not been contained in IS in its unamended form.  However, Mr Hui did not cite any direct case authority in support of his proposition and he simply sought to rely on what he described as “the general principles” of pleadings.

41.  With respect, I am unable to accept the above submissions of Mr Hui.  My reasons are as follows:

(i) a general indorsement on the writ consists only of “a concise statement of the nature of the claim made or the relief or remedy required in the action begun thereby”: see O 6, r 2(1)(a), RHC; and

(ii) as a general rule, a plaintiff is permitted in his subsequent statement of claim to alter, modify or extend his original claim and to claim further or other relief without amending his writ provided that the new cause of action arises from facts which are the same as, or include or form part of, facts giving rise to a cause of action mentioned in the writ.  A defect in a writ may, therefore, be cured by a proper statement of claim which may operate in the same way as the obtaining of leave to amend: see Hill v Luton Corp;[62]see also HKCP at §18/15/7.

42.  My attention has also been drawn by Mr Kong and Ms Chan to Phelps v Spon‑Smith & Co (a firm),[63] where it was held that there was jurisdiction to grant leave to amend the writ outside the limitation period when the result of doing so was merely to regularize claims already made before the expiry of the limitation period.  The effect of that judgment would be that the absence of a cause of action in the general indorsement is not bar to a claim of relief based on that cause, if it had already been pleaded in the statement of claim.

AS TO (5): DISCRETION

43.  Mr Hui submitted that this court should exercise its discretion by refusing leave to amend on the grounds that (i) insufficient particulars of fraud have been pleaded; and (ii) the new fraud claim is self‑contradictory and bound to fail.

44.  Again, I am unable to accept Mr Hui’s submissions.  As regards (i), I have already ruled that P has already pleaded a distinct case of fraud or fraudulent breach of trust by the defendants.  I do not see that, if leave to amend was granted, the state of P’s pleadings would prejudice D1 and D2 in advancing any arguments available to them.  However, if D1 and D2 consider that there is a need for further and better particulars, it is a matter for them to consider making the relevant application.

45.  As regards (ii), I have already ruled that whether the new fraud claim (fraudulent/dishonest concealment) is in fact contradictory to P’s original case would require a detail consideration of all the relevant evidence which is not a matter of present concern but a matter within the province of the trial judge.  Based on the limited material before me, I do not agree that the new fraud claim is bound to fail.

46.  Lastly, I have considered the matter in the round.  I do not see any prejudice to D1 and D2, should leave to amend be granted, which cannot be compensated by costs.

CONCLUSION

47.  P is granted leave for the proposed amendments to SC and IS.  I also grant leave to the defendants to file amended defence within 21 days of this judgment, if so advised.

COSTS

48.  I make an order nisi that:

(i) D1 and D2 have the costs of the application and the consequential amendments in any event, to be taxed if not agreed; and

(ii) the costs of the hearing be costs in the cause.

	(Alex Lee)
	Deputy High Court Judge

Mr Hatten Kong and Ms Candy Chan instructed by M.M. Wong & Co, for the plaintiff

Mr John Hui and Mr Jonathan Chan instructed by Cheung & Yip, for the 1^st and 2^nd defendants

Tang & So, for the 3^rd defendant (attendance excused)