CHAN KAI YAN AND ANOTHER v. LEUNG CHI KIT AND OTHERS

HCA 1357/2012

[2023] HKCFI 2410

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1357 OF 2012

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AND

HCA 2498/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2498 OF 2014

________________________

________________________

(Heard together)

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DECISION
(EXPERT EVIDENCE)

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A.  Introduction

1.  These two actions – HCA 1357/2012 (“1357”) and HCA 2498/2014 (“2498”) – together with and related third-party proceedings (“TPP”) are fixed for trial to be heard by me, over 24 days in January and March 2024.

2.  On 21 September 2023, I heard the PTR, and made various directions for preparation for and the conduct of the trial.  I do not need to repeat those directions here – not least because I think I am still awaiting the draft order to be drawn up in accordance with my oral directions and submitted for my approval.

3.  However, one contentious issue was reserved by me for decision, relating to a matter of expert opinion evidence.

4.  This is my Decision on that issue.

B.  Summary of Cases

5.  In a previous decision, I gave the following summary of the cases, which the parties have accepted as sufficient for present purposes.

6.  2498 was commenced in late 2014, and is a claim brought by two plaintiffs against six defendants.  The plaintiffs are Chan and To (as the widow and administrator of the estate of Chiu).  The defendants are Leung (as D1), Shiu (as D2), Ng (as D3), Wong (as D4), Choi (as D5) and Sun Hing (as D6).  I refer to D1, 2 & 5 together as “D125”.  All of the individual parties, i.e. except Sun Hing, were the only shareholders and directors of a company, Lucky Ford Industrial Limited (“Lucky Ford”).

7.  Lucky Ford was used as a corporate vehicle to acquire a building in Mong Kok for redevelopment into a shopping mall.  The plan was to sell the individual shops in the mall for a profit, which could then be distributed as dividends by Lucky Ford.  A Shareholders Agreement was entered into on 4 September 2006 providing, amongst other things, for: (1) the allocation of dividends (after taking into account various expenses and shareholder loans); and (2) the sale of 10 shops by Lucky Ford to Chan and Chiu for HK$19,708,420, on condition that Lucky Ford loan that sum to them (and for which purpose a separate Loan Agreement between Lucky Ford and Chan and Chiu was entered into).

8.  However, no dividends were distributed.  The central dispute in the proceedings is as to why no dividends were distributed.

9.  The plaintiffs contend that the other shareholders misappropriated Lucky Ford’s monies, and/or failed to procure Lucky Ford to distribute its profits, and deliberately concealed the financial affairs of Lucky Ford by maliciously causing Lucky Ford not to prepare any audited accounts or to file tax returns, so that no dividends could be distributed to the plaintiffs.  There is also a claim that all six defendants conspired to create a false pretence that Lucky Ford had suffered a loss.

10.  D125 contend that there were no profits, because the project’s expenses exceeded its revenue.  They also plead that audited financial statements would have been ready, but for the fact that Lucky Ford was wound up on the plaintiffs’ petition, and that the Shareholders Agreement was unenforceable for seeking to provide for an unlawful or unauthorised return of capital to shareholders, as if on a winding up but without making proper provision for its creditors.

11.  Lucky Ford was wound up on 29 October 2012, upon the plaintiffs’ petition, and liquidators were appointed.

12.  However, before its winding up, Lucky Ford sold the sums due under the Loan Agreement to Sun Hing.  On 1 August 2012, Sun Hing commenced 1357 against Chan and To for repayment.  Chan and To’s defence is that the loan was “notional”.  Consequently, Lucky Ford was joined as the third defendant in 1357 on the basis that, if the loan was notional, then Lucky Ford had misrepresented its validity.

13.  In turn, Lucky Ford (by its liquidators) commenced the TPP against Chan and Chiu’s nominee companies, seeking return of the 10 shops.  The TPP as against the nominees was dismissed when Lucky Ford failed to comply with an order to pay security for costs.  The TPP were also brought against Leung and Shiu as the directors behind any misrepresentation made by Lucky Ford.

14.  Though 2498 names Ng and Wong as D3 and D4 respectively, the proceedings were not in fact joined against them.  Ng has since passed away in 2020.  Wong was never served with the proceedings, apparently on the basis that he could not be located for effecting service on him.  Attempts to extend the validity of the writ, or to affect substituted service on Wong, were disallowed by the Court.  But, following a previous decision of mine, Wong will give evidence at the trial.

C.  The Expert Evidence Issue

15.  This issue concerns only Chan and To on the one hand, and D125 on the other.  By the time of the PTR, To had filed a notice to act in person and made no separate submissions, but I shall treat Chan and To as having the same position on this issue.

16.  Chan and To applied in 1357 for expert evidence directions, which were in due course made by the Master on 25 October 2018. The ensuing expert report dated 2 May 2019 was served on the parties including D125.

17.  No directions were sought or made in 2498. Therefore, I do not think Ms Lau’s suggestion that “it so happened that the Master did not separately make direction” for the other action is accurate.

18.  Nevertheless, I accept from Ms Lau that in the former case management hearings (CMS and CMC), the various hearings dealt with both actions together.  It may also be that the solicitors for D125 confirmed to the Master that D125 would not seek to adduce expert evidence in response (though quite what that might have meant is perhaps open to interpretation).

19.  Ms Lau also points to the fact that at the last long trial case management hearing, the proposal was made to hear evidence of factual witnesses in January and the expert evidence in March, to which the Court agreed.

20.  Ms Lau submits that, despite the fact that D125 were well aware that Chan and To would rely on the expert evidence in 2498, they never suggested that they would adduce expert evidence.  Hence, she suggests that it is for D125 to issue a summons to seek to adduce expert evidence, if they wish to adduce it in 2498.  She also suggests that if leave is given to D125 to adduce expert evidence, then Chan (and To) should be allowed to prepare an expert report in response.

21.  But I think these points misunderstand the submissions made by Mr Kwok.  I do not think he was separately suggesting that D125 wanted to file expert evidence in 2498.  Rather, he was saying that D125 oppose the suggestion that the expert evidence filed in 1357 – and originally sought to be filed only in 1357 – should be allowed to stand for use in 2498; but, if that expert evidence is allowed to be used by Chan and To in 2498, then D125 should be given the opportunity to file evidence in response.

22.  Mr Kwok also points out that, whatever was or was not said by the solicitors for D125 at the case management hearings, D125 simply had no reason to file any expert evidence in response to that filed by Chan and To in 1357, because D125 are not parties to that action.  Indeed, Mr Kwok points out, the expert report itself expressly states that it is solely for the use of the solicitors for Chan and To in 1357, pursuant to the Master’s order, and that the report was filed as part of Chan and To’s defence to Sun Hing’s claim (and to Lucky Ford’s now gone claim against the nominee companies in the TPP).

23.  Mr Kwok also submits that, if the expert report is admitted for use in 2498, D125 would have to seek leave to file their own expert evidence in opposition.  But, he says, it is unclear whether they would be able to find an expert in the time remaining before the trial. Further, there might be disruption to trial preparations, which would also be unfair and unsatisfactory.  Mr Kwok also submits that the trial length might be affected.

24.  I see considerable force in those submissions. However, Mr Kwok accepted at the hearing that the expert report is relevant to an issue which has commonality between 1357 and 2498, namely what funds were available to Lucky Ford as might have been used for declaring dividends.  Indeed, I have already identified as one of the central issues the dispute as the reason why no dividends were distributed.

25.  It also seems to be that what likely has happened as regards prior case management is that neither Chan and To nor D125 really addressed their minds to the overall effect of hearing the two actions and the TPP together, and what that might mean as regards any expert evidence. I suspect that the necessary focus has only come into being in advance of the PTR.

26.  In the end – somewhat unsatisfactory as it may be on the timing at this juncture – it seems to me only fair and appropriate that the expert evidence going to that question is available in both actions. Where the parties have agreed that the factual evidence in one action should stand in the other, it also seems to me to be appropriate that the expert opinion evidence which to some extent stands on that factual evidence, should also stand in both actions.

27.  I take into account that the expert evidence would only be dealt with in the second tranche of the trial, namely in the dates set aside in March 2024.  As a result, there are several months for D125 to obtain an expert report, and there ought to be sufficient time for the experts to get together to seek to narrow the issues between them.  There may well be additional cross-examination at trial which was not in mind when the trial dates were fixed.  However, I think the dates set aside will comfortably permit that additional evidence.

28.  Therefore, in accordance with my case management discretion, I give the appropriate directions under Order 38 rule 4A for the expert opinion evidence already provided in 1357 to stand also as evidence in 2498.  I give leave to D125 to adduce their own expert opinion evidence in response, that evidence also to stand in both actions.

29.  I invite the parties to agree an appropriate timetable for the production of expert evidence, and meetings between experts, and the provision of a joint report identifying what is agreed and disagreed (and the brief explanation of the reason for disagreement).  In the circumstances, the timetable should be on the generous side to D125 to permit the production of their expert evidence report.

30.  If the parties are unable to agree an appropriate timetable, I will set one.

31.  I will reserve the question of costs on this issue, including as to the costs of the argument leading to this Decision.

HCA 2498/2014

[2023] HKCFI 2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2498 OF 2014

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________________________

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D E C I S I O N

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A.  Introduction

1.  This action (“2498”) was commenced in late 2014.  The PTR is fixed for 21 September 2023, around 7 weeks from now.  Trial dates have been fixed for it to be heard, together with HCA 1357/2012 (“1357”) and related third-party proceedings (“TPP”), over 24 days in January and March 2024, so starting around 5 months from now.    The PTR and the Trial are fixed to be heard by me.

2.  2498 is a claim brought by two plaintiffs against six defendants.  The plaintiffs are Chan and To (as the widow and administrator of the estate of Chiu).  The defendants are Leung (as D1), Shiu (as D2), Ng (as D3), Wong (as D4), Choi (as D5) and Sun Hing (as D6).  I will refer to D1, 2 & 5 together as “D125”.  All of the individual parties, i.e. except Sun Hing, were the only shareholders and directors of a company, Lucky Ford Industrial Limited (“Lucky Ford”).

3.  A helpful and succinct summary of the matters giving rise to the relevant claims has been provided by Mr Eugene Kwok, Counsel for D125, which – with some adaption, and with some additional parts of the summary taken from the submissions of Ms Lorinda Lau, Counsel for the plaintiffs – I can adopt for present purposes.

4.  Lucky Ford was used as a corporate vehicle to acquire a building in Mong Kok for redevelopment into a shopping mall.  The plan was to sell the individual shops in the mall for a profit, which could then be distributed as dividends by Lucky Ford.  A Shareholders Agreement was entered into on 4 September 2006 providing, amongst other things, for: (1) the allocation of dividends (after taking into account various expenses and shareholder loans); and (2) the sale of 10 shops by Lucky Ford to Chan and Chiu for HK$19,708,420, on condition that Lucky Ford loan that sum to them (and for which purpose a separate Loan Agreement between Lucky Ford and Chan and Chiu was entered into).

5.  However, no dividends were distributed.  The central dispute in the proceedings is as to why no dividends were distributed.

6.  The plaintiffs contend that the other shareholders misappropriated Lucky Ford’s monies, and/or failed to procure Lucky Ford to distribute its profits, and deliberately concealed the financial affairs of Lucky Ford by maliciously causing Lucky Ford not to prepare any audited accounts or to file tax returns, so that no dividends could be distributed to the plaintiffs.  There is also a claim that all six defendants conspired to create a false pretence that Lucky Ford had suffered a loss.

7.  As an aside, it can be noted that the original claim commenced by the plaintiffs in 2498 was struck out for being a claim for reflective loss.  The current claim was made by way of amendment.

8.  D125 contend that there were no profits, because the project’s expenses exceeded its revenue.  They also plead that audited financial statements would have been ready, but for the fact that Lucky Ford was wound up on the plaintiffs’ petition, and that the Shareholders Agreement was unenforceable for seeking to provide for an unlawful or unauthorised return of capital to shareholders, as if on a winding up but without making proper provision for its creditors.

9.  Lucky Ford was wound up on 29 October 2012, upon the plaintiffs’ petition, and liquidators were appointed.

10.  However, before its winding up, Lucky Ford sold the sums due under the Loan Agreement to Sun Hing.  On 1 August 2012, Sun Hing commenced 1357 against Chan and To for repayment.  Chan and To’s defence is that the loan was “notional”.  Consequently, Lucky Ford was joined as the third defendant in 1357 on the basis that, if the loan was notional, then Lucky Ford had misrepresented its validity.

11.  In turn, Lucky Ford (by its liquidators) commenced the TPP against Chan and Chiu’s nominee companies, seeking return of the 10 shops.  The TPP were also brought against Leung and Shiu as the directors behind any misrepresentation made by Lucky Ford.

12.  Though 2498 names Ng and Wong as D3 and D4 respectively, the proceedings were not in fact joined against them.  Ng has since passed away in 2020.  Wong was never served with the proceedings, apparently on the basis that he could not be located for effecting service on him.  I am also told by Ms Lau that attempts to extend the validity of the writ, or to affect substituted service on one, were disallowed by the Court.

13.  The current application is made by D125, and seeks leave for them to rely at trial on (1) a witness statement of Wong (“Wong’s Statement”), and (2) the 68 documents (“Documents”) annexed to Wong’s Statement.  The latter point is not so controversial.

14.  I previously gave directions for the filing of evidence, and to bring the matter on for hearing today.

15.  This is my Decision.

B.  Wong’s Statement

16.  After the Lucky Ford project, D125 lost contact with Wong – who apparently was made bankrupt and left Hong Kong to seek opportunities in Cambodia.  They were, therefore, surprised when on 27 April 2022 Lucky Ford applied to adduce Wong’s Statement in 1357 and the TPP.

17.  D125 consider Wong’s Statement to be relevant to their defence in 2498, hence the current application.  Originally, it seems that D125 intended to await the outcome of Lucky Ford’s application to adduce Wong’s Statement (which they expected to be granted) and then to seek directions for leave to rely on it and the Documents in 2498 (on the basis that 2498 is to be tried together with 1357 and the TPP).

18.  The correspondence between solicitors for Lucky Ford and the plaintiffs did not reach agreement as to the terms upon which Wong’s Statement might be used in 1357 and the TPP.  Therefore, once the trial date had been fixed, the solicitors for D125 contacted Wong (through the solicitors for Lucky Ford) and sought his agreement to testify on their behalf in 2498. He agreed.

19.  On 24 March 2023, D125 sought to establish whether the other parties would object to Wong’s Statement and the Documents.  In the absence of a response, the current application was issued.  Solicitors for Sun Hing have since indicated that their client has no objection to the application.  The plaintiffs now oppose the application.

C.  Applicable Principles

20.  I think the principles applicable on application of this nature are relatively straightforward, and can be stated without lengthy reference to authority:

(1)  It is trite that, in general, a party is entitled to call the oral evidence of witnesses who that party thinks will assist in the presentation of his case.  Indeed, it is a feature of the adversarial system that – albeit subject to admissibility and relevance, and any procedural requirement – a party is generally at liberty to call or adduce whatever evidence he considers necessary and appropriate.

(2)  Introductory applications in general – including applications to deploy witness statements – should ordinarily be disposed of before the PTR.  Thereafter, such an application can be considered ‘late’.

(3)  If an application to deploy a witness statement is brought within time, the Court’s role is to provide a preliminary filter to ensure that the application is not an abuse of process and that the evidence relates to a cause or matter to which oral evidence is appropriate.  In general, that filter process does not require the Court to decide issues relating to the relevance of any evidence that may be given and its usefulness.

(4)  Even if the application is brought and can be disposed of before the PTR, it might in some circumstances – such as when trial is imminent, and trial preparation might be disrupted with consequent risks to milestone dates – nevertheless be considered as ‘late’.  Such an application will be closely scrutinised by the Court.

(5)  Depending on the materials, it may in some applications also be necessary to remember that it is the pleadings which define the issues to be resolved at trial and the scope of the relevant evidence, not the other way round.

(6)  If an application is clearly late, it may be dismissed on that basis of delay alone.  However, this is not a mechanical rule, and the Court will consider all the circumstances in making the decision.

(7)  It is important not to lose sight of what is the primary aim of the Court when exercising case management powers, which remains seeking to secure the just resolution of disputes in accordance with the substantive rights of the parties.

D.  Analysis

21.  I do not think this application turns on whether the application is regarded as ‘late’.  But I have taken into account its timing vis-a-vis the PTR and the trial.

22.  There does not seem to be any real dispute that Wong’s Statement (or at least most of it) is relevant to the issues to be determined at trial.  In my view, plainly it is.  Indeed, it might be thought that the very fact that the plaintiffs named Wong as an intended defendant identifies precisely that what he says will highly likely be relevant to the issues to be determined at trial.

23.  Ms Lau’s submission is really that, notwithstanding the relevance, allowing Wong’s Statement is not necessary because to do so would not prevent the just resolution of the issues, where D125 have already filed detailed pleadings and earlier witness statements, on which basis alone they agreed to have the case set down for trial, and in light of Au-Yeung J’s direction made on 7 June 2022 that all interlocutory application should be issued within 14 days thereafter.

24.  But, as Ms Lau herself points out, that was when it was understood by all involved that Wong was not going to be called as a witness.  That was because it was thought – apparently by the plaintiffs as well as by D125 – that Wong could not be located.  That position has changed, now that he has been located and has expressed agreement to give evidence at the trial.

25.  Further, I am not prepared to proceed on the suggestion made by Ms Lau that, contrary to their stated position on affirmation for the purposes of this application, D125 must in reality have been in contact with Wong over the years, not least because he has now agreed to act as their witness.  If that is a suggestion really pursued, it could be pursued (and realistically could only be resolved) at the trial.

26.  I also agree with Mr Kwok that there is little prejudice to the plaintiffs.  They have had Wong’s Statement since April 2022.  They have been dealing with it in the contact with the solicitors for Lucky Ford.  Even for the purposes of this application, the plaintiffs’ solicitors have been able to compile a detailed table comparing the content of Wong’s Statement with the other evidential materials already filed in the case.  The argument that Wong’s Statement is repetitive of some of those other materials seem to me to be a point which identifies even less prejudice.  Further, as Mr Kwok submits, it is neither unusual nor necessarily problematic that some parts of a witness statement overlap with the contents of another person’s witness statement.

27.  As to the point made by Ms Lau that some of Wong’s Statement deviates from, or even contradicts, D125’s pleaded case, that is a matter that can be dealt with at trial before a professional Judge.  In so far as it is said that there are inconsistencies between parts of Wong’s Statement and other evidence which will be produced by D125, it might even be thought that that is a matter which the plaintiffs would find of assistance to them at trial.

28.  I acknowledge the principle that lack of prejudice alone is not in itself a ground to grant an extension which is otherwise unjustified.  However, I do not think granting the extension in the current circumstances is otherwise unjustified.

29.  I do not think that allowing Wong’s Statement will jeopardise the trial dates, or even the PTR.  Nor will it realistically jeopardise the length of the trial, when Wong was originally intended to be a witness for Lucky Ford, and Lucky Ford’s TPP claim against some of the third parties has now been dismissed (as a result of the failure to provide the ordered security for costs).

30.  As to Ms Lau’s suggestion that it would be unfair for Wong to avoid the legal consequences of the claim against him by avoiding service of the writ, whilst at the same time acting as a witness for other defendants, it is trite that there is no property in a witness.  Further, the plaintiffs became aware in April 2022 that Wong had been located and was proposing to participate as a witness at the trial (at least in, but the natives have taken no steps even after that date to make Wong an actual defendant to the action.  That may be because as it happens, by then, the writ could no longer have been served on one, as its validity had long before expired.  So it is perhaps a fiction to suggest one could be a defendant, though I note Ms Lau suggests there may be other rules on which an application could be made for the purposes of serving Wong.

31.  I accept there is some force in Ms Lau’s point that the issues in 2498 are not the same as the issues in 1357, so that relying on the whole of Wong’s Statement in 2498 would mean that some irrelevant matters would be included.  However, I do not think that this is sufficient reason to shut out Wong’s Statement.  This is a matter easily and properly dealt with as a matter of case management at the trial.  In so far as it is necessary, appropriate directions could even be sought at the PTR – not least where, I think, there is as yet no direction that the evidence in either action would stand as evidence in the other.  As I have also already pointed out, the plaintiffs have been able to identify those parts of Wong’s Statement that they would say are irrelevant either to 2498, or potentially irrelevant to some part of 1357 or the TPP.

32.  Lastly, though Ms Lau has described D125 as having “sat on things”, I do not think it unreasonable in the circumstances for D125 first to have considered awaiting the outcome of Lucky Ford’s application to use Wong’s Statement, not least where there appeared to be some ongoing negotiation in correspondence between some parties as to which parts of that statement might be put in by agreement, or at least unopposed.  This is also some answer to Ms Lau’s point that Au-Yeung J ordered in June 2022 did all interlocutory applications should be issued within 14 days.  In any event, this does not seem to me to be a weighty factor against allowing Wong’s Statement.

33.  As to whether allowing Wong’s Statement really gives rise to any need for the plaintiffs to seek to reduce rebuttal materials, that seems to be a matter which can be considered further by the plaintiffs and if necessary raised at the PTR, perhaps by production of a draft witness statement for the consideration of the Court.

34.  As to what Mr Kwok has described as a “wrinkle”, in relation to the Documents, arising from the unless order made by the Master on 15 June 2021, I agree that it should not stand in the way of the use of either Wong’s Statement all the documents referenced in it.

35.  First, most if not all of the Documents have already been disclosed in the proceedings, and it seems that their use at trial is not really controversial.  Secondly, there is some force in the argument that the unless order as drafted is irregular.  Thirdly, and more importantly, if the sanction of an extension of time for applying for relief is necessary, it seems to me that the circumstances identify firmly the balance in favour of granting that sanction.

E.  Result

36.  In the circumstances, I allow the application. It seems to me to be appropriate to grant the order is indicated by Mr Kwok in his skeleton submissions, namely that D125 have leave to file and serve Wong’s Statement (duly signed with a statement of truth) and a second supplemental list of documents listing the Documents, within seven days.

37.  As to costs, D125 have won the argument.  But it might be thought that they have also been granted some indulgence, against the chronology.  I have considered whether to reserve the costs, but it seems to me appropriate to deal with the question of costs of the application now.  In all the overall circumstances I have identified, and in the broad exercise of my discretion as to costs, it seems to me that the correct order to make is that there be no order as to costs.

HCA 2498/2014

[2019] HKCFI 1828

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2498 OF 2014

________________________

________________________

________________________

DECISION

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INTRODUCTION

1.  This is the hearing of a summons issued by the 1^st, 2^nd and 5^th defendants (the “said defendants”) on 6 April 2018 pursuant to Order 18, rule 19(1) of the Rules of the High Court and the court’s inherent jurisdiction for an order that, amongst other things, the plaintiffs’ claims be struck out and the action dismissed on the grounds that it is scandalous, frivolous or vexatious and/or is otherwise an abuse of process of the court.

2.  In particular, the said defendants contend that:

(1)   The plaintiffs’ claims are “res judicata as they have already formed the basis of their unfair prejudice petition in HCCW 145/2012” (the “Res Judicata Ground”);

(2)   Further or alternatively, the plaintiffs’ pleaded claims for:

(a) alleged breaches of a shareholders’ agreement dated 4 September 2006 (the “Shareholders’ Agreement”); and

(b) alleged conspiracies to deprive the plaintiffs of their entitlements and rights under the Shareholders’ Agreement or as shareholders of Lucky Ford Industrial Limited (in liquidation) (“Lucky Ford”)

do not constitute viable causes of action, because “the Shareholders’ Agreement is unenforceable or otherwise ultra vires as (i) the Shareholders’ Agreement amounts to an unlawful or unauthorised return of capital to shareholders; or (ii) its effect is to seek a distribution of Lucky Ford’s assets to its shareholders as if on a winding up but without making proper provision for its creditors.”  (the “No Cause of Action Ground”);

(3)   Even if the plaintiffs have pleaded viable causes of action, “… they do not have locus standi to pursue the alleged claims as pleaded.  Instead, the only persons with locus standi to pursue the alleged claims as pleaded are the liquidators of Lucky Ford” (the “No Locus Ground”); and

(4)   In any event, “the plaintiffs’ pleaded claims are for a reflectiveloss, alternatively, any alleged loss or damage suffered by the plaintiffs is a reflective loss, and accordingly is irrecoverable by the plaintiffs …” (the “Reflective Loss Ground”).

3.  At the hearing and in his skeleton argument, Mr Eugene Kwok, counsel for the said defendants, did not pursue the Res Judicata Ground, leaving only the No Cause of Action Ground, No Locus Ground and the Reflective Loss Ground.  The arguments at the hearing, however, focused primarily on the No Locus and Reflective Loss Grounds.

THE AMENDED STATEMENT OF CLAIM

4.  The plaintiffs’ claims are set out in the amended statement of claim dated 4 January 2018 (the “ASoC”).  For convenience, I have adopted a summary of the plaintiffs’ claims in the skeleton argument of theplaintiffs’ leading counsel, Mr William Wong SC (leading Mr Alan Kwong and Mr Michael Ng), with some supplementation and modification:

(1)   The 1^st plaintiff and the late Chiu Chi Kuen (on behalf of whose estate the 2^nd plaintiff brings this claim as the administratrix — for convenience, I shall refer to the late Mr Chiu as the 2^nd plaintiff), together with the 1^st to 5^th defendants, were at all material times directors and shareholders of Lucky Ford.

(2)   Lucky Ford was at all material times a corporate vehicle used by the plaintiffs and the defendants for a property redevelopment project (the “Project”) to convert a cinema on Nathan Road into a shopping arcade (the “Shopping Arcade”).  The 1^st to 5^th defendants were the beneficial owners of 84.2% of the issued share capital of Lucky Ford, with the plaintiffs beneficially owning the remainder.

(3)   The 6^th defendant was a “corporate vehicle closely associated” with the 1^st to 5^th defendants.

(4)   In or around late 2005 or early 2006, the Project was completed with (a) 265 shop units on the first and second floors (the “Partitioned Shop Units”); and (b) 4 shop units on the ground floor and the external walls (the “Reserved Shops and Premises”).

(5)   In June 2006, the shareholders of Lucky Ford agreed that several units from the Partitioned Shop Units (the “Dividend Units”) be transferred to the plaintiffs, and the prices thereof be treated as dividends payable to the plaintiffs.

(6)   However, after seeking professional advice, the parties realised that Lucky Ford could not yet distribute dividends, as it had not yet finalised its audited accounts.

(7)   Envisaging that audited accounts would be finalised soon and that dividends would be declared in due course, the plaintiffs entered into two agreements with the defendants and Lucky Ford on 4 September 2006:

(a) The first being the Shareholders’ Agreement; and

(b) The second being a loan agreement, whereby Lucky Ford made a loan of HK$19,708,402 to the plaintiffs (the “Notional Loan Agreement”).

(8)   The terms and effect of the Shareholders’ Agreement were pleaded in paragraph 21 of the ASoC, inter alia, as follows:

“ Under Clause 2.2, the parties acknowledge that the project of the Shopping Arcade has been completed and their investment in relation to the Shopping Arcade should be realised for profits” for the benefit of all the beneficial shareholders of Lucky Ford (referred to as the “Equity Owners”) in the manner provided in the agreement.    (paragraph 21(1))

“ Clause 4.1 provides that Lucky Ford and all its shareholders should apply and/or distribute the profits arising from the … Partitioned Shop Units … as well as the Reserved Shops and Premises … in the manner stipulated under Clause 5.1. Further, Lucky Ford and all its shareholders should continue to sell and/or lease out [the Partitioned Shop Units] that had not yet been sold as of 4^thSeptember 2006 for profits.” (paragraph 21(3))

“ Clause 4.2 effectively provides that Lucky Ford … and all its shareholders … agree that the ‘Dividend Units’ be transferred to the 1^stplaintiff and [the 2^ndplaintiff], and Lucky Ford should grant the Notional Loan of HK$19,708,420.00 which should be set-off against the notional purchase price of the Dividend Units.” (paragraph 21(2))

“ Clause 5.1 stipulates the manner in which Lucky Ford and/or its shareholders should apply the income, revenue and/or profits arising from the sale of the [Partitioned Shop Units] and [the Reserved Shops and Premises]. It is provided that after:

(i) repaying the indebtedness under the personal overdraft facility (up to HK$10,000,000) borrowed by the 4^thDefendant from Hang Seng Bank Limited for the use of Lucky Ford;

(ii) repaying the Initial Shareholders’ Loan of HK$29,767,137 (defined in Clause 1) owed to the ‘Equity Owners’; and

(iii) defraying the Expenses as referred to in Clause 6.1,

the income, revenue and/or profits arising from the sale of the [Partitioned Shop Units and the Reserved Shops and Premises] should be distributed by way of dividends to the shareholders of Lucky Ford in proportion to their shareholdings …”

Clause 5.1(d) provides that, “For the avoidance of doubt, each of the Equity Owners and [Lucky Ford] agrees that the amount of the realised profits available for distribution under this clause shall be ascertained by the Auditors whose written confirmation shall be final and conclusive.”     (paragraph 21(4))

“ Clause 5.2 provides that … Each of the Equity Owners and [Lucky Ford] hereby agrees and approves that after the deduction of the Expenses and provision for Taxation, any profits derived from or arising out of the Reserved Shops and Premises shall be distributed by way of dividends to the Equity Owners in the proportion by reference to their respective shareholding in the capital of [Lucky Ford] except in the case of [the 1^st plaintiff] whose distribution shall be subject to and as agreed in Clause 5.3 hereof and for avoidance of doubt, in the case of [the 1^st and 2^ndplaintiffs and the 4^th defendant] in the percentage as set out opposite their names in Part B of Schedule 1.”

 (paragraph 21(5))

“ Under Clause 9.1, the parties undertook that they should exercisetheir shareholders’ rights and directorate powers to give effect to the terms and provisions of the [Shareholders’ Agreement] …”

(paragraph 21(6))

(I should also refer to clause 12.1 of the Shareholders’ Agreement, which provides that, “No dividend shall be payable except out of the distributable profits of [Lucky Ford].”)

(9)   As to the Notional Loan Agreement, the plaintiffs contend that it was merely “notional” because the sum of HK$19,708,402 was in fact the price or consideration of the Dividend Units transferred to the plaintiffs.  Once the audited accounts were finalised, dividends would be distributed pursuant to the Shareholders’ Agreement, and the plaintiffs could use such dividends to set-off against the “notional” loan (paragraphs 22 to 23 of the ASoC).

(10)   After the agreements were entered into, Lucky Ford earned handsome profits from the sale of Partitioned Shop Units andReserved Shops and Premises and received significant rentalincome from the unsold units (paragraphs 24 to 30 of the ASoC). 

(11)   Lucky Ford should therefore have been in a position to distribute, and should have distributed, the profits to the plaintiffs pursuant to the Shareholders’ Agreement.  However, in breach of the same, the 1^st to 5^th defendants and Lucky Ford:

(a) refused and/or failed to declare dividends by applying the revenue, income and/or profits derived from the sale of the Partitioned Shop Units and/or the Reserved Shops and Premises in accordance with clauses 5.1 and 5.2 of the Shareholders’ Agreement;

(b) dissipated the revenue, income and/or profits derived from and/or arising out of the Partitioned Shop Units and/or the Reserved Shops and Premises.  Specifically, on various dates in 2007, the 1^st to 5^th defendants wrongfully and unlawfully withdrew aggregate sums of no less than HK$14,168,000 from Lucky Ford which should have been applied in the manner of and/or in accordance with the priority as stipulated in the Shareholders’ Agreement;

(c) in breach of clause 9.1 of the Shareholders’ Agreement, the 1^st to 5^th defendants deliberately concealed the financial affairs of Lucky Ford from the plaintiffs, such that the plaintiffs were unable to ascertain the distributable profits of Lucky Ford, and deliberately and maliciously caused Lucky Ford not to prepare any audited accounts or to file tax returns, such that no dividends could be distributed to the plaintiffs.

(12)   The 1^st to 5^th defendants were also liable in tort for procuring and/or inducing Lucky Ford to breach the Shareholders’ Agreement.

(13)   In the premises, the plaintiffs suffered loss and damage, in that they had been “… unable to receive any dividends from Lucky Ford, and they had been unable to share the profits and/or income arising from the [Partitioned Shop Units and/or the Reserved Shops and Premises]”.

(Paragraphs 31 to 41 of the ASoC: I shall refer to the claims in these paragraphs as the “Breach of Shareholders’ Agreement Claims”.)

(14)   Further, the 1^st to 5^th defendants and Lucky Ford (or two or more of them) conspired to defraud and/or injure the plaintiffs by unlawful means with the purpose or objective of depriving “the plaintiffs of their entitlement, rights, interests and/or benefits under the Shareholders’ Agreement and/or their entitlements, rights, interests as shareholders of Lucky Ford generally …”:

(a) The overt acts relied upon by the plaintiffs were:

“ (a) flagrant and continuous breaches and violations of Clauses 4.1, 5.1, 5.2 and 9.1 of [the Shareholders’ Agreement]; (b) flagrant and continuous breaches and violations of the provisions of the former Companies Ordinance (Cap 32) (‘CO’), including sections111 and 122 (in that no audited accounts of Lucky Ford had everbeen prepared and laid before its general meetings) as well as the provisions of the Inland Revenue Ordinance (Cap 112) (‘IRO’) (in that notwithstanding substantial profits were earned by Lucky Ford, the 1^st to 5^th defendants and/or Lucky Ford failed and/or refused to file any tax return to the Inland Revenue Department; (c) flagrant breach of fiduciary duties on the part of the 1^st to 5^th Defendants; and (d) misrepresentation”;

(b) Further, on various dates in 2007, 2008 and early 2009:

“ with a view to defeat and/or decrease the Plaintiffs’ rights, interests and/or entitlements under the Shareholders’ Agreementby channelling away and/or disposing of the assets of Lucky Ford,the 1^st to 5^th defendants had caused and/or procured Lucky Ford to transfer some of the units to their relatives and/or close associates and/or companies controlled by and/or associated withthemselves, and so far, the 1^st to 5^th defendants and/or Lucky Ford had been unable to show that the considerations had been paid to and/or received by Lucky Ford at all. If (which is denied) the consideration had been paid at all and the whereabouts of the considerations were and still are unknown to the Plaintiffs, and by reason of the matters pleaded above, the Plaintiffs believe that such consideration (if any) had been misappropriated by the 1^st to 5^th defendants.”

(c) The total value of units sold where no sale consideration was received by Lucky Ford was HK$86,477,000.  The units were effectively channelled to the 1^st to 5^th defendants, their family members, relatives as well as companies controlled by or associated with themselves.  Lucky Ford also took no steps to demand for or to recover such consideration;

(d) The 1^st to 5^th defendants further caused Lucky Ford not to perform an agreement dated 8 December 2008 for the sale of “Shop E” of the Reserved Shops and Premises at a consideration of HK$10,000,000, but rather charge that portion together with other parts of the Reserved Shops and Premises on 6 March 2009 to a company known as Kumatei Ltd for HK$2,000,000.  The whereabouts of the proceeds of HK$2,000,000 is unknown and it is believed that the same has been misappropriated by the 1^st to 5^th defendants;

(e) Subsequently, on 28 October 2009, the 1^st to 5^th defendants further caused Lucky Ford to sell Shop E to a company known as Trump Strong Ltd, a company closely associated with the 6^th defendant, at a consideration of HK$7,000,000, which was “grossly undervalued” as another purchaser had been willing to purchase the same premises for HK$10,000,000.  In any event, the 1^st to 5^th defendants and Lucky Ford have been unable to show that the consideration was paid or received by Lucky Ford, and if so received, it is believed that the same has been misappropriated by the 1^st to 5^th defendants;

(f) Further, on 23 December 2009, Shops A, B and C of the Reserved Shops and Premises were transferred to one Madam Yu Kit Wan Judy (the 99.98% shareholder of Trump Strong), Treasure Most Ltd (a company said to be associated with Madam Yu, Trump Strong and the 6^th defendant) and Trump Strong Ltd for HK$70,000,000.  The 1^st to 5^th defendants and Lucky Ford had been unable to show that the consideration was paid or received by Lucky Ford, and if so received, it is believed that the same has been misappropriated by the 1^st to 5^th defendants;

(g) As a result of this conspiracy, the plaintiffs “suffered loss and damage”.

(Paragraphs 42 and 43 of the ASoC: I shall refer to these paragraphs as the “Primary Conspiracy Claims”.)

(15)   The 1^st to 6^th defendants and Lucky Ford (or two or more of them) further conspired to defraud and/or injure the plaintiffs by unlawful means with the purpose or objective of depriving “the plaintiffs of their entitlement, rights, interests and/or benefits under the Shareholders’ Agreement and/or their entitlements, rights, interests as shareholders of Lucky Ford generally …”:

(a) In March or April 2011, the 1^st to 5^th defendants procured Lucky Ford to repurchase 22 shop units in the Shopping Arcade from themselves, their associates and/or relatives at the aggregate consideration of HK$29,138,220.  Within one month after the repurchase, on 19 April 2011, the 1^st to 5^th defendants immediately procured Lucky Ford to sell these 22 shop units to the 6^th defendant at an aggregate price of only HK$10,610,750;

(b) By doing so, the 1^st to 5^th defendants, Lucky Ford and the 6^thdefendants created a false pretence that Lucky Fordsuffered a serious loss of HK18,527,470, and the profits, income and/or revenue arising from the 22 shop units and/or their value had been wrongfully channelled and/or transferred to the 6^th defendant;

(c) Further, the 1^st to 5^th defendants and Lucky Ford had been unable to show that the consideration of HK$10,610,750 from the 6^th defendant was paid or received by Lucky Ford, and if so received, it is believed to be misappropriated by the 1^st to 5^th defendants;

(d) Further, the purported sale of the units to the 6^th defendant was at a gross undervalue and the transactions were inexplicable.  The purpose and effect of the wrongdoings were to reduce and/or extinguish the dividends and/or profits to be distributed to and/or shared with the plaintiffs.

(e) Being closely associated with the 1^st to 5^th defendants and Lucky Ford, the 6^th defendant was at all material times aware of and/or ought to have been aware of the plaintiffs’ interests, rights and/or entitlements under the Shareholders’ Agreement.

(Paragraphs 44 to 45 of the ASoC: I shall refer to this as the “Further Conspiracy Claims”)

(16)   As a director of Lucky Ford, the 5^th defendant owed fiduciary duties to Lucky Ford:

(a) Wrongfully and in breach of such duties, the 5^th defendant through Landsources (Hong Kong) Property Consultant Ltd (in which the 5^th defendant as a shareholder and director) acted as a purported estate agent and charged Lucky Ford for commissions for the sale of various units of the Shopping Arcade;

(b) The plaintiffs have not seen any board resolutions approving the 5^th defendant to charge commission against Lucky Ford and it is averred that Lucky Ford’s board had not approved the same.  Hence, the 5^th defendant is liable to refund and/or account for the commission sums, and the same should have been used and/or applied as dividends to be distributed to the plaintiffs in accordance with the Shareholders’ Agreement.

(I shall refer to this as the “Commissions Claim”.)

(17)   As a result of the aforesaid breaches and/or tortious acts of the defendants, despite the substantial profits derived from the Partitioned Shop Units and the Reserved Shops and Premises, the plaintiffs never received any dividend from Lucky Ford.

(18)   In the absence of such dividends, the plaintiffs were unable to set-off the “notional” loan of HK$19,708,402 under the Notional Loan Agreement.  Knowing this to be the case, the defendants then maliciously caused Lucky Ford to assign the said “notional” loan to the 6^th defendant.

5.  At the end of the ASoC, in section F entitled, “The Plaintiffs’ Claims against the Defendants”, the plaintiffs plead that:

“ 46. By reason of the matters pleaded above, the plaintiffs claim against the 1^st, 2^nd, 3^rd, 4^th and 5^th defendants for damages (to be assessed) in respect of their flagrant breach and violation of the terms and provisions of the … Shareholders’ Agreement.

47. The plaintiffs claim against the 1^st, 2^nd, 3^rd, 4^th and 5^th defendants for an account and/or enquiry in respect of all sums and/or moneys due and/or owed to them.

48. Further, the plaintiffs also claim against the 1^st, 2^nd, 3^rd, 4^th, 5^th and 6^th defendants for damages (to be assessed) in respect of their Conspiracies as pleaded and particularised in Sections D and E hereinabove.

49. Further, the plaintiffs are entitled to claim, and does [sic] claim,against the defendants for interest (whether compound or simple)on such sums found due from the defendants to the plaintiffs …”

6.  On 30 January 2018, the said defendants filed an amended defence, and on 23 March 2018, the plaintiffs filed an amended reply to theamended defence.  As this is an application for striking out the ASoC, thesubstantive defence advanced by the said defendants is of limited relevanceat this stage.  For completeness, I mention the following contentions raised by the said defendants (not intended to be exhaustive):

(1)   Although the sale of the units in the Shopping Arcade generated revenue, Lucky Ford was unprofitable overall and was therefore never in a position to declare any dividends or distribute profits to its shareholders;

(2)   The Shareholders’ Agreement was in any event unenforceable or otherwise ultra vires as (i) the Shareholders’ Agreement amounted to an unlawful or unauthorised return of capital to shareholders; or (ii) its effect was to seek a distribution of Lucky Ford’s assets to its shareholders as if on a winding up but without making proper provision for its creditors;

(3)   The 2^nd defendant ceased to be a director of Lucky Ford on 26 August 2011, and the 5^th defendant ceased to be a director on 4 September 2009;

(4)   The defendants never misappropriated or dissipated any proceeds from the sale of any shop units in the Shopping Arcade.  Further, none of the payments made by Lucky Ford to them was in any way improper, unlawful or in breach of the Shareholders’ Agreement;

(5)   In March 2011, Lucky Ford was suffering from cash flow difficulties.  In order to obtain funds for Lucky Ford, some of its shareholders and/or family members or other related entities who had previously purchased shop units fromLucky Ford agreed to transfer those units back to Lucky Ford to enable it to resell those units to raise funds.  No consideration was in fact paid by Lucky Ford as it did not have the funds to do so.  The units were then resold at the best available prices, and Lucky Ford received the proceeds of sale;

(6)   The said defendants were never shareholders nor directors of the 6^th defendant and never played any part in its business, operations or affairs. In any event, all the shops sold to the 6^th defendant was on an arm’s length basis;

(7)   In the circumstances, the said defendants deny any breach of fiduciary duty or being part of any conspiracy.  In any event, any claims in relation to dealings in the units and/or alleged payments lie with Lucky Ford’s liquidators, and the plaintiffs have no locus standi to make such claims; and

(8)   The said defendants also raise a limitation defence in relation to any alleged payments and/or related breaches of the Shareholders’ Agreement which occurred more than six years prior to the issue of the writ.

7.  It should also be mentioned by way of background:

(1)   On 2 May 2012, the plaintiffs issued a petition in HCCW 145/2012 for statutory relief for unfair prejudice, or alternatively, for Lucky Ford to be wound up on the just and equitable ground; and

(2)   Although the winding up proceedings were initially opposed by the defendants, such opposition was later withdrawn, and on 29 October 2012, Harris J made a winding up order against Lucky Ford.

PRINCIPLES ON STRIKING OUT

8.  The principles on striking out are well established and not in dispute:

(1)   Striking out is for plain and obvious cases.  The question for the court is whether the allegations as pleaded in the statementof claim disclose some cause of action or raise some questionthat ought to be tried.  It is not concerned with an assessment of the strength or weakness of the case.  The mere fact that the case is weak and not likely to succeed is no ground for striking it out.  The court would only strike out when it is impossible, and not just improbable, for the case to succeed;

(2)   A reasonable cause of action means a cause of action with some chance of success when only the allegations in the pleading are considered.  The court will therefore assume the facts as pleaded in the statement of claim to be proved and determine, on that basis, whether the pleading discloses a reasonable cause of action;

(3)   Where a statement of claim does not disclose the cause of action relied upon but there is reason to believe that the case can be improved by amendment, the court may give an opportunity to amend, even though the formulation of the amendment is not before the court;

(4)   A proceeding is frivolous when it is not capable of reasoned argument, without foundation or where it cannot possibly succeed. A proceeding is vexatious where it is oppressive and/or lacks bona fide.  To strike out a litigant’s claim on the grounds that it is frivolous or vexatious and he has thus abused the process of the court is a serious finding to make, and one would expect the discretion to be sparingly exercised.

See eg Hong Kong Niiroku Ltd v Kyokuto Securities (Asia) Ltd HCA 4122/2000 (unreported, 18 March 2002); Chinabase Holdings Ltd v Robert Chun Chung Ip [2016] 4 HKLRD 304; Yifung Properties Ltd v Manchester Securities Corp HCA 1341 and 1359/2014 (unreported, 19 October 2015).

NO CAUSE OF ACTION GROUND

9.  This ground can be disposed of shortly.  As I pointed out to Mr Kwok at the hearing, and as mentioned above:

(1)   Clause 5.1(d) provides that, “the amount of the realised profits available for distribution under this clause shall be ascertained by the Auditors whose written confirmation shall be final and conclusive”; and

(2)   Clause 12.1 expressly provides that no dividend shall be payable except out of distributable profits.

10.  In the circumstances, it is plainly arguable that the Shareholders’ Agreement does not require Lucky Ford to make (or its shareholders to procure it to make) any unlawful or unauthorised return ofcapital to shareholders.  I therefore decline to strike out any claims relating to the Shareholders’ Agreement on this ground.

NO LOCUS GROUND

11.  Mr Kwok referred to the well-established principle that, where a wrong has been done to a company, it is the company itself who is the proper plaintiff to pursue those wrongs: see eg Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 at §11.  The plaintiffs have no locus to sue in their personal capacities for any alleged wrongs and losses caused to Lucky Ford.

12.  He submits that it is clear from the ASoC that the plaintiffs’ allegations all revolve around the defendants’ wrongdoings or misconduct committed against Lucky Ford, and therefore, the plaintiffs have no locus standi to bring the claims in this action.

13.  As mentioned above, however, section F of the ASoC seeks to confine the plaintiffs’ claims to damages suffered by the plaintiffs personally for the defendants’ alleged breaches of contract and conspiracy.  In his submissions, Mr Wong SC confirmed that the plaintiffs are not seeking to recover any losses suffered by Lucky Ford per se.

14.  Hence, the real issue between the parties does not seem to me to be a question so much of locus standi, but rather whether the plaintiffs’ personal claims are barred by the principle of reflective loss.

REFLECTIVE LOSS GROUND

Principle of Reflective Loss

15.  The principle of reflective loss is not in serious dispute between the parties.  For completeness, I set out the principles below in so far as they are relevant to the present dispute.

16.  A useful starting point is Johnson v Gore Wood[2002] 2 AC 1, where Lord Bingham of Cornhill summarised the principles at 35E – 36B:

“ (1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. Noaction lies at the suit of a shareholder suing in that capacity and noother to make good a diminution in the value of the shareholder’sshareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs,has declined or failed to make good that loss.… (2) Where a company suffers loss but has no cause of action to sue to recoverthat loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. … (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from thatsuffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss causedto it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other.”

Further, Lord Millett explained at 62E–G:

“ The position is, however, different where the company suffers loss caused by the breach of a duty owed both to the company and to the shareholder. In such a case the shareholder’s loss, in so far as this is measured by the diminution in value of his shareholding or the loss of dividends, merely reflects the loss suffered by the company in respect of which the company has its own cause of action. If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at theexpense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle;there is no discretion involved. Justice to the defendant requiresthe exclusion of one claim or the other; protection of the interestsof the company’s creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder.”

And at 64A–B:

“ The plaintiff sought to distinguish Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 by arguing that the defendant was in breach of a duty owed to him personally. But, as I pointed out, that was not the problem. The problem was that the only conduct relied upon as constituting a breach of that duty was the misappropriation of assets belonging to the old companies, so that the only loss suffered by the plaintiff consisted of the diminution in the value of his shareholding which reflected the depletion of the assets of the old companies. The old companies had their own cause of action to recover theirloss, and the plaintiff’s own loss would be fully remedied by the restitution to the companies of the value of the misappropriated assets.”

17.  The principle was affirmed by the Court of Final Appeal in Waddington (ibid).  As Lord Millett NPJ explained at §74:

“ [The rule] is a matter of legal policy. It is not because the law does not recognise the loss [of the shareholder] as a real loss; it is because if creditors are not to be prejudiced the loss must be recouped by the subsidiary [ie the company in that case] and not recovered by its shareholders.”

18.  In Basab Inc v Superb Glory Holdings Ltd(2017) 20 HKCFAR 384, the Court of Final Appeal also observed (in refusing leave to appeal) at §8:

“ … the fact it is alleged that the plaintiffs have independent causes of action does not help. If they had no independent cause(s) of action, it is difficult to see on what basis either of them could launch a personal claim. The no reflective loss rule applies nevertheless because as Yuen JA explained [in Landune International Ltd v Cheung Chung Leung [2006] 1 HKLRD 39 at §24]:

… the focus of the rule against reflective loss is not on whether a wrong had been done to the plaintiff…personally[thus giving rise possibly to an independent cause of action],but on the loss he is seeking to recover—if the loss can be made good if the company … enforces its rights against the defendant, the plaintiff’s loss is a reflective loss and to prevent double recovery, its claim should be struck out.”

The said Defendants’ Case

19.  Mr Kwok submits, therefore, that whether or not the plaintiffs have a personal cause of action for breach of contract or conspiracy is irrelevant.  The reflective loss principle still applies because the plaintiffs have not suffered a loss that is separate and distinct from Lucky Ford’s own loss. Ultimately, all of the plaintiffs’ losses would be made good if Lucky Ford enforced its own claims against the defendants for their alleged misconduct.  The losses all arose from the same underlying conduct — namely, the misappropriation or dissipation of Lucky Ford’s assets which resulted in Lucky Ford being unable to pay dividends to the plaintiffs.

20.  As Lucky Ford is in liquidation, it is for the liquidators to pursue such claims if they think fit.  Even if the liquidators choose not to do so, or settle the claims for less than what the plaintiffs consider might be recoverable, that would not prevent the operation of the principle: Waddington (ibid) at §87 per Lord Millett NPJ.  Further, as Lord Millett pointed out in Johnson (ibid) at 66E, shareholders and creditors who are aggrieved by the liquidators’ decisions are not without remedy as they canhave recourse to the companies court or sue the liquidators for negligence.  

21.  Mr Kwok further points out that the principle is not limited to claims for diminution in the value of the shares.  It extends to the loss of dividends and all other payments which a shareholder (or any other party) might have obtained from the company if it had not been deprived of its funds.  As Yuen JA explained in Landune International (ibid) at paragraph 31:

“ The principle debarring reflective loss is not based on the relationship of the plaintiff to the company, whether it be shareholder–company, or employee–employer, or creditor–debtor. The common thread is that the plaintiff’s loss would be made good if the company, employer or debtor, recovers from the defendant.”

22.  The principle is also not limited to claims for damages, but includes claims for an account of profits and indeed other relief. As Fok JA (sitting as an additional judge of the Court of First Instance) stated in Pico North Asia Holdings Ltd v Cheung Yuk Ting Linda& Anor HCA 1371/2009 (unreported, 8 February 2011), at §§32 – 33:

“ First, [counsel for the plaintiff] submitted that the principle only applies in respect of claims for damages and has no application to a claim for an account of profits or to other relief sought by the plaintiff in this action. …

I do not consider that the first point advanced on behalf of the plaintiff is correct.  In my opinion, the principle can apply to other types of remedies including an account of profits and is not limited to claims for damages.  The test is not the form of relief but, whether as a matter of substance, the claim is for monies that the company may claim for itself.”

The Plaintiffs’ Case

23.  Mr Wong SC does not challenge the principles above.  Rather, he submits that the rule against reflective loss is not engaged or at least the position is not sufficiently clear for striking out, for the following reasons:

(1)   The plaintiffs’ case is that Lucky Ford earned significant distributable profits from the Project, and under the Shareholders’ Agreement, the declaration of dividends over such profits is mandatory;

(2)   However, the defendants conspired together, and caused Lucky Ford not to declare any dividends to the plaintiffs.  This constituted a breach of the Shareholders’ Agreement and unlawful conspiracy to injure;

(3)   Hence, the plaintiffs claim against the defendants for losses arising from their breach of contract and tortious wrongdoings in this action.  The main loss is the dividends which the plaintiffs would have received had there been no wrongdoings by the defendants;

(4)   Lucky Ford itself has no claim for its own dividends, and the damages claimed by the plaintiffs in the present action is a loss solely to the plaintiffs’ pockets.  Such loss cannot be made good by Lucky Ford commencing an action;

(5)   Further, Lucky Ford suffered no loss as it was under an immediate and mandatory obligation under the Shareholders’ Agreement to declare dividends over a proportion of such distributable profits in favour of the plaintiffs;

(6)   The plaintiffs are not suing for the alleged misappropriation or withdrawals which took place only after the breach of the Shareholders’ Agreement;

(7)   The references to withdrawals and misappropriation were “merely suggestions as to where the distributable profits might have gone” based on the plaintiffs’ beliefs and limited information. The purpose of the pleas is to rebut the defendants’ allegations that Lucky Ford had suffered serious business loss, thereby becoming insolvent. Further, the pleas also show that the defendants had been acting in concert with each other as one single camp;

(8)   Whilst the alleged withdrawals or misappropriations are relevant to (i) the question of Lucky Ford’s insolvency and (ii) the fact that the defendants had acted together as a single camp, the plaintiffs “…do not even need to rely on these allegations to establish their claims for damages (i.e. loss of dividends).”

Discussion

24.  Irrespective of whether the causes of action lie in contract or in tort, the plaintiffs’ complaints in the ASoC fall into two broad categories:

(1)   First, the defendants’ failure or refusal to procure Lucky Ford to distribute its profits from the Project to its shareholders, including the plaintiffs, as provided for in the Shareholders’ Agreement; and

(2)   Second, the defendants’ actions (to use a neutral term) reduced or extinguished Lucky Ford’s profits available for distribution to its shareholders, including the plaintiffs, pursuant to the Shareholders’ Agreement.

25.  On the first category, I have little difficulty (at least at this stage) with the claims that the defendants failed or refused to procure Lucky Ford to distribute its profits where such profits wereavailable for distribution. There should be no question of reflective loss as the failure to distribute available profits per se is unlikely to give rise to any cause of action or claimable loss by Lucky Ford.

26.  Now that Lucky Ford has been wound up, the plaintiffs can simply make a claim for distribution of such profits in the liquidation since Lucky Ford was also a party to the Shareholders’ Agreement. The reality, however, is that although the plaintiffs have denied in their reply that Lucky Ford is insolvent, it can fairly be assumed from the allegations in the ASoC that there are insufficient remaining profits or assets availableto Lucky Ford to satisfy the plaintiffs’ claims under the Shareholders’ Agreement.

27.  That being the case, the plaintiffs will need to show that Lucky Ford did at some prior point or points in time have profits which could and should have been distributed, but which the 1^st to 5^th defendants failed or refused to procure Lucky Ford to do. This is a straightforward question of fact and accounting as to if, and when, such profits were available. Either Lucky Ford had such profits at the relevant time, or it did not – there being no question as to the lawfulness or otherwise of the reasons why such profits are no longer available (if they ever were).  Had the ASoC been limited to such contentions, in my view, no difficulty of reflective loss arises.

28.  However, as summarised above, the ASoC goes much farther and makes lengthy and detailed allegations that Lucky Ford no longer has such distributable profits because of the defendants’ fraudulent breaches of duty and/or other wrongdoings against Lucky Ford.

29.  The 1^st, 2^nd and 5^th defendants in their defence have, inter alia, denied any wrongdoing or breach of duty to Lucky Ford.  In paragraph 11(2B) of their amended reply dated 22 March 2018, the plaintiffs reiterate their stance on the defendants’ conduct:

“ In the premises, if (which is denied) Lucky Ford had no profits/distributable profits and/or had become insolvent, these were ascribed to the wrongdoings on the part of the Defendants (including the 1^st, 2^nd and 5^th defendants) in misappropriating and/or dissipating the assets of Lucky Ford and channeling awaythe assets of Lucky Ford to their relatives/corporate vehicles, the6^thDefendant (and the persons associated with it) as pleaded and particularised in the Amended Statement of Claim and in this Amended Reply. The Plaintiffs will seek to rely on the prevention principle at common law to contend that the Defendants are not entitled to rely on their own wrongdoings.”

30.  As mentioned above, Mr Wong SC submitted that such complaints of wrongdoing vis-à-vis Lucky Ford were “merely suggestions as to where the distributable profits might have gone”, that their purpose is to rebut allegations that Lucky Ford had suffered serious business loss, that the defendants have been “acting in concert” as “one single camp”, and that, in any event, the plaintiffs “do not even need to rely on these allegations” to establish their claims for damages.

31.  First of all, Order 18, rule 7(1) of the Rules of the High Court makes clear that,

Subject to the provisions of this rule and rules 7A, 10, 11 and 12 [which are inapplicable here], every pleading must contain, and contain only, a statement in a summary form of the material facts on which the party pleading relies for his claim or defence, as the case may be, but not the evidence by which those facts are to be proved, and the statement must be as brief as the nature of the case admits.

32.  With respect, it is inappropriate to plead allegations that are “merely suggestions” or which are not intended to be relied upon at trial. This is especially so given the serious nature of the allegations of fraud, conspiracy and breach of fiduciary duty made against the defendants, none of which should be lightly made and all of which would have to be investigated at the trial at significant time and expense. The purpose of pleadings is well established and need not be repeated here. It is also far from clear from the extensive manner in which the allegations of wrongdoing against Lucky Ford have been pleaded in the ASoC that they are merely intended to be “suggestions” or to show that the defendants had been acting “in concert”.

33.  More importantly, however, the plaintiffs’ characterisation of the defendants’ actions as breaches of duty or other wrongdoings against Lucky Ford not only does not assist but is potentially fatal to the plaintiffs’ case. In this regard, there is a critical distinction between actions that give rise to a cause of action on the part of Lucky Ford, and those that do not.

34.  For those that do – for instance, where the defendants’ actions amounted to a breach of duty to or other wrongdoing against Lucky Ford, as Lord Millett explained in his speech in Johnson(ibid) cited above, a loss of dividends that merely reflects the loss suffered by the company in respect of which the company has its own case of action is not allowed.  The rule applies, in my view, irrespective of whether the loss of dividends is dividends that the company might have subsequently chosen to declare or those that the company was obligated to do so under a prior agreement.

35.  In this situation, the argument that Lucky Ford has no claim for its own dividends misses the point, as we are concerned not with the failure or refusal to distribute profits per se but with the defendants’ actions that allegedly disabled Lucky Ford from doing so. Provided that Lucky Ford has a cause of action for the same loss arising from the defendants’ actions, Lucky Ford’s claims will “trump” (to borrow the expression used by Arden LJ in Day v Cook [2002] 1 BCLC 1) those of the plaintiffs – the reason being that Lucky Ford’s assets could (at least in theory) be replenished through action by Lucky Ford against the defendants. Such replenishment would then be reflected in the value of the plaintiffs’ shareholding in Lucky Ford or their entitlement to the distribution of Lucky Ford’s profits (if any) under the Shareholders’ Agreement. The latter could be enforced by action by the plaintiffs directly against Lucky Ford if necessary, or now that it has been wound up, in the liquidation process.

36.  Hence, Mr Wong’s submission as to the purpose of the pleas of unlawful withdrawals and misappropriation – that is, to rebut (or more accurately, to pre-empt) the defendants’ anticipated contention that Lucky Ford had suffered serious business loss and thereby became insolvent, operates against the plaintiffs. Once it is asserted that the reason for Lucky Ford’s inability to make distributions under the Shareholders’ Agreement is due to actions which give rise to a cause of action by Lucky Ford, the plaintiffs’ claims are trumped by those of the company.

37.  On the other hand, where the actions of the defendants are lawfulvis-à-vis Lucky Ford and hence do not give rise to any cause of action on the part of Lucky Ford against the defendants—for instance, if the 1^st to 5^th defendants caused Lucky Ford to use its distributable profits, which ought to have been earmarked for distribution, for a legitimate purpose that resulted in their loss (otherwise, the profits would still have been available for distribution) or for some other justified expenditure, the position is different. While the plaintiffs may have a claim against the 1^st to 5^th defendants for failing to procure Lucky Ford to distribute those profits, Lucky Ford itself would have no cause of action against them. In these circumstances, the principle of reflective loss would not be engaged.

38.  There is also no difference in principle whether the plaintiffs’ causes of action arose earlier or subsequent in time to those of Lucky Ford (if any) against the defendants. Provided that the loss is not distinct in that upon Lucky Ford’s recovery from the defendants for their actions, its assets would be replenished to the same extent and reflected (at least in theory) in the plaintiffs’ shareholding or their entitlement to distribution, then the plaintiffs’ claims are trumped by those of the company and are barred.

39.  For instance, in Gardner v Parker [2004] 2 BCLC 554 at paragraph 70 (cited by Yuen JA in Landune International (ibid) at paragraph 32 of her judgment), Neuberger LJ (as he then was) observed that:

“ …the rule against reflective loss is not limited to claims brought by a shareholder in his capacity as such; it would also apply to him in his capacity as an employee of the company with a right (or even an expectation) of receiving contributions to his pensionfund. On that basis, there is no logical reason why it should notapply to a shareholder in his capacity as a creditor of the companyexpecting repayment of his debt. Indeed, it is hard to see whythe rule should not apply to a claim brought by a creditor (or indeed an employee) of the company concerned, even if he is not a shareholder.”

No distinction was drawn between whether the company’s obligations to its shareholders, employees or creditors arose before or after the company’s cause of action against the defendants.

40.  In any event, the defendants’ complaints as to the failure or refusal to procure Lucky Ford to make distributions of profit from the time of the Shareholders’ Agreement until Lucky Ford was wound up would necessarily be a continuing breach, and it would in my view be artificial to confine the breach only to a point in time before the alleged wrongdoings against Lucky Ford took place.

41.  The proper questions, then, are (1) whether Lucky Ford has a viable cause of action for the defendants’ actions complained of; and (2) if so, whether the plaintiffs’ loss is distinct from that of Lucky Ford, or in other words, whether the plaintiffs’ loss would be remedied (at least in principle) by compensation or restitution Lucky Ford would receive for its claim.

42.  Bearing the above approach in mind, I shall examine each of the plaintiffs’ heads of claim in the ASoC.

Breach of Shareholders’ Agreement Claims

43.  In summary, the plaintiffs’ complaints here are that the 1^st to 5^th defendants, in breach of their personal obligations under the Shareholders’ Agreement: (1) failed to procure Lucky Ford to distribute its profits; (2) dissipated the profits of Lucky Ford such that it was incapable of distributing its profits in accordance with the terms of the Shareholders’ Agreement; and (3) deliberately concealed the financial affairs of Lucky Ford, such that the plaintiffs were unable to ascertain the distributable profits of Lucky Ford, and deliberately and maliciously caused Lucky Ford not to prepare any audited accounts or to file tax returns, such that no dividends could be distributed to the plaintiffs. Alternatively, the 1^st to 5^th defendants tortiously induced or procured Lucky Ford to breach the Shareholders’ Agreement, with the intent to injure the plaintiffs.

44.  The claims in (1) above fall into the first category of claim I have mentioned above and therefore are not, by themselves, barred by the principle of reflective loss. The allegations in (2) above, on the other hand, plainly give rise to potential causes of action on the part of Lucky Ford to recover the monies or to seek damages from the defendants.  Unless the plaintiffs can show that their losses are distinct from those of Lucky Ford, their claims would be barred.  Here, the losses are plainly not distinct. If Lucky Ford were able to recover its losses or the misappropriated funds from the defendants, that would replenish Lucky Ford’s assets available for distribution to its creditors and shareholders, including the plaintiffs.  To allow the plaintiffs to claim independently against the defendants for such losses (irrespective of whether there is a separate cause of action) would not only result in potential double recovery at the expense of the defendants, but also at the expense of the company and its creditors, neither of which is permitted.

45.  As to the claims in (3), however, these potentially stand on a different footing.  Whilst such conduct may constitute breaches of fiduciary duty or a contravention of the CO in respect of which Lucky Ford or its liquidators may have a cause of action against the defendants, the plaintiffs’ losses in this regard are arguably distinct from those of the company.

46.  The failure to prepare financial accounts and file tax returns in a timely manner may well result in losses to Lucky Ford in terms of fines and penalties under the CO and the IRO.  However, this is not the loss that is claimed by the plaintiffs. Rather, the plaintiffs' complaints are that the 1^st to 5^th defendants' failure to prepare accounts and file returns on behalf of Lucky Ford (both being prerequisites to the distribution of profits) rendered Lucky Ford incapable of distributing profits.

47.  In the event that the plaintiffs were able to show that Lucky Ford was at some point in a position, but for the 1^st to 5^th defendants’ failure to prepare accounts and file returns on behalf of Lucky Ford, to make distributions pursuant to the Shareholders’ Agreement, then it is at least arguable that the 1^st to 5^th defendants’ actions (or inaction) caused a real loss tothe plaintiffs distinct from that suffered by Lucky Ford.  Such a loss would be part and parcel of the loss arising from the breach of their obligation to procure Lucky Ford to distribute.  

48.  On the other hand, if Lucky Ford was never in a position to make any distributions (whether due to the fact that it was never profitable, as contended by the said defendants, or due to dissipations and misappropriations of its assets, as contended by the plaintiffs), then no distinct or additional loss would have arisen from the defendants’ conduct in this regard. As these are matters for trial, I am not prepared to strike out the claims in (3) at this stage.

49.  Finally, framing the same allegations against the defendants as claims in tort, namely, that the defendants induced or procured Lucky Ford to breach the Shareholders’ Agreement with the intent to injure the plaintiffs, does not change or add to the analysis above.

The Primary and Further Conspiracy Claims

50.  The same reasoning applies mutatis mutandis to the Primary and Further Conspiracy Claims.

51.  Insofar as the unlawful means conspiracy claims are based or rely upon wrongdoings of the 1^st to 5^th defendants (for the Primary Conspiracy Claim) and the 1^st to 6^th defendants (for the Further Conspiracy Claim) vis-à-vis Lucky Ford as being the overt and unlawful acts involved, such claims are barred, notwithstanding that the cause of action is one of conspiracy directed against the plaintiffs, unless the plaintiffs can show a loss that is distinct from that of Lucky Ford.

52.  In respect of the Primary Conspiracy Claim, allegations including inter alia “channelling away and/or disposing of the assets of Lucky Ford”, “transfer … of the units to their relatives and/or close associates and/or companies controlled by and/or associated with themselves” for no consideration and/or misappropriation of such consideration, sale of units at an undervalue and misappropriation of proceeds of the secured loan, plainly give rise to potential causes of action by Lucky Ford against the 1^st to 5^th defendants.  For the same reasons as above, the loss suffered by the plaintiffs as a result of such conduct is not distinct from that of Lucky Ford, and as a result, Lucky Ford’s claims trumps those of the plaintiffs.

53.  On the other hand, if the unlawful and overt acts of the conspiracy are limited to the failure and/or refusal to prepare audited accounts or to file tax returns, then again, the loss suffered by the plaintiffs would arguably be distinct from that of Lucky Ford, and the claim should be allowed to go to trial.

54.  In respect of the Further Conspiracy Claim, the entirety of the unlawful acts relied upon gives rise to potential causes of action by Lucky Ford against the 1^st to 6^th defendants for inter alia breach of fiduciary duty, knowing receipt, dishonest assistance and/or conspiracy to injure Lucky Ford using unlawful means.

55.  Such allegations of unlawful acts include inter alia, the wrongful channelling or transfer of the revenue and profits of the sale of 22 units to the 6^th defendant, the failure to pursue the consideration of HK$10,610,750 from the 6^th defendant and/or the misappropriation of the same, and the sale of units at a gross undervalue.  The losses suffered by the plaintiffs in these circumstances again cannot be said to be distinct from those of Lucky Ford, and hence, the plaintiffs’ claims cannot be entertained and must be struck out.

56.  Finally, the allegations forming the basis of the Commissions Claim plainly give rise to potential claims by Lucky Ford of breach of fiduciary duty against the 5^th defendant, which would again trump the plaintiffs’ claims.  These claims, too, must be struck out.

CONCLUSION

57.  For the reasons above, save for the relatively narrow circumstances identified above where the plaintiffs are allowed to maintain a personal claim, the claims in the ASoC should be struck out on the grounds that the losses claimed by the plaintiff are barred by the principle of reflective loss.

58.  As emphasised in the authorities, the plaintiffs are not without remedy.  Lucky Ford is in liquidation, and there is no apparent reason why the liquidators cannot pursue the claims ofmisappropriation or other breaches of fiduciary duty, or indeed, conspiracy, against the defendants.  If such claims are brought and successfully pursued, the plaintiffs would be entitled to a share of the damages or assets recovered (if any), whether as a claim against Lucky Ford under the Shareholders’ Agreement or as a dividend in the normal course of winding up.  Whilst such a course may well be less advantageous or desirable to the plaintiffs, it is a matter of legal policy that such claims can only be pursued by the company and not its shareholders.

59.  This is not a case where discrete paragraphs of the ASoC can readily be expunged. Rather, the plaintiffs will need to make substantial re-amendments to the ASoC before the action can be allowed to proceed. In the circumstances, I make the following directions:

(1)   Having regard to this Decision, the plaintiffs do have leave to serve on the 1^st, 2^nd and 5^th defendants for their consideration a draft re-amended statement of claim within 14 days from the date hereof;

(2)   The parties to inform the court within 14 days thereafter whether the parties are able to agree on the proposed re-amendments and the terms of disposal of the Summons;

(3)   In the event that no agreement can be reached, whether in whole or in part, the parties be at liberty to fix a hearing before me (or another Judge) with one hour reserved on the proposed re-amendments and the disposal of the Summons;

(4)   There be liberty to apply.

60.  Although I have given the plaintiffs an opportunity to amend the ASoC, the said defendants have been largely successful in the Summons.  Taking into account of all the circumstances, I make an order nisi that the 1^st, 2^nd and 5^th defendants are to have 80% of the costs of the Summons, to be taxed on a party and party basis.

61.  Last but not least, I thank both counsel for their assistance.