KP FINANCIAL SERVICES LTD v. ETERNALUCK LTD AND ANOTHER

HCA 1919, 1922, 2525/2015
& 429/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1919 & 1922 OF 2015

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2525 OF 2015

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 429 OF 2016

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(Heard together)

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D E C I S I O N

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INTRODUCTION

1.  KP Financial Services Limited (“KPFS”) is a money lender.  It lent monies to various borrowers.  The relevant loans were secured by legal charges over real properties executed, or purportedly executed, by attorneys or authorised representatives of the registered owners of those properties.  The borrowers defaulted in repayment. When KPFS sought to enforce repayment of the loans and the securities by action, it was met by the defence that the relevant loan documents, including loan agreements, powers of attorney and legal charges were forged documents. Counterclaims were brought against KPFS seeking declarations that the loan documents were invalid or unenforceable.  KPFS then commenced third party proceedings against Alan Ho & Company (“AH&Co”), KPFS’s solicitors in the loan transactions.  In the third party proceedings, KPFS wishes to have various questions or issues relating to or connected with the authenticity or validity of the loan documents being determined not only as between it and the borrowers/chargors, but also as between either or all of them and AH&Co.

2.  The principal issue which arises for determination in this decision is whether the court should order KPFS and AH&Co to exchange pleadings in the third party proceedings.

BASIC FACTS

3.  The following brief summaries of the facts of the 4 cases should suffice for the present purpose. 

4.  HCA 1919/2015:

(1) The 1^st and 2^nd defendants are husband and wife, and the 3^rd defendant is the son of the 1^st defendant.  The three of them are also the registered owners of the property known as No 213C Shek Wu Tong, Pat Heung, Yuen Long, New Territories, Hong Kong.

(2) KPFS lent HK$6 million to the 1^st, 2^nd and 3^rd defendants pursuant to a facilities letter and a memorandum of agreement upon the security of a second legal charge over the property all dated 12 February 2015.

(3) The memorandum of agreement and second legal charge were signed by the 3^rd defendant on his own behalf and also on behalf of the 1^st and 2^nd defendants pursuant to a power of attorney executed, or purportedly executed, by the 1^st and 2^nd defendants in favour of the 3^rd defendant dated 2 September 2014.

(4) As a result of the 1^st, 2^nd and 3^rd defendants’ default in making repayment of the loan, KPFS commenced an action against them on 21 August 2015 seeking repayment of the outstanding principal and interest thereon and vacant possession of the property.

(5) In their defence and counterclaim dated 30 August 2016, the 1^st and 2^nd defendants alleged that the 3^rd defendant forged the signatures of the 1^st and 2^nd defendants on the power of attorney, and he signed the memorandum of agreement and second legal charge purportedly on behalf of the 1^st and 2^nd defendants without their knowledge or consent.  They counterclaimed against KPFS for a declaration that the memorandum of agreement and second legal charge were void and/or unenforceable.

(6) The 3^rd defendant has not filed any defence.

(7) On 28 September 2016, KPFS issued a third party notice against AH&Co pursuant to Order 16, rule 1(1)(c) of the Rules of the High Court, Cap 4A (“the RHC”), requiring that certain issues relating to or connected with the original subject matter of the action should be determined not only as between KPFS and the 1^st and 2^nd defendants but also as between either or all of them and AH&Co.

(8) On 20 February 2017, KPFS applied to amend the third party notice to narrow down the issues as follows –

(a) whether the power of attorney dated 2 September 2014 was a forged document; and

(b) whether the 1^st and 2^nd defendants knew of and agreed to the 3^rd defendant making a joint loan application to KPFS using the property as security for the loan.

5.  HCA 1922/2015:

(1) The parties are the same as in HCA 1919/2015.

(2) The 1^st and 2^nd defendants are the registered owners of another property known as Flat F, 8/F, Block 3, Bayview Garden, 633 Castle Peak Road, Tsuen Wan, New Territories.

(3) KPFS lent HK$3 million to the 1^st and 2^nd defendants pursuant to a facilities letter and a memorandum of agreement upon the security of a second legal charge over the property all dated 9 January 2015.

(4) The memorandum of agreement and second legal charge were signed by the 3^rd defendant on behalf of the 1^st and 2^nd defendants pursuant to a power of attorney executed, or purportedly executed, by the 1^st and 2^nd defendants in favour of the 3^rd defendant dated 26 November 2014.

(5) By a deed of guarantee dated 9 January 2015, the 3^rd defendant guaranteed the due and punctual payment of all general credit facilities granted by KPFS to the 1^st and 2^nd defendants, including the said loan of HK$3 million.

(6) As a result of the 1^st, 2^nd and 3^rd defendants’ default in making repayment of the loan, KPFS commenced an action against them on 21 August 2015 seeking repayment of the outstanding principal and interest thereon and vacant possession of the property.

(7) In their defence and counterclaim dated 12 September 2016, the 1^st and 2^nd defendants alleged that the 3^rd defendant forged the signatures of the 1^st and 2^nd defendants on the power of attorney, and he signed the memorandum of agreement and second legal charge purportedly on behalf of the 1^st and 2^nd defendants without their knowledge or consent.  They counterclaimed against KPFS for a declaration that the memorandum of agreement and second legal charge were void and/or unenforceable.

(8) The 3^rd defendant has not filed any defence.

(9) On 7 October 2016, KPFS issued a third party notice against AH&Co pursuant to Order 16, rule 1(1)(c) of the RHC requiring that certain issues relating to or connected with the original subject matter of the action should be determined not only as between KPFS and the 1^st and 2^nd defendants but also as between either or all of them and AH&Co.

(10) On 20 February 2017, KPFS applied to amend the third party notice to narrow down the issues to (inter alia) the following[1] –

(a) whether the 1^st and 2^nd defendants had knowledge of and consented to the 3^rd defendant making a loan application to KPFS using the property as security for the loan; and

(b) whether the power of attorney dated 26 November 2014 was forged.

6.  HCA 2525/2015:

(1) The 1^st defendant is a limited company incorporated in Hong Kong, and the registered owner of a property known as 10/F (Apartment 2 on 10/F), Kiu Kin Mansion, 566 Nathan Road, Kowloon, Hong Kong.

(2) The 2^nd defendant was, or purported to be, the sole director and shareholder of the 1^st defendant.

(3) KPFS lent HK$5.4 million to the 1^st defendant pursuant to a facilities letter and memorandum of agreement upon the security of a legal charge over the property all dated 18 March 2015.

(4) The memorandum of agreement and legal charge were executed on behalf of the 1^st defendant by the 2^nd defendant acting as its sole director.  The company chop and/or common seal of the 1^st defendant were also affixed on various loan documents.

(5) By a deed of guarantee dated 18 March 2015, the 2^nd defendant guaranteed the due and punctual payment of all general credit facilities granted by KPFS to the 1^st defendant, including the said loan of HK$5.4 million.

(6) As a result of the 1^st and 2^nd defendants’ default in making repayment of the loan, KPFS commenced an action against them on 30 October 2015 seeking repayment of the outstanding principal and interest thereon and vacant possession of the property.

(7) In its defence and counterclaim dated 14 January 2016, the 1^st defendant alleged that the 2^nd defendant was a complete stranger, and it did not authorise the 2^nd defendant to execute the memorandum of agreement, facilities letter or legal charge on its behalf.  It counterclaimed against KPFS for a declaration that the memorandum of agreement and legal charge were of no effect, void and unenforceable.

(8) The 2^nd defendant has not filed any defence.

(9) On 1 November 2016, KPFS obtained the leave of Master M Wong to issue a third party notice against AH&Co requiring that certain questions or issues relating to or connected with the original subject matter of the action should be determined not only as between KPH and the 1^st and 2^nd defendants but also as between either or all of them and AH&Co.

(10) A total of 6 issues (containing many sub-issues) are set out in the third party notice.  It is not necessary to recite those issues and sub-issues in this decision, save to point out that they relate (inter alia) to the question of the authenticity of various corporate documents of the 1^st defendant and loan documents, and whether the 2^nd defendant had authority to enter into the memorandum of agreement and legal charge on behalf of the 1^st defendant.

7.  HCA 429/2016:

(1) The 1^st and 2^nd defendants are husband and wife, and the 3^rd defendant is their son.  The 1^st and 2^nd defendants are the registered owners of the property known as Flat F, 6/F, Block 5, Belvedere Garden, Phase 3, 625 Castle Peak Road, Tsuen Wan, New Territories.

(2) KPFS lent HK$2.5 million to the 1^st and 2^nd defendants pursuant to a memorandum of agreement and a facilities letter upon the security of a legal charge over the property all dated 11 May 2015.

(3) The memorandum of agreement, facilities letter and legal charge were signed by the 3^rd defendant on behalf of the 1^st and 2^nd defendants pursuant to 2 powers of attorney dated 22 April 2015 executed, or purportedly executed, by the 1^st and 2^nd defendants respectively in favour of the 3^rd defendant.

(4) By a deed of guarantee dated 11 May 2015, the 3^rd defendant guaranteed the due and punctual payment of all general credit facilities granted by KPFS to the 1^st and 2^nd defendants, including the said loan of HK$2.5 million.

(5) As a result of 1^st, 2^nd and 3^rd defendants’ default in making repayment of the loan, KPFS commenced an action against them on 19 February 2016 seeking repayment of the outstanding principal and interest thereon and vacant possession of the property.

(6) In their defence and counterclaim dated 30 April 2016, the 1^st and 2^nd defendants alleged that they did not request for the loan, did not execute any power of attorney in favour of the 3^rd defendant, and did not confer any authority on the 3^rd defendant to create the legal charge. They counterclaimed against KPFS for a declaration that the powers of attorney, the memorandum of agreement and legal charge were null, void and unenforceable.

(7) In his defence dated 24 May 2016, the 3^rd defendant, while admitting that he received a loan in the net amount of HK$2,087,000 from KPFS, alleged that the loan documents that he signed at KPFS’s office and the solicitors’ office had not been explained to him and he did not understand the contents of the same, he did not execute any document or enter into any loan agreement as attorney for or on behalf of the 1^st and 2^nd defendants, he did not agree to provide any personal guarantee for any loan advanced by KPFS to the 1^st and 2^nd defendants, and the 1^st and 2^nd defendants did not sign any power of attorney appointing him as his/her attorney.

(8) On 18 January 2017, KPFS obtained the leave of Master S Lo to issue a third party notice against AH&Co requiring that certain questions or issues relating to or connected with the original subject matter of the action should be determined not only as between KPH and the 1^st, 2^nd and 3^rd defendants but also as between either or all of them and AH&Co.

(9) A total of 5 issues (including a number of sub-issues) are set out in the third party notice.  It is not necessary to recite those issues and sub-issues in this decision, save to point out that they relate (inter alia) to the question of the authenticity of the powers of attorney, and whether the 3^rd defendant had authority to enter into the memorandum of agreement and legal charge on behalf of the 1^st and 2^nd defendants.

8.  As confirmed by Mr Pow SC on behalf of KPFS at the hearing on 27 September 2017, KPFS’s position in respect of the allegations of forgery and lack of authority raised by the various defendants in the 4 actions is that it would put them to strict proof of those allegations, but KPFS wishes the court’s findings on those allegations to be binding also on AH&Co.

9.  In each of the 2 case management summonses issued by KPFS in HCA 1919 and 1922/2015 dated 20 February 2017, KPFS seeks leave to amend the third party notice as well as the following directions from the court (amongst others):-

(1) filing and service of lists of documents (paragraphs 2 and 8 of the summons);

(2) exchange of witness statements (paragraphs 3 and 9 of the summons);

(3) the issues listed in the amended third party notice be tried as between the KPFS, the 1^st and 2^nd defendants and AH&Co at the same time (paragraph 6 of the summons); and

(4) leave to AH&Co to appear at the trial and to call witnesses and to cross examine witnesses relevant to those issues (paragraph 7 of the summons).

10.  KPFS also took out summonses in HCA 2525/2015 on 17 February 2017 and HCA 429/2016 on 21 February 2017 seeking similar directions in those actions.

11.  On the other hand, AH&Co took out a third party summons in each of HCA 1919 and 1922/2015 on 23 March 2017 and in HCA 429/2016 on 30 March 2017 seeking (amongst others) the following directions:-

(1) the documents and witness statements to be served by KPFS and the defendants in the main action be served also on AH&Co (paragraph 1 of the summons);

(2) filing and service of statement of claim, defence and reply as between KPFS and AH&Co (paragraphs 2 to 4 of the summons);

(3) filing and service of lists of documents as between KPFS, the defendants and AH&Co (paragraph 5 of the summons);

(4) filing and service of witness statements as between KPFS, the defendants and AH&Co (paragraph 7 of the summons); and

(5) leave to AH&Co to appear at the trial of the action between KPFS and the defendants and to call and cross-examine witnesses (paragraph 8 of the summons).

12.  Pursuant to the order of Mr Registrar K W Lung dated 10 April 2017, the aforesaid summonses came before this court on 27 September 2017, with the defendants in the 4 actions having been excused from attending the hearing.

13.  At the hearing, the parties focused on the question of whether the court should direct pleadings to be exchanged between KPFS and AH&Co.  This is the issue that I shall deal with in this decision, leaving the rest of the matters mentioned in the various summonses to be dealt with on another date to be fixed in the event that the parties (including the defendants) cannot reach agreement on those matters.

discussion

14.  Order 16, rule 1(1) of the RHC permits a defendant, who has given notice of intention to defend, to issue a third party notice in three different situations, namely:-

(1) where the defendant wishes to claim against a person not already a party to the action any contribution or indemnity (sub-paragraph (a));

(2) where the defendant wishes to claim against such a person any relief or remedy relating to or connected with the original subject-matter of the action and substantially the same as some relief or remedy claimed by the plaintiff (sub‑paragraph (b)); or

(3) where the defendant requires any question or issue relating to or connected with the original subject-matter of the action should be determined not only as between the plaintiff and the defendant but also as between either or both of them and a person not already a party to the action (sub-paragraph (c)).

15.  By virtue of Order 16, rule 11, where in any action a counterclaim is made by a defendant, the provisions of Order 16 shall apply in relation to the counterclaim as if the subject-matter of the counterclaim were the original subject-matter of the action, and as if the person making the counterclaim were the plaintiff and the person against whom it is made a defendant.  Accordingly, KPFS, being a person against whom a counterclaim has been made in each of the 4 actions, may issue a third party notice against AH&Co under Order 16, rule 1(1).

16.  It is clear that under Order 16, rule 1(1), a defendant may issue a third party notice even though it is not making any claim against the third party (whether for contribution or indemnity under sub‑paragraph (a) or for any relief or remedy under-paragraph (b)), but merely for the purpose of having some question or issue relating to or connected with the original subject-matter of the action to be determined not only as between the plaintiff and the defendant but also as between either or both of them and the third party under sub-paragraph (c).  The purpose of permitting a defendant to issue a third party notice under this sub‑paragraph is to ensure that the relevant question or issue will be determined once and for all amongst the plaintiff, the defendant and the third party, thereby avoiding multiplicity of proceedings on the same point with possibly different results.  Thus, in Chatsworth Investments Ltd v Amoco (UK) Ltd [1968] 3 WLR 343 at 356-357, Russell LJ stated as follows:-

“We were referred by the defendants to the comments of Scrutton L.J. in Barclays Bank v. Tom[2] on the function of third party proceedings. He made three points, of which the first and leading one was the desirability of binding the third party as against the defendant to the court’s decision on a point between the plaintiff and the defendant, avoiding the burden on the defendant of proving against the third party the case of the successful plaintiff against the defendant. Put another way, third party proceedings avoid multiplicity of proceedings on the same point with possibly differing conclusions.”

17.  In the present case, KPFS has potential negligence claims against AH&Co in respect of the loan transactions, but does not wish to bring a claim against AH&Co for any relief or remedy at this stage pending the determination of various issues regarding the authenticity or validity of the relevant loan documents.  If those loan documents are ultimately found by the court to be valid and binding on the borrowers and chargors, there would be no need for KPFS to make any claim against AH&Co.  On the other hand, if those loan documents should be found by the court to be invalid and unenforceable, such findings would not, by themselves, be admissible against AH&Co unless it is brought in as a third party to the main actions.  See Myers v Sherick (N&J) [1974] 1 All ER 81, at 85-86 per Goff J:-

“Counsel says there are no common issues, and provided the defendants do not compromise without the consent of the firm, but properly fight the action and lose, then the judgment will be conclusive against the firm as to the defendants’ liability to the plaintiff and the quantum of damage. In my judgment, however, that is not so. In their claim for breach of duty, the defendants must prove their loss, and the firm, if not brought into the main action as third parties will not be bound by the judgment in it, but will be free to dispute the extent of the defendants’ true liability. In particular, in my view, it will be open to the firm to argue afresh the point taken in the defence to the main action that the plaintiff is not entitled to sue on the implied covenants, because of alleged illegality in connection with the statement of the consideration and the stamping of the transfer.”

18.  In my view, it is, in principle, open to KPFS not to make any claim against AH&Co at this stage, but to utilise the third party procedure to ensure that the court’s findings on the authenticity and validity of the relevant loan documents will be binding on AH&Co in any future professional negligence claims that KPFS may bring against the latter.

19.  Where a third party notice is issued under Order 16, rule 1(1)(c), there should, generally speaking, be no necessity for any pleadings to be exchanged between the defendant and the third party because the issues which the defendant wishes to be determined not only as between the plaintiff and the defendant but also as between either or both of them and the third party ought already to be have been stated with precision.  The issues so stated would define the scope of the evidence and discovery and enable the parties to decide what points of law should be taken.  It would, indeed, be incongruent to require the defendant in such a situation to serve a statement of claim (which, by virtue of Order 18, rule 15(1) of the RHC, must state specifically the relief or remedy being claimed) on the third party when the defendant is currently not making any claim against it.  It is also difficult to see how the third party can be required to serve a “defence” on the defendant in the absence of some claim being made against it by the defendant.

20.  Mr Pang SC on behalf of AH&Comakes a number of points in support of his contention that KPFS and AH&Co should be required to exchange pleadings.  First, he says that it is highly unfair that KPFS should drag AH&Co into the litigations without even making it clear whether KPFS is alleging that AH&Co was professionally negligent, and if so how. In my view, KPFS is quite entitled to require that questions regarding the authenticity and validity of the relevant loan documents should first be determined amongst all the parties concerned, leaving the question of professional negligence to be determined at a later stage, if necessary.  As earlier mentioned, adopting this course has the advantage of avoiding multiplicity of proceedings on the same issues with possibly different results.  It will also save unnecessary costs from being incurred on the question of professional negligence should the court uphold the authenticity and validity of the relevant loan documents.

21.  Second, Mr Pang argues that the “common issues” listed in the various third party notices are deficient in particulars.  I have examined the issues as set out in the third party notices.  By and large, I consider the issues to be clearly and properly defined.  In any event, if some of the issues are lacking in particulars as submitted by Mr Pang, the remedy lies in refining the issues instead of ordering pleadings to be exchanged.   If there are any particular issues which AH&Co considers ought to be further or better defined, appropriate third party directions can be sought under Order 16, rule 4(4), which gives the court wide powers to “give such directions as appear to the Court proper for having the rights and liabilities of the parties most conveniently determined and enforced and as to the extent to which the third party is to be bound by any judgment or decision in the action.”

22.  In passing, I should mention that Mr Pow accepts that some of the issues currently listed in the third party notice in HCA 2525/2015 do not strictly arise out of the pleadings in the main action, but arise out of the affidavits or affirmations exchanged between KPFS and the defendants in the course of a previous strike out application.   In my view, where Order 16, rule 1(1)(c) is invoked, the issues that the defendant wishes to be determined not only as between the plaintiff and the defendant but also as between either or both of them and the third party ought to be confined to issues arising strictly out of the pleadings between the plaintiff and defendant, for the simple reason that issues outside those pleadings will not, or will not necessarily, be determined as between the plaintiff and the defendant at the trial.  I shall leave this matter to be considered at the further hearing mentioned in paragraph 27 below.

23.  Third, Mr Pang submits that it is unfair to AH&Co to have to defend itself, make discovery, challenge factual evidence, and put forward a positive case without knowing what the real case against it is or is going to be.  I am unable to accept this submission.  Subject to possible refinement and cutting down of issues as mentioned above, I believe that the issues currently set out in the third party notices are sufficiently clear to enable AH&Co to decide what discovery it is required to make, what evidence it needs to put forward or challenge, and what cases it wishes to advance in respect of those issues.

24.  At the hearing on 27 September 2017, Mr Pang said that, instead of a full statement of claim, KPFS should at least be ordered to file and serve a document similar to a statement of claim but without the prayer for relief so that KPFS’s stance on the various issues listed in the third party notices would be clearly set out.  The court has, undoubtedly, jurisdiction to order the parties to exchange succinct statements of the nature of their respective cases where there are genuine difficulties in ascertaining the parties’ cases or for the purpose of narrowing down the scope of the disputes between the parties as much as possible.  In the present cases, subject to the point mentioned in paragraph 22 above, KPFS’s stance on the issues listed in the third party notices should be readily ascertainable from the pleadings already filed in the 4 actions.  As earlier mentioned, Mr Pow has also confirmed that KPFS’s position is basically that it would put the defendants to strict proof of the allegations of forgery and lack of authority.  KPFS’s solicitors previously proposed to AH&Co’s solicitors by a letter dated 6 April 2017 that the parties should file and serve an agreed statement of issues in dispute in order that the issues could be property formulated.  AH&Co’s solicitors did not, however, respond to that proposal.  I consider that there are merits in requiring KPFS and AH&Co to exchange succinct statements of their respective cases, or prepare an agreed statement of issues in dispute (with their respective stances on each issue being clearly set out in the document), but do not consider that it is necessary to order the parties to exchange formal pleadings. 

25.  Fourth, Mr Pang says that AH&Co may be prejudiced on the issue of costs because (as I understand his submissions), in the absence of any claim being made by KPFS against AH&Co, it will not be possible to make an order that costs should follow the “event”.  When determining the question of costs, the court will have to consider, amongst other things, whether the defendants have succeeded in challenging the authenticity and validity of the various loan documents and what (if any) cases have been advanced by AH&Co in respect of the issues set out in the third party notices.  I do not consider that the court will be unable to make a costs order at the end of the day which will fully reflect the justice of the case as amongst all the parties concerned.

DISPOSITION

26.  For the foregoing reasons, I decline to order pleadings to be exchanged between KPFS and AH&Co.

27.  Since the defendants will be affected by the rest of the directions sought in the summonses mentioned in paragraphs 9 to 11 above, I direct that the summonses be restored for a further hearing before this court with 1 hour reserved, unless all parties (including the defendants) can agree on the directions to be made, in which event a consent summons should be submitted for the court’s approval. For the avoidance of doubt, at the restored hearing of the summonses, the court will also deal with the question of amendments of the third party notices, objections (if any) to the issues as currently listed in the third party notices, as well as the matters mentioned in paragraphs 22 and 24 above.

28.  On the question of costs, I make an order nisi that AH&Co shall pay KPFS its costs of the hearing on 27 September 2017, to be taxed if not agreed with certificate for senior counsel.

29.  Lastly, it remains for me to thank counsel for their assistance rendered to the court.

HCA 2525/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2525 OF 2015

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DECISION ON COSTS

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Background

1.  On 16 December 2016, I dismissed the 1^st defendant’s application by summons, dated 25 July 2016, to strike out the plaintiff’s claim against it and I made a costs order nisi that the 1^st defendant pay the plaintiff’s costs, which I assessed summarily at HK$516,596.00.

2.  By letter, dated 30 December 2016, the 1^st defendant’s solicitors wrote to the court advising that they were instructed to write to object to my costs order nisi and proposing directions for the filing of submissions and for disposal of the objection on paper.

3.  I am advised by the 1^st defendant’s solicitors that, on 17 January 2017, they wrote to the plaintiff’s solicitors drawing the latter’s attention to the Court of Appeal’s decision in AXA China Region Insurance Company Limited v Leong Fong Cheng (unreported, CACV 113/2016, 28 October 2016) in which the Court of Appeal expressed the view that it was only in very exceptional circumstances that a court will entertain an application by letter.  As Mimmie Chan J noted in Chan Shun Kei t/a Chan Shun Kei Construction WorksvHong Kong Construction(Hong Kong)Limited (formerly known as Hong Kong Construction(Holdings)Limited) (unreported, HCCT 2/2011, 21 August 2014), (referring to para 32/6/9A Hong Kong Civil Procedure) an application to vary a costs order nisi made under Order 42, rule 5B(6) of the Rules of the High Court should be made by summons.

4.  However, non-compliance with the prescribed mode of application is at most an irregularity and does not render the proceedings a nullity.  The court will not set aside the final costs order if the applicant has not suffered any prejudice by the mode of application that was adopted:  Hong Kong Civil Procedure 2017, Vol 1, para 32/6/9A.

5.  On 2 February 2017, the plaintiff filed an ex parte application applying for a Charging Order Nisi to enforce my costs order.  The plaintiff had taken the view that my costs order nisi had become absolute 14 days after it was pronounced since no proper application for its variation had been made.

6.  On 3 February 2017, the 1^st defendant filed and served a summons seeking an order to vary my costs order to reduce the sum assessed to $270,000 and an extension of time in which to apply.

7.  On 6 February 2017, the plaintiff filed an affirmation informing the court of the 1^st defendant’s summons.

8.  Master S Lo made a Charging Order Nisi in favour of the plaintiff on 6 February 2017.  Also, on 6 February 2017, I gave directions as to the filing of submissions in respect of the 1^st defendant’s application.  At that time, I was aware only of the letter, dated 30 December 2016 and a follow up letter from the 1^st defendant’s solicitors, dated 17 January 2017.  In accordance with my directions, the 1^st defendant filed its Grounds of Objection on 17 February 2017 and the plaintiff filed its Reply on 22 February 2017.

9.  On 9 February 2017, Master Roy Yu, after considering the plaintiff’s affirmation filed on 6 February 2017, directed that the Charging Order Nisi still stood.

10.  As the case now stands, there are three matters to be disposed of:

(a) The objection to my costs order made on 16 December 2016;

(b) The 1^st defendant’s summons, dated 3 February 2017; and

(c) The Charging Order Nisi, dated 6 February 2017.

11.  I am advised by the plaintiff’s solicitors that, subject to endorsement by the court, the parties have agreed to deal with the 1^st defendant’s summons as follows:

(a) Leave to the 1^st defendant to withdraw the summons; and

(b) There be no order as to costs of the summons and the intended consent application.

12.  As to the Charging Order Nisi, the plaintiff submits that it should stand if no variation to my costs order is made but that it should be discharged if a variation is made.  However, the plaintiff submits, in view of the history of the variation application, the costs of the Charging Order Nisi should be borne by the 1^st defendant in the event that it is discharged.

Variation application

13.  The plaintiff filed a Statement of Costs for Summary Assessment on 9 December 2016, the date of the hearing before me.

14.  The 1^st defendant objects to Item C2, “Attendance on other side:  5 hours and 25 minutes, $21,666”.  This item is for the charges of a solicitor at $4,000 per hour.  The 1^st defendant objects also to the amounts claimed in respect of the costs of Senior Counsel briefed by the plaintiff.

15.  Regarding Item C2, the 1^st defendant points out that the attendances comprise correspondence concerning inspection, request for extension of time and service of documents.  The plaintiff notes that the 1^st defendant’s application was filed on 25 July 2016 and the substantive hearing was not held until five months later, 9 December 2016 during which period there were two call-over hearings.

16.  I am not assisted by the length of time between application and hearing.  Taking a broad-brush approach, I agree with the 1^st defendant that the claim is excessive but I shall not reduce Item C2 by as much as requested by the 1^st defendant.  For Item C2, I allow three hours, ie $12,000.

17.  Regarding Senior Counsel’s fees, there was no dispute as to principle.  The test is whether such fees were necessary or proper and a non-exhaustive set of relevant facts are set out in Hong Kong Civil Procedure 2017, Vol 1, para 62/App/48.

18.  The plaintiff briefed Senior Counsel and junior counsel, the latter with 17 years call, although only Senior Counsel appeared at the hearing before me.  The 1^st defendant briefed a junior counsel with eight years call.

19.  The 1^st defendant submitted:

(a) The strike out application was straightforward and did not present any lengthy or complex set of facts or legal issues.  The arguments focused on facts.

(b) The consequences of striking out were not draconian because the plaintiff could still sue the 2^nd defendant and the third party.

(c) The plaintiff’s junior counsel had the experience and competence to handle the case.

(d) It was disproportionate to brief Senior Counsel when the 1^st defendant briefed a junior counsel with eight years call.

20.  The plaintiff’s solicitors stated in the Reply that, at the invitation of the parties, Master S Lo directed that the substantive hearing be fixed before a Judge in Chambers because the parties recognized that difficult questions of law or complex or difficult issues were involved.  The solicitors stated that they were under the impression that the 1^st defendant may have obtained advice from Senior Counsel.

21.  The plaintiff’s solicitors also stated that, upon further consideration of the matters, including the nature of the application, difficult questions of law, complexity, difficult issues involved, the amount of money involved ($5,400,000) and the importance of the matter to the client, junior counsel suggested that the plaintiff brief Senior Counsel to attend the hearing before me.

22.  The plaintiff submitted:

(a) The application, if successful, would have had the effect of disposing of the entire action.

(b) Both parties had recognized that the application involved complicated issues.

(c) Suing the 2^nd defendant and the third party would give rise to a multiplicity of proceedings and the risk of inconsistent findings of fact.  Hence, the application was important.

(d) Instructing Senior Counsel was justified in view of the matter’s procedural history.

23.  That the application was listed before a Judge in Chambers because the parties apparently considered it to be complex or difficult is not determinative.  That the plaintiff thought that the 1^st defendant had been advised by Senior Counsel is irrelevant.  That junior counsel suggested that senior counsel attend the hearing is not determinative.  An objection to costs has been taken and I must determine whether the application was actually complex or difficult.

24.  I accept that the application was important but any contested strike out application would be important because, if successful, it brings to an end a plaintiff’s claim against a defendant.  The primary considerations in respect of this application are the difficulty and complexity of the legal and factual issues.

25.  In my view, neither the legal nor the factual issues were complex or difficult and were not such that it was necessary to brief Senior Counsel.  Notwithstanding the amount of money involved, I consider the application was one within the experience and competency of the plaintiff’s junior counsel.  Accordingly, I shall not allow the claim for Senior Counsel’s fees.  Accordingly, I do not allow Items E4, E5 and E6 of the Statement of Costs for Summary Assessment.

26.  Regarding Item E2, “Attending the Plaintiff’s office for document inspection on 29.08.2016 and attending instructing solicitor on telephone on the conduct of the case: [junior counsel] — $3,500”, the 1^st defendant asserts that the inspection took only 10 minutes such that the amount allowed should be $600.  However, this ignores the attendance on the instructing solicitor.  I allow the full amount claimed, ie $3,500.

27.  As to Item E3, Senior Counsel’s perusal of documents, I shall allow junior counsel’s fees for that item — $3,500/hour — and I allow three hours.  In all, $10,500.

28.  As for Item E7, Senior Counsel’s perusal of further documents and settling affirmation in opposition, I allow junior counsel’s fees for that item and I allow $28,000.

29.  As for the brief to appear, Item E8, I allow a fee for junior counsel, which I fix at $150,000.

30.  Taking into consideration the variations I have made above, I assess the plaintiff’s costs at $269,430.

31.  I grant leave to the 1^st defendant to withdraw its summons, dated 3 February 2017 with no order as to costs of either the summons or the consent application.

32.  I discharge the Charging Order Nisi.  In light of the fact that the 1^st defendant initially proceeded irregularly by letter and then took out a summons only after the plaintiff’s application for a Charging Order Nisi, I make a costs order nisi that the 1^st defendant pay the costs of the Charging Order Nisi.

33.  As the 1^st defendant has been successful in its objection to costs, I make an order nisi that the plaintiff is to pay the 1^st defendant’s costs to be taxed if not agreed.

HCA 2525/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2525 OF 2015

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D E C I S I O N

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Background

1.  The plaintiff is a licensed money lender registered under the Money Lenders Ordinance, Cap 163 and its claim against the 1^st defendant is for breach of contract.

2.  The claim is based on a written memorandum of agreement and facility letter, both dated 18 March 2015, granting a loan of HK$5,400,000.00 to the 1^st defendant. The loan was secured by a first legal charge over real property owned by the 1^st defendant.  The plaintiff alleges that the legal charge was executed by the 1^st defendant through the 2^nd defendant acting in the capacity of sole director of the 1^st defendant.

3.  The 2^nd defendant signed a personal guarantee to secure the 1^st defendant’s liability to repay the loan.  The 2^nd defendant is sued as guarantor.

4.  Following a default in monthly repayments, the plaintiff issued demand letters to which there was no response.  A Writ was issued on 30 October 2015 by which the plaintiff claims payment of outstanding monies due and delivery of vacant possession of the real property.  On 14 January 2016, the 1^st defendant filed a defence and counterclaim, together with an affirmation of one Zhao Rufa.

The plaintiff’s case

5.  The plaintiff’s case is that the 2^nd defendant was the 1^st defendant’s director and shareholder acting on behalf of the 1^st defendant when agreeing to the loan and the mortgage.  The plaintiff alleges that, to establish his position, the 2^nd defendant produced to the plaintiff copies of the following documents:

(1) instrument of transfer of the 1^st defendant’s shares from Zhao Rufa to the 2^nd defendant signed by Mr Zhao;

(2) instrument of transfer of the 1^st defendant’s shares from one Huang Beiqiang to the 2^nd defendant signed by Mr Huang;

(3) bought and sold note;

(4) return of allotment, dated 18 November 2014;

(5) notices of cessation of acting as directors of the 1^st defendant for Mr Zhao and Mr Huang;

(6) notice of appointment of the 2^nd defendant as director of the 1^st defendant; and

(7) minutes of the 1^st defendant’s directors and shareholders meeting, dated 17 November 2014, approving the transfer of Mr Zhao and Mr Huang’s shares to the 2^nd defendant.

6.  The documents at (1), (2) and (3) purportedly bore the signatures of Mr Zhao and Mr Huang. These documents bear chops marked “Hong Kong stamp duty paid”.  The documents at (4) to (7) appear on their face to have been filed at the Companies Registry because they bear the receipt chop of the Registry’s Document Management Section.  A number of these documents bear a chop in the form of “Certified True Copy” and apparently signed by one Tung Yui Tao Kaiser, solicitor, Choi and Associates.

7.  The memorandum of agreement and other documents associated with the loan bear the chop “For and on behalf of” the 1^st defendant, signed by the 2^nd defendant.

8.  The plaintiff also relies on a letter confirming the 2^nd defendant’s employment and salary as a director of the 1^st defendant, purportedly on the 1^st defendant’s letterhead and bearing the chop “For and on behalf of” the 1^st defendant, signed by the 2^nd defendant and the 1^st defendant’s business registration form produced by the 2^nd defendant.

9.  Finally, the plaintiff relies on a bank statement produced by the 2^nd defendant, purportedly concerning an account held by the 1^st defendant with HSBC.

The 1^st defendant’s case

10.  In essence, the 1^st defendant’s case is:

(1) the 2^nd defendant is a stranger.  He had no authority to enter into any agreement or legal documents for and on behalf of the 1^st defendant;

(2) the 1^st defendant did not apply for or obtain any loan from the plaintiff;

(3) the 1^st defendant did not agree to mortgage the real property to the plaintiff;

(4) the loan documents and first legal charge bore a forged common seal and, hence, are forged documents.

11.  By its counterclaim the 1^st defendant claims:

(1) a declaration that the 1^st defendant is not party or privy to the memorandum of agreement and the same is of no effect, void and/or unenforceable as against the 1^st defendant;

(2) a declaration that the 1^st defendant is not party or privy to the legal charge and the same is of no effect, void and/or unenforceable as against the 1^st defendant; and

(3) an order that the registration of the purported legal charge/mortgage at the Land Registry or Land Office be vacated.

Application to strike out

12.  By summons, dated 25 July 2016, the 1^st defendant applied to strike out the plaintiff’s claim against it on the grounds that it:

(1) discloses no reasonable cause of action against the 1^st defendant;

(2) is frivolous and vexatious; and/or

(3) amounts to an abuse of the court’s process.

13.  The application was brought pursuant to the Rules of the High Court, Order 18, rule 19 and the court’s inherent jurisdiction.

14.  As far as ground (1) is concerned, it is trite law that no evidence will be admissible and the court will examine only the pleading.  The amended statement of claim discloses a loan, a legal charge, default on the loan, monies outstanding and enforcement of mortgage security, in short, a cause of action. The 1^st defendant’s counsel, Mr Kwong, did not argue otherwise.

15.  Rather, the 1^st defendant’s case is that the plaintiff has failed to discharge its legal burden of proving that the documents upon which it relies to establish its case are genuine. Mr Kwong submitted that the plaintiff’s evidence is not cogent; it has only produced copy documents, which is not enough to discharge the legal burden of proof.  Mr Kwong submitted that the plaintiff has to prove that the documents are genuine by pinpointing objective evidence, such as, having checked the public record to confirm that the documents are genuine.  Counsel also submitted that the copy documents are forgeries.

16.  The 1^st defendant also relies on the affirmations of Mr Zhao, who asserts that he and Mr Huang are and have been at all material times the 1^st defendant’s directors and shareholders and that the 2^nd defendant is not known to them and never had authority to enter into the loan agreement and mortgage on behalf of the 1^st defendant, and the exhibits thereto.  The principle evidence upon which the 1^st defendant relies is as follows.

17.  Regarding the bank statement, HSBC has provided a letter advising:

(1) the name of the account is not that of the 1^st defendant;

(2) the bank statements were not issued by HSBC; and

(3) there is currently no account in the 1^st defendant’s name.

18.  A search of the Companies Registry revealed that no notice of either the cessation of Mr Zhao and Mr Huang’s directorship or the appointment of the 2^nd defendant as director has ever been filed.

19.  The 2^nd defendant made a statutory declaration provided to the plaintiff alleging that the title deeds of the property were lost.  However, Mr Zhao stated that the title deeds were always in Mr Huang’s and his possession.  Hence, counsel submitted the statutory declaration is false.

20.  A statement of claim filed in another action, HCA 1320/2016, alleges that the 2^nd defendant is a fraudster and a wanted person.

21.  The 1^st defendant also relied upon a comparison of two photographs, one of the common seal affixed to the charge and the other of another common seal, which shows (the 1^st defendant) says that the one affixed to the charge differs from the 1^st defendant’s genuine common seal.  Hence, the 1^st defendant asserts, it is obviously faked.

Legal principles

22.  The principles concerning an application to strike out are well‑settled and were not in dispute:

(1) Only in plain and obvious cases should the court exercise its power to strike out an endorsement on a writ or pleading;

(2) There should not be a trial on affidavit.  Disputed facts are to be taken in favour of the party against whom the application is made;

(3) The claim must be obviously unsustainable, and it must be impossible, not just improbable, for the claim to succeed.  The court must be “clear beyond doubt” before striking out is ordered;

(4) Where the legal viability of a cause of action is sensitive to the facts, an order to strike out should not be made;

(5) That a case is weak and not likely to succeed is no ground for striking out.

See: Hong Kong Civil Procedure 2017 Vol. 1, para 18/19/4; LY Group Development Ltd v East Canton Ltd [2015] 4 HKLRD 84 at para 14; Wenlock v Moloney [1965] 1 WLR 1238 at p1244.

23.  In Hutchvision Asia Ltd v Asia Television Ltd [1993] 2 HKC 510 at p514, Godfrey J observed:

“… any lawyer with any experience of private practice will be able to remember, only too well, those cases which appeared to be certainties but which, to his surprise, nevertheless failed and, by the same token, those cases which seemed bound to fail but which, to his surprise, nevertheless succeeded. It is for just this reason that the court will not embark, at this stage of an action, on a consideration whether the case of one side or the other is true or false…”

The application’s merits

24.  Mr Pow SC accepts that the plaintiff bears a legal burden to prove that the documents are genuine and, in my view, the plaintiff has discharged that burden.  The plaintiff has produced documents, albeit copies, which bear what appear to be the signatures of Mr Zhao and Mr Huang.  The documents bear what appear to be Companies Registry chops, the 1^st defendant’s chops and common seal and certification by a solicitor.  Regarding the bank statement, HSBC has not revealed the name of the account holder and the statement contains entries in terms of “From Eternaluck H‑gold/exchange credit”; there appears to be a connection with the 1^st defendant.  These references are not exhaustive but establish a case that the 2^nd defendant had the 1^st defendant’s authority to enter into the loan and mortgage.

25.  Having discharged its burden, the burden shifted to the 1^st defendant.  The 1^st defendant has produced evidence to rebut the plaintiff’s evidence but the resolution of the conflict between the parties’ evidence should not be undertaken on the affirmations alone.  This is clearly a matter which should go to trial.  To give some examples as to why there should be a trial:

(1) The plaintiff is entitled to test the evidence concerning the apparent signatures of Mr Zhao and Mr Huang;

(2) The plaintiff is entitled to cross‑examine the 1^st defendant’s witnesses regarding the 1^st defendant’s apparent connection with the bank statement;

(3) The plaintiff is entitled to cross‑examine the 1^st defendant’s witnesses regarding the letter purportedly on the 1^st defendant’s letterhead confirming the 2^nd defendant’s employment and salary as a director of the 1^st defendant, bearing the chop “For and on behalf of” the 1^st defendant, signed by the 2^nd defendant;

(4) The plaintiff is entitled to explore the question how the 2^nd defendant came into possession of the 1^st defendant’s business registration form;

(5) The plaintiff is entitled to investigate (a) whether there are differences in the two seals shown in the photographs; and, if so (b) the reason for the differences

26.  Moreover, the plaintiff’s counsel submitted that one cannot rule out the possibility that, if there is forgery, the 1^st defendant was involved.  In this regard, counsel referred me to the approach of Recorder Kotewall SC in Talent Wise Ltd v Cheung Shui Ching [1998] 2 HKLRD 744. That case concerned an application for summary judgment in which the defendant raised a defence based on an allegation of possible conspiracy and fraud. Although Recorder Kotewall characterized the defendant’s case as “intriguing possibilities”, it was sufficient to provide circumstances which called for further investigation.

27.  Relying on Nina Kung alias Nina T.H. Wang v Wang Din Shin [2005] 8 HKCFAR 387, at paras 183–187, Mr Pow also submitted that,  if the 1^st defendant is alleging forgery, the 1^st defendant bears the evidential burden of proving forgery by adducing cogent evidence.  This evidence, Mr Pow submits, the plaintiff is entitled to test at trial.  Mr Kwong submitted that the 1^st defendant did not have to prove forgery, only that the 2^nd defendant did not have the 1^st defendant’s authority to enter into the loan and charge such that there was no contract between the plaintiff and the 1^st defendant.  Mr Kwong may be correct but his submission does not answer the point that there is a dispute concerning authority, which dispute should be resolved at trial.

28.  As the evidential conflicts should be resolved at trial, I dismiss the 1^st defendant’s summons.

Discretion

29.  The plaintiff submitted that there is a further consideration which is relevant to the exercise of discretion to dismiss the summons.  The plaintiff has issued a third party notice to its former solicitors who acted for it in respect of the loan and mortgage.  The third party notice has identified common issues of fact as between the plaintiff, the 1^st defendant and the former solicitors.  The plaintiff submits that, while the trial proceeds as between it and the 1^st defendant, the former solicitors should be given the opportunity to participate in the resolution of those common issues and would be bound by findings of fact.  I agree with the plaintiff that this would attain justice between all relevant parties and avoid a multiplicity of proceedings and the risk of inconsistent findings of fact.  Having dismissed the summons on its merits, it is not necessary for me to consider my discretion but, if it had come down to discretion, I would have exercised it in favour of the plaintiff’s submissions and dismissed the summons.

Disposition

30.  The 1^st defendant’s summons, dated 25 July 2016, is dismissed.

31.  I make a costs order nisi that the 1^st defendant is to pay the plaintiff’s costs, which I assess summarily at HK$516,596.00.