IVY ZHU XU v. HONG KONG PETROCHEMICAL CO LTD

HCA 1248/2017

[2023] HKCFI 3252

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1248 OF 2017

____________

BETWEEN

____________

_______________

D E C I S I O N

_______________

A. INTRODUCTION

1.  On 24 February 2023, Master KW Wong ordered:

(1) The Defendant to produce a series of documents for inspection pursuant to the Plaintiff’s summons dated 23 November 2022 (“Discovery Order”); and

(2) The Plaintiff to pay security for the Defendant’s costs up to and including trial in the sum of $715,500, adopting the Plaintiff’s suggested amount (“Security Order”).

2.  The Defendant now appeals against both Orders. In this appeal against the Discovery Order, only 4 groups of documents (defined below) are in dispute. Existence or possession is not in issue. Rather, necessity for disposing fairly of the cause or matter or for saving costs is. In respect of the appeal against the Security Order, the Defendant seeks an increase in the quantum of security to $2,000,000.

3.  An appeal from a master to a judge operates by way of re- hearing but the judge can give weight it deserves to the master’s decision or adopt the master’s reasoning as the judge thinks fit: Hong Kong Civil Procedure 2023, Vol 1, §58/1/2.

B. FACTUAL BACKGROUND

4.  According to the Plaintiff, there were 2 loans (collectively, “Root Loans”) granted by one C&S Chem Limited (“C&S”) to the Defendant, a company incorporated in Hong Kong.

5.  The Root Loans were rolled over and refinanced by the 1^st and 2^nd LoanAgreements respectively, tabled below:

	1st Loan or Director’s Loan	2nd Loan or Related Company Loan
Date of loan agreement	14 January 2011	14 January 2011
Amount of loan	HK$12,480,000	HK$15,184,260
Interest	2.5% per annum	2.5% per annum

6.  There were 2 subsequent assignments of each of the 2 Loans such that the Plaintiff became the assignee. This is an action by the Plaintiff, for recovery of the 2 Loans from the Defendant.

7.  The Defendant denies the claim and effectively puts the Plaintiff to strict proof. In gist, the defences are that:

(1) The Root Loans had never been advanced and hence never refinanced by the 1^st and 2^nd Loans because of a total absence of bank account records at the material time;

(2) The 1^st and 2^nd Loan Agreements executed by the then Chief Financial Officer of the Defendant were void for want of authority;

(3) The documents adduced by the Plaintiff in support of the Root Loans, the Loan Agreements, and the Assignments are not binding on the Defendant as the relevant directors of the Defendants had acted in breach of fiduciary duties;

(4) The Assignments are not binding on the Defendant for want of authority of the person executing on behalf of the Defendant and want of the metallic seal;

(5) The 2^nd Assignment was void ab initio;

(6) The Assignments are void for being champertous;

(7) The Plaintiff is a mere equitable assignee;

(8) The claim is time-barred.

C. APPEAL AGAINST THE DISCOVERY ORDER

C1. Legal principles on discovery

8.  There is no dispute that an applicant has the burden of showing relevance, existence and possession of the documents by the respondent; and that the documents are necessary for the fair disposal of the trial and for saving costs: Hong Kong Civil Procedure 2023, Vol 1, §24/7/2.

9.  A document is considered to be relevant if it contains information which may, not must, either directly or indirectly enable the party requiring the same either to advance his own case or damage the case of his adversary. It is a document which may fairly lead the party to a train of inquiry which may have either of these two consequences: Compagnie Financiere et Commerciale du Pacifique v Peruvian Guano Co (1882) 11 QBD 55. This authority was applied in K&L Gates v Navin Kumar Aggarwal and Others, HCA 1061/ 2011 (unreported, 27 November 2017) at §16. There, Lok J cautioned against the excessively wide application of the Peruvian Guano test, and said that ultimately the question is whether the discovery is necessary for disposing fairly of the proceedings.

10.  In deciding whether discovery is necessary either for disposing fairly of the cause or matter or for saving costs, the Court should always bear in mind the objectives of, amongst others, ensurance of fairness between the parties: Sunny Tadjudin v Bank of America, National Association, HCA 322/2008, 22 December 2011, §7 Mimmie Chan J.

C2. A few preliminary observations

11.  Of the 4 groups of documents in dispute, Groups One and Four were mentioned in the Defendant’s former Expert Evidence Application but are sought only after dismissal of that Application. Dismissal of the Expert Evidence Application does not, in my view, bar the Plaintiff’s Discovery Application. This is because the 2 applications involve different tests. For expert evidence, the Defendant had to satisfy the Court that there was an issue that required an expert to give an opinion and not just to help the Defendant find documents. The Defendant failed to discharge that burden. For discovery, the Plaintiff has to satisfy the criteria in paragraph 8 above. The refusal to grant leave to adduce expert evidence meant that there was no issue that required the assistance of an expert. It does not mean that documents referred to in the Expert Evidence Application may not be relevant to the issues for trial.

12.  To seek discovery, it is not necessary for the document to have been pleaded or mentioned in an affirmation. Most often, documents are not pleaded because many of them are evidence and it is not the function of pleadings to plead evidence. If a document has been mentioned in a pleading or affirmation, it only means that the applicant can seek discovery under Order 24, rule 10(1).

13.  Contemporaneous documents are important especially since the personnel of either party actually handling the Root Loans, the 1^st and 2^nd Loans are not the witnesses themselves. Generally speaking, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility: Hui Cheung Fai and Another v Daiwa Development Ltd and Others HCA 1734/ 2009 (unreported, 8 April 2014) at §77.

C3. Group One Documents – §1(a) to (c) of the Discovery Summons

14.  These items are:

(1) §1(a): the Agreement for Sale and Purchase of Shares dated 26 January 2010 (“SPA”);

(2) §1(b): a cashier’s order dated 26 January 2010 in the sum of $12,480,000 owed by the Defendant to C & S with interest at 2.5% p.a;

(3) §1(c): a cashier’s order dated 26 January 2010 in the sum of $15,184,260 owed by the Defendant to C & S with interest at 2.5% p.a.

15.  There is no dispute that Group One Documents were referred to in the 5^thaffirmation of Chau Kit Yee (“CKY-5^th”), filed in support of the Defendant’s application for leave to adduce expert evidence (“the Expert Evidence Application”). That application was dismissed by Master Dick Ho without any appeal.

16.  Under Order 24, rule 10(1),

“Any party to a cause or matter shall be entitled at any time to serve a notice on any other party in whose pleadings, affidavits or witness statements served under Order 38, rule 2A, … reference is made to any documents requiring him to produce that document for the inspection of the party giving the notice and to permit him to take copies thereof.” (emphasis added)

17.  In Moulin Global Eyecare Holdings Ltd v Olivia Lee Sin Mei [2013] 3 HKLRD 72, at §35, Fok JA (as he then was) laid down a two- stage test for this rule:

“35. There are thus two separate stages to be considered, although in practice these will usually be examined together. First, the party who has referred to the document in a pleading or affidavit bears the burden of showing good cause why an order for production should not be made. As a matter of practicality, at that stage, the fact of reference to a document in a pleading or affidavit will make it difficult for the referring party to contend that the document does not exist and it may also make it difficult for him to contend that it is not relevant. However, that is not the end of the inquiry as there is not then a presumptive rule in favour of an order for production and the referring party may be able to show, for example, that the document is privileged from production. In any event, under O.24 r.13 there remains, secondly, and independent of the first stage, a burden on the applicant for an order for production to show the Court that the order is necessary either for disposing fairly of the cause or matter or for saving costs.” (underline added)

18.  For the first stage, Mr Cheung and Ms Wong, defence counsel, submit there is good cause that an order for production should not be made. This is because the Group One documents are not canvassed in the pleadings but only in CKY-5^th, in support of the issue that the Loans were extinguished. Clause 4 of the SPA provided for some specified direct arrangements for full settlement or discharge of the Root Loans and the cashier orders were presumably issued pursuant thereto. Master Dick Ho held that that issue was not pleaded and the Expert Evidence Application was dismissed. The Plaintiff had not sought disclosure of any of the documents referred to in CKY-5^th prior to the hearing of the Expert Evidence Application and vehemently opposed that Application. Mr Cheung submits that the Plaintiff is estopped from withdrawal of its stance to say that the Group One Documents are relevant.

19.  I am unable to agree with defence counsel. I repeat paragraph 11 above. Under Order 24, rule 10(1), the Plaintiff is entitled to seek discovery “at any time”.

20.  The Group One Documents bore specific dates and were clearly in existence at the material times. This brings us to the second stage described by Fok JA.

21.  Mr Cheung submits that the Plaintiff has failed to establish necessity for fair disposal of the cause or for saving costs. The documents sought are not part of the pleaded case of either party. Specific discovery for the purpose of impeaching the credit of the opposing party is not generally allowed: Kan Wai Chung v Hau Wun Fai (unreported, HCA 811/2010; HCA868/2013, 6 February 2015), §§ 16-17, Chung J.

22.  I am unable to agree with Mr Cheung. Firstly, I repeat paragraph 12 above. Class One Documents constitute evidence. The Court can order inspection of documents even where those documents are not mentioned in the pleadings, provided that the requirements in paragraph 8 above are met.

23.  The Defendant’s reliance on Kan Wai Chung is misplaced. In that case, Chung J held (at §14) that the subject documents were not part of the false evidence relied on by the plaintiffs as part of their pleaded case concerning the false claim and evidence conspiracy. The part of the defence focussed on the background leading to why the documents referred to therein came to be executed, rather than on the documents themselves. Hence, mere relevance did not by itself satisfy either of the purposes in Order 24, rule 13(1). Kan Wai Chung is fact-sensitive and does not assist in the disposal of the present Discovery Application.

24.  Secondly, it was the Defendant’s own case in the Expert Evidence Application that Group One Documents were of particular relevance. CKY-5^th (§13) explained that the SPA was the first sale and purchase agreement that C&S executed as the buyer with other parties including the Defendant, which had the affect of discharging the Root Loans. The SPA was not completed resulting in another sale and purchase agreement. Clause 4 of the SPA provided for full settlement and discharge of the Root Loans. The Defendant is barred from saying that the Group One Documents are not relevant.

25.  Thirdly, Group One Documents are not for impeaching the credit of the Defendant. They go to the core of the issue in dispute, ie whether the Root Loans existed in the first place. If they had never existed, how could they ever be purportedly settled or discharged?

26.  For the reasons given in this Section, Group One Documents are relevant and necessary and would save costs of establishing the existence of the Root Loans. This Group clearly ought to be disclosed pursuant to the Peruvian Guano principles.

C4. Group Two and Three Documents

27.  Group Two Documents are:

(1) §1(h): the general ledger that shows “Loan payable” as stated under “Statement of Financial Position” of the Annual Financial Statement (“AFS”) of the Defendant from 1 January 2012 to 31^st December 2016;

(2) §1(i): the general ledger that shows “Loan payable” as stated under “Statement of Financial Position of the 2017 AFS of the Defendant.

(3) §1(j): the general ledger that shows “Other loans, unsecured” as stated under “Statement of Financial Position” of the 2018 AFS.

28.  Group Three Documents (§1(k)(viii) and (ix) of the Discovery Summons) concern finance costs, ie other loan interest in 2016, 2017 and 2018 as stated in the 2017 and 2018 AFSs.

29.  The Defendant says that they are irrelevant and unnecessary. The Defendant did not possess the general ledger, accounting vouchers and supporting documents sought for the years of 2009-2011. Those sought for 2012 to 2018 are not contemporaneous documents. They have not been canvassed in pleadings or affidavits either.

30.  On the other hand, the Plaintiff points out that two entries in the AFSs match exactly with the total principal sum of the 1^st and 2^nd Loans, i.e. HK$27,664,260; and the interests payable thereon, i.e. HK$691,607 as claimed by the Plaintiff. The AFSs, however, do not show who the lenders were, but one would expect the general ledgers to show their identity.

31.  I notice that the 2 entries in the preceding paragraph appear throughout in the Defendant’s AFSs not only for 2009-2011 but also for 2012-2018 (except 2016). Whilst the Defendant does not possess the general ledger, accounting vouchers and supporting documents sought for the years of 2009-2011, it may possess such documents for 2012-2018. These documents may shed light on who the lenders were and whether the finance costs matched the interest charged under the 2 Loans Agreements. I agree with the Plaintiff that the Group Two and Group Three Documents are relevant as going to the core of either party’s case and ought to be disclosed pursuant to the Peruvian Guano principles.

32.  Imagine that if these 2 Groups of Documents are not disclosed now and the Defendant denies that the sum of HK$27,664,260 and the interests of HK$691,607 in the AFSs are in relation to the 2 Loans, there is nothing to affirm or contradict that answer. These documents are plainly necessary and can save costs if they are disclosed ahead of the trial.

C5. Group Four Documents – §1(l) of the Discovery Summons

33.  This Group is for the AFSs of the Defendant for the 3 years ending 31 December 2019, 2020 and 2021.

34.  Mr Cheung points out that Group Four has never been canvassed at all in any pleading or affidavit. All along, the Plaintiff only referred to one audit report of the Defendant in the re-amended reply, ie the one for the year ending 31 December 2009, to illustrate that the Defendant acknowledged and confirmed the 2 Root Loans. The Plaintiff made no reference to any other AFSs in her pleadings.

35.  Further, Mr Cheung points out that the Plaintiff is already in possession of the AFSs of the Defendant for the years between 2010 and 2018 (except 2016), and 17 monthly Financial Reports from January 2016 to May 2017. Given that the 2 Root Loans were allegedly advanced in around 2009 and the 1st and 2^nd Loan Agreements were dated 14 January 2011, Mr Cheung submits that the Plaintiff is effectively “witch hunting” for AFSs 10 years after the event. No relevance or necessity can be established by the Plaintiff. Discovery of Group Four Documents is not cost-effective pursuant to the underlying objectives in Order 1A, rule 2, RHC.

36.  Mr Cheung also points out that Master KW Wong initially had reservations on the necessity of Group Four Documents. The Plaintiff’s counsel submitted before the learned Master that there was a duty on the directors under the Companies Ordinance to prepare the annual accounts to give a true and fair view of the financial position of the Defendant. Once the Defendant discovered the “mistake” (presumably about the existence of the 2 Loans), the directors needed to reverse their entry. That was for “testing” the Defendant’s case. Once again, Mr Cheung submits that discovery solely for the purpose of impeaching the credit of a party will not be ordered: Hong Kong Civil Procedure 2023, Vol 1, §24/8/3.

37.  On the other hand, Mr Fong, counsel for the Plaintiff, maintains his submission before the Master as stated in the preceding paragraph. He explains that the annual accounts needed to apply the accounting standards laid down by the Hong Kong Financial Reporting Standard for Private Entities (“FRSFPE”) issued by the Hong Kong Institute of Certified Public Accountants in May 2017. See s.380(1) & (4), and s.357(1) of the Cap 622; Companies (Accounting Standards (Prescribed Body)) Regulation (Cap. 622C).

38.  Under the FRSFPE, a company needs to disclose and correct prior period errors in the first financial statement authorized for issue after its discovery (§§10.19-10.23); and make provisions for contingent obligations (including those arising from litigation) (§21.4, 21.10, 21.11). An entity shall recognize a provision only when … it is probable (ie more likely than not) that entity will be required to transfer economic benefits in settlement” (original emphasis in §21.4(b)).

39.  The defence was filed on 7 May 2018. If the directors of the Defendant allegedly discovered the two Loans in 2018 as “erroneously” recorded in the Defendant’s AFSs, the directors should have reversed the entries in the 2018 AFSs in order to give a true and fair view of the accounts. “Provisions” had been made for the 1^st and 2^nd Loan Agreements together with the incidental interest in the 2018 AFS under Note 31.^[1]

40.  Mr Fong submits that the Plaintiff is entitled to “test” the case of the Defendant by verifying against its 2019 to 2021 AFSs to see whether the provisions made in the 2018 AFS had been reversed.

41.  Further, the Defendant itself has accepted, in its Expert Evidence Application, that the Group Four Documents were of particular importance in determining whether the Loans had been advanced (§§18 and 27 of CKY-5^th).

42.  I ask rhetorically, to test what? Whether the AFSs had been corrected reflects the directors’ opinion of the situation as the litigation progressed. The Court should not and could not rely on the directors’ opinion to determine if the 2 Loans existed. The Group Four Documents are to test and impeach the credibility of the Defendant’s directors.

43.  Moreover, there are many other financial documents of the Defendant that the Plaintiff can rely on. Group Four Documents are not contemporaneous to any of the disputed Loan transactions.

44.  I agree with Mr Cheung’s submission set out in paragraphs 35-36 above and thus decline to make an order for discovery of Group Four Documents.

C6. Conclusion on appeal against Discovery Order

45.  For the reasons given in this Section, the appeal is only allowed in relation to the Group Four Documents.

D. APPEAL AGAINST SECURITY ORDER

46.  There is no dispute that the Court should adopt a broad-brush approach instead of a mini-taxation when assessing the amount of security. Even on this approach, the Defendant submits that the sum of HK$715,500 as proposed by the Plaintiff and ordered by Master KW Wong was too low.

47.  Quantum of security is a matter of discretion. The Court will fix such sum as it thinks just, having regard to all the circumstances of the case. It is not always the practice to order security on a full indemnity basis. It is for the applicant to place materials before the court to enable the court to come to a view on the quantum to be ordered as security: Hong Kong Civil Procedure 2023, Vol 1, §23/3/32, p669.

48.  Further, in my view, a judge on appeal should, as a matter of principle, give great weight to a master’s decision on quantum because a master with taxation experience is better placed than the judge to have an overall view on the costs of an action. Hence, a judge should only interfere with the master’s decision if the master has erred in principle, failed to take into account relevant matters or has taken into account irrelevant matters.

49.  The security in this case is to cover all stages of the proceedings up to and including trial. The Defendant has estimated costs ranging between HK$2.3 million and HK$2.67 million.

50.  Neither the Defendant’s bill nor the list of objections of the Plaintiff adopt a broad-brush approach but is drafted in a way more for taxation. I shall not consider the items one by one. To engage a law-costs draftsman to do the list of objections is a waste of costs for this summons.

51.  There are 2 major factors which the learned Master has failed to give sufficient weight to:

52.  Firstly, the length of the trial. The Defendant estimated that the trial would last for 5 days, with 2 days reserved, in its bill of costs. In accepting the Plaintiff’s proposed figure, the learned Master must have accepted the estimate of trial length to be 3 days, as set out in page 6 of the list of objections.

53.  Following a series of exchanges between the Master and Mr Fong, the latter indicated that the whole trial would last for 4 days and he later even accepted 5 (pp 37E-38C and p43L of the transcripts before Master KW Wong).

54.  In my view, 3 days were an over optimistic estimate. Although this case relies heavily on documentation, one cannot ignore the fact that there will be 5 witnesses. The existence of the Root Loans is only one of the issues. There are other issues as set out in paragraph 7 above.

55.  The Plaintiff and the current personnel of the Defendant do not have personal knowledge of the grant of the Root Loans and execution of the Loan Agreements. One can reasonably expect each party to cross- examine the other party’s witnesses on various matters.

56.  In my view, an estimate of 5 days is more realistic and tallies with the Plaintiff’s own estimate before Master KW Wong. The learned Master has failed to give sufficient consideration to the length of trial.

57.  Secondly, the Plaintiff has attempted, in her list of objections, to rely on costs orders in her favour to object to the Defendant’s estimated costs, but she has failed to quantify her costs. Mr Fong has no submission on this respect. In accepting the Plaintiff’s proposed security, the learned Master has wrongly taken into account those costs orders.

58.  Mr Fong refers to the meaning of “refresher fee” as set out in Hong Kong Civil Procedure 2023, Vol 1, §62/App/28, p1390 and the refresher of the Defendant’s counsel. It is not clear what Mr Fong’s objection is.

59.  For the reasons given in this Section, I consider it fit to exercise the discretion on quantum of security afresh. Even if one were to consider the Defendant’s bill of costs (including the refreshers) to have been inflated, I consider the sum of HK$715,500 to be far below the reasonable scope of a broad-brush assessment of the quantum. I replace it with a figure of HK$1,500,000. The Defendant’s appeal is allowed.

E. A NOTE ON PRODUCTION OF TRANSCRIPTS ON APPEAL

60.  An appeal against a master’s decision is by way of rehearing. There is no point in producing the reasons for decision of the master except, eg where there is a record of a party’s concession which has not featured in the pleadings, affirmations or written submissions before the master.

61.  In the present case, the transcripts of the hearing before Master KW Wong were produced. Master KW Wong’s reasons for decision were that he agreed with the Plaintiff’s counsel in respect of Groups One to Three Documents. He initially had reservations about Group Four but eventually ordered its discovery with only a one-liner explanation: that “many of the amendments [to pleadings] took place recently” (p50M-P of the transcripts). Instead of citing extensively from the transcripts, I do not see why Mr Fong could not have just repeated his submission before the Master in his present written submission.

62.  Two other sets of transcripts were produced in respect of (i) the call-over hearing for the Discovery Summons on 6 December 2022 when, as admitted by the Plaintiff, there was no written submission by either side as yet; and (ii) the hearing before Master Dick Ho in respect of the Expert Evidence Application. They do not concern this appeal.

63.  Therefore, on a nisi basis, the party who sought to produce the transcripts should bear all the costs incidental thereto.

F. CONCLUSION AND COSTS

64.  I therefore order as follows:

(1) In respect of the appeal against the Discovery Order,

(a) The appeal is allowed in part such that the Discovery Order as regards the Group 4 Documents is set aside;

(b) On a nisi basis, 25% of the Defendant’s costs here and below should be borne by the Plaintiff;

(2) In respect of the appeal against the Security Order,

(a) The appeal is allowed such that the Master’s Order is set aside and the Plaintiff shall provide security in the sum of $1,500,000 as security for the Defendant’s costs;

(b) On a nisi basis, the Defendant’s costs here and below should be borne by the Defendant.

(3) Notwithstanding paragraphs (1)(b) and 2(b) above, on a nisi basis, the party suggesting the production of the transcripts should bear all costs of and incidental thereto.

65.  In the light of the above costs order nisi¸ I direct the Defendant to re-draft its statement of costs within 7 days and the Plaintiff to produce its grounds of objection, if any, within 7 days thereafter. The costs will be summarily assessed on paper.

Mr David Fong, instructed by Chin & Associates, for the Plaintiff

Mr Jeremy Cheung and Ms Angel Wong, instructed by Pauline Wong & Co, for the Defendant

HCA 1248/2017

[2023] HKCFI 2071

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1248 OF 2017

__________________

__________________

________________________

D E C I S I O N

________________________

A.  Introduction

1.  By summons of 13 December 2022 (the “Striking Out Summons”), the plaintiff (“P”) seeks an order striking out §§10(e) and 19(e) (the “Impugned Paragraphs”) of the defendant’s Re-Re-Re-Amended Defence (“D” and “RRRAD”), on the basis that the Impugned Paragraphs are inconsistent with §§4(b)(ii), 10(c)(i), 10(c)(ii), 12(b)(ii), 19(c)(i) and 19(c)(ii) of the RRRAD (the “Specified Paragraphs”).

2.  On 6 April 2023[1], Master Elizabeth Cheung (the “Master”) dismissed the Striking Out Summons (the “Decision”).

3.  This is P’s appeal against the Decision.

4.  The main issues are whether D has via the Impugned Paragraphs put forward factually inconsistent pleas, and if so, whether it has any reasonable grounds for doing so.

5.  Mr David Fong appeared for P. Mr Jeremy Cheung with Ms Angel HY Wong appeared for D.

B.  Parties’ respective cases

6.  By the present action, P seeks against D repayment of 2 alleged loans (the “1^st Loan” and “2^nd Loan”, and collectively the “2 Loans”). The 2 Loans were made pursuant to 2 loan agreements both dated 14 January 2011 (the “1^st Loan Agreement” and “2^nd Loan Agreement”).

7.  The 2 Loans, according to P, are “roll-over” loans. P is not the original lender, but an assignee of the same. P’s case in gist is as follows:

(a)  In respect of the 1^st Loan, its genesis (or the root loan) was a loan advanced by Lau Siu Wing (“LSW”) to D (the “LSW Loan”). It was a director’s loan. It was in the sum of HK$12,480,000, and made in around 2009. LSW and D had since entered into at least 17 agreements extending repayment of the same. On 7 January 2011, LSW assigned the LSW Loan to C&S Chem Limited (“C&S”). When the LSW Loan was about to mature, C&S entered into the 1^st Loan Agreement with D “for the purpose of refinancing the [LSW] Loan with the 1^st Loan”[2]. On 28 March 2012, C&S assigned the 1^st Loan to Xu Guangkun (“Mr Xu”), who on 27 December 2016 in turn assigned the same to P;

(b)  The 2^nd Loan has followed a similar path. Its genesis (or the root loan) was a loan advanced by Korchina Logistics (H.K.) Limited (“KLHKL”) to D (the “KLHKL Loan”, and together with the LSW Loan collectively the “Root Loans”). It was in the sum of HK$15,184,260, and made also in around 2009. On 31 December 2009, KLHKL assigned the KLHKL Loan to Ms Lau Vivian Sio Kuan (“LVSK”). LVSK and D had since entered into at least 12 agreements extending repayment of the same. On 7 January 2011, LVSK assigned the KLHKL Loan to C&S. When the KLHKL Loan was about to mature, C&S entered into the 2^nd Loan Agreement with D “for the purpose of refinancing the [KLHKL] Loan with the 2^nd Loan”[3]. On 28 March 2012, C&S assigned the 2^nd Loan to Mr Xu, who on 27 December 2016 assigned the same to P.

8.  D first filed its defence 7 May 2018. 4 sets of amendments have subsequently been made (on 9 March 2020, 9 July 2021, 28 July 2021, and 28 December 2021, the last set for ease of reference being referred to as the “4^th Amendment”), resulting in the current Re-Re-Re-Amended Defence (RRRAD).

9.  D has pleaded a number of defences. They include breach of fiduciary duties owed to it by LSW and LVSK as directors, failure on their part to disclose interest, lack of records recording the requests, approvals and advancements of the Root Loans, the ineffectiveness of the various assignments, invalidity of the 1^st and 2^nd Loan Agreements for want of authority, and limitation defences under the Limitation Ordinance Cap 347.

10.  Amongst the defences pleaded, of most relevance to the present application are the following arising from the Impugned Paragraphs and the Specified Paragraphs:

(a)  In respect of the 1^st Loan:

(i)  D avers, on a further or alternative basis, “that there had never been any actual advancement and/or transfer of the said sum of HK$12,480,000 by LSW to [D]” – §4(b)(ii) of the RRRAD;

(ii)  Particulars on D’s bank accounts (the “Bank Accounts”) are then provided, leading to the averment that there “is no record of the actual advancement and/or transfer of any exact sum of HK$12,480,000 by LSW to [D] in any of the bank statements of the Bank Accounts in or around 2009” – Particulars (2) under §4(b)(ii);

(iii)  “At no time or at all did C&S ever lent to [D] the 1^st Loan (viz HK$12,480,000) or at all” – §10(c)(i);

(iv)  “Further or alternatively, at no time or at all did C&S ever refinanced the LSW Loan, the existence of which is denied by [D], with the 1^st Loan or at all …”
– §10(c)(ii);

(v)  §4(b)(ii) is added by the 4^th Amendment, whereas §§10(c)(i) and 10(c)(ii) (save some minor amendments) appear in the original Defence;

(vi)  The 4^th Amendment adds further §10(e) (1 of the 2 Impugned Paragraphs), that:

“Further or alternatively, [D] avers the 1^st Loan and/or any advancement and/or transfer of any sum by C&S to [D] pursuant the 1^st Loan Agreement, which is denied, is in the nature of quasi capital/equity instead of a debt:

(i) No maturity date of the 1^st Loan was scheduled in the 1^st Loan Agreement;

(ii) The 1^st Loan has not been rolled-over since its execution;

(iii) C&S was given the option to convert the 1^st Loan into equity/shares in the event of default on the part of [D] pursuant to Clause 7.1.”;

(b) The 2^nd Loan follows a similar pleading pattern:

(i)  D avers, also on a further or alternative basis, “that there had never been any actual advancement and/or transfer of the said sum of HK$15,184,260 by KLHKL (or LVSK) to [D]” – §12(b)(ii) of the RRRAD, with similar particulars in relation to absence of record in the Bank Accounts statements;

(ii)  “At no time or at all did C&S ever lent to [D] the 2^nd Loan (viz HK$15,184,260) or at all” – §19(c)(i);

(iii)  “Further or alternatively, at no time or at all did C&S ever refinanced the KLHKL Loan, the existence of which is denied by [D], with the 2^nd Loan or at all …” – §19(c)(ii);

(iv)  §12(b)(ii) is added by the 4^th Amendment, whereas §§19(c)(i) and 19(c)(ii) (save some minor amendments) appear in the original Defence;

(v)  Similar to the case of the 1^st Loan, the 4^th Amendment adds further §19(e) (the other of the 2 Impugned Paragraphs), that

“Further or alternatively, [D] avers the 2^nd Loan and/or any advancement and/or transfer of any sum by C&S to [D] pursuant the 2^nd Loan Agreement, which is denied, is in the nature of quasi capital/equity instead of a debt:

(i) No maturity date of the 2^nd Loan was scheduled in the 2^nd Loan Agreement;

(ii) The 2^nd Loan has not been rolled-over since its execution;

(iii) C&S was given the option to convert the 2^nd Loan into equity/shares in the event of default on the part of [D] pursuant to Clause 7.1.”

11.  Procedurally, it is also relevant to note that:

(a)  the 4^th Amendment was effected by way of a consent summons of 14 December 2021 (the “4^th Amendment Consent Summons”);

(b)  on 18 August 2022, D’s application to adduce expert evidence (“D’s Expert Evidence Summons”) on the nature of the 2 Loans was heard by Master Dick Ho; and

(c)  by summons of 23 November 2022, and in respect of the paragraphs of the RRRAD mentioned above, P sought further and better particulars on “the material facts in support of the reasonable grounds for making of the above inconsistent alternative(s) by [D]” (“P’s F&BP Summons”).

C.  Parties’ stances

12.  Mr Fong points to the Specified Paragraphs. He also refers to the supplemental witness statement of 周潔儀 (“Chau”) of 6 January 2023 filed on D’s behalf, wherein Chau says at §§32 and 34, inter alia, that:

“32. 承如上文所述，公司大部分於2009至 2011年的文件經已散失，唯本人亦一直在被告人代表律師的協助下，不斷翻查被告人的辦公室，才終於在2021年下旬找到被告人的再再再經修訂的答辯書中第4(b)(ii)段所提及的公司於匯豐銀行以及星展銀行賬戶的銀行賬單。

…

34. 本人經翻閱上述銀行帳戶由2009年至2011年月結單後，發現在該些關鍵時間，公司從未獲存入與第一筆借款或第二筆借款數目同等的款項 …」

13.  Mr Fong submits[4], in summary and conclusion, that:

“… this is a case where a defendant pleads on the one hand that the loans have never been advanced whilst pleading on the other hand that if the loans were advanced, they were in the nature of “quasi-capital/equity” despite its actual knowledge that even the bank statements of all of its bank accounts at the material time suggest otherwise.”

14.  Mr Cheung submits that by consenting to the filing of the RRRAD, P is estopped from applying to strike out the Impugned Paragraphs. The alternative case put forward by the Impugned Paragraphs (the “Alternative Case”) is founded on the same set of facts P has pleaded. D is not seeking to raise any inconsistent alternative plea grounded on different sets of facts. It is merely a fallback position, in the sense that:

“… [D] is merely advancing the plea that, if, contrary to what [D] avers, the Court finds in favour of [P] and rules that there is the ‘1^st Loan and/or any advancement and/or transfer of any sum by C&S to [D] pursuant to the 1^st Loan Agreement’, the said 1^st Loan and/or any sum so advanced or transferred are by nature quasi capital/equity but not debt. The same can be said in respect of the 2^nd Loan and the 2^nd Loan Agreement.”[5]

Mr Cheung submits further that even if the Court is to rule that D is indeed raising factually inconsistent alternatives, there are reasonable grounds for D to do so[6].

D.  Whether a factually inconsistent case pleaded

15.  For the following reasons, my view is that D has not by way of the Impugned Paragraphs pleaded any factually inconsistent alternative.

16.  Order 18 rule 10 provides as follows:

“Departure (O. 18, r. 10)

(1) A party shall not in any pleading make any allegation of fact, or raise any new ground of claim, inconsistent with a previous pleading of his.

(2) Paragraph (1) shall not be taken as prejudicing the right of a party to amend, or apply for leave to amend, his previous pleading so as to plead the allegations or claims in the alternative.”

(a)  Order 18 rule 10 however has to be read together with and is subject to Order 18 rule 12A. The latter was introduced by the Civil Justice Reform, which provides as follows:

“Pleading with inconsistent alternatives (O. 18, r. 12A)

A party may in any pleading make an allegation of fact which is inconsistent with another allegation of fact in the same pleading if—

(a) the party has reasonable grounds for so doing; and

(b) the allegations are made in the alternative.”

17.  Order 18 rule 12A only concerns allegations of facts. The raising of a point of law does not fall within its ambit – see Hong Kong Civil Procedure 2023 Volume 1 §18/12A/3.

18.  The Alternative Case raises two main constituent points:

(a)  whether the funds representing the Root Loans had been physically advanced (“Constituent#1”); and

(b)  if so, the nature of the advancements, and in particular whether each of them was “in the nature of quasi capital/equity instead of a debt” (“Constituent#2”).

19.  In so far as Constituent#2 is concerned, Mr Cheung submitted that during the hearing of D’s Expert Evidence Summons and in resisting the same, P’s own stance was that the nature of the 2 Loans was a question of law. There is some dispute as to what was exactly submitted and their implications. But irrespective of those disagreements, Mr Fong has now confirmed that “P accepts that whether the two loans are quasi-capital/equity is a question of law”[7](“P’s Acceptance re Constituent#2”).

20.  In respect of Constituent#1:

(a)  The wording of the Impugned Paragraphs and Specified Paragraphs should be noted. The newly added §§4(b)(ii) and 12(b)(ii) (together with the Particulars thereunder) make it quite plain that D’s primary case in those regards concerns the flow of the funds, in the sense that the relevant Bank Accounts statements contain “no record of the actual advancement and/or transfer of any exact sum” (emphasis added), but that if there had in fact been such actual advancements and/or transfers, then they were in the nature of quasi capital/equity instead of a debt;

(b)  Hence, according to D’s pleaded case, if there had been no actual advancement/or transfer of the exact sum as the records show, P’s claim fails. But if, contrary to the records, there had in fact been such actual advancements and/or transfers, the Alternative Case in relation to the nature of the advancement and/or transfer becomes engaged;

(c)  Viewed as such, there is clear force in Mr Cheung’s submissions, understood in the context of P’s Acceptance re Constituent#2, that the Alternative Case is grounded on P’s own plea, and is a fallback position in law[8];

(d)  In contending otherwise:

(i)  Mr Fong submitted in the course of the hearing that all 3 cases D relies on (Sun Tian Gang (孫天罡) v Changchun High & New Technology Industries Development Parent Co (長春高新技術產業發展總公司) [2018] 5 HKLRD 485, Binks v Securicor Omega Express Ltd [2003] 1 WLR 2557, and Poon Hau Kei v Hsin Chong Construction Co Ltd, Taylor Woodrow International Ltd Joint Venture (2004) 7 HKCFAR 148) concerned the plaintiff “feeding off” the pleaded defence or riding on the defendant’s defence;

(ii)  Whilst Mr Fong’s submissions are factually correct in respect of those 3 cases, I see no basis in principle to suggest that a defendant cannot in the reverse be permitted to “feed off” the plaintiff’s case. As Deputy Judge Le Pichon observed in Sun Tian Gang in §20 adopting Maurice Kay J’s observations in Binks at [8], that (with emphasis added):

“20. The Court of Appeal [in Binks] disagreed with the Judge and noted that CPR (Civil Procedure Rules 1998) Pt.22 r.1(2) enables the court to dispense with verification by a statement of truth when a statement of case is amended. Maurice Kay J (at [8]) took the view that amendment to plead in the alternative a case derived from an opponent’s documents, pleadings or evidence is capable of being such a case and he did not accept that ‘the purpose or effect of Pt.22 is to exclude the possibility of pleading inconsistent factual alternatives.’ ”

(e)  For the above reasons, I accept Mr Cheung’s submissions on Consituent#1 in the above regards;

(f)  I hence also accept Mr Cheung’s submission that Order 18 rule 12A is not engaged.

E.  Whether reasonable grounds

21.  For the following reasons, it is my view that even if what D has put forward amounts to pleading alternatives on inconsistent facts, so that Order 18 rule 12A is engaged, D has reasonable grounds in doing so.

22.  In Herostar Properties Ltd & Ors v Cheung Yu Ping (張宇平) & Anor [2018] 6 HKC 165, Deputy Judge Le Pichon observed at §38 that:

“… the purpose or objective of O 18 r 12A of the Rules of the High Court is to exclude dishonest or opportunistic and speculative claims. It is not intended to exclude honest claims reasonably advanced on the basis of incomplete information which points to alternative sets of fact, each of which would be legally viable as part of the party’s case.”

23.  In Hui Yin Sang（許彥生）& Anor v Tsoi Ping Kwan（蔡炳坤）& Anor [2010] 1 HKC 585, Au J (as he then was) observed at §25(10), with emphasis added, that:

“One of the objectives of [O 18 r 12A] is to prevent a party from pleading inconsistent cases in relation to a matter which is plainly within his knowledge, so that there could be no justification for him to put forward inconsistent factual alternatives. The party also simply could not properly verify the pleading as he is now required to do.”

24.  In that same context, the word “plainly” also appears in the observations of Zervos J in Yiu Ka Fung Vincent t/a Confidence Services Centre v Info-Vantage Ltd and Another (CACV 96/2014, 3 July 2015) at §63, also with emphasis added, that:

“Cases may arise where the party has no personal knowledge of the facts, but has evidence pointing to alternative possibilities. The pleading and verification of such alternative pleas is permissible as long as there is a reasonable basis for doing so on the evidence available. In such circumstances, where a party puts forward a pleading with alternative and mutually inconsistent versions of the facts, because the facts as known to him admit of alternative interpretations, the pleading is permissible and verifiable on the basis that the party believes on the evidence available that the facts will ultimately correspond to one or other of the possibilities pleaded. However, if the matters pleaded are matters which are plainly within that party’s knowledge, so that he must know which of the inconsistent alternatives is the correct one, then the pleading of inconsistent alternative cases is not permissible.”

25.  In the present case:

(a)  Even on P’s case, the background facts leading to the 2 Loans are not straightforward: the Root Loans took place quite some years ago, that there had been multiple extensions for their repayment, that the 2 Loans were given for the purpose of “refinancing” the Root Loans, and that there had been repeated assignments of the Root Loans and the 2 Loans;

(b)  P does not have any personal involvement in the material transactions. She was only an assignee several tiers removed from the Root Loans;

(c)  In so far as D is concerned, it is alleging impropriety against LSW and LVSK. It has also raised issues arising from the absence of records relating to the Root Loans and the 2 Loans, which is not unusual in cases when director improprieties are alleged;

(d)  Ms Chau is D’s finance and human resources manager. But she only joined D in 2011, after the time when the Root Loans were allegedly made;

(e)  Ms Chau bases her evidence on her interpretation of the records. She notes the absence of any records from the Bank Accounts statements which tally exactly the amount of the 2 Root Loans;

(f)  D is seeking to prove the negative here (that there had been no actual advancement/or transfer of the exact sums which correspond with the Root Loans). Proving the negative is not always easy. The absence of records relating to the Root Loans may not be conclusive as to the absence of any advancement or transfer. Objectively, and as a matter of common sense, there could have been setoffs not apparent from those bank statements. On the other hand, there were apparent references to the Root Loans in D’s 2009 Audit Report;

(g)  The relevant pleaded matters, and in particular the facts relating to Constituent#1, are hence not matters which are plainly within D’s current knowledge;

(h)  On such facts as outlined above, I conclude that there exist reasonable grounds for D to plead the Alternative Case to cover the scenario of there having actually been advancements or transfer of sums representing the Root Loans despite the Bank Accounts statements;

(i)  In the context of the present appeal, there is further the added consideration that striking out is only for plain and obvious cases, of which this case in respect of the Impugned Paragraphs is in my view not.

F.  Conclusion

26.  For the reasons set out above, I dismiss the appeal.

G.  Estoppel

27.  Having reached the above conclusion based on the substantial merits (or lack of merits) of P’s application and appeal, there is in fact no need for this court to consider the question of estoppel. But if necessary, and for the following reasons, I would also have held P to have estopped from seeking to have the Impugned Paragraphs struck out:

(a)  On 9 December 2021, D took out a summons for leave to amended as per the draft RRRAD attached;

(b)  On 14 December 2021, the 4^th Amendment Consent Summons was filed, whereby inter alia leave for D to file the RRRAD was consented to and granted;

(c)  In the Hong Kong Civil Procedure 2023 at §18/12A/4:

“It is as yet unclear as to whether these “reasonable grounds” [required to Order 18 rule 12A] must also be pleaded, contained or stated in the pleadings themselves”;

Mr Fong submits that it is in fact D’s case that it is not required to state any “reasonable ground” for pleading the Impugned Paragraphs in its pleadings[9];

(d)  But the above hardly assists P:

(i)  If P herself was of view that D was required to plead the “reasonable grounds” but had not done so, P could have objected to the same as opposed to consenting to the RRRAD being filed; and

(ii)  If P herself was of view that D was not required to plead the “reasonable grounds” and for that reason had not done so, P could have asked D to state its “reasonable grounds” before deciding whether to consent or to object;

(e)  As things turned out, the consent for D to file the RRRAD was not subject to any request, condition or reservation;

(f)  On 28 December 2021, D filed its RRRAD;

(g)  At that stage, P still took no step to seek to clarify the “reasonable grounds”, but proceeded on 8 February 2022 to file its Re-Re-Amended Reply (“RRAR”);

(h)  In the RRAR, and in reply to §10(e) of the RRRAD, all P has pleaded are as follows:

“34B. Save that there was no maturity date stipulated in the 1^st Loan Agreement, paragraph l0(e) is not admitted. It is further averred that the 1^st Loan was repayable upon demand.”

(i)  P’s reply to §19(e) of the RRRAD is to the same effects[10];

(j)  P only took out P’s F&BP Summons in November 2022, months afterwards;

(k)  In Compania Sud Americana De Vapores SA v Hin-Pro International Logistics Ltd [2015] 2 HKLRD 458, the Court of Appeal observed at §§16-17 as follows:

“16. The principle derived from Chanel Ltd v FW Woolworth & Co Ltd is that if a point was open to a party on an earlier interlocutory application and was not pursued, then it is not open to him to take the point at a later application when there has been no material change of circumstances and no new facts ...

17. The Chanel Ltd v FW Woolworth & Co Ltd principle is founded on the basis that the party has a responsibility to take the point when it is first reasonably available to him before the court and that it would be an abuse of process to delay taking it until a subsequent application …”

(l)  P could have pursued the issue of inconsistent alternatives by seeking clarifications in relation to the “reasonable grounds” before endorsing the 4^th Amendment Consent Summons. P did not do so. Not only that, she proceeded to plead to the Impugned Paragraphs without raising the point;

(m)  Mr Fong relies on P’s F&PB Summons and what happened during the hearing of the same as change of circumstances justifying its belated issuing of the Striking Out Summons. I do not accept those submissions. Those are not changes of circumstances, but only clarifications which P could have obtained earlier had P pursued the issue of inconsistent alternatives when it was first reasonably available to her.

H.  Overall disposition

28.  For the above reasons, I dismiss the appeal. I express my agreement to the Master’s Decision dismissing the Striking Out Summons.

I.  Costs

29.  Both Mr Fong and Mr Cheung accepted that costs of the appeal should follow the event.

30.  I order that P should bear the costs of this appeal, with certificate for one counsel.

31.  I have considered D’s statement of costs placed before this Court towards the end of the hearing. It covers only the fees of Mr Cheung. The costs as set out are HK$109,030. I find that amount overall reasonable, and summarily assess D’s costs of this appeal as such.

Mr David Fong, instructed by Chin & Associates, for the Plaintiff

Mr Jeremy Cheung and Ms Angel HY Wong, instructed by Pauline Wong & Co, for the Defendant