GREAT STRATEGY PROPERTIES LTD AND ANOTHER v. WONG WEI GEORGE AND OTHERS

HCA 962/2015

[2020] HKCFI 151

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 962 OF 2015

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D E C I S I O N

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1.  The 2^nd to the 6^th defendants apply for the preliminary trial of the issue of whether the claim in the present action is statute-barred. This is opposed by the plaintiffs.

Background

2.  In a related decision dated 5 September 2017, DHCJ William Wong, SC set out[1] the following background of the present action, which I would borrow for the present purpose.

3.  Wah Nam Group Limited (“Wah Nam”) was a company whose shares were publicly traded in the Stock Exchange of Hong Kong.  At all material times, Wah Nam wholly owned Great Strategy Properties Limited (“Great Strategy”) and Crystal Services Limited (“Crystal Services”), which, where appropriate, are simply referred to below as the plaintiffs.  The plaintiffs in turn owned all the shares in Summit Mass Limited (“Summit Mass”).

4.  Summit Mass owned a parcel of land situated in Xinhui District, Jiangmen City, Guangdong Province, the People’s Republic of China (“the Land”).  On or about 6 January 2000, the plaintiffs[2] acquired Summit Mass, which therefore became one of the indirectly wholly owned subsidiaries of Wah Nam.  The consideration paid for the acquisition was HK$45 million.  The Land was thus an important asset of the Wah Nam Group for the purpose of the liquidation.

5.  Trading of the shares in Wah Nam was suspended on 14 July 2000, following the presentation of a winding up petition against it.  A compulsory winding up order was made against it on 26 July 2000.  On 27 January 2001, Mr Desmond Chiong and Mr John Robert Lees (of Ferrier Hodgson, the 6^th defendant herein) were appointed as the joint and several liquidators of Wah Nam.

6.  On 15 April 2001, Mr Desmond Chiong and Mr John Robert Lees, through their control over Wah Nam, appointed their corporate vehicles, namely, Chater Secretaries Ltd (“Chater”) and Lansdowne Nominees Ltd (“Lansdowne”), the 2^nd and the 3^rd defendants herein, as directors of Great Strategy, and also obtained control over Crystal Services and Summit Mass.

7.  On 3 November 2003, Mr John Robert Lees was replaced by Mr Roderick John Sutton.  Since then until their removal in May 2012, they were the joint and several liquidators of Wah Nam (“the Former Liquidators”).

8.  On 3 June 2006, the shares in Summit Mass owned by the plaintiffs were misappropriated by one George Wong (“Wong”), the 1^st Defendant herein, who was an employee of Ferrier Hodgson. The shares in Summit Mass were first transferred to a Ms Shung Tung (“Shung”). On 7 December 2006, Ms Shung further transferred the shares in Summit Mass to a Mr Chen Shunqiang (“Chen”).

9.  Neither Wah Nam nor any of the plaintiffs received any consideration from Shung or Chen for the transfer of the shares in Summit Mass.  The Former Liquidators were not aware of the misappropriation of those shares until sometime in about November 2007.

10.  On 15 February 2008, the Former Liquidators commenced a legal action in Hong Kong in the name of Great Strategy against Chen.  The alleged intended beneficiary in the transfer was subsequently joined as defendant as well.

11.  Meanwhile, Mr Cosimo Borrelli (“Mr Borrelli”) and Miss Jacqueline Walsh were appointed as receivers and managers of Summit Mass by a court order.

12.  On 5 August 2011, a settlement agreement was executed amongst Great Strategy, Crystal Services, Summit Mass, Mr Sutton (for the Former Liquidators), Mr Borrelli (as receiver of Summit Mass) with the defendants in the legal action mentioned above (“the Settlement”). The gist of the Settlement was that Great Strategy and Crystal Services gave up their shares in Summit Mass for a consideration of RMB3.35 million, which was less than 10% of the acquisition cost of the Land mentioned above.

13.  The Settlement was subject to the approval of the committee of inspection of Wah Nam or the court.  On 8 August 2011, the Former Liquidators filed an application to the court for an order to sanction the Settlement.  The application was heard by Hon Barma J (as he then was) on 12 August 2011.  Having considered the state of affairs presented to him at that stage, including the litigation risks involved, the delay involved and the risk of forfeiture of the Land, Hon Barma J sanctioned the Settlement.

14.  On 2 May 2012, on the application of one of the creditors of Wah Nam and a member of the committee of inspection, Mr Ho, Hon Harris J made an order by consent that the Former Liquidators be removed and released as the joint and several liquidators of the Company pursuant to section 200(5) of the Companies Ordinance (Cap 32).

15.  Mr Osman Mohammed Arab and Mr Wong Tak Man Stephen were appointed as the joint and several liquidators of Wah Nam (“the Current Liquidators”) after the Former Liquidators have been removed.  The Current Liquidators now take issue as to how the above affairs of the plaintiffs and Summit Mass have been handled under the control and supervision of the Former Liquidators.

The previous striking out

16.  The Current Liquidators commenced HCA 960/2015 and the present action in 2015.  In the former action, only the Former Liquidators were named as the defendants.  The damage alleged is the difference between the value of the Land that could have been realized in liquidation, had there been no breach on the part of the defendants, and the settlement sum mentioned above.  The damage is said to be caused by the negligence on the part of the Former Liquidators and the alleged vicarious liability of them and the other defendants for the wrongful acts of Wong.

17.  In late 2016, the Former Liquidators took out their applications to have the statements of claim in these actions struck out and the actions dismissed.

18.  After hearing, DHCJ William Wong, SC struck out the claim in HCA 960/2015 on the ground that Wah Nam was claiming the same loss and damage that the plaintiffs are claiming in the present action.  In the absence of a personal claim against the Former Liquidators, that would be a claim for reflective loss and effectively double recovery.

19.  As to the present action, the learned DHCJ dismissed the Former Liquidators’ application to strike out on all the grounds advanced, except that the causes of action other than negligence were struck out for they were time-barred pursuant to the Limitation Ordinance, Cap 347 (“LO”).  The alleged damage suffered by the plaintiffs occurred in 2006-2007, and the action was commenced in 2015 and thus well beyond the limitation period. However, in respect of the claim in negligence for such damage, the learned DHCJ found that the plaintiffs’ reliance on the secondary limitation period pursuant to section 31 of the Limitation Ordinance, Cap 347 (which is set out below) was not liable to be struck out.

20.  Surviving the striking out, the claim in the present action has undergone amendments.  The defence has since been filed and also amended.

21.  The plaintiffs complain that the affairs of Summit Mass have been negligently handed by the defendants (other than Wong) in that they:

(1)  negligently and wrongfully exposed the Land to the risk of forfeiture by the PRC authorities;

(2)  negligently failed to take remedial actions when the Land had been classified as idle land;

(3)  negligently failed to put in place control and safeguard to protect the plaintiffs’ assets from misappropriation;

(4)  negligently failed to manage and monitor the plaintiffs’ affairs and the whereabouts of the assets; and

(5)  negligently procured the plaintiffs to fail to accept the alternative offer of acquisition instead of the Settlement.

22.  For the wrong committed by Wong, the plaintiffs also hold Ferrier Hodgson, together with the other defendants, vicariously liable.

23.  By the most recent amendment, the plaintiffs also introduce their conflict of interest claim against the defendants (other than Wong) in that the latter are said to have wrongfully allowed themselves to be placed in a conflict of interest with the plaintiffs, which has a cause for claim against them.  Such breach is said to be continuing until the removal of the Former Liquidators in 2012.

The present application

24.  By summons filed on 24 October 2018, the 2^nd to the 6^th defendants (where appropriate, simply referred to below as the defendants) apply for the trial and determination of the following issues set out in the schedule to the summons as preliminary issues:

Issue 1

Whether the plaintiffs are entitled, in the circumstances and facts of the present case, to invoke section 31 of the Limitation Ordinance (Cap 347) so as to enable the plaintiffs to demonstrate that they have a subsisting cause/causes of action against the respective defendant(s) within the secondary limitation period, upon which they can assert claim(s) against the defendant(s).

Issue 2

For the purposes of Issue 1 above, in the circumstances and facts of the present case:

a.  What matters constitute the “knowledge required for bringing an action for damages in respect of the relevant damage” in relation to each of the 2^nd to 6^th defendants (“the Relevant Knowledge”)?

b.  At what point in time did each of the plaintiffs acquire: (i) the Relevant Knowledge and (ii) the right to bring the action, in relation to each of the 2^nd to 6^th defendants?

Issue 3

For the purposes of Issue 2b above:

a.  Whether and when the defendant(s) acquired the Relevant Knowledge?

b.  Whether, in construing and applying section 31, Cap 347 the knowledge of the defendant(s) of the Relevant Knowledge (if established as a matter of fact) is attributable to the plaintiff?[3]

Issue 4

Whether the plaintiffs are entitled, in the circumstances and facts of the present case, to bring any claim or claims based upon or connected to the matters pleaded in paragraphs 17A, 17B, and/or 41(5A), or whether any such claims are time-barred and liable to be struck out or dismissed.

25.  §17A of the plaintiffs’ pleading mentioned in Issue 4 above sets out the various alleged duties on the part of Chater and Lansdowne as the corporate directors of Great Strategy.  §§17B and 41(5A) of the plaintiffs’ pleading constitute the most recently introduced conflict of interest claim mentioned above.  The plaintiffs hold the Former Liquidators responsible for such breach as the corporate directors were appointed by them and under their control at all material times[4].  As mentioned, the plaintiffs contend that the conflict of interest was a continuing breach until the Former Liquidators ceased to have control in May 2012, and therefore such claim is within time.

26.  Whilst it was stated in the summons that the application is taken out pursuant to O14A and O33 of the Rules of the High Court, it became clear that the latter rule is the statutory basis of the present application.  As mentioned at the beginning, the plaintiffs object to the application.

The provisions and principles

27.  O33, r3 provides:

“The Court may order any question or issue arising in a cause or matter, whether of fact or law or partly of fact and partly of law, and whether raised by the pleadings or otherwise, to be tried before, at or after the trial of the cause or matter, and may give directions as to the manner in which the question or issue shall be stated.”

R4(2) also provides that one or more questions or issues may be ordered to be tried before the others.

28.  The cause of action in negligence accrues when the damage is suffered.  Section 31 of the LO provides for the special or secondary time limit for negligence actions where facts relevant to cause of action are not known at date of accrual.  This applies where the earliest date on which the plaintiff first had (i) the knowledge required for bringing an action for damages in respect of the relevant damage and (ii) a right to bring such an action falls after the date on which the cause of action accrued (subsection (1)).  In such a case, the limitation period is either (i) 6 years from the date on which the cause of action accrued; or (ii) 3 years from the date of knowledge, if that period expires later than (i).

29.  As to the requisite knowledge, the section says:

“(5) In subsection (1) “the knowledge required for bringing an action for damages in respect of the relevant damage” means knowledge-

(a)  of such facts about the damage in respect of which damages are claimed as would lead a reasonable person who had suffered such damage to consider it sufficiently serious to justify his instituting proceedings for damages against a defendant who did not dispute liability and was able to satisfy a judgment;

(b)  that the damage was attributable in whole or in part to the act or omission which is alleged to constitute negligence;

(c)  of the identity of the defendant; and

(d)  if it is alleged that the act or omission was that of a person other than the defendant, of the identity of that person and the additional facts supporting the bringing of an action against the defendant.

(6)  Knowledge that any acts or omissions did or did not, as a matter of law, involve negligence is irrelevant for the purposes of subsection (1).

(7)  For the purposes of this section … a person’s knowledge includes knowledge which he might reasonably have been expected to acquire –

(a)  from facts observable or ascertainable by him; or

(b)  from facts ascertainable by him with the help of appropriate expert advice which it is reasonable for him to seek…”

30.  In Kensland Realty Ltd v Tai, Tang Chong (2008) 11 HKCFAR 237, Hon Chan PJ elaborated (at §30) the host of issues that would need to be examined to determine whether a plaintiff can invoke the above provisions:

“Whether a plaintiff can invoke s31 is a question of mixed law and fact. This involves examination of a host of issues, such as, what was the defendant’s act or omission complained of, what is the cause of action relied on, when did the cause of action accrue, what was the damage caused to the plaintiff, how much did the plaintiff know about these facts or ought he reasonably to have known about these facts, would a reasonable person having such knowledge or imputed knowledge consider the damage sufficiently serious to justify instituting proceedings for damages, when did the plaintiff first have actual or imputed knowledge of such facts, did the plaintiff know or ought he reasonably to have known that the damage was attributable in whole or in part to the defendant’s act or omission, and if so, when did he first have actual or imputed knowledge of this. Needless to say, all the circumstances of the case have to be considered.”

31.  In the same case, Hon Ribeiro PJ made (at §141) the following final remark (which Hon Chan PJ indicated that he had read and agreed):

“I would finally add that where a plaintiff’s reliance on section 31 is sought to be challenged in advance of the trial, this should generally be by trial of a preliminary issue so that all relevant evidence can be adduced and tested. As it happens, the materials available to the court in the present case were sufficient to allow the claim to be struck out in the exercise of the court’s inherent jurisdiction. However, even then, certain issues of possibly relevant fact were unresolved, such as why Kensland changed solicitors in December 1998 and on what basis the value of the property was said to have dropped by HK$17.98 million as at 19 May 1998. Issues such as these ought to be investigated, with oral evidence if necessary, on the trial of a preliminary issue.”

32.  It is clear to me that Hon Ribeiro PJ added the above final remark to explain the proper procedure for challenging the plaintiff’s reliance on section 31 of the LO in advance of the trial. That was necessary, because the defendant took out a striking out application instead in that case.  His Lordship explained that this should instead generally be by way of trial of a preliminary issue, whereby all relevant evidence can be adduced and tested, instead of a striking out application.  However, I do not read His Lordship’s remark to be suggesting that when the plaintiff’s reliance on section 31 is challenged, a trial of that as a preliminary issue in advance of the trial should follow.

33.  Trial of a preliminary issue will be directed only if the determination of the preliminary issue would dispose of the case or part of it, so that costs and delay would be saved: see Lee Yiu Kwan v Ting Yin Wah, CACV 311-312/2011 (21 April 2001) at §§39-40.

34.  It is also clear from the wordings of O33, r3 and His Lordships’ explanation in Kensland Realty Ltd that the existence of factual dispute is not a factor against the giving of direction under that Order.  His Lordships’ explanation serves to guide the court’s consideration of what factual dispute is expected to be resolved for the purpose of determining the limitation issue, and whether a separate trial of such issue would indeed save costs and delay in the circumstances of the present case.

Consideration

35.  Ms Lam does not argue that the determination of the preliminary issues would in any event dispose of the entire claim.  Only when the issues are resolved in favour of her clients would that also decide the outcome of the action.  She argues that there is a real possibility that the issues would indeed be determined in her clients’ favour such that the claim could be dismissed in its entirety.  A trial of these issues as preliminary issues would save time and costs by avoiding the trial of what would become unnecessary issues.  Such unnecessary issues, according to her, would include her clients’ substantive defence to the claim, such as their alleged failure to make sufficient effort to sell the Land, to take steps to protect the Land from the exposure of forfeiture after the Land had been classified as idle land, and to supervise Wong, etc. and negligence.  Needless to say, quantum will not be an issue, if the plaintiffs fail on liability.

36.  In a given case where the question of whether section 31 can be invoked by the plaintiff, the host of issues that Hon Chan PJ explained in Kensland Realty Ltd (above) would be examined and tested for the purpose of determining the plaintiff’s (own or imputed) knowledge required for bringing an action in respect of the relevant damage, i.e., section 31(5). Whilst the defendant is entitled to test such evidence of the plaintiff in respect of the requisite knowledge, his substantive defence becomes relevant normally only if the limitation issue is resolved in favour of the plaintiff.  However, such distinction, in my view, is not so straightforward in the present case.  The reason perhaps has to do with what Mr Lai for the plaintiffs describes as the peculiar feature of the present case, which I shall discuss below.

37.  The damage alleged in the present case took the form of the loss arising out of the difference in value of the Land held by Summit Mass and indirectly owned by the plaintiffs[5] and the consideration received from the Settlement.  For the purpose of determining the limitation issue, the questions, in line with section 31(5), that follow will be:

(1)  how much did the plaintiffs know about these facts or ought they reasonably have known about these facts;

(2)  would a reasonable person having such knowledge consider the damage sufficiently serious to justify instituting proceedings for damages;

(3)  when did the plaintiffs first have knowledge of such facts; and

(4)  did the plaintiffs know or ought they reasonably to have known that the damage was attributable in whole or in part to the defendants’ act or omission, and if so, when did they first have knowledge of this.

38.  Prior to their removal, the Former Liquidators are the only natural persons in control of the corporate directors and the plaintiffs who could have knowledge about the facts surrounding the relevant dealings.  Ms Lam submits that it is indisputable that the Former Liquidators acquired the requisite knowledge at the latest in November 2007, when they also started taking legal steps against Wong for misappropriation of the shareholdings of Great Strategy in Summit Mass.  Such knowledge of the Formal Liquidators was attributed to the plaintiffs.  That, she argues, would be the factual context of the consideration of the limitation issues at the preliminary trial.

39.  However, it appears to me that the claim, and thus the limitation issue, is not limited to that against Wong personally or against the defendants on the basis of vicarious liability for the acts of Wong.  The plaintiffs also claim against, amongst the other defendants, the Former Liquidators on the basis that through the corporate directors of the plaintiffs appointed by the Former Liquidators as well as Ferrier Hodgson, the employer of Wong, which was also under the control of the Former Liquidators, the Former Liquidators owed the plaintiffs duties as de facto or shadow directors of these corporate bodies.  For the purpose of section 31(5), the damage, the plaintiffs contend, is attributable to the breach of such duties on the part of the defendants including the Former Liquidators.

40.  At the time of the striking out application before DHCJ William Wong, SC, the defendants (2^nd to 6^th) had yet to file their defence.  However, the learned DHCJ noted that the Former Liquidators’ case was that no act or omission had been committed by them that could be said to constitute negligence[6]. Their defence filed since then has indeed made clear such denial of any act or omission on their part that caused the alleged damage.  The peculiar situation of the present purpose that Mr Lai describes thus arises.

41.  It is difficult to see how the defendants could possibly attribute to the plaintiffs their own alleged knowledge either of the fact that the damage was sufficiently serious to justify the plaintiffs’ instituting proceedings against them or the fact that the damage was attributable to their act or omission that is alleged to constitute negligence, when the defendants deny such very facts.  Practically, the attribution of the knowledge on the part of the defendants to the plaintiffs has to be premised on the plaintiffs’ establishing by evidence at the preliminary trial that the damage was in fact attributable to the acts and omissions of the defendants that are said to constitute negligence.  That would be a bulk part of the dispute in respect of liability raised by the defendants in the present action.

42.  In the circumstances, contrary to Ms Lam’s projection, the substantive defence will not realistically be isolated from the trial of the limitation issues.  As a trial of the limitation issue would involve the finding of attribution of the requisite knowledge of the Former Liquidators to the plaintiffs, which in turn depends on the resolution of the factual dispute as to the acts and omissions on the part of the Former Liquidators, those would not be unnecessary matters for the trial of the limitation issues, as Ms Lam describes, either.

43.  I should also point out that contrary to what Ms Lam submits[7], Mr Lai for the plaintiffs never suggests that the Former Liquidators’ requisite knowledge must encompass an awareness of their legal liability.  Indeed, section 31(5)(b) (above) says that clearly.  What Mr Lai submits, and so does this court say above, is that the fact that the damage was attributable to the acts and omissions on the part of the Former Liquidators (and the other defendants) that is alleged to constitute negligence, which the Former Liquidators deny, would need to be established.  Only then could there be factual premise for considering whether a reasonable person would consider it sufficiently serious to justify instituting proceedings for such damage against the Former Liquidators.

44.  Ms Lam argues that even if the limitation issues are resolved in favour of the plaintiffs, there would be little prejudice to the plaintiffs as the issues would have to be determined in any event.  However, this is not the test.  The question is whether or not it is justified to separate issues for determination in advance of the trial.  An order under O33 should be made because that would save the costs, which would have had to be incurred for the resolution of the balance of the dispute.  If the determination of the limitation defence is going to represent the resolution of the bulk of the dispute between the parties in the action, one becomes concerned about the costs of resolving the balance of the dispute that could be saved.

45.  The concern mentioned in the preceding paragraph is a valid one, because the possibility of the limitation issues being resolved in favour of the defendants, and thus that of the disposal of the entire claim, would depend not merely on the resolution of the factual dispute mentioned above but also the relevant law.  It is seriously arguable whether as a matter of law the Former Liquidators should be allowed to attribute their knowledge about their alleged wrong to the plaintiffs so that they could effectively bar the plaintiffs’ claim against them for such alleged wrong.  In this respect, I should perhaps put it no higher than the observation of DHCJ William Wong, SC in his decision[8] at this stage.  Resolution of the dispute as to whether the Former Liquidators were in such position as shadow or de facto directors of the plaintiffs at the material times again would not be unnecessary for the trial of the limitation issues, contrary to Ms Lam’s argument.

46.  Amongst the alleged unnecessary matters for the trial of the limitation issues are what Ms Lam refers to as events post-dating November 2007[9]. Following from the above discussion, I do not agree.  Events such as how the Former Liquidators caused the plaintiffs to prefer the Settlement to the alternative acquisition offer were acts and omissions that the plaintiffs allege to have caused the damage that allegedly constituted negligence.  These matters are denied by the Former Liquidators whilst at the same time they are seeking to attribute their own knowledge about such wrong that the plaintiffs complain about for the purpose of limitation.

47.  Insofar as liability is concerned, net of the finding of the alleged damage and whether the same was attributable to the acts and omissions of the defendants, the balance of the dispute mostly goes to whether the defendants were in the circumstances negligent.  Other substantive defence such as release of the Former Liquidators (by the order of Hon Harris J mentioned above) would appear to more legal than factual argument, which has been rehearsed before DHCJ William Wong, SC, albeit for the purpose of determining the striking out application.  I am not impressed that resolution of such issues of liability would entail more substantial time or costs than that of the preliminary issues framed by the defendants.

48.  Quantum is to be assessed. Various valuations of the Land were pleaded to demonstrate their differences from the value obtained from the Settlement.  Expert evidence is contemplated[10]. However, the fact that the quantum part of the action may be substantial does not assist the defendants’ argument for the present purpose.  It may have been different, had the defendants been seeking a split trial of liability, in which limitation is but one issue of liability, from quantum.

49.  It is for the defendants as the applying party to satisfy the court separating particular issues in dispute for trial in advance of the trial of the action would save time and costs, which would have had to be incurred for the resolution of the balance of the dispute: see Telford Development Limited v Shui On Construction Co Ltd [1990] 2 HKC 110 at §§30-31.  All submissions and authorities considered, this court is not satisfied that the defendants have clearly demonstrated such utility in the circumstances of the present case to justify ordering the trial of the issues set out in the summons separate from the others in the present action.

Order

50.  Accordingly, the application is dismissed with costs payable by the 2^nd to the 6^th defendants to the plaintiffs, to be taxed, if not agreed.  The costs order is nisi, and shall become absolute without further order in the absence of application in 14 days to vary.