CHINA EVERBRIGHT - IHD PACIFIC LTD. v. CH'NG POH AND OTHERS and LOW CHANG HIAN AND OTHERS (Third Party)

HCA 12837/95

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12837 OF 1995

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DECISION

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1. This is an application by Notice of Motion by the 5th Third Party to strike out the 1st Defendant's Third Party Statement of Claim against him on the ground that it does not disclose a reasonable cause of action.

2. The 1st Defendant has, subsequent to the issue of the Notice of Motion, issued a Summons to amend his Third Party Statement of Claim, and the parties have addressed me on the proposed amendment de bene esse, because if the proposed amendment does not disclose a reasonable cause of action, then leave ought not to be given for the amendment. However as it was not clear to me that Mr Strachan QC was accepting that the 1st Defendant's original pleading was defective, it is necessary for me to consider both the original pleading and the proposed amendment.

3. The Motion was amended to include the ground that the Third Party Statement of Claim was also an abuse of the process, but Mr Eben Hamilton QC counsel for the 5th Third Party, did not proceed on that basis and did not adduce evidence in reliance on that ground.

4. So, since this is an application to strike out based on the pleading alone, I have to be satisfied that it is plain and obvious that the pleading contains no cause of action with some chance of success.

Original Third Party Statement of Claim

5. The Third Party Statement of Claim in its original form expressly pleaded the causes of action of indemnity and contribution in paragraph 9. However it is not good enough for a pleader simply to plead certain facts and to assert a named cause of action. He must plead the facts in such a way as to show the Court and the opposite party how that cause of action arises.

6. The facts pleaded in respect of these causes of action were that the 1st Defendant and the 5th Third Party had acquired a company, Join Park Limited (until recently the 13th Defendant), holding 74% and 26% respectively.

7. By a written agreement dated 18 July 1985, Join Park agreed to purchase certain shares in the Plaintiff company from a company called Territorial Development Ltd at a price of HK$232.5m.

8. This purchase price was financed partly by a loan from the Ka Wah Bank of $120m made (apparently to companies respectively controlled by the 1st Defendant and the 5th Third Party) on the security of a pledge of the shares by Join Park. Of this loan, it is alleged by the 1st Defendant that he (through his company) was to be liable to the Bank for $80m (66.6%) and the 5th Third Party (though his company), for $40m (33.3%).

9. As for the other part of the purchase price, apparently some $127m was "used" to pay the balance of the purchase price on the completion of the purchase on 17 August 1985.

10. The Plaintiff company alleges that this was its own money which had been used to pay for its own shares, in breach of s.48 of the Companies Ordinance, and it is this allegation that is the subject-matter of the action between the Plaintiff and the 1st Defendant, in which the Plaintiff has pleaded that the 1st Defendant is liable to it for conspiracy, breach of fiduciary duty and conversion.

11. Insofar as the 5th Third Party is concerned however, there is no allegation by either the Plaintiff or the 1st Defendant that the 5th Third Party was privy to the alleged conspiracy or scheme that the Plaintiff would provide the funds for the purchase of its own shares, nor is there any allegation of knowing receipt against the 5th Third Party.

12. The 1st Defendant denies liability to the Plaintiff, but says that if he is liable to it for $127m, then part of that sum went towards the acquisition of part of 26% of the shares. About 20m shares (being 26%) had been "acquired by the 5th Third Party or held for his benefit", in that 9.1m shares were transferred to two companies which were controlled by the 5th Third Party and 10.9m shares were transferred to Join Park. Subsequently, the 5th Third Party defaulted on repayment of the loan from the Bank, and the shares were re-possessed by the Bank.

13. The 1st Defendant claims against the 5th Third Party an indemnity or contribution in respect of any loss and damage the 1st Defendant may suffer arising from the Plaintiff's claims of conversion and tracing (although the claim in tracing has now been deleted by the Plaintiff) .

14. In my view, the original Third Party Statement of Claim does not disclose a reasonable cause of action in indemnity or contribution and should be struck out.

15. A right to an indemnity arises from (1) express contract; (2) statute or (3) implication from some principle of law. The Third Party Statement of Claim does not disclose either (1) or (2).

16. If an indemnity is to be implied under (3), it is necessary for the pleader to plead clearly what are the facts from which the Court is being asked to make such an implication, and so that the opposite party would know what case he has to meet.

17. In the present case, such facts are not pleaded, or at least have not been sufficiently clearly pleaded for me to understand what is the 1st Defendant's case for an implied indemnity.

18. It has not been argued by Mr Strachan QC that there is any particular legal relationship between the 1st Defendant and the 5th Third Party that gives rise to any indemnity as an incident of that relationship, the most usual being agent and principal or employee and employer.

19. Nor has it been shown to me that there is an implied agreement or obligation at law that the 5th Third Party should indemnify the 1st Defendant.

20. It has not been suggested that any part of the $127m was paid to the 5th Third Party, or any company controlled by him, by way of loan or otherwise.

21. There is no pleading that the funds for the 26% (or part thereof) had been paid by the 1st Defendant to Territorial (or alternatively, Join Park) at the request of the 5th Third Party, or indeed even with his knowledge.

22. It is said that the 5th Third Party had not paid entirely for "his tranche" of 26% of the shares, but the shares were bought by Join Park from Territorial. There is no pleading at all of any financial arrangements between Join Park, the 1st Defendant and the 5th Third Party. There is no pleading that Join Park has a cause of action against the 5th Third Party, and how that cause of action has now become vested in the 1st Defendant (if that be the case).

23. In conclusion I cannot see from the pleading as it stands what is the implied agreement or obligation at law for an indemnity.

24. As to the cause of action of contribution, a right to contribution at common law arises where there is a common liability to be sued for that which the 1st Defendant has to pay ($127m to the Plaintiff). But the 5th Third Party is under no such common liability to be sued.

25. Mr Strachan QC has referred me to liability for contribution in equity. There has to be a community of interest in the subject-matter to which the burden is attached. But I fail to see from the pleading what is the subject-matter in which the 5th Third Party has a community of interest with the 1st Defendant.

26. Finally, I should deal with Mr Hamilton QC's argument on time-bar. He submits that even if a reasonable cause of action has been disclosed, the Third Party action is time-barred. With respect, I do not agree. It seems clear that whether in common law or in equity, time does not start to run until the liability of the person seeking to be indemnified or seeking contribution has been incurred (In Re Richardson Ex p Governors of St Thomas' Hospital [1911] 2 KB 705, 712 referred to in Telfair Shipping Corp v Inersea SA [1985] 1 WLR 553, 567; Chitty on Contracts 27th ed Vol. 1 §28-029). As the 1st Defendant's liability to the Plaintiff has not been established, the 1st Defendant's action against the 5th Third Party is within time.

Proposed amended Third Party Statement of Claim

27. I shall now deal with the proposed amendment. Although the references to indemnity and contribution have been deleted from the original paragraph 9 and from the prayer, Mr Strachan QC says the causes of action are still indemnity and contribution, and that this was not a simple money claim (which might of course invoke the use of the limitation defence).

28. There is added in paragraph 1(a) the pleading that the 1st Defendant and the 5th Third Party acquired Join Park specifically for the purpose of purchasing the shares in the Plaintiff company.

29. There is also added a new paragraph 2A (to which Mr Strachan seeks to add, if necessary, a further sentence articulated in paragraph 8 of his Skeleton). Taken together, this pleads that "the 1st Defendant and the 5th Third Party intended that their respective beneficial interests in the Shares [in the Plaintiff company] and their respective shares of the Purchase Price would be in the same proportions as their said shareholdings in Join Park. The 1st Defendant and the 5th Third Party thereby impliedly agreed that in the event that one of them paid in excess of his respective share of the purchase price, he would be indemnified by the other in the amount of any such excess".

30. As far as the 1st Defendant's intention is concerned, it has not been pleaded that this had been made known to the 5th Third Party, and if so, how.

31. As for the pleading that an implied agreement is to be built from an "intention" of the 5th Third Party, that intention, read in its widest sense, was nothing more than that he would be beneficially interested in 26% of the shares of the Plaintiff company (as compared with the 1st Defendant being interested in 74%), and that his share of the Purchase Price (or presumably, whatever balance was outstanding after the Bank's financing) was 26%.

32. It is not clear to me from the pleading how that "intention" is then transformed into an implied agreement by the 5th Third Party to give an indemnity to the 1st Defendant, when as we have seen, the purchase was by Join Park, and there is nothing pleaded at all of the 5th Third Party's position vis-a-vis Join Park, or Join Park's position in this respect vis-a-vis the 1st Defendant.

33. Alternatively if the 1st Defendant says that he has pleaded that the 5th Third Party's "intention" somehow translated into an implied agreement, it has been pleaded too obscurely for me to understand how a cause of action in implied indemnity arises.

34. Even if paragraph 2A is read as pleading a common intention of both the 1st Defendant and the 5th Third Party that they should each be responsible for the stated proportions of the purchase price, such a common intention is neither here nor there. There is still nothing pleaded of any request by the 5th Third Party to the 1st Defendant to make any payment on his behalf to Territorial or Join Park, nor even of any knowledge by the 5th Third Party that the 1st Defendant had paid any excess on his account.

35. The rest of the proposed amendments do not develop the matter any further.

36. I should add as a matter of completeness that Mr Strachan QC has not taken any point on delay in the filing of the Motion. The Third Party Statement of Claim was served in April 1998 and the Motion to strike out was issued in October the same year. Mr Hamilton QC has explained that the delay was due to the inexperience of his junior, having failed in an earlier bid to strike out the Third Party Notice. In any event, although applications to strike out should be made at an early stage of the proceedings, no prejudice has been suffered by the 1st Defendant and in the exercise of my discretion, I do not consider that such delay as has occurred should restrain me from striking out what to me is a pleading which does not disclose a reasonable cause of action.

37. Consequently, the Third Party Statement of Claim is struck out, the 1st Defendant's Summons for leave to file the proposed Amended Third Party Statement of Claim is dismissed, the Third Party action as against the 5th Third Party is dismissed, and I would make an order nisi that the costs of the Third Party proceedings against the 5th Third Party (save the costs of the 5th Third Party's pleadings) be paid by the 1st Defendant to the 5th Third Party to be taxed if not agreed.