LEUNG MAN KEUNG v. EVER WEALTHY RESOURCES LTD

DCCJ3972/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3972 OF 2003

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R U L I N G

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1. There has been a serious falling out between the plaintiff and the defendant (in the original action), who are brothers, over the estate of their late mother, Madam Lam Hop. Both are executors and beneficiaries under her will.

2. The dispute concerns a small flat which I propose to hereafter refer to as "the property", which is at the corner of Peel Street and Staunton Street in the now up-and-coming area known as Soho.

3. Madam Lam died on 13 July 1998. Her will was made on 14 July 1994. The plaintiff as the "primary executor" (he having actively taken steps to obtain probate) obtained probate on 22 May 2000.

4. The defendant took up residence in the property before the death of Madam Lam, at a time when she was seriously ill. After her death, what appears to have happened is that the brothers had tried to resolve the issue of the property between them, and there is a suggestion that they were talking to each other on the basis that the defendant would pay his brother $250,000 to buy out his share in the property. In the meantime, the defendant continued to reside there, and he resides there to this day.

5. Whilst this was going on, the plaintiff sold the property on 26 June 2003 for $380,000 to the 2nd defendant (by counterclaim), a private property investment company controlled by a Mr Eric So.

6. The original action has been brought by the plaintiff against the defendant for mesne profits to be assessed for the period starting July 1999 up to the date of the sale of the property by him on 26 June 2003, and also for damages to be assessed and any other relief that may be appropriate.

7. The defendant's riposte to this has been to deny the claim, but the main thrust of his case is a counterclaim in which the plaintiff is 1st defendant and the 2nd defendant as the purchaser of the property.

8. The counterclaim alleges fraud against both defendants in the carrying out of the sale, and inter alia, seeks to have the sale set aside.

9. The 2nd defendant has taken out a summons to strike out the counterclaim against it under Order 18 rule 19 of the Rules of the District Court and/or under the court's inherent jurisdiction as disclosing no reasonable cause of action or as being frivolous or vexatious and/or as an abuse of the process of the court. The basis of this is that the purchaser cannot be concerned with the dispute between the brothers. That must be a matter for them. The purchase was from the plaintiff who, as the relevant executor, was properly authorised to sell the property on the terms set out in the agreement between them. They must be left to resolve that between themselves. The purchaser has no part in this.

10. In terms of Order 18 rule 19, this is put on the basis that where an allegation of fraud is made it should be distinctly pleaded and pleaded with the utmost particularity. Authority for this proposition, which is of course very well established, can be found in Davey v Garrett [1878] 7 ChD 473, where at 489 Thesiger LJ observed "that fraud must be distinctly alleged and as distinctly proved." This passage in Davey v Garrett is cited in the judgment of Millett LJ (as he then was) in Armitage v Nurse [1998] Ch 241, who went on to say that:

"It is not necessary to use the word 'fraud' or 'dishonestly' if the facts which make the conduct complained of fraudulent are pleaded. But, if the facts pleaded are consistent with innocence, then it is not open to the court to find fraud."

11. Millett LJ then referred to the judgment of Buckley LJ in Belmont Finance Corporation Limited v Williams Furniture Company Limited {1979] Ch 250, 268, which contains the following passage:

"An allegation of dishonesty must be pleaded clearly and with particularity. That is laid down by the rules and it is a well recognised rule of practice. This does not import with the word 'fraud' or the word 'dishonesty' must be necessarily used. The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated, this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatal. The allegation of its dishonest nature will not have been pleaded with sufficient clarity."

12. I have no doubt that these passages also represent the position in Hong Kong.

13. From this I now turn to the pleading itself. Given its central importance to the outcome of the summons, I should set out its material parts in full.

14. The counterclaim repeats the defence. The material parts of the defence are at paragraphs 27 to 33.

"27.	It is specifically denied that the plaintiff is entitled to damages under paragraphs 7 and 8 of the amended statement of claim. The defendant avers that the purported sale and purchase of the property was a sham caused to be entered into by the plaintiff and the 2nd defendant by counterclaim in order to perpetrate the fraud pleaded in the counterclaim hereof. The defendant did not know of the existence of the sale and purchase until so informed by Messrs Peter W K Lo & Co., solicitors acting for the 2nd defendant, by counterclaim.
28.	Further or alternatively, by purportedly entering into the above scheme of fraud and by purportedly entering into sale and purchase of the property, the plaintiff was acting in breach of the trust.
29.	In the circumstances, the purported sale and purchase of the property is vitiated by bad faith on the part of the 2nd defendant by counterclaim.
30.	Further or alternatively, in further breach of trust the plaintiff had failed to consult and/or obtain consent from the defendant being his co-executor and co-trustee under the said will before entering into the purported sale and purchase of the property.
31.	By reason of the aforesaid, the said purported sale and purchase of the property should be set aside.
33.	In the premises, the defendant avers that the plaintiff collaborated with the 2nd defendant by counterclaim to perpetuate the fraud pleaded in the counterclaim hereof and the plaintiff's claim in this action was part of the said scheme of fraud."

15. The counterclaim pleads the particulars of the fraud as follows:

"37.	The defendants by counterclaim, have jointly and acted in concert entered into the purported sale and purchase of the property with the 2nd defendant by counterclaim to perpetrate the following fraud,"

and then a submission-heading in the centre of the page,

"Particulars of Fraud"

(a)	Shortly after the death of the deceased, the 1st defendant by counterclaim obtained the title deeds of the property from the plaintiff by counterclaim, claiming that he caused the transfer of the property to the plaintiff and the defendant jointly.
(b)	The alleged transfer of the property was never carried out.
(c)	The 1st defendant by counterclaim obtained the said grant of probate in 2000 without notifying his co-executor and co-trustee under the said will.
(d)	Shortly after the said meeting pleaded in paragraph 10 above, the 1st defendant by counterclaim suddenly instructed his solicitors to demand the purported licence fee from the plaintiff by counterclaim.
(e)	In the course of discussing the purported licence fee and without the knowledge and consent of the plaintiff by counterclaim as co-executor, co-trustee and co-beneficiary of the estate of the deceased, the defendants by counterclaim entered into the purported sale and purchase of the property.
(f)	All the conveyancing documents were executed on the same date and completion took place on the same date as well.
(g)	The 2nd defendant by counterclaim is a British Virgin Islands company.
(h)	The purchase price of the property was below market price.
(i)	Both the 1st and 2nd defendants by counterclaim were represented by the same solicitors, who were also the same solicitors as acting for the 1st defendant by counterclaim in this action.
(j)	Vacant possession was not warranted to be delivered under the purported sale and purchase, but the 1st defendant by counterclaim purportedly undertook to provide all reasonable assistance for the 2nd defendant by counterclaim to obtain vacant possession to indemnify the 2nd defendant by counterclaim all his reasonable legal costs in obtaining an order for vacant possession of the property and for reasonable damages in relation to the loss of use of the property.
(k)	Less than one week after the purported sale and purchase of the property, the 2nd defendant by counterclaim gave the plaintiff by counterclaim final notice to surrender the property."

And then paragraph 38:

	"By reason of the said fraud, the 1st defendant by counterclaim has breached his duty as co-executor and/or co-trustee of the estate of the deceased.
39.	In the premises, the plaintiff by counterclaim has suffered loss and damage by reason of the said fraud and breach of trust.
40.	Further, by reason of the said fraud, the 2nd defendant is not a bona fide purchase of the value without notice of the purported sale and purchase of the property. In the circumstances, the purported sale and purchase of the property should be set aside."

16. It should be remembered that this summons is brought by the 2nd defendant to the counterclaim, the purchaser. I need to see whether the plea of fraud, as it stands, is sufficiently pleaded and, if so, whether taken at face value, it discloses a cause of action against the purchaser.

17. Quite rightly, Miss Queenie Ng for the plaintiffs draws my attention to the very considerable hurdle that must be cleared by a party seeking such an order. This principle is reproduced in the rubric to Order 18 rule 19 in the current White Book as follows:

"It is only in plain and obvious cases the court should exercise its summary powers to strike out the endorsement on any writ or any pleading under this rule. The claim must be obviously unsustainable, the pleadings unarguably bad, and it must be impossible, not just improbable, for the claim to succeed before the court can strike it out. (See Order 18/19/4)"

18. I need to apply this test to the material before the court, remembering that in approaching an application of this sort I should not go outside the parameters of the pleading itself (see Order 18, rule 19/3(4)). I must look at the pleading and see whether, on the assumption that the facts as pleaded are true, the pleading discloses a cause of action.

19. Having gone through that exercise, I have no doubt that on this basis such a cause of action has been made out. The particulars of fraud, taken in combination, are precise enough. The pleaded facts, if proved, are capable of amounting to a collusive transaction entered into by the purchaser with the executor amounting to a fraud on the defendant.

20. Whether this plea actually succeeds is a matter for the trial judge, having regard to a large extent on the view that he forms of the evidence given by the witnesses. I decline therefore to strike out the pleading against the purchaser on this basis.

21. Reliance is also placed on the court's inherent jurisdiction. For these purposes, I am prepared to hold, without finally deciding the issue, that the District Court as a creature of statute has an inherent jurisdiction to exercise, as the High Court undoubtedly has.

22. There is an important difference here, which is that where the inherent jurisdiction is relied on, the evidence can undoubtedly be gone into (see Order 18 rule 19/4(2)). Under this limb therefore I have considered and had regard to the affidavits as well as to the pleadings. Such applications may be brought to deal with, for instance, hopeless cases or spurious claims (see Order 18 rule 19/16 and Order 18 rule 19/21), and therefore it is open to the purchaser to invite the court to use its powers on this occasion.

23. In doing so, I am of the view that this matter must be allowed to proceed to trial. The whole flavour of the transaction is one which calls for a more detailed investigation which only the trial judge could bring to bear.

24. Whilst I appreciate that an independent valuation was obtained, the discount on the price has not been fully explained, notwithstanding Mr So's proffered explanations. The unfortunate fact that Mr So's former firm of solicitors, he having previously been a partner in that firm, acted for both parties raises questions, notwithstanding that this was permissible under the Solicitors Practice Rules, as well as the breakneck speed at which this transaction was carried through without any requisitions having been raised. It was all dealt with on the same day.

25. These are elements which will properly be inquired into by the trial judge.

26. It would not be right on this evidence to drive the plaintiff from the judgment seat on a mere consideration, albeit I hope a careful one, of the affidavits, uncontested as they are by cross-examination, and of the pleadings.

27. The summons therefore must also fail on this alternative basis.

(Discussion re costs)

28. I take the view that although they have come and they have failed, this is a matter which really ought to, abide the event, which is the trial itself, and what I am going to do is that I am going to protect the successful party before me from ever having to pay the costs of the losing side today by making an order of the plaintiff's costs in the cause; so that is the order.