RAYTECH INDUSTRIES CO LTD v. LEUNG WAI KIT

HCA 1360/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1360 OF 2011

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1.  This was the defendant’s appeal from the decision of 23 January 2014 of Master Hui dismissing the defendant’s application for leave to amend the defence made by summons dated 13 January 2014 (“the amendment summons”).  On 30 April 2014, the defendant took out a summons for leave to amend the amendment summons to which was attached a revised amended defence. At the conclusion of the hearing judgment was reserved which I now give.

Background facts

2.  The plaintiff is a Hong Kong company engaged in the business of manufacturing and supplying small domestic electrical appliances.  Part of the manufacturing is subcontracted to other PRC factories.

3.  Mr Ching is the managing director and major shareholder of the plaintiff.  He was in charge of the marketing and manufacturing side of the business and has been based in China since June 1999 where he resides although that appears to be disputed.

4.  The defendant was a director of the plaintiff at the latest from 27 June 2000 and was in charge of the Hong Kong office and of all the financial and administrative matters of the plaintiff.  The defendant holds 18% of the issued shares of the plaintiff.

5.  The plaintiff’s business operations involved cash reimbursements from PRC factories (for example for expenses paid by the plaintiff’s Hong Kong office for raw materials) that were paid by the PRC factories into a DBS account in the personal name of the defendant and later into another DBS account in the joint names of the defendant and another director of the plaintiff.

6.  According to the plaintiff, sometime in 2009, the Inland Revenue Department raised with the plaintiff the issue of false invoices used in the preparation of its accounts which caused the plaintiff’s profits to be understated for various tax years.  It led to the termination of the defendant’s employment in April 2009 and a thorough investigation into the books and records of the Hong Kong office.  The police were also involved.

7.  The plaintiff engaged an accountant with 20 years experience to carry out the investigation.  Statements taken by the police from a Ms Yuen (the only subordinate of the defendant but no longer in the employ of the plaintiff) suggest that the defendant had sabotaged the plaintiff’s documents and computer ledgers before he left, rendering the task difficult and complex.  It took the accountant a year to uncover the irregularities.

The pleadings

8.  The defalcations uncovered culminated in the writ that was served on the defendant on 11 August 2011.  There are eight separate heads of claim totalling some $16 million but in substance they fall within the following groups: misappropriation of funds in breach of trust and converted to the defendant’s use; fraudulently submitting false invoices causing the plaintiff to issue cheques to the defendant; making a secret profit in breach of fiduciary duties in respect of various transactions; and the fine paid to the IRD for having filed false and/or incorrect tax returns in respect of the years of assessment 2000/2001 to 2006/2007.

9.  In respect of each head of claim, there was a corresponding annexure that set out chronologically the date and amount involved for each item.  For example, the 1^st head concerned 79 items commencing 14 January 2003 and ending 17 December 2008.  In respect of the false invoices, Annexure F provided equally detailed particulars for each of the 370 odd transactions commencing 31 July 2001 and ending 20 December 2004.

10.  The defence filed on 1 November 2011 alleged that everything that was done was with the knowledge and/or consent and/or authority and/or under the direction of Mr Ching.

Chronology of proceedings

11.  The chronology of proceedings is as follows:

11 August 2011	Writ issued
March 2012	Pleadings closed
18 June 2012	Parties ordered, inter alia, to seek counsel’s opinion within 28 days after the exchange of witness statements and to take out all interlocutory applications within 14 days thereafter
July 2012	Lists of documents exchanged
26 September 2012	Witness statements exchanged
28 September 2012	Defendant commenced a separate action (the 2nd action) against Mr Ching and sought consolidation
(Mid November 2012	All interlocutory applications should have been made per order of 18 June)
6 December 2012	CMC 1.  Defendant ordered to take out a specific discovery application if so advised by 17 January 2013 and to take out all interlocutory applications by 22 February 2013
17 January 2013	Defendant issued his discovery summons
13 May 2013	Defendant issued a similar discovery summons in the 2nd action
16 May 2013	CMC 2.  HCA 1360/2011 be heard together with the 2nd action; and Defendant’s application to file a supplemental witness statement be made 14 days after the determination of the specific discovery summons
23 July 2013	Substantive hearing of discovery summons adjourned to 16 October; and defendant’s application dated 19 July to amend the discovery summons dismissed with costs
8 October 2013	Defendant withdrew all discovery summonses resulting in a consent order dated 15 October 2013
19 December 2013	CMC 3.  Adjourned to 16 January 2014, inter alia, for defendant to take out a summons to amend the defence; and leave to defendant to serve a supplemental witness statement within 14 days
13 January 2013	Defendant’s summons to amend defence
16 January 2014	CMC 4.  Hearing (of defendant’s application to amend defence) adjourned for the defendant to put in evidence of plaintiff’s knowledge
23 January 2014	CMC 5.  Application to amend defence dismissed with costs; and defendant’s supplemental witness statement expunged with indemnity costs

This appeal

12.  The proposed amendments seek to introduce a limitation defence.  The revised version adds a plea of acquiescence and laches as an additional defence to several of the heads of claim. 

13.  Mr Lai, counsel for the defendant (who did not appear below), submitted that the applicable principles are those set out in the judgment of Lord Brandon in Ketteman v Hansel Properties Ltd [1987] 1 AC 189 at 212F‑H: the amendments are necessary to enable the real questions between the parties to be decided; they should not be refused solely because they have been made by the honest fault or mistake by the party seeking leave; however blameworthy (short of bad faith) and however late, they should be allowed provided it will not prejudice the other party; and there is no injustice if the other party can be compensated by an appropriate costs order.

14.  Mr Lai submitted that those principles remain applicable post‑CJR, subject only to the caveats mentioned by Deputy Judge Lok in Li Shiu To v Li Shiu Tsang, unreported, HCA 416/2003, 14 August 2012 at §§16‑17, namely that the exercise of the discretion should promote the underlying objectives of the CJR stated in Order 1A of the Rules of the High Court and the importance of not disturbing a milestone date.  Mention was made of Order 1A, rule 2(2) which provides that the court “shall always recognize that the primary aim in exercising the powers of the Court is to secure the just resolution of disputes in accordance with the substantive rights of the parties”.

15.  The practical effect of the amendments (if allowed) is this: 83% in value of the claims concern events/transactions that occurred more than six years before the date of the writ (ie before 11 August 2005).  In relation to that part of the claim (amounting to about $13.3 million), the burden of proof would be reversed as the onus would fall on the plaintiff to prove that its cause of action occurred within the limitation period: Kensland Realty Ltd v Tai, Tang & Chong (2008) 11 HKCFAR 237 at §153. As to the balance of the claim of some $2.7 million, the burden would fall on the defendant to make good his defence.

Absence of explanation for delay

16.  The hearing bundle contained a certificate for time estimates dated 1 December 2012 from the defendant’s counsel.  Clearly, counsel had been advising the defendant for a considerable period of time, certainly since late 2012.  Surprisingly, there is no explanation why the proposed amendments are made so late in the day when limitation was such an obvious defence to plead. That the amounts claimed go back to payments/transactions from 2001 (10 years prior to the issue of the writ) is readily apparent even from a cursory perusal of the statement of claim.  In these circumstances, the delay is inexplicable and cries out for an explanation.  There is none.

17.  While the absence of explanation is not determinative, it is a factor to be taken into consideration and the weight to be given to it would depend on the particular circumstances.  Unlike Li Shiu To where the affirmations contained materials that provided some explanation for the delay, it is not the case here.

18.  In the circumstances, the defendant’s conduct in the course of these proceedings assumes greater significance. It would be indicative of his general approach to this litigation.  I now turn to consider that history and the many CMCs that have already taken place. 

The defendant’s conduct

19.  §§28 and 29 of Practice Direction 5.2 provide as follows:

“28. A CMC is a critical stage in the proceedings and for most of the cases virtually the only milestone event before trial. It is not a second opportunity for the parties to ask for directions which they could have sought after they have first filed their Timetabling Questionnaires.

29. Parties are expected to have complied with the timetable laid down by the Court by the time of the CMC …”

It is clear that a CMC is a “milestone event”.

20.  There have been no fewer than five CMCs in the present case. Pursuant to the order dated 18 June 2012 all interlocutory applications should have been made by mid November 2012.  What one finds in the defendant’s first Listing Questionnaire dated 4 December 2012 prepared for CMC 1 scheduled for 6 December 2012 is the defendant’s statement of intention to take out an application for specific discovery and to serve a supplemental witness statement.  (There was also outstanding at that date the defendant’s application for consolidation which was finally determined at CMC 2 on 16 May 2013.)

21.  One would have thought that given the terms of Practice Direction 5.2 the defendant would have attended CMC 1 equipped at the very least with a draft of the proposed specific discovery application.  That did not happen.  Instead, the defendant did not take out his specific discovery application until 17 January 2013. 

22.  In the event, what did happen was that the defendant was able to spin out his specific discovery application for 10 months from December 2012 to mid October 2013 before finally throwing in the towel on the eve of the adjourned substantive specific discovery hearing by withdrawing his summonses on 15 October 2013.  That would suggest that specific discovery was not necessary in the first place.  In the process, he managed to displace the original July substantive hearing date for the specific discovery application by his last minute application to amend the specific discovery summons.  Although his application was rejected, it was little consolation as the substantive hearing had to be adjourned to October, only to be withdrawn by the defendant at the last minute.

23.  Meanwhile, the defendant’s application to file a supplemental witness statement (which had to await the determination of his specific discovery application) remained an outstanding interlocutory application.  That was eventually disposed of when, at CMC 5, it was expunged with indemnity costs.

24.  The defendant’s approach to CMC 3 was a repeat of his approach to CMC 1.  His Listing Questionnaire dated 16 December 2013 stated his intention to amend the defence.  The first matter to note is that this was in defiance of the order of 6 December 2012 which set 22 February 2013 as the new deadline for making interlocutory applications.  Be that as it may, as CMC 3 did not take place till three days later, the defendant had ample time to prepare a draft of the proposed amendment to plead limitation, a simple enough exercise.  Yet, it was not done and required two further CMCs to resolve.  In my view that was unacceptable and wasted judicial time and resources.  In fact, it was not until 13 January 2013 that a draft of the amended defence became available.

25.  Bearing in mind the obligation imposed by Order 1A, rule 3 to assist the court to further the underlying objectives of the CJR, parties and their legal representatives should be disabused of the notion that they do not need to prepare for a CMC and that all that is required is their attendance and a statement of an intention to make a particular application if they are unable to put a tick in the box against A4 of the questionnaire.  CMCs are milestone events and should be taken seriously. 

26.  Having regard to the underlying objectives of the CJR, the court must be vigilant against attempts to derail the timetable set.  So, where there is an order setting a deadline for making interlocutory applications, late applications require an explanation and should not be entertained without the court being satisfied with the explanation for the delay.  Further and in any event, a late application should not be entertained in the absence of a draft of the proposed application save for exceptional reasons.

27.  The strong impression conveyed by the manner in which the defendant has seen fit to conduct his defence so far is to delay the proceedings by every possible means.  It would appear that at a minimum he has seriously fallen short of his obligations under Order 1A, rule 3.

28.  As regards the Ketteman principles, I would observe that I find the concept of “conduct however blameworthy (short of bad faith)” somewhat elusive and difficult to apply.  Where is the line to be drawn?  However, for reasons that will become apparent, I do not consider it necessary for present purposes to make a finding of bad faith. 

Prejudice

29.  It was Mr Lai’s position in his written submissions that the amendments are purely procedural and that no further discovery or witness statements are required to deal with the defences. 

30.  At the hearing, that position was no longer maintained.  Mr Lai accepted that the pleadings would require amendment, supplemental witness statement(s) would be necessary and that, in turn, might lead to further discovery.  He estimated that all that would involve four months of delay but submitted that as the trial date has not been fixed, the amendment would not disturb any milestone date.

31.  Mrs Chan (counsel for the plaintiff) disagreed with Mr Lai’s estimate of four months.  In her view, given the need to review and adduce evidence of the management system in operation over the period in question, the need to locate former employees whose whereabouts are not known, not to mention the volume of documents that may have to be discovered, her estimate was that it could be as much as two years.

32.  I have no doubt that if the amendment were allowed the plaintiff would suffer prejudice that could not be compensated by appropriate orders as to costs.  The delay likely to arise would be considerable, possibly by as much as a year, as the amendments would involve another round of pleadings, witness statements and discovery before the matter could be set down.  In that regard, it would hardly be fair in the circumstances to subject the plaintiff to too tight a time frame if the court were minded to grant leave.  On any view, the delay involved would cause significant prejudice.

Conclusion

33.  Ultimately it is a question of weighing up the various competing factors.  I do not consider that absent the proposed amendment, the real question cannot be tried.  The issue is whether the plaintiff knew or authorised the payments/transactions.  What the defendant seeks to derive from the proposed amendment is a tactical advantage.

34.  It was said that as no trial date has yet been set, no milestone date would be disturbed by granting the proposed amendment.  But for this late application for leave to amend and the time wasted by the specific discovery application mentioned above, this action could have been set down at CMC 2 in May 2013.  In substance and effect, it is little different from disturbing a milestone date.  That is a matter that is also to be taken into consideration having regard to the underlying objectives.  Those matters coupled with the serious prejudice that would be caused to the plaintiff if relief were granted weigh heavily against an exercise of discretion in favour of the defendant.

35.  Accordingly, the appeal is dismissed.  There is to be an order nisi of costs in favour of the plaintiff.