TRUE RANK HOLDINGS LTD AND OTHERS v. LAM KA CHUNG, WILLIAM AND OTHERS

cacv 38/2004 & CACV 184/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal noS. 38 & 184 of 2004

(on appeal from HCMP NO. 4078 OF 2003)

____________________

____________________

_________________________

REASONS FOR JUDGMENT

_________________________

Hon Rogers VP:

1.  This is an appeal against a ruling of Deputy High Court Judge Muttrie given on 9 January 2004.  The application before the judge was an application to strike out the Originating Summons in this action on the basis that it disclosed no cause of action or was an abuse of the process of the court.  The judge dismissed the application.  At the conclusion of this appeal this court dismissed the appeal with costs with reasons to be given in writing later.

Background

2.  The 1^st plaintiff is a company incorporated in the BVI and the 2^nd plaintiff is a company incorporated in Hong Kong.  The claim is put on the basis that they are corporate investment vehicles of Mr Albert Chan Chun Wai and the remaining members of his family who are named and referred to collectively as the “Chan family”.  The essence of the plaintiffs’ claim is that in the 1980’s the 1^st defendant had been an investment adviser of Mr Albert Chan and had later continued to advise him on an ad hoc basis.  Later still he came to advise the Chan family generally on their financial and investment matters.  In the course of that, the 1^st defendant is said to have introduced the Chan family to a property development project in the Mainland which has been identified and referred to as the “Project”.  It is said that the Chan family was persuaded to make the investment because, in particular, the 1^st defendant would be responsible for the day to day management of the Project.  The Project was said to have had a very bright prospect particularly in view of the fact that others involved in it, in particular the 3^rd defendant, had extremely good relations with relevant government authorities in the Mainland.  It is said that acting in reliance on those representations and assurances made in particular by the 1^st defendant and in particular that the 1^st defendant would be responsible for the management of the Project and by reason of the trust and confidence reposed in the 1^st defendant as well as the other defendants, the plaintiffs as the medium of the Chan family invested some $18 million in the Project.  They did so by subscribing for shares and later by paying for more shares in the 4^th defendant.

3.  It is said that against the wishes of the Chan family, and hence against the wishes of the plaintiffs, the interest of the 4^th defendant in the Project was sold on to the 5^th defendant and later to the 6^th defendant.  This was part of the way in which it is said that the investment came to be lost and the plaintiffs have not received the return on their investment that they should have done.  In essence the plaintiffs aver that of some $257.8 million that has been received in respect of the Project at least $155 million remains unaccounted for.  There are various complaints made including the fact that company accounts and proper books have not been kept by the 4^th and 5^th defendants and that at least some of the accounts have been qualified by the auditors.  It is the plaintiffs’ case that despite the inter-company manoeuvrings of the assets of the Project they still relied upon the 1^st defendant to ensure that their interest in the Project was properly maintained and protected.

4.  In those circumstances the plaintiffs brought the originating summons in the first place seeking an account and an inquiry into the various sums paid and received relevant to their investment in the Project.  It has to be noted that the plaintiffs were not seeking specific company accounts in respect of any of the 4^th to 6^th defendant’s although they were seeking repayment of amounts which were found due from all the defendants.

The striking out application in the court below

5.  It appears that, before the judge, the major argument on behalf of the 1^st defendant was that there was no trust which had arisen because no legal title to any property ever passed to the 1^st defendant.  In essence it was said that the plaintiffs had paid money directly to the 4^th defendant for the purchase of shares and their rights were rights as against the 4^th defendant and if they had a complaint that assets of the 4^th defendant had been sold at an undervalue that could be redressed in many ways under company law.  As such, it was said that the 1^st defendant was not a trustee of anything on behalf of the plaintiffs.  The judge summarised his conclusions in respect of the case in a concise way in paragraphs 31 and 32 of his judgment as follows:

“31.The difficulty here is that we have allegations of fact namely that those who controlled the plaintiffs did in fact repose trust and confidence in the 1st defendant, and they did in fact put money into a project which he recommended.  Crucially, the evidence is that he did in fact represent that he would be running the project; and there seems to be some evidence that he did.  It is not just a situation of a financial adviser advising a client or even a friend to put money in a project but rather of inviting the friend to put money in the adviser's own project which the adviser himself administered.  In that situation the 1st defendant would have the opportunity to exercise power or discretion to the detriment of the plaintiffs.  He could dissipate the funds they had invested. They would be vulnerable.

32.On that basis it seems to me that it cannot be said that the claim is obviously unsustainable or that it is impossible for the claim to succeed.  The legal viability of the cause of action is sensitive to the facts of the relationship between the 1st defendant and the Chans so that an order to strike out should not be made.”

6.  It is also to be noted that the judge said that the action should have been better commenced by writ but that it would not be right to make the plaintiffs start all over again and, therefore, he ordered that the action should continue as if begun by writ.

7.  Following the judgment below there were a number of further affidavits which were filed, which have not been the subject of argument in this court but importantly, on 30 June 2004, a statement of claim was filed.  Defences have been filed on behalf of the 1^st, 2^nd and 5^th to 8^th defendants.  Replies have been filed to the defences of the 2^nd and 5^th defendants and, apparently, discovery is imminent.

This appeal

8.  The papers for this appeal did not include the statement of claim, nor the defences nor the additional affidavits.  This court had become aware of the statement of claim because the court file of the documents in the court below had been examined.  The matter was raised by Mr Chang SC on behalf of the plaintiffs.  When the court inquired of Mr Smith SC as to what the 1^st defendant’s attitude was to the statement of claim and as to whether it was intended to apply to strike that out, it became apparent that counsel had not seen that document.  This court pointed out to counsel that the case was no longer in the condition that it was when the judge considered the matter.  In view of the statement claim, which the plaintiffs considered extended that claim, it would be necessary for this court to consider whether the claim as now constituted in the statement of claim was objectionable.  If this court were simply to shut its eyes to the claim as presently formulated it would be an exercise in futility since that was not now the claim which the plaintiffs were putting forward.  Indeed, the difficulty of an Originating Summons is that although relief sought is clear, the basis on which the relief is sought has to be gleaned from affidavits and not pleadings.  Hence, the approach taken in the court below that the action should be carried on as if commenced by writ.  To hear the appeal by trawling through affidavits without considering the pleaded case would be to risk obscuring the real question in the case.  It would also have the disadvantage that it would simply be an exercise which at best related to costs but in reality was a matter of continuing satellite litigation.  The object of any interlocutory proceedings must be the efficient disposal of an action.  In this case that could only be accomplished if the plaintiffs’ case were properly considered.  An adjournment was granted to enable counsel to consider the statement of claim.  After the short adjournment the court was informed by Mr Smith that he considered that there was no difference in substance between the claim as formulated in the statement of claim and that as he understood it in the Originating Summons as supported by the affidavits.  In those circumstances this court proceeded to consider the matter on the basis of the statement of claim.  The averments in the statement of claim and in particular paragraphs 12 to 27 are as I have outlined above.

9.  The objection taken by Mr Smith to the plaintiffs’ case amounted to the fact that the plaintiffs’ case was, in effect, a claim against the 4^th defendant since it was a claim made by the plaintiffs in respect of their shareholding.  It was said that what in effect it amounted to was the loss of the value of the shareholding in the 4^th defendant by reason of the sale of the Project for $4.00.  As such, it was said that the plaintiff’s might have various causes of action, including a possibility of bringing a claim under section 168A of the Companies Ordinance, but they could not bring a claim for consequential loss in respect of their shareholding except against the company.

10.  In my view this matter boils down to a question of fact.  It is open to the 1^st defendant, and indeed the other defendants, to aver that the plaintiffs’ investment was simply an investment in the company.  However, as pleaded, that is not the case.  The plaintiffs’ case as pleaded is that it was an investment in the Project and that they relied upon the 1^st defendant to look after their interests.  As pointed out in the skeleton argument on behalf of the plaintiffs it is stated at page 21 of Underhill and Hayton Law Relating to Trusts and Trustees, 16^th edition “a trustee often has property vested in him or under his control but this need not be the case.”

11.  As part of the argument Mr Smith sought to rely upon cases such as Johnson v Gore Wood and Co (a firm) [2002] 2 AC for the proposition that the plaintiffs’ claim in this case could not be sustained because it was a loss on the part of the 4^th defendant whose assets were sold at a gross undervalue; hence, the loss is the loss of the company and although the shareholder may himself have lost as a consequence because the value of his shares may have diminished that is not a loss which the shareholder can claim directly because it is a loss of the company.  This is the rule that where a company suffers loss as a result of an actionable wrong done to it, the cause of action is vested in the company and the company, and not the shareholders, can pursue in respect of it.

12.  The present case on the pleaded facts is quite different.  The case is not brought on the basis that the 4^th defendant has suffered an actionable wrong.  The case is brought on the basis that the 4^th defendant was simply a vehicle for the Project.  The basis of the claim is that although the plaintiffs were not particularly happy with the transfer of the Project out of the 4^th defendant and of the subsequent dissolution of the 4^th defendant, nevertheless they anticipated and expected that their investment in the Project would be maintained specifically under the watchful eye of the 1^st defendant in no matter what corporate vehicle the Project ultimately resided.  Whether the plaintiffs are correct that their investment was an investment in the Project or the defendants can show that the plaintiffs’ investment was simply an investment in shares in the 4^th defendant will no doubt have to be decided at trial.  In my view the plaintiffs’ claim does not fall to be struck out at this stage.  It is a matter which should be progressed to trial as quickly as possible.  For these reasons this appeal was dismissed

The certificate for two counsel

13.  At the conclusion of the hearing when costs were discussed, Mr Chan, junior counsel on behalf of the plaintiffs, sought a certificate for two counsel.  This court explained that it was not prepared to give a certificate for two counsel because it considered that it in any matter before the Court of Appeal, whether in chambers or in open court and whether before a single judge or a full court, a party was entitled to be represented by leading and junior counsel.  As such, it has not been the practice of this court to grant certificates for two counsel and it would be undesirable for this court to do so.  Indication was however given to the parties that if there should be any difficulty on taxation in recovering the costs in respect of two counsel the matter could be referred back to this court for further directions and order.

Hearing before two Justices of Appeal

14.  This appeal was heard before two Justices of Appeal in accordance with the provisions of section 34B(4)(a) of the High Court Ordinance, Cap. 4.  This court is, naturally, cognisant of the statutory provisions relating to its constitution.  If there were no prior consent filed by all parties, an appeal from a lower court would only be heard by two Justices of Appeal in circumstances where the court was satisfied that the appeal was against an interlocutory order or interlocutory judgment.  To avoid any doubt about the matter and to save any waste of time and costs which might result from the matter being raised in the future, despite the fact that there was no question raised in argument, it is specifically stated that this court has considered whether the appeal was against an interlocutory order and is of the view and so decides that it was against an interlocutory order.  The matters in question are not determinative of the action, nor are they determinative of a crucial issue in the action. 

15.  In those circumstances the provisions of section 14(5) of the High Court Ordinance apply namely:

“No appeal shall lie from a decision of the Court of Appeal as to whether a judgment or order is, for any purpose connected with an appeal to that court, final or interlocutory”

16.  This provision is drawn to the parties’ attention because it appears to have been overlooked in some cases, see for example Shell Hong Kong Ltd v Yeung (2003) 6 HKCFAR 222 and Hip Hing Timber Company Limited v Tang Man Kit and Foo Tak Ching (suing as managers of Wah Yan Mo Fan Heung) 15 June 2004.

Hon Le Pichon JA:

17.  I agree.