SAP PRODUCTS LTD v. XENA SECURITY LTD AND ANOTHER

DCCJ 2014/2015

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2014 OF 2015

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DECISION

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INTRODUCTION

1.  This is the 2^nd defendant’s (“D2”) application by way of summons dated 11 April 2016 (“the Summons”) to strike out the plaintiff’s (“P”) claim against D2, contained in §§11-14 of P’s statement of claim (“SoC”).

2.  P commenced this action to recover a sum of US$36,575.80 (“the Sum”), which P alleges to be the outstanding balance for goods sold and/or delivered to the 1^st defendant (“D1”).

3.  D1 is a limited company incorporated in Hong Kong.  D2 is a shareholder and director of D1.

4.  In around October to November 2013, D1 through D2 negotiated with P for the sale and purchase of a product known as “Hotcoils”.  The history of the transaction is immaterial for the present purpose except it is common ground that D1 paid the sum of US$13,885.85 as deposit for the Hotcoils to P on 19 November 2013 (“the Deposit”).

5.  P’s claim against D2 is on the basis that the corporate veil between D1 and D2 should be pierced.

6.  D2 says that the claim is plainly and obviously bad and should be struck out for the following reasons:-

(1) they disclose no reasonable cause of action against D2;

(2) they are frivolous or vexatious; and/or

(3) they are an abuse of process of the court.

DISCUSSION

A1. Applicable legal principles

7.  The applicable principles are trite.  The applicant bears the burden to show it is plain and obvious that the court should strike out a pleading.  The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible for the claim to succeed.  Disputed facts are to be taken in favour of the party sought to be struck out: Hong Kong Civil Procedure 2017(“HKCP”) §18/19/4.

8.  Questions of law can be determined in strike out applications provided that they are crucial and the court has all the relevant facts before it and these facts are certain: HKCP §18/19/4.

A2. Piercing of corporate veil

9.  I agree with the following summary of the law in relation to  piercing of corporate veil submitted by Mr Peter Chiu, counsel for P and Ms Cherry Xu, counsel for D2.

10.  It is trite that a company is a legal entity distinct from its shareholders to enable it to carry on commercial activities as an individual distinct from legal liability arising out of those activities: see Winland Enterprises Group Inc v Wex Pharmaceuticals Inc [2012] 2 HKLRD 757, at §50.

11.  Hence, the corporate veil of a company will only be pierced in a limited number of situations.

12.  In Prest v Petrodel Resources Ltd & Others [2013] 2 AC 415, the UK Supreme Court reformulated the test for piercing the corporate veil as follows at p487 §§34-35, per Lord Sumption JSC:-

“These considerations reflect the broader principle that the corporate veil may be pierced only to prevent the abuse of corporate legal personality. It may be an abuse of the separate legal personality of a company to use it to evade the law or to frustrate its enforcement. It is not an abuse to cause a legal liability to be incurred by the company in the first place, or to rely on the fact that a liability is not the controller’s because it is the company’s. On the contrary, that is what incorporation is all about ...”

“I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality...” (emphasis added)

13.  Hence, the court will only pierce the corporate veil when there is some relevant impropriety or wrongdoing.  The mere fact that a company is a façade or puppet of its shareholders is neither here nor there.  The corporate veil will only be pierced where it is used for some illegitimate purpose, such as devices to perpetrate frauds or to evade legal obligations: see Winland, supra at §§50-54.

14.  The deliberate blurring of distinct legal personalities is one of the instances when the court is ready to pierce the corporate veil.  In Yue Tai Plywood & Timber Co Ltd v Far East Wagner Construction Ltd [2001] 2 HKLRD 446, P entered into an agreement with D1, an associated company of D2.  The payment was made by cheque drawn by D2, which was dishonoured.  P sought summary judgment against D2 for the dishonoured cheques.  The court rejected D2’s argument that there was no consideration for the cheques because there was no privity of contract between P and D2.  D2 was found liable.  The corporate veil of the associated company was pierced on the grounds that there had been “a deliberate and obvious blurring of the edges in the operation” of the transactions therein (at 450E).

A3. Personal liability of parties in control of corporate vehicle

15.  Besides the doctrine of piercing of the corporate veil, liabilities may be attached to parties behind the corporate veil where the company is used as a mere agent or nominee.  In Smith Stone & Knight Ltd v Lord Mayor [1939] 4 All ER 116, it was held at 120 that:-

“It is well settled that the mere fact that a man holds all the shares in a company does not make the business carried on by that company his business... It is also well settled that there may be such an arrangement between the shareholders and a company as will constitute the company the shareholders’ agent for the purpose of carrying on the business and make the business the business of the shareholders.” (emphasis added)

16.  Whether such arrangement does exist is a question of mixed law and facts (see Siu Tung Choi v Foo Lum Holdings Ltd [2016] 1 HKLRD 1411 at 1431).

17.  Alternatively, even when the individual was in fact the agent for the corporate vehicle, the mere fact that the agent was acting with authority from his principal does not necessarily negate his personal liability in the transaction (see Stanley Yeung v HSBC [1981] AC 787 at 795D; Bowstead & Reynolds on Agency 20^th edn at §9-002).

18.  Whether an agent is personally liable for a written contract is a question of construction of the parties’ intention as appeared from the written terms of the agreement (see Bowstead & Reynolds at §9-036).  Where the contract is oral, whether the agent is personally liable is a question of fact (see Bowstead & Reynolds at §9-043).

B1. Any reasonable cause of action against D2

19.  The basis upon which P asks this court to find D2 liable has been set out in the SoC:-

(1) The corporate veil of D1 should be pierced because Ds had deliberately blurred their separate legal identities by the way in which Ds had conducted their affairs [§§12-13].

(2) Further and alternatively, D2 had represented himself to be the party dealing with P [§14].

20.  In P’s reply and defence to counterclaim (“R&DC”), P also pleaded the following factual matters purportedly in support of P’s case against D2:-

(1) D2 had used his personal bank accounts to pay to P on at least 3 occasions in amounts totalling more than US$75,000.

(2) D2 had used his personal email accounts to conduct business for his own personal business, ie D1, on at least 10 occasions [R&DC §15].

21.  On P’s own case, the alleged agreement for the sale and purchase of Hotcoils was made between P and D1 [SoC §2].  Thus, the only way to make D2 liable for the Sum, being the alleged outstanding balance for the Hotcoils, is to pierce D1’s corporate veil.  In this connection, P relies solely on the following allegations [SoC §§12-13 & R&DC §15]:-

(1) D2 used his personal bank account to make payments to P on 3 occasions, including for the payment of the Deposit; and

(2) D2 corresponded on behalf of D1 with P through D2’s personal email account on various occasions.

22.  In my judgment, even if one assumes all the factual allegations pleaded by P in the SoC to be true, they are wholly insufficient to justify the piercing of D1’s corporate veil.

23.  The reasons are as follows:-

(1) First, even assuming the allegations to be true (which is denied by D2) and all the disputed facts to be taken in favour of P, I fail to see how, by making payments on behalf of D1 out of his personal bank account, D2 had engaged in any illegitimate purpose such as fraud or evasion of existing legal obligations.  I agree with Ms Xu that, at most, this suggests a close connection between D1 and D2, whereby D2 would settle payments on behalf of D1.

(2) Secondly, the allegation that D2 used his personal email account for correspondence on behalf of D1 is neither here nor there.  It is undisputed that D2, being the director and shareholder of a small company, is the person who conducts business on behalf of D1.  In my view, there is nothing unusual, let alone objectionable, for D2 to use his personal email account when negotiating on behalf of D1.  In my judgment, P’s reliance on this allegation simply fails to appreciate commercial reality and common sense.

(3) Third and perhaps most importantly, on the pleaded facts, there was no evasion of liability or obligation by D2 and therefore the test in Prest cannot be satisfied. In my view, there was simply no liability or obligation on D2’s part to evade.  It is clear that there was no liability or obligation on anybody’s part existed until P and D1 entered into the agreement.  P chose to deal with D1 (a company limited in its liability), delivered the goods and issued the invoices to D1 [SoC §§4-5].  At most, the above allegations suggest that D2 had used the corporate structure to insulate himself from future obligations.  There is nothing objectionable about such conduct and the corporate veil cannot and will not be pierced for this reason alone: Winland, §§47-50.

24.  To conclude, I find P’s pleaded case based on the piercing of corporate veil bound to fail and as such the SoC discloses no viable cause of action against D2.

B2. Frivolous or vexatious claim; abuse of process

25.  In Yifung Properties Ltd v Manchester Securities Corp (unrep, HCA 1341 and 1359/2014, 19 October 2015), Au Yeung J stated at §§12-13:-

“... Where a litigant brings a claim knowing that there is no substance in it or that it is bound to fail, or if the claim is on its face so manifestly misconceived that it can have no prospect of success, it may be deemed frivolous and an abuse of process: see ET Marler Ltd v Robertson [1974] ICR 72 at 76D-E. The court should see what the party in question knew or ought to have known if he had gone about the matter seriously: Cartiers Superfoods Ltd v Laws [1978] IRLR 315 at 317, §18.”

“... Vexatiousness implies the doing of something over and above that which is necessary for the conduct of the litigation, and suggests the existence of some spite, or desire to harass the other side to the litigation, or some other improper motive: Cartiers Superfoods, §16.”

26.  Mr Chiu on behalf of P submits that the affirmation relied on by D2 does not provide a sufficient basis for the court to conclude that P’s claim against D2 is impossible to succeed.  He further submits that, putting aside all the arguments contained in D2’s affirmation, the only relevant piece of evidence put in by D2 for this application is the payment of the deposit of US$13,885.85.  P says that this puts D2’s case nowhere near one that would justify summary determination in a strike out application.  P further claims that D2 has intentionally refrained from saying anything in the affirmation in relation to some of the factual disputes as revealed by pleadings which are undoubtedly relevant to D2’s involvement.

27.  With respect, I do not agree with Mr Chiu’s submissions.

28.  First, P claims that D2 did use his personal bank account to pay P on 3 other occasions [see R&DC §15] and D2 has not attempted to disprove this allegation, whether by producing the relevant bank records or by a simple denial in the affirmation.

29.  In my judgment, this is a non-starter.  Whether he used his personal accounts to pay on previous occasions is not relevant.  The most important thing being that in the transaction in dispute, the Deposit was paid out of D1’s bank account, not D2’s personal bank account.  This can be seen from the payment advice in relation to the Deposit, which stated the name of the payer to be “X**A SEC****Y LIM***D”, ie D1.  Further, D2 has sent the payment advice as confirmation to P via email.  It is also clear from the email from HSBC that the request for the payment advice was made by “X**A SEC****Y LIM***D”, ie D1.  Thus, P must have known that the payment was made out of D1’s bank account and that the allegation that it was paid out of D2’s personal account must be incorrect: [see SoC §12(a)].

30.  Second, D2 in his affirmation (which is not contradicted by P) claims that he has all along used his personal email account for correspondence on behalf of D1 with P.  This mode of communication had been in place between D1 and P for a long time. However, P was well aware that D2 was acting on behalf of D1 in his capacity as a director of D1.  This is well supported by the fact that P had delivered the Hotcoils and issued the invoices to D1 only and not to D2: [D2’s Aff §§9-10; SoC §§2, 4 & 5].

31.  Third, P claims that Ds denied on the pleadings that the agreement was partly in oral and partly in writing and averred that the agreement was contained in an invoice from D1 to P by email on 7 November 2013 (see defence & counterclaim §3(2)). P complains that neither the invoice nor the email has been produced.  P further claims that D2 remained silent in the affirmation on the circumstances in which the agreement was concluded.

32.  In my judgment, all the above matters would make no difference to the issue of whether D2 was deliberately trying to blur the legal personalities at all.  For the reasons stated in (see §§22-24 above), it is abundantly clear from the documents produced that the contract in question was entered into between P and D1 and there was no deliberate blurring of personalities by D2 at all.

33.  For the above reasons, I accept D2’s submissions that P’s claim against D2 is frivolous and/or vexatious and hence an abuse of the court’s process.

CONCLUSION

34.  For the aforestated reasons, I consider that the SoC, insofar as it relates to D2, should be struck out and P’s action against D2 should be dismissed.

35.  Costs will follow the event.  D2 who succeeds in this application will be entitled to his costs, such costs to be taxed on a party and party basis, with certificate for counsel.