LEE TAK (or TUCK) YAN AND OTHERS v. THE PRUDENTIAL ENTERPRISES LTD AND OTHERS

HCA4225/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4225 OF 2001

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D E C I S I O N

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1. There are three striking out applications before the court. The first is the 1st and 2nd plaintiffs' application to strike out the 2nd defendant's counterclaim. The second is the 1st plaintiff's application to strike out the Contribution Notice issued by the 2nd and 5th defendants. The last is the 1st third party's application to strike out the Amended Third Party Notice issued by the 2nd and 5th defendants.

Background

2. This is a derivative action instituted by the shareholders of The Prudential Enterprises, Limited ("PEL"), other than the 2nd to 5th defendants, against the 2nd to 5th defendants, who are and/or were directors of PEL and also against the 6th defendant, who was formerly the accountant of PEL.

3. Between 1990 and 1993, a series of litigations were commenced involving, on the one hand, PEL, the 2nd defendant and MW Lee & Sons Enterprises Limited ("MWLS") and, on the other hand, members of Mr Lee Chai Cheong's branch of family and Greenhill Enterprises Limited ("Greenhill"). The litigations led to what is called the Blue Pool Road Settlement ("BPRS") and the conclusion of the BPRS Agreement on 26 September 1995.

4. The principal terms of the BPRS Agreement, so far as they are relevant to these proceedings, are the sales of No.5 and No.7 Blue Pool Road ("BPR") by MWLS and Greenhill respectively to PEL at HK$108 million and HK$110 million. The purchases were subsequently carried out through Dorfit Properties Limited ("Dorfit"), a subsidiary of PEL.

5. The present action relates to the sale of No.5 BPR by MWLS, the consideration for which was satisfied as to HK$60.48 million by cash and as to the balance of HK$47.52 million by allotment of 1,357 shares in PEL.

6. At the material time in 1995, the directors of MWLS were the 1st plaintiff and the 2nd defendant. They were also shareholders of MWLS together with the estates of their parents, Lee Man Wah, deceased and Ng Chan Wa, deceased ("the Estates"). The 1st and 2nd plaintiffs are the executors of the Estates, and have in that capacity sued as the 5th and 6th plaintiffs.

7. On 19 December 1995, the sale of No.5 BPR was completed. Out of the 1,357 PEL shares, 1,295 shares were allotted to the 2nd defendant and 62 shares to the 3rd defendant at the price of HK$35,070 per share. Consequential upon the allotment, the total shareholding of the 2nd defendant and his children and nominee company in PEL rose from 5.78% to 26.86%.

The action

8. The plaintiffs' claim as appeared by the Re-Amended Statement of Claim are for :

(1) as against the 2nd to 6th defendants, damages for conspiracy;

(2) as against the 2nd to 5th defendants, damages for breach of fiduciary duty and of duty of care as directors and/or for deceit;

(3) as against the 2nd and 3rd defendants, damages in lieu of rescission of the allotment of shares in PEL; and

(4) as against the 6th defendant, damages for negligence.

9. The gist of the plaintiff's complaints is that the allotment of 1,357 shares to the 2nd and 3rd defendants was at gross or substantial undervalue. The plaintiffs claim that the undervalue was the result of a conspiracy between the 2nd to 5th defendants as directors and the 6th defendant as accountant of PEL. In particular, the plaintiffs say that the 6th defendant had given a dishonest valuation of the value of the PEL shares. Using the 6th defendant's valuation, the 2nd to 5th defendants made misrepresentations to the shareholders regarding the fair and proper value of the PEL shares, and further procured resolutions to be passed at the EGM enabling the allotment to be made.

10. The 2nd and 5th defendants have filed a Re-Amended Defence disputing the plaintiffs' claim. In addition, the 2nd defendant counterclaims against the 1st and 2nd plaintiffs, but in their capacity as executors of the Estates for breach of executors' duties. The 2nd defendant brings the counterclaim in his capacity as a beneficiary of the Estates and also on behalf of the beneficiaries thereof.

11. On 24 October 2002, the 2nd and 5th defendants also issued a Contribution Notice against the 1st plaintiff in his personal capacity.

12. Separately, the 2nd and 5th defendants had on 23 October 2002 issued a Third Party Notice against MWLS seeking indemnity, accounting and tracing relief. The Third Party Notice was amended on 17 December 2002.

13. By amended summons dated 9 December 2002, the 1st and 2nd plaintiffs apply to strike out the counterclaim. By another summons dated 23 December 2002, the 1st plaintiff also applies to strike out the Contribution Notice. On 14 January 2003, MWLS also applies by summons to strike out the Amended Third Party Notice.

Applicable principles

14. Counsel have no disagreement over the general principles relating to striking out applications. In essence, the court should only strike out in plain and obvious cases. It is not the court's function to resolve factual disputes and in determining a striking out application, the court will proceed on the assumption that the facts pleaded by the respondent to the application can be proved at trial.

The 2nd defendant's counterclaim

15. The Re-Amended Defence of the 2nd and 5th defendants and the counterclaim of the 2nd defendant is a huge document of 165 pages long. The counterclaim, which is 12 pages long, apart from repeating some parts of the Defence, is primarily self-contained.

16. The thrust of the 2nd defendant's pleaded case on the counterclaim is that :

(1) As executors of the Estates, the 1st and 2nd plaintiffs owe certain fiduciary duties to the beneficiaries of the Estates, including the 2nd and 5th defendants.

(2) In the context of the BPRS, the 1st and 2nd plaintiffs as executors were further under a duty to ensure that :

(a) MWLS received full value for No.5 BPR;

(b) the consideration received by MWLS were distributed to its shareholders pro rata according to their entitlements;

(c) PEL did not pay a too high price for the BPR properties; and

(d) the value of the shareholdings of the Estates and of HY & HT Lee Brothers & Co. Limited ("HY & HT"), the 15th plaintiff, in PEL were not diluted or diminished by the consideration paid for the BPR properties.

(3) The 1st and 2nd plaintiffs had other and personal interests in that they held shares in PEL and the 1st plaintiff further held shares in MWLS and was a director in MWLS and another family company, HY & HT.

(4) The 1st plaintiff harboured certain personal agenda, including a desire to emigrate to the USA and to extract cash, and also a concern for any possible personal liability for PEL debts owed to HSBC ("Personal Agenda"). The sale of No.5 BPR was a means of partially satisfying some of the 1st plaintiff's desires.

(5) If indeed the 6th defendant's valuation was at an undervalue, the 1st and 2nd plaintiffs had acted in breach of their duties as executors of the Estates in that :

(a) they entered into the BPRS Agreement without :

(i) satisfying themselves that the 6th defendant's valuation was a fair one, and

(ii) seeking independent advice on the value of PEL shares; and

(b) they failed to ensure that :

(i) MWLS received full value for No.5 BRS,

(ii) the consideration received by MWLS was distributed to the shareholders pro rata and according to their entitlements,

(iii) the value of the shareholding of the Estates and of HY & HT in PEL was not diluted or diminished by the consideration paid for No.5 and No.7 BPR;

and

(c) insofar as they had relied on the 6th defendant's valuation, they entered into the BPRS Agreement without :

(i) satisfying themselves as to the propriety of the basis of the 6th defendant's valuation,

(ii) inspecting the full valuation report from the 6th defendant, and

(iii) seeking independent advice as to the value of PEL shares.

(6) The 1st plaintiff had also acted in breach of his duties as executor of the Estates in that he was under a conflict of interests and he had exercised his powers for his own benefit and in furtherance of this Personal Agenda.

17. Broadly speaking, the 1st and 2nd plaintiffs apply to strike out the counterclaim on the ground that it discloses no reasonable cause of action, is frivolous and vexatious, embarrassing and an abuse of process. Specifically, the 1st and 2nd plaintiffs say that :

(1) There is no basis for the claim in breach of executors' duty.

(2) The 2nd plaintiff has no locus standi to bring the counterclaim.

(3) The counterclaim is premature in that the alleged loss is contingent and based on hypothetical assumption that the defendants would not compensate PEL for the loss if they fail in defending the plaintiffs' claim.

18. Before dealing with these specific grounds, it is worth noting that the defendants named in the counterclaim are the 1st and 2nd plaintiffs, i.e. Lee Tak Yan ("TY Lee") and Lee Wing Kim May ("May Lee") in their personal capacity. Given that the 2nd defendant is counterclaiming against TY Lee and May Lee as executors of the Estates, the proper defendants to the counterclaim should have been the 5th and 6th defendants. Strictly speaking, the 1st and 2nd plaintiffs are entitled to have the counterclaim struck out as against them on this basis. But then the 2nd defendant may seek to amend the counterclaim to one against the 5th and 6th plaintiffs. Therefore for practical purpose, I shall deal with the striking out application as if the proper defendants, namely, the 5th and 6th plaintiffs had been named.

19. The first main ground relied upon by TY Lee and May Lee as executors of the Estates (collectively referred to as "the executors") is that the specific duties as executors pleaded do not exist and there is no breach of duties on their part. An important aspect of the counterclaim is the plea that the executors are under a duty to satisfy themselves that the valuation provided by the 6th defendant was a fair valuation and also to seek independent advice as to the value of PEL shares. It is the 2nd defendant's case that the executors were at fault in failing to obtain independent valuation and to satisfy themselves as to the propriety of the 6th defendant's valuation.

20. There is no dispute that the executors owe the general fiduciary duties pleaded in the counterclaim. There is no dispute, too, that an executor is under a general duty to protect the assets of the estate. What is in issue is the extent of the duty and whether it necessitates the executors going behind the 6th defendant's valuation. The question has to be determined in the context of the undisputed and relevant factual matrix.

21. Firstly, the board of directors of PEL had on 8 September 1995 issued a circular to the shareholders recommending the acquisition of the BPR properties and the issue of 1,357 PEL shares by way of part consideration for the purchase of No.5 BPR. The circular had included in it the 6th defendant's valuation of the issued shares of PEL. Under the "Recommendation" section of the circular, it states that :

"[the 6th defendant], a chartered accountant has confirmed that the terms of the Acquisitions [of BPR properties] are fair and reasonable so far as the shareholders of [PEL] are concerned, ..."

and that the directors strongly recommend the shareholders to vote in favour of the proposed resolutions.

22. Secondly, a letter dated 16 August 1995 from the 6th defendant to the shareholders was contained in Part III of the circular. The 6th defendant's letter set out their valuation and further states that :

"Your Company is valued as a going concern and based on general accepted valuation principles, parameters and methodology which included weighted balance of dividends base, earnings base and net assets value base in our computation.

It is our opinion that a band should be used to describe the true value. It is our view, which we consider to be fair and reasonable, that the dollar per share value of (PEL) is in a range between HK$26,900 and HK$41,600."

23. Thirdly, the 6th defendant is a chartered accountant and had been acting as the accountant of PEL. On the 2nd defendant's own pleaded case (paras.41.1.1 and 41.1.2, Section E, Re-Amended Defence), the directors of PEL had "represented to the shareholders that the fair and proper value of PEL's shares in or around September 1995 was HK$35,017 per share". The representation was based upon the 6th defendant's valuation and the PEL directors "had no reason to doubt the efficacy and reliability of the resolution", and that "they had acted properly and reasonably in relying on that valuation".

24. Fourthly, the estates are shareholders in PEL. They also hold shares in a shareholder of PEL, i.e. HY & HT. The question of the extent of the executors' duties with regard to the PEL shares held by the estates ought therefore to be approached from the perspective of a shareholder. The question is to be answered by considering what a reasonable shareholder of PEL in September 1995 would have done in relation to the valuation and the allotment of shares.

25. On the pleading, the 2nd defendant has not made out a case for imposing upon the executors a duty to go behind and to check the 6th defendant's valuation. Fundamentally, there is no plea that the executors had any knowledge, whether actual implied or constructive, of the valuation given by the 6th defendant being an undervalue, or of any circumstances that would cast doubt on the correctness or reliability of the 6th defendant's valuation, or of the independence and competence of the 6th defendant as a professional. The pleading has therefore not shown why the executors were not entitled to rely on the directors of PWL and an independent professional chartered accountant and to act on their recommendations and professional advice. Short of any allegation that the executors were aware of any want of competence or independence of the 6th defendant and/or of any impropriety in the valuation, there is no basis for contending that the executors were required to do more than what a reasonable shareholder would have done with regard to the valuation of PEL shares. Even though they are trustees of the Estates, they were only bound to act in the same manner as a prudent man of business : Bartlett v. Barclays Trust Co. (No.1) [1980] 1 Ch.515 at 532E.

26. Mr Coleman submits that the executors should have obtained their own valuation for a number of reasons. Essentially, it is said that the allotment arose out of disputes, litigations and settlement proposals and that there had been at least a breakdown of trust between May Lee and the 2nd defendant over the administration of the mother's estate.

27. Although the allotment did have a background of litigations and settlement agreement, the 2nd defendant and the executors were on the same side in the context of the BPRS and the BPRS Agreement as well as the sale of No.5 BPR. Any hostility between May Lee and the 2nd defendant is therefore irrelevant.

28. It is also submitted that the executors had information that might put them on inquiry in that during a conversation on 20 August 1995 TY Lee had told the 2nd defendant that the Inland Revenue Department had placed a higher value on PEL shares in connection with the mother's estate (para.34.17.6, Section D, Re-Amended Defence). This averment has to be viewed against the 2nd defendant's pleaded case that he and the other PEL directors had no reason to doubt the 6th defendant's valuation and that he had acted reasonably and properly in relying on it. If directors who are closely involved in the day-to-day administration of PEL were justified in relying on the valuation, the executors, who were one step removed from the management and affairs of PEL, should similarly be entitled to act on the valuation and the directors' recommendation. This is so even if TY Lee knew that the Inland Revenue Department had put a higher value to the PEL values held by the mother's estate because the 2nd defendant was similarly aware of the point as a result of the conversation he had with TY Lee in August 1995.

29. Additionally, it is said that the executors being lay person should have taken appropriate advice. But the executors and the other shareholders do have the benefit of professional opinion represented by the 6th defendant's valuation. It is to be noted that the 6th defendant was engaged to render expert opinion to the shareholders of PEL. From this perspective, the 6th defendant was on the same side as the executors. Short of any allegation of knowledge of irregularity, the executors cannot be expected to take step to check the advice given by the 6th defendant.

30. Another major aspect of the counterclaim is the averment that the executors owe various duties to the beneficiaries of the Estates with regard to the consideration for the sale of No.5 BPR and the shareholding of the Estates and HY & HT in PEL, and that they had failed to discharge these duties.

31. So far as the alleged duty in connection with the consideration for the sale of No.5 BPR is concerned, the averment is clearly misconceived. The plaintiffs have taken no issue on the sale of No.5 BPR or the consideration for the sale of it. It is not the plaintiffs' case that HK$108 million was not an appropriate settlement sum or that the sale proceeds received by MWLS had been improperly distributed. The essence of the plaintiffs' claim is that the 2nd defendant had mis-used the occasion to enable the 3rd defendant and himself to acquire shares in PEL at inadequate consideration. The averment that the executors had failed to ensure that MWLS received full value for No.5 BPR is therefore irrelevant. It is also bad for the reason that the executors are not parties to the BPRS and the settlement agreement. Further, the fact that the 2nd and 3rd defendants had received more distribution of the sale proceeds than their entitlement, as a result of the allotment at undervaluation, does not mean that the other shareholders of MWLS, including the Estate, is entitled to receive more by way of distribution. It also does not mean that MWLS is entitled to receive more than what it had been paid for No.5 BPR. The averment that the executors failed to make a proper distribution to the shareholders of MWLS is misplaced.

32. In as much as the plaintiffs are not contending that MWLS had been underpaid, the plaintiffs do not claim herein that PEL had overpaid for the purchase of No.5 BPR. The plea that the executors fail to ensure that PEL did not pay too high a price for the purchase is irrelevant. At any rate, there is no basis for imposing on the executors a duty to ensure that the company, in which the Estates are shareholders, does not pay too high a price for its acquisition.

33. Similarly, the executors cannot be under a duty to ensure that the shareholding of the Estates was not diluted or diminished, unless the dilution or diminished was improperly achieved.

34. A third major aspect of the counterclaim is the averment that TY Lee was in breach of the duty not to place himself under a conflict of interest and not to exercise his powers for collateral purposes. It is pleaded that TY Lee had a Personal Agenda and had knowledge of the 2nd defendant's desires to, inter alia, take BPR properties into PEL for development. It is further pleaded that TY Lee encouraged the 2nd defendant to attribute a value to the PEL shares and was reckless as to what value was attributed. This is a theme that also features in the Contribution Notice against TY Lee and the Amended Third Party Notice against MWLS, to which I shall return later.

35. This averment is defective. Short of alleging that TY Lee had encouraged the 2nd defendant to attribute a value to the PEL shares that did not represent the true worth of the shares, the Personal Agenda and knowledge of the 2nd defendant's desires do not give rise to a breach of duty on TY Lee's part. The allegation that TY Lee was reckless is also not particularized.

36. There is, in short, no sound basis for counterclaiming against the executors in breach of duties in connection with the BPRS and the valuation of PEL shares. Indeed, upon analysis, the 2nd defendant is effectively saying that the executors had failed to prevent the defendants form committing the wrong on PEL. Because of that and because the 2nd defendant has a beneficial interest in PEL through the Estates, the executors should be liable to the 2nd defendant for the loss caused by the wrong committed by the other defendants and himself. This cannot be right.

37. As to the locus standi of the 2nd defendant to counterclaim against the executors, it is apparent from the relief sought in the counterclaim that the 2nd defendant was claiming compensation for the beneficiaries. The 2nd defendant has no proper basis for so doing. This is particularly so when one considers that the counterclaim is put on the assumption that the 6th defendant's valuation was an undervaluation brought about by conspiracy and/or breach of duties involving the 2nd defendant. The 2nd defendant cannot be heard to complain that he has suffered loss as a beneficiary by reason of wrongs done to the company, for which he is responsible as a director.

38. Additionally, the loss which the 2nd defendant is counterclaiming for will only arise if PEL cannot be fully compensated by the defendants, despite the plaintiffs' claim herein being successful. It is therefore contingent upon the failure of the defendants, including the 2nd defendant, to observe the court order and to pay damages as ordered. The counterclaim is both premature and speculative.

39. For these reasons, I am of the view that the 2nd defendant's counterclaim against the 1st and 2nd plaintiffs as executors of the Estates are unsustainable and ought to be struck out. I need not consider the other grounds relied upon by the 1st and 2nd plaintiffs, including jurisdiction and limitation. Suffice to say that I do not regard them as plain and obvious points justifying a striking out.

The Contribution Notice

40. By the Contribution Notice, the 2nd and 5th defendants seek an indemnity by way of contribution from the 1st plaintiff in respect of the plaintiffs' claim and costs of the action.

41. The grounds for contribution are set out in 18 paragraphs. Paragraphs (1) to (17) are identical to the first 17 paragraphs in the Amended Third Party Notice. Given their importance in determining the merits of the 1st plaintiff's and MWLS's striking out application, they are set out in full as follows :

"(1) the allotment to MW Lee & Sons Enterprises Limited ('MWLS') of shares in PEL and the agreement dated 26 September 1995 for the Sale and Purchase of No.5 Blue Pool Road ('the Sale and Purchase Agreement') were an integral part of the Blue Pool Road Settlement and the Blue Pool Road Settlement Agreement dated 26 September 1995 which form the subject matter of this action ('the BPRS Agreement');

(2) further, the BPRS Agreement, amongst other things compromised:

(a) Proceedings between Greenhill Enterprises Limited ('Greenhill') and MWLS under folio No. HCA 1792/92;

(b) Proceedings between CC Lee and Lee Chai Kwong and PEL under folio No. HCA 3850/90 and CA 123/91;

(c) Proceedings between Lee Hon Fai, Lee Hon Yin, Lee Hon Yuen and Lee Hon Cheong and PEL under folio No. HCMP 62/92; and

(d) Proceedings between Moreta Lee and PEL under folio Nos. HCA 3851/90 and HCA 9795/91;

(3) as at 26 September 1995 and 18 December 1995, the Permanent Managing Directors of MWLS were:

(a) TY Lee; and

(b) ST Lee.

(4) TY Lee had a desire to extract cash from MWLS and to emigrate from Hong Kong ('TY Lee's Personal Agenda');

(5) TY Lee was told by ST Lee on 9 January 1992 that ST Lee would like to have taken into PEL, No. 5 Blue Pool Road, an asset of MWLS, in which company it could be developed;

(6) TY Lee consistently encouraged ST Lee in relation to that work of ST Lee's;

(7) TY Lee did so with a view to furthering his own Personal Agenda;

(8) TY Lee knew that the prospect of selling No. 5 Blue Pool Road to PEL, thereby enabling him to extract further cash from MWLS was dependent upon the sale by Greenhill to PEL of the adjacent property at No. 7 Blue Pool Road, so that the two properties could be developed together;

(9) indeed, TY Lee knew that CC Lee, the Permanent Managing Director of Greenhill, was insistent on a sale of both No. 5 and No. 7, Blue Pool Road at the same time, to minimise PEL or to another person, so that would maximise the value of No. 7 Blue Pool Road;

(10) TY Lee sought to persuade CC Lee to cause Greenhill to sell No. 7 Blue Pool Road to PEL;

(11) TY Lee agreed to resolve with May Lee, the issue regarding a memorandum dated 22 November 1989 attached to the Will of Madam Ng purportedly directing that May Lee, should distribute to such children of TY Lee and ST Lee as she may appoint at her sole discretion the 1,800 shares in MWLS registered in the name of Lee Cheong Yee and the 200 shares in PEL registered in the name of Lee Wai Loy appointed pursuant to clauses 8 and 11 of her Will ('the Secret Trust') without which ST Lee would not have agreed to the Blue Pool Road Settlement;

(12) TY Lee knew that ST Lee wanted to take, by means of a distribution of the proceeds of the sale of No. 5 Blue Pool Road in MWLS, shares in PEL rather than cash;

(13) TY Lee knew that ST Lee would only take the shares in PEL if the value approximated to HK$35,000 each;

(14) in his desire to further his Personal Agenda, TY Lee encouraged ST Lee to fix the value of the shares in PEL at that price which he (ST Lee) thought to be appropriate;

(15) with that knowledge TY Lee and ST Lee agreed on a course of action the effect of which was to ensure that PEL would acquire both No. 5 and No. 7 Blue Pool Road;

(16) that course of action was designed to, and did, achieve the following:

(a) fulfilment of ST Lee's desire to develop within PEL, No. 5 and No. 7 Blue Pool Road;

(b) the maximisation of the consideration which MWLS would receive for No. 5 Blue Pool Road;

(c) the ability of TY Lee to extract cash from MWLS;

(d) the maximisation of the cash which TY Lee could extract from MWLS;

(e) to bring to an end the litigation between MWLS and Greenhill;

(f) to bring to an end the litigation between PEL and members of the CC Lee family;

(17) in acting in that way, TY Lee encouraged ST Lee to attribute a value to the shares in PEL, and was reckless as to what, and simply did not care what, value was attributed.

...."

42. The 1st plaintiff applies to strike out the Contribution Notice principally on the ground that it discloses no reasonable cause of action. The 1st plaintiff says that the 2nd and 5th defendants have not brought themselves within the terms of section 3(1) of the Civil Liability (Contribution) Ordinance, Cap.377 which provides, inter alia, that :

"... any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)."

43. As accepted by Mr Coleman, the Contribution Notice is brought against the 1st plaintiff personally and not in his capacity as executors of the Estates. In order that the 1st plaintiff is liable to contribute to the 2nd and 5th defendants herein, the Contribution Notice must plead a case that the 1st plaintiff is liable personally in respect of the damages for which the 2nd and 5th defendants may be held liable to the plaintiffs herein : see Birse Construction Ltd v. Haiste Ltd [1996] 1 WLR 675 and Clerk & Lindsell on Torts (18th edn), paras.4-116 at p.208.

44. The damages that the plaintiffs seek to recover from the defendants herein is represented by the loss suffered by PEL as a result of the allotment of the 1,357 shares at an undervalue to the 2nd and 3rd defendants as a means of distribution in MWLS of the sale proceeds of No.5 BPR. On the plaintiffs' case, the undervaluation and, in turn, the loss came about as a result of conspiracy and breach of duties involving the 2nd and 5th defendants.

45. It is not altogether apparent from the Contribution Notice as to the basis on which the 1st plaintiff is said to be liable personally for the loss to PEL and its shareholders caused by the allotment at an undervalue so as to give rise to a liability to contribute. The Contribution Notice contains no averment of fraud or negligence or breach of duty on the 1st plaintiff's part. At the most, paragraphs (14) and (17) plead that the 1st plaintiff had encouraged the 2nd defendant to attribute whatever value to the PEL shares the 2nd defendant considered appropriate, and the 1st plaintiff was reckless and did not care what value was attributed. They do not give rise to any cause of action against the 1st plaintiff.

46. Mr Coleman in his submission puts the liability to contribute on the basis that if the 2nd defendant was held to have conspired as claimed, then the 1st plaintiff is also liable as a co-conspirator. The conspiratorial agreement is said to be between the 1st plaintiff and the 2nd defendant and "involved the acquisition of No.5 and No.7 BPR". The object of the agreement is said to enable the 1st plaintiff to further his Personal Agenda and to fulfill the 2nd defendant's desire to acquire and develop No.5 BPR.

47. Quite apart from the fact that this is not pleaded, a point that I will return to later, the conspiracy that Mr Coleman puts forth is entirely different from the conspiracy pleaded and relied upon by the plaintiffs in claiming against the defendants. The conspiracy that is pleaded in the Amended Statement of Claim is a conspiracy to :

(a) misrepresent to the shareholders of PEL the fair and proper value of PEL shares in about September 1995;

(b) procure the passing of resolutions approving the allotment at undervalue; and

(c) procure the allotment of shares at undervalue.

48. The conspiracy in question is therefore a conspiracy to defraud PEL and its shareholders by dishonestly putting forward for reliance by its shareholders, the 6th defendant's valuation as fair and proper, when in fact the valuation was an undervaluation. The conspiracy is in relation to the valuation of the shares for the purpose of the allotment as a means of distribution of the sale proceeds of No.5 BPR within MWLS. The conspiracy is not in relation to the acquisition of No.5 and No.7 BPR by PEL. Indeed, the crux of the plaintiffs' claim is not about the sale of the BPR properties or the terms of the BPRS or the BPRS Agreement. There is also no complaint against the allotment of shares to the 2nd and 3rd defendants as a means of distribution of the sale proceeds within MWLS. What is at the heart of the plaintiffs' complaint is that the 2nd defendant had made use of the opportunity presented by the BPRS to benefit himself and/or his children and nominee company by causing the allotment to be made at an undervalue.

49. The conspiratorial agreement advanced by Mr Coleman in his submission being a different agreement, the 1st plaintiff cannot be said to be a co-conspirator of the 2nd defendant in terms of the conspiracy in question. It follows that no liability to contribute can arise under section 3(1) of the Civil Liability (Contribution) Ordinance in the event the 2nd defendant were found liable to the plaintiffs for damages in conspiracy.

50. Another major difficulty that the 2nd and 5th defendants face in putting forward a case for contribution on conspiracy is that this is not pleaded at all. It is a well-recognized rule of pleading that allegations of fraud must be pleaded distinctly and with the utmost particularity : ADS v. Wheelock Marden & Co. Ltd [1994] 2 HKC 264.

51. The tort of conspiracy takes two forms, either conspiracy to injure or conspiracy to use unlawful means. In order to make out a case of conspiracy, the claimant must establish :

(1) an agreement between two or more persons;

(2) either, where the means are unlawful, an agreement the real and predominant purpose of which is injure the claimant, or where the means are unlawful, an agreement a purpose of which is to injure the claimant; and

(3) that acts done in execution of the agreement resulted in damage to the claimant :

Halsbury's Laws of England (4th edn Reissue), Vol.45(2) at para.697.

52. In Marquis Trading Co. & Ors v. Associated Insurance Co. Ltd & Ors [1982] HKLR 434 at 440A-B, Barker JA referred with approval to Bullen and Leake and Jacob's Precedents of Pleadings (12th edn) at p.341, in which it stated that a statement of claim for conspiracy to defraud should describe the parties to it and their relationship with each other. It should also allege the conspiratorial agreement and must state precisely the purpose or objects of the alleged conspiracy and must further set out, with clarity and precision, the overt acts that are alleged to have been carried out in pursuance and in furtherance of the conspiracy.

53. In ADS v. Wheelock Marden & Co. Ltd at 272B-C, Bokhary JA (as he then was) further held that in a claim in conspiracy, the pleader must allege at least one overt act which is the act of all the conspirators or alternatively a number of overt acts which include at least one act on the part of each conspirator. Additionally, the overt act or overt acts pleaded must be such as to show :

(i) that the conspiratorial agreement had been entered into by each and every conspirator;

(ii) that the agreement, and not merely the intention of one person alone, was implemented; and

(iii) that such implementation caused the damage complained of.

54. The Contribution Notice fails to meet the aforesaid requirements completely. Despite the submission that the 1st plaintiff is liable to contribute as a co-conspirator, the Contribution Notice does not contain any plea that the 1st plaintiff knew or was aware of the dishonest intention or knowledge of the 2nd defendant. No particulars of the conspiratorial agreement is pleaded. The Contribution Notice also does not contain any plea of dishonest acts that are carried out in furtherance of the conspiracy.

55. Mr Coleman submits that the Contribution Notice has pleaded the relevant facts for giving rise to a plea of conspiracy, and reliance is placed on paragraphs (15) and (16). But the two paragraphs merely plead that "a course of action" had been agreed upon between the 1st plaintiff and the 2nd defendant and the course of action was designed to, and did, achieve certain consequences. It gives no particulars of the course of action. Nothing therefore is known about the agreement.

56. As to avert act or overt acts, Mr Coleman relies on the following matters pleaded in the Contribution Notice as fulfilling the requirements on pleading overt act :

(1) The 1st plaintiff consistently encouraged the 2nd defendant in relation to the latter's work to take No.5 BPR into PEL.

(2) The 1st plaintiff sought to persuade CC Lee to cause Greenhill to sell No.7 BPR, knowing the prospect of selling No.5 BPR to PEL depended on a successful sale of No.7 BPR.

(3) The 1st plaintiff agreed to resolve with the 2nd plaintiff the issue relating to the memorandum attached to Ng Chan Wa's will, knowing that the 2nd defendant would not agree to the BPRS if the issue is not resolved.

(4) The 1st plaintiff encouraged the 2nd defendant to attribute whatever value to the PEL shares as he thought fit, knowing that the 2nd defendant would only go ahead with the BPRS if he got PEL shares valued at HK$35,000 each.

57. On the last point, the allegation that the 1st plaintiff knew that the 2nd defendant would only go ahead with the settlement if the PEL shares were valued at HK$35,000 each is not pleaded in the Contribution Notice. Even though paragraph (12) of the Contribution Notice states that the 1st plaintiff knew that the 2nd defendant wanted to take PEL shares rather than cash, short of pleading that the 1st plaintiff knew that the 2nd defendant would refuse to take cash, it does not give rise to the inference that the 1st plaintiff knew that the 2nd defendant would only go ahead with the BPRS if he was given PEL shares valued at about HK$35,000 each.

58. That aside, the overt acts identified by Mr Coleman are not in furtherance of the conspiracy in question. It is not shown they have resulted in the damages claimed by the plaintiffs.

59. The Contribution Notice is plainly defective and does not reveal an actionable cause in conspiracy or otherwise against the 1st plaintiff. The issue of it is an abuse of process. As such, the Contribution Notice ought to be struck out, and I so order.

Amended Third Party Notice

60. The Amended Third Party Notice is substantially identical to the Contribution Notice. The first 17 paragraphs are identical to those in the Contribution Notice. Additionally, paragraphs (18) to (20) of the Amended Third Party Notice pleads :

"(1) the knowledge of TY Lee and ST Lee, as directors of the third party, of the facts and matters set out in paragraphs (3) and (17) falls to be imputed to the third party;

(2) the third party was an integral part of, and participated in, the course of action referred to in paragraph (16) as an intended, and actual, beneficiary of it; and

(3) if, which is denied, the 2nd, 3rd and 5th defendants are liable in any way to the plaintiffs, or any of them, for damages for conspiracy the third party is also liable to them for such damage."

61. On this basis, the 2nd and 5th defendants claim against MWLS an indemnity in respect of the plaintiffs' claim and also for accounting and tracing relief in respect of dividends, profits or benefits derived from the allotment of shares and the consideration of HK$60.48 million for the sale of No.5 BPR.

62. Paragraphs (21) to (23) of the Amended Third Party Notice proceed on the basis that if the allotment of shares is rescinded, then the whole of the BPRS Agreement should be set aside and MWLS, as recipient of the consideration for the sale of No.5 BPR, should be made a party to these proceedings. This part of the Notice is academic given that the plaintiffs by the Re-Amended Statement of Claim had deleted the claim for rescission of the PEL shares. Mr Coleman in his submission also accepts that the accounting and tracing relief does not appear to be appropriate given that the claim for rescission is not pursued by the plaintiffs.

63. MWLS applies to strike out the Amended Third Party Notice on the basis that it discloses no reasonable cause of action. Insofar that the 2nd and 5th defendants seek to base their claim on conspiracy, MWLS complains that the Amended Third Party Notice does not show an agreement or combination involving MWLS to defraud PEL and/or its shareholders and that no overt acts in furtherance of the conspiratorial agreement has been pleaded.

64. A right to indemnity arises where there is an obligation in law or in equity to indemnify. The right may arise from contract, statute or by implication from some principles of law : Hong Kong Civil Procedure 2002, Vol.1, para.16/1/3; Halsbury's Laws of England (4th edn), Vol.20, paras.347, 348 and China Everbright-IHD Pacific Limited v. Ch'ng Poh & Ors (unreported), HCA12837/1995, CACV49/1999. The Amended Third Party Notice, however, does not indicate the basis upon which the claim to indemnity arises. From counsel's submissions, it will appear that the right to indemnity is put on the basis of MWLS being a co-conspirator.

65. In this respect, the Amended Third Party Notice suffers from the same defects in the Contribution Notice. While paragraph (15) pleads that the 1st plaintiff and the 2nd defendant had agreed to "a course of action", and paragraph (19) states that MWLS was an integral part and beneficiary of the course of action, there is no allegation that there was an agreement to conspire to defraud PEL and/or its shareholders in respect of the value of PEL shares. An agreement on a course of action is different from an agreement to defraud PEL and/or its shareholders in respect of the value of PEL shares. More importantly, it is neither pleaded nor shown that MWLS was a party to any alleged agreement between the 1st plaintiff and the 2nd defendant. The Amended Third Party Notice also contains no particulars of the alleged agreement, including the time and manner in which it was entered into and the terms of the agreement. There is also no plea of overt acts done by the alleged conspirators and in particular, MWLS, in pursuance and in furtherance of the conspiratorial agreement.

66. It is submitted on behalf of the 2nd and 5th defendants that the overt acts consist of MWLS's knowledge of the motives or desires of the 1st plaintiff and the 2nd defendant and of the agreed course of action, coupled with MWLS's participation in the agreed course of action.

67. This submission ignores the fundamental fact that the 2nd defendant himself is a director of MWLS. On the 2nd defendant's pleaded case, the guilty knowledge of MWLS is imputed from him and the 1st plaintiff. If indeed MWLS was an integral part to the "course of action" agreed upon by the 1st plaintiff and 2nd defendant and had participated in it, it was no more than a vehicle of fraud. Any dishonest acts of MWLS would only be at the instance of its directors, of whom the 2nd defendant was one. Thus analysed, the 2nd defendant cannot have any entitlement to seek an indemnity from MWLS. It would be absurd that a director who had caused the company to be used as a vehicle of fraud has a right to be indemnified by the company for the consequences of the fraud, just because he happens to be interested in the victim of the fraud in another capacity.

68. In addition, without particularizing the so-called course of action, a plea that MWLS participated in the course of action will not be sufficient to amount to a plea of overt acts. MWLS's participation in the BPRS Agreement and the involvement in the allotment of PEL shares, even with the imputed knowledge, cannot amount to overt acts in pursuance and furtherance of the conspiracy to defraud PEL and/or its shareholders with regard to the value of the PEL shares. It is of paramount importance to note that there is no allegation that the dishonest intention to misrepresent the value of the shares and the knowledge of the undervaluation, was shared by the 1st plaintiff and/or imputed to MWLS. As pointed out previously, the crux of the plaintiffs' complaint is the misrepresentation of the value of the PEL shares and the allotment to the 2nd and 3rd defendants at undervalue. The participation by MWLS in the BPRS Agreement and the distribution of the sale proceeds by allotment are therefore incapable of being overt acts in pursuance and furtherance of the conspiracy in question. Furthermore, the loss suffered by PEL and its shareholders, namely, the underpayment for the allotment, is not occasioned by the BPRS Agreement nor the distribution of sale proceeds by allotment.

69. The Amended Third Party Notice for the reasons indicated has failed to plead a reasonable cause of action against MWLS. No proper basis for seeking an indemnity can arise. It should therefore be struck out and I so order.

Conclusion

70. For the reasons above, I make the following order :

(1) The counterclaim of the 2nd defendant against the 1st and 2nd plaintiffs be struck out and dismissed.

(2) The Contribution Notice of the 2nd and 5th defendants against the 1st plaintiff be struck out.

(3) The Amended Third Party Notice of the 2nd and 5th defendants against the 1st third party be struck out.

(4) There be an order nisi that :

(a) The costs of the counterclaim, including the costs of the application to strike out, be to the 1st and 2nd plaintiffs against the 2nd defendant, to be taxed if not agreed, with certificate for two counsel.

(b) The costs of and occasioned by the Contribution Notice, including the costs of the application to strike out, be to the 1st plaintiff against the 2nd and 5th defendants, to be taxed if not agreed, with certificate for two counsel.

(c) The costs of and occasioned by the Third Party Notice as amended, including the costs of the application to strike out, be to the 1st third party against the 2nd and 5th defendants, to be taxed if not agreed.