ZENG GUI MIN v. TSAI TIM YUEN AND OTHERS

HCMP 964/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 964 OF 2013

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D E C I S I O N

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1. This is an application by the 1^st and 2^nd Respondents to strike out the Originating Summons taken out by the Applicant against them on the ground that it discloses no reasonable action against them.

2. The Originating Summons was issued on 6 May 2013 by the Applicant, an individual who ordinarily resides in Mainland China (as can be seen from the address given in the annual return filed with the Companies Registry), naming three respondents. The 1^st and 2^nd Respondents are also individuals. The 3^rd Respondent are the joint and several liquidators of Access Tree Industrial Limited (“Access Tree”) who were appointed by the court on 22 November 2006 in HCCW 861 of 2005.

Background

3. The background to this matter is not as full as it should be since the evidence before this court is patchy to say the least.

4. The case itself concerns the shares of Yuen Tai Food Dealers Limited (“Yuen Tai”) a company incorporated in Hong Kong.

5. At all material times up to 14 May 2008, the issued share capital of Yuen Tai was 10,000 shares of HK$100 each held in equal amount by the 1^st and 2^nd Respondents of 5,000 shares each. The 1^st and 2^nd Respondents were also, up to that time, the only two directors of Yuen Tai.

6. On 14 May 2008, at a board meeting of the directors of Yuen Tai attended by the 1^st and 2^nd Respondents, it was resolved (inter alia) that a further 10,000 shares of HK$100 each be allotted (thereby increasing the issued share capital of Yuen Tai to 20,000). Of the newly allotted shares, 4,600 shares were allotted to the Applicant with the remaining shares being allotted to other individuals. The minutes of that board meeting were signed by the 1^st and 2^nd Respondents.

7. Thereafter, the annual returns filed by Yuen Tai with the Companies Registry for each succeeding year all reflected the fact that the Applicant did hold 4,600 shares of HK$100 each in Yuen Tai.

8. On 24 October 2012, the 3^rd Respondent wrote to the Applicant to the effect that the 1^st and 2^nd Respondents held each of their 5,000 shares in Yuen Tai on trust for Access Tree and enclosing copies of two Declarations of Trust both dated 31 May 2001 by each of the 1^st and 2^nd Respondents to that effect. It was also claimed by the 3^rd Respondent in their letter that the allotment of the 4,600 shares in Yuen Tai to the Applicant was without the agreement of Access Tree and was a matter not known to the liquidators at the time the allotment was made. Accordingly, it was claimed by the 3^rd Respondent that the allotment was not a valid allotment.

9. Messrs Tang & So, the solicitors acting for the 1^st and 2^nd Respondents also by letter dated 24 October 2012 wrote to the Applicant’s solicitors putting on record that Access Tree has no interest whatsoever in any share of Yuen Tai and denying that Access Tree is the beneficial owner of the 10,000 shares of Yuen Tai held by the 1^st and 2^nd Respondent.

10. It would therefore appear that there is here a dispute as between the 3^rd Respondent on the one hand and the 1^st and 2^nd Respondents on the other hand with the Applicant being caught in the middle insofar as the 4,600 shares allotted to the Applicant are concerned.

The Originating Summons

11. The Originating Summons was taken out by the Applicant on 6 May 2013. The reliefs sought by the Applicant as contained in the Originating Summons are as follows:

(a)   A declaration that the Applicant has since 14 May 2008 been and is the owner of 4,600 shares in the issued share capital of Yuen Tai;

(b)   If the court finds the allotment of the 4,600 shares to the Applicant to be invalid, an order validating the said allotment to be made;

(c)   The register of members of Yuen Tai to be rectified in relation to the said 4,600 shares after the decision by the court; and

(d)   Costs to be provided for.

12. From the reliefs claimed by the Applicant above, it should be noted that somewhat strangely Yuen Tai has not been made a party to the Originating Summons. Despite the fact that Yuen Tai was not named as a party, it is indicated on the Originating Summons itself that the Originating Summons was served on Yuen Tai at its registered office.

The Striking out application

13. The present application for striking out is taken out by the 1^st and 2^nd Respondents.

14. The short point taken in submission by counsel appearing for the 1^st and 2^nd Respondents is that there is nothing in the Originating Summons or in the reliefs claimed by the Applicant which would constitute a cause of action of the Applicant against the 1^st and 2^nd Respondents.

15. Moreover, the stance taken by the 1^st and 2^nd Respondents in denying that they hold the shares of Yuen Tai on trust for Access Tree does not conflict with but in fact agrees with the stance of the Applicant to the effect that the Applicant has been allotted 4,600 shares of Yuen Tai.

16. Accordingly, there is no dispute between the Applicant and the 1^st and 2^nd Respondents. More importantly, counsel for the 1^st and 2^nd Respondents emphasizes, there is no lis as between the Applicant and his two clients.

17. On that basis, it was submitted that the “claim” by the Applicant against the 1^st and 2^nd Respondents ought to be struck out as there is nothing for the Applicant to claim against the 1^st and 2^nd Respondents.

18. In response to the Applicant’s submission that the 1^st and 2^nd Respondents are “necessary parties” pursuant to Order 15 rule 6(2) of the RHC and can be added by the court even if they were not originally made parties to the action, counsel for the 1^st and 2^nd Respondents submitted that there has to exist good reasons before a court would order parties to be added to a claim. As matters now stand at the moment, there are no good reasons to say that the 1^st and 2^nd Respondents are “necessary parties” to this claim.

Proposed amendments

19. In the course of submissions, counsel for the Applicant indicated that in the event that the court should come to find that the allotment of the shares to the Applicant was invalid on the basis that the 1^st and 2^nd Respondents were in breach of their fiduciary duties by holding the original 10,000 issued share capital of Yuen Tai as trustees for Access Tree, as claimed by the 3^rd Respondent, then the Applicant ought to be able to seek remedy against the 1^st and 2^nd Respondents personally for in damages and loss thus caused.

20. Quite obviously, the difficulty faced by the Applicant to such a line of argument was that the claim by the Applicant against the 1^st and 2^nd Respondents had never been put on such a footing in the Originating Summons.

21. As a result, the Applicant saw fit to put before the court proposed amendments adding to the reliefs initially claimed in the Originating Summons the following further or alternative relief as follows:

“Further and/or alternatively, if this Honourable Court finds the allotment of the 4,600 shares to the Applicant was invalid and the Applicant is not the owner of the 4,600 shares, the Applicant claims damages (quantum to be assessed) against the 1^st and 2^nd Respondents for total failure of consideration and breach of the following implied terms of the agreement that the Applicant, the 1^st and 2^nd Respondents entered into on or about 14 May 2008 in which the 1^st and 2^nd Respondents agreed to cause [Yuen Fat] to allot 4,600 shares to the Applicant :-

(a) The 4,600 shares are to be validly allotted to the Applicant;

(b) The 4,600 shares should not be allotted by the 1^st and 2^nd Respondents for ulterior or improper purpose; and

(c)   The 4,600 shares to be allotted with good title and free of encumbrances.”

22. In putting the above proposed amendments before the court, it was emphasized by counsel for the Applicant that such proposed amendments do not detract from their initial stance that even as the Originating Summons now stands (ie without the proposed amendments) it is still the contention of the Applicant that the 1^st and 2^nd Respondents are ‘necessary parties’ before the court and the present application for striking out should not be acceded to.

DECISION

23. I would deal first with the proposed amendments put before this court by the Applicant.

24. By the proposed amendments the Applicant seeks to make a claim against the 1^st and 2^nd Respondents. However, the cause of action pleaded in the proposed amendments is fairly and squarely on contract or agreement and on total failure of consideration.

25. In putting forward such proposed amendments, the Applicant or at least his legal advisers have again dug a hole for themselves.

26. Putting their cause of action on contract, agreement or total failure of consideration cannot avail the Applicant since the contract for the allotment of the 4,600 shares must have been a contract between the Applicant and Yuen Fat. Quite apart from the fact that the 1^st and 2^nd Respondents were the directors of Yuen Fat and therefore only the agent of Yuen Fat in entering such agreement or contract, Yuen Fat being the principal has not been made a party to this action.

27. If the 1^st and 2^nd Respondents had been doing something wrong or unlawful in entering or purporting to enter into such a contract or agreement with the Applicant by allotting the 4,600 shares to the Applicant and in the process caused loss to the Applicant, one would have thought that the proper cause of action by the Applicant against the 1^st and 2^nd Respondents personally would be for liability in tort rather than in contract. But that unfortunately was not how the proposed amendments had been framed.

28. Quite apart from the above, the short point taken by Mr. Man for the 1^st and 2^nd Respondents was that no consideration (as between the Applicant and the 1^st and 2^nd Respondents) had been pleaded in the proposed amendments. The failure to plead consideration is firstly a failure to plead a material fact. In the RHC against marginal note 18/12/7 it is stated:

“(6) Consideration – If this is for any agreement not under seal, it is a material fact and must be pleaded, except in the case of negotiable instruments, where it is presumed.”

29. Secondly, these being proposed amendments, the effect of it lacking particularity is succinctly stated by Fuad J.A. in the case of Perak Pioneer Limited v Carrian Holdings Limited (in liquidation) (CACV No. 59 of 1985) where he said at page 5 of the judgment:

“As regards particulars, in my view, it is no answer to an objection that a proposed amendment lacks particulars, to say that particulars can later be given. Of course, if a pleading lacks particulars, particulars can be asked for in the usual way and ordered by the Court if necessary, but where an amendment is applied for it would be an unusual case where the Court would consider it appropriate to allow an amendment to be made which lacks particularity, and might cause embarrassment.”

30. For the reasons given above, and in particular, the failure to plead particulars of consideration in the proposed amendments, I am not disposed to grant leave to the Applicant to make the amendments proposed.

31. Having said that, I now turn to deal with the application for striking out on the basis of the Originating Summons as it stands.

32. The basic and the major relief sought by the Applicant in the Originating Summons is a declaration that he has been validly allotted the 4,600 shares in Yuen Tai on 14 May 2008.

33. To that end, he has exhibited the minutes of the board meeting of Yuen Tai to that effect signed by the 1^st and 2^nd Respondents as directors of Yuen Tai.

34. On the other hand, the Applicant is now faced with an allegation by the 3^rd Respondent that all the 10,000 shares in the issued share capital of Yuen Tai were held by the 1^st and 2^nd Respondents on trust for Access Tree and that neither Access Tree nor the liquidators were consulted or had given their consent to the allotment of shares of Yuen Tai made on 14 May 2008. The 3^rd Respondent therefore says that such allotment of shares were invalid. The 3^rd Respondent have also presented to the Applicant two Declarations of Trust made by the 1^st and 2^nd Respondents to the effect that they each hold 5,000 shares of Yuen Tai on trust for Access Tree.

35. The 1^st and 2^nd Respondents have denied, through their solicitor’s letter, that they hold the 10,000 shares on trust for Access Tree. However, there is (at least before me in this application) absolutely no explanation given by the 1^st and 2^nd Respondents as to the two Declarations of Trust signed by them on 31 May 2001.

36. It can at once be seen that there is here a factual dispute between the 1^st and 2^nd Respondents (denying that they hold the shares on trust for Access Tree) on the one hand and the 3^rd Respondent (claiming that the shares are held on trust for Access Tree by the 1^st and 2^nd Respondents) on the other hand.

37. At the hearing, counsel for the 1^st and 2^nd Respondents was content for the court to proceed in this application on the basis that the shares were held by his clients on trust for Access Tree, as claimed by the 3^rd Respondent.

38. On that basis, there is always a risk to the Applicant that at the end of the day the court may come to the finding as alleged by the 3^rd Respondent, that such allotment of shares to the Applicant was invalid. In that eventuality, loss will be caused to the Applicant. This is a matter that cannot be decided at this stage in the absence of all the relevant evidence and the full circumstances relating to the allotment.

39. Looked at from the point of view of the 3^rd Respondent, their primary contention must be that the allotment of the shares to the Applicant was not a valid allotment. If the 3^rd Respondent fails on that contention, they can still claim against the 1^st and 2^nd Respondents for breach of fiduciary duty.

40. Looking at the matter from the angle of the Applicant, if the Applicant succeeds against the contention put forward by the 3^rd Respondent, the allotment should end up being a valid allotment. But there is always a risk that if the Applicant fails to overcome the contention by the 3^rd Respondent, the only redress to the Applicant may well be a claim against the 1^st and 2^nd Respondents personally possibly on misrepresentation.

41. The evidence put before me are far from complete. For instance there is no firm indication as to what is the relationship between the 1^st and 2^nd Respondents (or either or them) and Access Tree, both at the time the Declarations of Trust were made by them up to the time of the allotment. That there is some sort of relationship between them can be seen by the fact that the 1^st Respondent signed on behalf of Access Tree in both Declarations of Trust. Moreover, even the Memorandum and Articles of Yuen Tai is not before me since the Articles would govern the procedure for allotment of shares by Yuen Tai.

42. The 1^st and 2^nd Respondents are therefore caught in the very midst of these conflicting contentions by reason of the fact that they were wearing a number of different hats at the time of the allotment, being the directors of Yuen Tai as well as holding the 10,000 Yuen Tai shares on trust for Access Tree, by which time the liquidators of Access Tree had already been appointed by the court in HCCW 861 of 2005.

43. It may be true that none of the reliefs claimed in the Originating Summons, in its present form, show a cause of action against the 1^st and 2^nd Respondents, however, it would be over-simplistic to decide this application on that basis alone.

44. Order 15 rule 6 (2) (b) provides as follows:

“(2) Subject to the provision of this rule, at any stage of the proceedings in any cause or matter the Court may on such terms as it thinks just and either of its own motion or on application-

(b) order any of the following persons to be added as a party, namely-

(i) any person who ought to have been joined as a party, or whose presence before the Court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, or

(ii) any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.”

…

45. I accept of course that the provision in the RHC cited above relates to addition of parties. That provision cited above, if applicable to the present case, it would mean that the 1^st and 2^nd Respondents can properly be added as parties (if they have not been added) and should not be struck out from the claim if they have already been added.

46. Given the circumstances of this case as already referred to above, there are of course a number of issues and questions not only as between the 1^st and 2^nd Respondents and the 3^rd Respondent, but also as between the 1^st and 2^nd Respondents and the Applicant (if the allotment should be found to be invalid) which are related to or connected with the declaration sought by the Applicant.

47. It would of course be just and convenient to have all these issues and questions determined as between all of them at the same time.

48. In my opinion, it would therefore be necessary for the 1^st and 2^nd Respondents to be parties in the cause or matter so that any orders made by the court after determination of the issues and questions involved, such orders of the court can be binding upon the 1^st and 2^nd Respondents, a matter which could not be achieved without them being parties to this cause or matter.

49. For the reasons given above, the 1^st and 2^nd Respondents’ application for striking out is dismissed.

Costs (order nisi)

50. Costs of the application and of the hearing (1 ½ hours in the morning) be paid by the 1^st and 2^nd Respondents to the Applicant to be taxed and paid forthwith if not agreed.

51. All costs thrown away by the proposed amendments and of the hearing (1/2 hour in the afternoon) be paid by the Applicant to the 1^st and 2^nd Respondents to be taxed and paid forthwith if not agreed.

Postscript

52. The Applicant’s legal advisers should give serious consideration to put his house in order by proper amendments to plead a proper cause of action against the 1^st and 2^nd Respondents and also to consider the necessity of joining Yuen Tai as a party to this action.