STEPHEN NG NGON KWAN AND OTHERS v. KEVIN HSU SHANG AND OTHERS

HCA 893/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 893 OF 2011

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BETWEEN

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R U L I N G

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A. Background

1.  The claim, briefly stated, is by the 1^st Plaintiff (whom I shall, for convenience refer as the Plaintiff) in respect of a transaction under a sub-sale purchase agreement in 1981 entered in the name of a company (the 3^rd Plaintiff) with the 3^rd Defendant for the purchase of a unit of property in a development purportedly to be developed by the 3^rd Defendant. The 1^st and 2^nd Defendants are the directors of the 3^rd Defendant.

2.  The Plaintiff paid the deposit roughly in the amount of HK$800,000.  Eventually the land or the project was not developed and the Defendants had allegedly pocketed the moneys in the sum of about $22 million which they obtained from a mortgage provided by a bank

3.  In around December 1987 the 1^st Plaintiff was informed by the solicitor acting for the Defendants, Mr. Martin Fairbairn that the whole project went bust and there was no prospect for the Plaintiff to recover anything.

4.  Investigation by the ICAC ensued. The 1^st and 2^nd Defendants were in fact eventually prosecuted though the prosecution was unrelated to the land project.

5.  In March 2011, the 1^st Plaintiff was allegedly advised by a lawyer friend that he could sue the Defendants.  He further subsequently discovered that the 1^st and 2^nd Defendants, whether by themselves or through their children, were found to be holding a large number of properties both overseas and locally.  About two months later in May 2011, the Plaintiff instituted the present proceedings against the Defendants.

6.  Default judgment against the 3^rd Defendant has been entered.    The 2^nd Plaintiff had filed a notice of discontinuance. The 3^rd Plaintiff had also filed a notice of discontinuance. Notwithstanding, however, I acceded to the 1^st and 2^nd Defendants’ application this morning by striking out the claim of the 3^rd Plaintiff for the reason that it being a deregistered company when the action was commenced. Hence, the only plaintiff is the 1^st Plaintiff.

B. The Striking Out Application

7.  The claim can be broadly grouped under one big umbrella of fraud with allegations of conspiracy to injure, misappropriation, false pretence or false representation (on the basis that that the Defendants had no intention to develop the land project).  Counsel for the Plaintiff, Mr. Aiken, SC, also confirms in his synopsis submitted this morning, that the claim is based on “the overt acts of conspiracy and fraud of the Defendants”.

B.1 Grounds of the Application

8.  The Defendants’ striking out application is on the usual grounds that the claim is scandalous and frivolous, and is an abuse of process.   The principle of a striking out is well established.  I shall only recap by stating that the court would only accede to an exercise of the summary power to strike out if it is plain and obvious.  Further, there will be no trial on affidavits.  Therefore, any disputed fact should only be taken in favour of the plaintiff.  Hence, before a court would accede to an application to strike out, the claim must be obviously unsustainable.

9.  Although there are also other grounds stated in the striking out summons, I think it is convenient to only deal with the three grounds counsel for the Defendants, Mr. Pow, SC, relied on in his written submission.

10.  The three grounds are: first, it is an abuse of process to allow the claim to proceed when limitation period has expired.  Secondly, the claim offends the rule that prohibits a claim for reflective loss. Thirdly, the special damage claim for the sum of $20 arising from the repurchase of premises lacks particulars.

11.  Instead of going by the same order of the said three grounds as Mr. Pow adopts in his submission, I think it would be more convenient to , instead consider them in the reverse order as the latter grounds appear to be simpler.   I would therefore deal with the last ground first, which is the lack of particulars.

B.1(a) Lacking Particulars

12.  There is no dispute (and Mr. Aiken also accepts) that the statement of claim currently has no particulars in support of this special damage claim.  For the purpose of this application, I am prepared to take into account of the proposed re-amendments (which will be a subject matter of another application for leave to amend).  The proposed amendment, apart from adjusting the amount of $20 million upward to $30 million, does not contain any necessary particulars.

13.  The question I should ask is whether lacking particulars for a special damage claim is a viable ground for striking out.  I am not inclined to take the view that it is plain and obvious that the Plaintiff’s claim would be unsustainable.  It may perhaps later become a suitable case for striking out, say when the Plaintiff fails to provide particulars after a request is made.  But I do not think it is sufficient at this stage for this court to strike out the claim just on the complaint of lacking particulars alone.

B.1(b) Offending the principle of reflective loss

14.  I will now deal with the second ground for striking out, which is the rule against reflective loss claim.  The principle, shortly stated, is to debar a shareholder from suing to recover loss which is merely a reflection of the loss suffered by the company of which he is a shareholder.

15.  In this case I think there is no dispute that such relationship exists because the 1^st Plaintiff was the shareholder of the 3rd Plaintiff, which was the contracting party of the contract.  The 3^rd Plaintiff having dropped out of the claim,  the 1^st Plaintiff’s claim is therefore said to be a claim reflecting the loss actually suffered by the 3^rd Plaintiff (the company) in his position as the shareholder of a company.

16.  Mr. Aiken submits that, well, the reflective loss rule in this case is not offended because the Plaintiff himself has a separate and independent claim.  The fact that he had personally paid the deposit by using his personal cheque;  the fact that the 3^rd Plaintiff did not have any company bank account and further that there is now an averment in the Re-Amended Statement of Claim that the Plaintiff was the beneficiary and the company was a mere bare trustee holding the interest and title for the benefits of the Plaintiff.

17.  The mischief in this rule is clearly to (and again there is no dispute) prevent double recovery.  Mr. Pow however contends that well, while it is true that with the 3^rd Plaintiff having been struck off by virtue of it being a deregistered company, there is, however, still a chance that it may be reinstated. It is because under the Companies Ordinance, a company that has been struck off can be reinstated within 20 years when the necessary requirements can be satisfied. Coming back to this case, it means the 3^rd Plaintiff (which was struck off in 1996) would have the possibility of it being reinstated up to 2016.  On this basis, it is argued that the risk still exists. 

18.  Mr. Aiken has referred to Greater Beijing Region Expressways Limited v Cosco Hong Kong (Group) Limited, unrep., HCA 474/2005, 11 August 2006, and  submitted that if a company which has become dissolved, the rule may not be offended.  I cannot say at this stage that the analogy made by Mr. Aiken of a deregistered company to a dissolved company in Greater Beijing Region Expressways  is not arguable, in particular Mr. Aiken has made reference to a provision of the Companies Ordinance that says that a dissolved company can have the order being declared void.  Since this may be a valid argument, I am disinclined to find it suitable to strike out on this ground.

B.1(c) Expiry of the limitation period

19.  I will deal with the most important ground relied on by the Defendants, which is the issue of limitation on the ground that if this claim were to be allowed to carry on would amount to an abuse of process.

20.  It is common ground that the action is now time barred by virtue of section 4 of the Limitation Ordinance.  The six year limitation period as prescribed by the Ordinance has expired because the period started to run from the date this cause of action accrued.

21.  The Plaintiff is however relying on section 26 of the Ordinance.  It would be convenient to refer to section 26, which I think can be found in the judgment of Fok J ( as he then was) in  Lee Tsan Sum v Wong Pui Hon [2010] 4 HKLRD 219, §37.  For convenience, I will quote the section as set out in the relevant part of the judgment in full:

“There will be a postponement of the running of the limitations when the matter fulfils these requirements. (a) the action is based upon the fraud of the defendant. (b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or (c) the action is for relief from the consequences of a mistake, the period of limitation shall not begin to run until the Plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.” (emphasis added)

The present claim falls within section 26(1)(a) because it is a claim based on fraud as well as on mistake, so Mr. Aiken’s submission goes.

C. Discussion

22.  The issues I think the court would have to consider for the purpose of striking out is to determine on the facts as pleaded and also the evidence filed, whether the Plaintiff discovered the fraud of the Defendants when the so-called land project went bust or collapsed, or alternatively whether he could have, with reasonable diligence discovered the fraud.

23.  I accept, for the purpose of striking out that, it is not suitable (as submitted by Mr. Aiken) to determine any disputed facts.  I think the principle in fact goes even further in that whenever there are disputed facts the court would be prepared to resolve the facts in a plaintiff’s favour.

24.  Mr. Pow submitted that, well, on the facts and on the evidence, the Plaintiff should have by December 1987 discovered the facts of fraud.   A number of cases have been cited to show what kind of facts having been found by the court to be sufficient knowledge of fraud under section 26(1) (a).

25.  In Peconic Industrial Development Ltd v Lau Kwok Fai (2009) 12 HKCFAR 139, it is suggested that only facts of a prima facie case would be sufficient.  There is no need for the evidence as to what essential facts would be known to him, and the burden is on a plaintiff to prove that he did not know or could have discovered the fraud with reasonable diligence.  The victim did not need to have the evidence to prove the claims. In Chiu Ming Sun v Ma Wing Michael [1986] HKC 217, in considering whether a plaintiff could have with reasonable diligence discovered the fraud, one should apply the objective test, taking into consideration a plaintiff’s personal characteristics as discussed in Peconic Industrial Development Ltd.

26.  With these principles in mind, I will consider several main points being relied on by Mr. Pow.  According to the evidence and the facts set out in the claim (including those pleaded in the proposed amendments), the Plaintiff’s case on the issue of knowledge of the fraud is this: in December 1987, the 1st Plaintiff received information for the first time, or knew about the problem of the fact that the project went bust when he was told by Mr. Fairbairn, the solicitor acting for the Defendants as well as for the 3^rd Plaintiff in the execution of the sub-sale and purchase agreement. He was told – quoting the words as appeared in the Plaintiff’s affirmation - that “the project was dead”.  Mr. Fairbairn told the 1^st Plaintiff that, well, the 3^rd Defendant (the company) was insolvent.  Further, the directors (the 1^st and 2^nd Defendants) had gone missing. Based on such little information, the Plaintiff therefore decided not take any action against any of the Defendants there and then.

27.  When Mr. Aiken alluded to this part of the evidence in his submission, I have asked him to clarify how would the said evidence show that the Plaintiff would not have been aware of the fraud.  Mr. Aiken submitted that the said evidence goes to show that the Plaintiff would not have known the fraud in December 1987 because Mr. Fairbairn had not told him of the Defendants’ fraud.

28.  Putting this piece of evidence in the best possible light in favour of the Plaintiff, I am unable to agree with Mr. Aiken that the said evidence shows that the Plaintiff would not have discovered the fraud. The advice was no more, in my view, pointing to the fact that it was not commercially viable for the Plaintiff to bring any action against the fraudsters because of the obvious reason that the company which was insolvent would not be good for satisfying any judgment. Further, he would have also found himself encountering difficulty in tracking down the 1^st and 2nd Defendants for effecting service of a writ.  Hence, I do not accept that the said evidence shows that the Plaintiff would not have discovered the fraud.

29.  After December 1987, there were a number of, in my view, significant events.   There was an investigation by the ICAC of the Defendants, including the Plaintiff. There was also the ICAC’s  prosecution of the two Defendants even though the criminal prosecution did not relate to the development project, but related to, what I was told,  “cheque kiting”.

30.  However, I think it is important to consider in the context of the whole thing that had happened.  The fact that the 1^st and 2^nd Defendants were criminally implicated would have alerted to the Plaintiff that these two Defendants were not people with honesty.  This, together with the circumstances of the execution of the sub-purchase agreement (that the Plaintiff himself was a witness to the execution), and the disappearance of the Defendants without explanation would have been, in my view, provides a strong inference (especially for a person in the position of the Plaintiff, when viewed objectively) that something had gone terribly wrong - the whole project must have been tainted with illegality and fraud.

31.  There is no explanation as to why the Plaintiff would not have taken the trouble of digging the matter further by, for example, inspecting the various assignments, the documents - which as it is quite clear to everyone now -  are public documents.  This, I think, has to be borne in mind the fact that not only the Plaintiff had lost, indeed, a valuable investment but also an important investment as he had intended to use it as his matrimonial home.  The Plaintiff having failed to explain why he had been so readily accepting - what I think the words Mr. Fairbairn had used - that it was only “bad luck”. Given the circumstances of the matter, I think it is inexplicable.

32.  The recent discovery in March 2011 (as pleaded in the statement of claim and from the evidence adduced) concern mainly two matters.  One of them is about the assertion that the Plaintiff has been informed by a lawyer friend that he could sue the Defendants. Another concerns with the alleged discovery of the substantial wealth of the Defendants and their family. These so-called recent discoveries, when looked at in the context of this case, are not consistent, in my view,  with the Plaintiff’s assertion that the Defendants’ fraud was only discovered in March 2011.

33.  There is no plea as to how he would have changed his position in 1987 and today subsequent to what his lawyer friend had allegedly told him.  The later discovery of the Defendants’ wealth, in my view, runs in a similar vein, suggestive of commercial viability influencing the Plaintiff’s decision to sue, rather than pointing to the discovery of fraud.

34.  Having considered the principle as cited by both counsel in relation to the issue of discovery of fraud under section 26, I find that the Plaintiff, on his own case, has failed to discharge the required burden.  Having that said, however, I think I will further consider the proposed amendments set out in the Re-amended Statement of Claim in order to further consider if the proposed amendments will have assist the Plaintiff.

35.  The proposed amendments, as confirmed by Mr. Aiken this morning, relate to four matters.  (1)  The Defendants had gone missing and  the advice by Mr. Fairbairn; (2)The Defendants were trying to conceal the fraud by not passing the documents to a very honest auditor, Mr. Fan; (3) the discovery of wealth of the Defendants; and (4) the advice by his lawyer friend.

36.  The proposed amendments, apart from the matter relating to Mr. Fan, the auditor, all deal with the issues which I have just discussed above, and I do not think they assist the Plaintiff.  The proposed amendment concerning the deliberate concealment of their fraud by not passing the company’s documents to the auditor, Mr. Fan, is, in my view, is a red herring.  I do not find that the proposed amendments are able to assist the Plaintiff to explain why he could not have discovered the fraud.

D. Conclusion

37.  Conscious as I am of the principle that when a limitation period is being relied on as a ground for striking out, that I should only concede to such application if it is plain and obvious.  I have considered the fact that if the Plaintiff’s allegations against the Defendants were proved, he would be, in my view, a real victim of fraud, and justice should be done for him.

38.  However, I have to consider this case and apply the principles dispassionately. Despite the valiant efforts by Mr. Aiken, I, however, am driven to the conclusion that it is a clear case for striking out on the ground that it would be an abuse of process to allow the Plaintiff to continue after the limitation period has clearly expired. For these reasons, I accede to the Defendants’ application, and strike out the claim.