LAU KAK v. CHEUNG MO KIT

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HEADNOTE

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DISMISS OR STAYING ACTION TO SET ASIDE JUDGMENT OF THE COURT OF APPEAL ON GROUND OF FRAUD - MATERIALITY OF MATTERS ALLEGED TO BE TAINTED TO THE JUDGMENT - WHETHER EVIDENCE OF FACTS DISCOVERED SINCE THE FORMER JUDGMENT WHICH RAISE A REASONABLE PROBABILITY OF THE ACTION SUCCEEDING NECESSARY

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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DECISION

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1. This summons was issued by the Defendant ("Mr Cheung") in HCA No.A10016 of 1995 ("the 1995 Action") to dismiss the action brought against him by the Plaintiff ("Mr Lau") on the ground that issues raised by Mr Lau in the Statement of Claim in this action had already been adjudicated and determined upon in HCA No.A3181 of 1994 ("the 1994 Action"), that it is frivolous and vexatious and an abuse of the process of the Court.

The 1994 Action

2. Mr Cheung was the 2nd Plaintiff in the 1994 Action and, inter alia, claimed against Mr Lau who was the 1st Defendant the sum of $505,146.00 by way of contribution. Mr Cheung was a 50% shareholder and director in International Bally Worldwide Development Ltd. ("IBWD"). Mr Lau was a 25% shareholder and director in IBWD. There was a third director and shareholder who had a 25% interest in IBWD who was not a party to the 1994 Action.

3. The three shareholders were co-sureties of IBWD's indebtedness to the Nanyang Commercial Bank ("the Bank") under Guarantees given in November 1992. According to bank statements produced in evidence, by 19th October 1993, after various payments and set-offs by IBWD to the Bank, the indebtedness stood at $2,016,295.07. On 30th October 1993, the Bank commenced proceedings against IBWD and the three shareholders to recover that sum. Mr Cheung discharged the entire indebtedness (including agreed interest) amounting to $2,020,584.37 on 4th November 1993. The co-sureties amongst themselves agreed that each should contribute according to his shareholding in IBWD rather than in equal shares.

4. Mr Lau's defence was that he had discharged his liability as co-guarantor by paying $500,000 into IBWD's account on 13th October 1993. He does not dispute the agreement to contribute in proportion to their respective shareholdings in IBWD. Rather, it is his case that that agreement was reached in early October, in any event, prior to 13th October 1993.

The Order 14 proceedings

5. On 23rd June 1994, Mr Cheung took out a summons under O.14 of the Rules of the Supreme Court for summary judgment. This was supported by an affirmation ("the Plaintiff's 4th affirmation") which, inter alia, contained the standard statement to be found in affidavits in support of O.14 applications, namely, that the party against whom summary judgment was sought was liable for and had no defence to the claim. On 19th July 1994, Mr Lau filed an affirmation ("the 2nd Lau affirmation") opposing the O.14 application on the ground that he had discharged his liability as co-guarantor by the October payment of $500,000. On 14th September 1994, Mr Cheung filed an affirmation in response to the 2nd Lau affirmation ("the Plaintiff's 5th affirmation") in which he asserted that the $500,000 paid by Mr Lau represented monies Mr Lau had collected from customers for IBWD's products and for which Mr Lau had to account. Mr Cheung also exhibited a copy of resolution of 1st December 1993 to the effect that IBWD's indebtedness to the Bank be discharged by the co-sureties in proportion to their respective shareholdings in IBWD.

6. The O.14 application was heard on 28th September 1994 and Mr Lau was granted unconditional leave to defend. Mr Cheung appealed and his appeal was allowed by the Court of Appeal on 4th July 1995.

7. The principal judgment of the Court of Appeal was delivered by Keith, J. The key issue was Mr Lau's assertion that the $500,000 paid by him into IBWD's account with the Bank was made by him "in his capacity as a guarantor of [IBWD's] indebtedness to the Bank". As there were no contemporaneous documents supporting Mr Lau's assertion, the learned judge went on to examine the three factual claims made by Mr Lau to make good his assertion, namely,

8. In view of the state of IBWD's various accounts with the Bank as at the end of September and for the month of October which were in evidence, counsel for Mr Lau accepted that the third of the three claims was incorrect. The learned judge also found the second of Mr Lau's claims to be incorrect because if there had been no demand for about $2.5 m by the date Mr Lau made the payment of $500,000, the only demand to which that payment could have been a response to was the demand of 8th September for over $10 m. As to the first of Mr Lau's claims, the learned judge did not consider it credible. He noted that some six weeks later, on 1st December 1993, Mr Lau acknowledged his liability for IBWD's debt to the Bank. If the debt had been extinguished, why was an acknowledgement of liability given?

9. The learned judge considered Mr Cheung's assertion regarding the $500,000 payment and rejected it as "vague and unsubstantiated". He went on to say that that assertion was immaterial because Mr Lau's claim as to "what the payment was for is ... simply not credible".

10. Liu, J.A. allowed the appeal because of the lack of credible evidence in support of Mr Lau's main allegation, namely that he had discharged his liability to contribute as a co-surety. Litton, V-P delivered a concurring judgment.

The 1995 Action

11. On 3rd October 1995, Mr Lau commenced an action to set aside the judgment of the Court of Appeal on the grounds that it was obtained by fraud and/or perjury.

12. The particulars of the fraud alleged to have been perpetrated are :

13. The summons before me was taken out by Mr Cheung on 19th October 1995.

14. Counsel for Mr Lau put his case a little differently at the hearing. The complaint appears to be that the Court of Appeal relied on the 5th affirmation in reaching its decision. It was submitted that the Court of Appeal ought not to have placed any reliance on the 5th affirmation and had they not done so, they would have dismissed the appeal and granted Mr Lau unconditional leave to defend. It was further submitted that the 5th affirmation was tainted in two respects, namely, the assertion made by Mr Cheung relating to the $500,000 payment and the resolution of 1st December. I pause here to observe that insofar as this court is being asked to allow the 1995 Action to proceed because the Court of Appeal ought to have reached a different conclusion, that is clearly misconceived.

The applicable legal principles

15. That the court has jurisdiction to set aside a completed judgment on the ground of fraud is not disputed : Jonesco v. Beard [1930] AC 298.

16. As the matter before me is a striking out application rather than the action to set aside the judgment itself, counsel for Mr Lau submitted that the court should not stay or strike out Mr Lau's action unless Mr Lau has no hope of proving his case; that Mr Lau is not obliged at this stage to put forward conclusive evidence of fraud and need only demonstrate that there is a serious question to be tried.

17. It is to be noted that in the present case, no new evidence has been put before the court. In fact, what is before me largely replicates what was before the Court of Appeal. The threshold question appears to me to be whether the matters alleged to be tainted were directly relevant to the judgment of the Court of Appeal. In other words, would judgment have been in favour of the other party but for the matters alleged to be tainted? That the tainted matters must be directly material to the judgment to be set aside for fraud finds support in the judgment of Cozens-Hardy, L.J. in Birch v. Birch [1902] P.130 at 136.

18. On the facts of this case, the threshold test is not met. The central or key issue before the Court of Appeal was whether Mr Lau's claim as to what the payment made by him in October was for was credible. That conclusion was reached without any reliance on Mr Cheung's assertion regarding the payment of the $500,000. As noted above, that assertion did not find favour with Keith, J. and I cannot discern from the other judgments any reliance on Mr Cheung's assertion in this regard. That is the only substantive "tainted" matter appearing in the particulars of fraud as pleaded in the Statement of Claim.

19. The other "tainted" matter argued before me was the 1st December resolution. There is of course no allegation that the resolution was forged. What is submitted is no more than that the Court of Appeal ought to have believed Mr Lau rather than Mr Cheung that the agreement of the co-sureties was reached in October rather than 1st December. That is too simplistic an argument. The credibility of Mr Lau's assertion regarding the payment of $500,000 did not turn on the existence or otherwise of the 1st December resolution. Rather, Mr Lau's assertion was simply not credible, having regard to the totality of the evidence. Once the second and third assertions referred to in the judgment of Keith, J. were found to be incorrect, the first could not have survived on its own: its fate was inextricably linked to the validity of the other two assertions.

20. In my judgment, Mr Lau has failed to establish materiality of the matters alleged to be tainted.

21. There appears to be another ground for striking out or staying the 1995 Action which is that there is a pre-requisite to actions to set aside for fraud which has not been met.

22. Counsel for Mr Cheung relied on Birch v. Birch supra for the proposition that "the court ought to treat as frivolous and vexatious any cause of action in support of which the Plaintiff does not produce evidence of facts discovered since the former judgment which raise a reasonable probability of the action succeeding": see per Vaughan Williams, L. J. at p. 136.

23. If evidence of facts discovered since the former judgment were a pre-requisite, that condition has not been fulfilled and the 1995 Action would fail in limine. Counsel for Mr Lau therefore argued that Birch v. Birch has been impliedly overruled by the House of Lords in Jonesco v. Beard, supra.

24. In that case B brought an action against J which was dismissed. B appealed and asked that the judgment in favour of J be set aside and a new trial ordered. On the appeal, B adduced further evidence consisting of affidavits and containing allegations of fraud against J, upon which the Court of Appeal concluded that the trial was tainted with fraud and ordered that the judgment be set aside. The House of Lords reversed the Court of Appeal's decision because on the facts, no fraud had been made out. The requirement of facts discovered since the former judgment did not arise for consideration. In these circumstances and in view of the fact that the authority of Birch has never been doubted, I am not prepared to accept that it has been overruled.

25. For the reasons given above, the 1995 Action is dismissed on the ground that it discloses no reasonable cause of action, is frivolous and vexatious and an abuse of the process of the Court.

Costs

26. I make an order nisi that costs of this application be awarded to Mr Cheung. As to the basis of taxation, I will adjourn this for argument on a date to be fixed.