LAVERY CO LTD v. WONG LEE YUK PING AGNES AND ANOTHER

HCA 393/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 393 of 2016

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J U D G M E N T

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Introduction

1.  Before this court are two applications.  The first in time is an application by the 1^st and 2^nd defendants (“D1 and D2, or collectively D”) under Order 18, rule 19(1)(a), (b) and (d) of the Rules of the High Court to strike out certain parts of the Amended Statement of Claim (“ASOC”) of the plaintiff (“P”).  The second is an application by P to further amend the ASOC under Order 20, rule 5 of the Rules of the High Court.

Background

2.  P is a Hong Kong company which carries on the business of trading plastic materials.

3.  D1 was until 3 December 2015 a director of P and it is alleged by P was in charge of its business at all material times.

4.  D2 is D1’s son and he was, so it is alleged, a manager of P responsible along with his mother for the business of P.

5.  In September 2011 P sold plastic materials to Kwan Kee Plastic Material Co (“Kwan Kee”), a sole proprietorship owned by one Leung Kin Kwan (“Leung”), to the value of $5,927,900 on terms of 14 days credit.

6.  Kwan Kee issued seven post‑dated cheques to P which in aggregate amounted to the purchase price.  These cheques were not presented for payment allegedly on the instructions of D.

7.  Kwan Kee ceased business on 18 December 2011 and Leung was adjudicated bankrupt on 31 January 2012.

8.  P alleges that, in an attempt to conceal the loss suffered by P as a result of Kwan Kee's default, D caused P to enter into various fictitious transactions which had the effect of covering up the loss.

9.  In December 2011 it is said D created false “sold goods return orders” which purported to evidence the return by Kwan Kee of plastic materials with a value of $4,270,572.  These returned goods were then purportedly resold for an identical amount to a company called Dongguan Kaiying Plastic Bag Co Ltd (“Dongguan Kaiying”) on terms of 30 days credit.

10.  The balance of the amount due from Kwan Kee after the purported return of the goods and their resale to Dongguan Kaiying was $1,657,328 and this amount was written off in the books of P as at 30 December 2011 being P’s financial year end.

11.  Dongguan Kaiying purportedly defaulted in the payment of the purchase price and was subsequently deregistered in February 2013.

12.  In December 2013, P received a sum of $2,445,228 from an unknown person and this amount was purportedly to be partial repayment of the amount owing by Dongguan Kaiying.

13.  P alleges, however, that this amount was not a genuine payment but instead arose out of further sham transactions.  Those transactions constituted the apparent purchase by P of plastic materials from Kam Lung (Hong Kong) Trading Ltd (“Kam Lung”) at a price of $2,445,112.80.

14.  Those materials were immediately resold to Shunda Plastic Limited ("Shunda") at a price of $2,451,807 on terms of 60 days credit.  Shunda subsequently defaulted in payment.

15.  Three days after P paid Kam Lung $2,445,112.80, P received from a source unknown $2,445,228 (but the obvious inference being from Kam Lung) which was used to partially repay the amount owed by Dongguan Kaiying.

16.  Although it will be necessary to analyse P's pleaded case in more detail below, as D's complaint relates to the pleaded case against them, in broad terms P asserts that the above factual matters give rise to claims against D1 for breach of fiduciary duty and breach of the duty to exercise reasonable skill and care whether at common law or under section 465 of the Companies Ordinance (Cap 622).  As against D2, the claims are framed as dishonest assistance of D1 in the breach of her fiduciary duties and, arising from his contract of employment, a breach of the duty of fidelity and good faith and a breach of the implied term to exercise reasonable skill and care in performing his duties.

17.  As matters currently stand, P’s case appears in the ASOC filed on 2 September 2016.  By a summons dated 16 December 2016, P seeks leave to further amend the ASOC into what would become a Re‑Amended Statement of Claim (“RASOC”).

18.  It is said by Mr Lam SC, counsel for P, that the RASOC is in no material way different to the ASOC but that it is a more refined and improved pleading.

19.  Mr Hingorani, counsel for D, very helpfully agreed he had no objection to the proposed amendments save that these amendments did not address his primary complaint of inconsistent alternative cases being advanced by P.

20.  In this judgment I will therefore make reference to the relevant paragraphs of the RASOC rather than the ASOC.

21.  In paragraphs 10 to 12 of the RASOC, P pleads the material facts relating to the sale of plastic material by P to Kwan Kee.  In paragraph 12A, P avers that these facts give rise to breaches of duty to exercise reasonable care and diligence on the part of D and particulars are given such as the grant of credit to Kwan Kee without obtaining adequate security and the failure to present the post‑dated cheques for payment.  Paragraph 13 pleads the consequential loss to P caused by these alleged breaches of duty being the purchase price which Kwan Kee failed to pay.

22.  In paragraphs 14 to 15, P pleads the material facts relating to the alleged return of a substantial body of the goods by Kwan Kee and the purported subsequent resale of those returned goods to Dongguan Kaiying.  In paragraph 15A, P pleads that this return of goods and their subsequent resale was fictitious and specific particulars are given in support of the allegation of fictitiousness.  These particulars include the fact Leung, the sole proprietor of Kwan Kee, affirmed in the statement of affairs made in his bankruptcy that he had no stock in trade and the fact P has no record of any return of the goods by Kwan Kee.

23.  In paragraphs 15B and 15C, P pleads that D1 was in breach of fiduciary duty and D2 dishonestly assisted D1 in such breach by the creation of the documents which purported to evidence the alleged return and resale of the goods.

24.  Up to this point, it should be said, Mr Hingorani, on behalf of D, has no objection.  Unsurprisingly, he makes no admissions to any of the matters pleaded but he concedes he is able to plead to these allegations in D's defence.

25.  In paragraph 16 of the RASOC, P pleads an alternative case to the effect that, if the sale of goods to Dongguan Kaiying was in fact genuine, then D were nevertheless still in breach of their duty to exercise reasonable care and skill because they allowed Dongguan Kaiying, a new customer of P, an excessive amount of credit and failed to obtain security for such credit or to carry out any credit check of Dongguan Kaiying.

26.  Although not strictly speaking the subject of D's strike out application mention should be made of the transactions with Kam Lung and Shunda.  The material facts are pleaded at paragraphs 27 to 30B of the RASOC and it is specifically alleged the transactions were artificial, not bona fide and a sham.

27.  As with the Dongguan Kaiying transaction, it is pleaded in paragraphs 30C and 30D that D1 was in breach of fiduciary duty and D2 dishonestly assisted D1 in such breach by the creation of the documents purportedly evidencing the false transactions with Kam Lung and Shunda.

28.  Again, as with the Dongguan Kaiying transaction, an alternative case is advanced in paragraph 31 of the RASOC based upon the assumption, which P specifically denies, that the Kam Lung and Shunda transactions were not artificial.  It is asserted there was no commercial or other justification for P to enter into the transactions with Kam Lung and Shunda and particulars are given to support this assertion.

The issue

29.  The issue to be determined boils down to the simple one of whether it is permissible for P to advance alternative cases which are on their face inconsistent.

The arguments

30.  Mr Hingorani submitted the facts pleaded by P lead to two inconsistent and mutually exclusive factual scenarios.  He says that if, as a fact, the plastic materials sold to Kwan Kee were never returned, then there can have been no resale of those materials to Dongguan Kaiying.  If there was no resale of the materials to Dongguan Kaiying, then there can have been no question of the granting of any credit to Dongguan Kaiying or P having suffered any loss arising from Dongguan Kaiying's default in payment because Dongguan Kaiying never had any liability to pay.

31.  Mr Hingorani further submitted it was P's own pleaded case, as evidenced by paragraph 15A of the RASOC, that the materials were never returned by Kwan Kee and therefore could not have been sold to Dongguan Kaiying.  In such circumstances, he said it was not open to P to advance an alternative case as if the sale to Dongguan Kaiying had actually taken place.

32.  Mr Lam submitted that Order 18, rule 12A of the Rules of the High Court expressly permits the pleading of inconsistent alternative cases.  He stressed that at the time the transactions were entered into, D were in charge of P's business operations and they were the ones who had personal knowledge of what actually happened.

33.  Mr Lam said the alternative case pleaded in the RASOC was legitimate in that, on the facts pleaded, the court might ultimately conclude from the evidence that the transaction with Dongguan Kaiying was fictitious, in which case any time spent on the alternative case of the transaction being genuine could be dealt with by an appropriate award of costs.  However, the court might also conclude that the transaction with Dongguan Kaiying was genuine in which case P should not be debarred from asserting that the entry into the transaction with Dongguan Kaiying nevertheless constituted breaches of duty by D.

Pleading alternative defences

34.  Order 18, rule 12A of the Rules of the High Court has been the subject of consideration by the Court of Appeal in Yiu Ka Fung Vincent v Info‑Vantage Ltd (unreported) CACV 96/2014.  Zervos J who gave judgment on behalf of the Court distilled the principles at paragraph 63 of his judgment :

“Cases may arise where the party has no personal knowledge of the facts, but has evidence pointing to alternative possibilities. The pleading and verification of such alternative pleas is permissible as long as there is a reasonable basis for doing so on the evidence available. In such circumstances, where a party puts forward a pleading with alternative and mutually inconsistent versions of the facts, because the facts as known to him admit of alternative interpretations, the pleading is permissible and verifiable on the basis that the party believes on the evidence available that the facts will ultimately correspond to one or other of the possibilities pleaded. However, if the matters pleaded are matters which are plainly within that party’s knowledge, so that he must know which of the inconsistent alternatives is the correct one, then the pleading of inconsistent alternative cases is not permissible."

35.  As for the time when one looks at the party's knowledge, it is not in dispute this is the time when the pleading is signed and verified by a statement of truth rather than the time when the matters which are the subject of the facts pleaded actually occurred.  So, for the purposes of this case, one is looking at the state of P's knowledge in March 2016 when the original Statement of Claim was filed rather than P's knowledge at the time of the purported transaction with Dongguan Kaiying in December 2011.  (As the note at Order 20/8/1 of Hong Kong Civil Procedure 2017 makes clear, the amendments in the RASOC take effect from the date of the original Statement of Claim filed on 29 March 2016.)

36.  The practical reasons for the principle that pleading inconsistent alternative cases is impermissible, save for exceptional cases, are obvious.  If a plaintiff were to be routinely allowed to assert a primary case but then have an alternative and divergent fallback position, much time and money will be wasted in dealing with the fallback position which will be wholly unnecessary if the plaintiff makes good his primary case.  Furthermore, a defendant is entitled to know the case it is said he has to meet on the matters pleaded.  This is particularly so where serious allegations are made against a defendant of dishonesty where it strikes me as in principle wrong to allow a plaintiff to claim that, notwithstanding he cannot make good his primary case of dishonesty, he is entitled to deduce from the facts an alternative and different type of wrongdoing on the part of the defendant.

37.  In my judgment, by March 2016 P must plainly have had within its knowledge the facts which have allowed it to plead the serious allegations against D of what may colloquially be described as “cooking the books”.  There is no suggestion that records and documents belonging to P have been destroyed or gone missing.  Accordingly, after D1 and D2 stopped working for P in December and January 2015 respectively, P and its directors have had full opportunity to review the book and records of P and this has permitted it to plead what Mr Lam described in his skeleton argument as P's primary case, namely there was no return of the plastic materials from Kwan Kee and no resale to Dongguan Kaiying.

38.  I am fortified in this conclusion by a further matter.  It is now specifically pleaded by P in paragraph 15(A)(4) of the RASOC that P has itself no records of either Kwan Kee returning the plastic materials or any delivery of such materials to Dongguan Kaiying.  Given this I do not see how P can credibly assert that the Dongguan Kaiying transaction was in fact genuine.

Directions

39.  I therefore find that D have made good their complaint about P pleading impermissible alternative cases.  However simply granting an order in terms of D's strike‑out summons will not in my view properly resolve all the pleadings issues in this case.  In their strike‑out summons, D sought further directions and I propose to give such directions as well as deal with issues relating to the Kam Lung and Shunda transactions which I raised with counsel during the course of argument.

40.  As I mentioned earlier in paragraph 28 of this judgment, an alternative case is advanced in paragraph 31 of the RASOC based upon the assumption the Kam Lung and Shunda transactions were not artificial, notwithstanding P denies this and asserts those transactions were a sham.  Mr Lam conceded, in my view quite properly, that if I found against him in respect of the Dongguan Kaiying transaction then the same logic would apply to the Kam Lung and Shunda transactions, namely P could not plead an alternative case based on an assumption those transactions were genuine.

41.  Rather than there being a separate strike‑out application relating to paragraph 31 and consequential paragraphs of the RASOC, I consider I have the jurisdiction to deal with this issue in the context of P's application to amend the ASOC so that, in granting leave to amend, I specifically exclude those paragraphs in the proposed RASOC where an alternative case is advanced from the pleading for which leave is granted.

42.  The same logic will apply to the other paragraph which is directly the subject of the strike‑out summons.  I therefore order that P be granted leave to amend its ASOC in the form marked in green in the RASOC attached to its summons of 16 December 2016 subject to paragraphs 16, 31, 34B and 35 being excised.

43.  Given this order, the RASOC will need to be recast so that the paragraph numbering is made sequential.  Such recasting is purely consequential on my order and I am confident this can be done by counsel for P within a short period of time.  I do not propose to give any direction as to the time by which P must file and serve its recast RASOC. Instead I shall direct that the time for D to file and serve their Defence be 21 days from the date of filing and service of the RASOC.

44.  As for costs, D have succeeded in their strike‑out application and P must in any event pay any costs incurred in its application to amend its ASOC.  I therefore make an order nisi that P should pay D the costs of these applications to be taxed if not agreed.

45.  Lastly, it only remains to thank counsel for their cogent and succinct submissions.