CHINA NONFERROUS METALS (HONG KONG) FINANCE CO LTD (In Liquidation) AND ANOTHER v. SOUTH-EAST ASIA INVESTMENT HOLDING CO LTD AND ANOTHER

CACV 253/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 253 OF 2012

(On Appeal from HCCL No. 20 of 2002)

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BETWEEN

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J U D G M E N T

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Hon Cheung JA :

1.  The defendants applied to strike out the plaintiffs’ action for want of prosecution under the inherent jurisdiction of the Court and under Order 18, Rule 19(1)(c) and (d) of the Rules of the High Court (‘RHC’). Deputy High Court Judge Mimmie Chan (as she then was) refused the application. Pursuant to leave granted by the Judge the defendants now appeal against the judgment.

The plaintiff’s case

2.  The 1^st plaintiff was a Hong Kong company and was a licensed moneylender.  The 2^nd plaintiff was the 1^st plaintiff’s holdings company.  The 2^nd defendant was a director and shareholder of the 1^st defendant. 

3.  The plaintiffs’ claim is that by a loan agreement dated 27 May 1997 (‘1^st Loan Agreement’), the 1^st plaintiff made a loan of HK$70 million to the 1^st defendant, to be repaid on 6 December 1997.  By an agreement dated 5 December 1997 (‘2^nd Loan Agreement’) made between the 1^st plaintiff and the 1^st defendant, the repayment date under the 1^st Loan Agreement was extended to 6 March 1998.  The principal loan under the 2^nd Loan Agreement was HK$75,012,282.86 (‘Loan’).

4.  On 8 May 1998, the 2^nd plaintiff entered into an agreement (‘Loan Repayment Agreement’) with the 1^st and 2^nd defendants, whereby in consideration of the 2^nd plaintiff agreeing to procure the 1^st plaintiff’s forbearance from exercising its rights to demand immediate repayment of the Loan and interest accrued, the 1^st and 2^nd defendants agreed that they would be jointly and severally liable to repay the Loan and interest to the 1^st plaintiff, on the terms and in the manner set out in the Loan Repayment Agreement. 

5.  As at 30 September 2001, the total amount due from the 1^st defendant under the 2^nd  Loan Agreement was HK$123,349,888.82 (‘Debt’), less repayments which had been made by it to the 1^st plaintiff. 

6.  The 1^st plaintiff claims the Debt and interest from the 1^st defendant, whereas the 2^nd plaintiff claims against the 2^nd defendant damages for breach of the Loan Repayment Agreement.

The defence

7.  The defence of the defendants is that the advance made under the 1^st Loan Agreement was not in fact a loan, but the 2^nd plaintiff’s capital contribution to a company known as Traffic Stream Infrastructure Holdings Company Ltd (‘Traffic Stream’), pursuant to a Share Investment Agreement dated 31 August 1996 (‘Share Investment Agreement’), and other contracts related thereto, made between the 2^nd plaintiff and the 1^st defendant.  Traffic Stream was claimed to be the vehicle set up pursuant to agreements made between the 1^st defendant and 2^nd plaintiff for investment in and development of toll roads and infrastructures in Mainland China.

Chronology of events

i)  Period from 11 December 2001 to 16 August 2004

8.  The writ of summons in the present action (originally entitled HCA 5322/2001) was issued on 11 December 2001 and on 28 January 2002, the plaintiffs issued an Order 14 summons seeking summary judgment against the defendants.

9.  A petition was presented on 31 January 2002 for the winding up of the 2^nd plaintiff.  By order made on 21 March 2002, the present action was transferred to the Commercial List.  On 8 May 2002, an order was made for the winding up of the 2^nd plaintiff. Shortly thereafter, on 24 June 2002, another petition was presented for the winding up of the 1^st plaintiff.  On 18 September 2002, a winding up order was also made against the 1^st plaintiff.  An order was made on 28 June 2002 for the present action to be stayed pursuant to section 186 of the Companies Ordinance.

10.  As a result of the winding up proceedings, no further step was taken in these proceedings until 16 August 2004, when the plaintiffs filed a notice of intention to proceed with the action.

ii) Period from 16 August 2004 to 28 July 2011

11.  Legal advice was taken by the liquidators of the plaintiffs in February 2003 on the merits of the plaintiffs’ case and on their application for summary judgment.  Counsel advised the liquidators, on a preliminary basis given on 30 April 2003, and confirmed on 16 July 2005 and 30 November 2005, that she was not confident that the liquidators could succeed at trial, and that they were ‘a long way off from showing on a balance of probabilities that the loan of $70 million was a straightforward loan’.  The liquidators were advised to consider instead a claim against the 1^st defendant for refund of a sum of $180 million, under the Share Investment Agreement between the 2^nd plaintiff and the 1^st defendant.

12.  The liquidators of the 2^nd plaintiff then commenced a separate action, namely, HCA 683/2007 (‘2007 Action’), in April 2007 against the 1^st defendant.  A defence was filed in April 2007, and witness statements were filed in 2008.

13.  No step was taken in the present action until 29 July 2011, when the liquidators filed another notice of intention to proceed.  The liquidators explained that it was only in May 2010 that they were made aware of the need to ascertain if the 1^st defendant had assets in order to make any judgment in the 2007 Action worthwhile. Investigation agents were engaged on 16 March 2011, and on 28 April 2011, the liquidators received the agents’ report on the assets of the defendants.  It was discovered that whereas the 2^nd defendant held substantial assets, there was ‘insufficient indicator of substantial assets being held by (the 1^st defendant)’.  Senior counsel’s advice was obtained on 31 May 2011 on the merits of the present action and the 2007 Action, and pursuant to such advice, the present action was reactivated in July 2011 by the filing of the notice of intention to proceed.

iii) Period from 29 July 2011 to 7 November 2011

14.  In August 2011, the plaintiffs’ solicitors offered to withdraw the application for summary judgment in the present action and to give security for costs up to the stage of the case management conference.  Without prejudice negotiations ensued.

15.  On 7 November 2011, the defendants applied to dismiss the present action for want of prosecution.  They also applied for security for costs on 18 April 2012.  On 24 May 2012, the plaintiffs were ordered by Reyes J to pay security for costs in the sum of HK$700,000.  Payment of such security was made into court on 20 June 2012.

The principles

16.  In Wing Fai Construction Co Ltd (in compulsory liquidation) v Yip Kwong Robert & Ors [2012] 1 HKLRD 589 (‘Wing Fai’), Ma CJ restated the principles concerning the applications to strike out actions for delay which was sometimes referred to as application to strike out for want of prosecution.  In so doing Ma CJ reviewed the authorities on striking out beginning with the landmark judgment of Birkett v. James [1978] AC 297 which reaffirmed the two basis of the exercise of jurisdiction: first, intentional and contumelious default or conduct amounting to an abuse of process, second, inordinate and inexcusable delay causing a substantial risk that it is not possible to have a fair trial or is likely to cause prejudice to the defendants.  Ma CJ then dealt with the two controversial issues arising from that decision in respect of the relevance of the limitation period and the ‘let sleeping dogs lie’ approach.  He then discussed the impact of the Civil Justice Reform (‘CJR’) and the proper interpretation to be given to the decision of Grovit v Doctor [1997] 1 WLR 640 in respect of ‘warehousing’ of claims.

17.  Instead of merely setting out the whole of the restated principles, I think it would be more helpful if I identify those principles which are relevant to this appeal :

1) The jurisdiction to strike out is a discretionary remedy and is based on the inherent jurisdiction of the Court [paragraph 80];

2) The foundation of the jurisdiction is based on an abuse of the process of the courts by the plaintiff [paragraph 80].  Inordinate and inexcusable delay causing prejudice to a defendant, contumelious conduct or initiating proceedings without any intention to bring them to a conclusion, are examples of abuse [paragraph 66].

3) Prejudice to the defendant is a relevant consideration.  Ma CJ held :

‘ I now deal with prejudice. I agree with the proposition that where abuse is clearly demonstrated, proceedings can be struck out even where prejudice to the defendant cannot be shown. For example, where there is contumelious conduct on the part of a plaintiff, no prejudice to the defendant need necessarily be shown. However, in the majority of applications to strike out for delay, the aspect of prejudice to the defendant will often be extremely relevant. Mr Barlow submitted at one stage that post-CJR, prejudice will not be relevant at all. That is not a correct submission. In my view, prejudice to the defendant (whether it exists or not) can still be very much a factor. It is a factor that may well be relevant to the overall justice of the case: see Purefuture Ltd v Simmons & Simmons [2001] CP Rep 30, para. 54(2).’

[paragraph 75(7)].

4) The Court is to look not only to the position of the parties themselves but also take a proper regard to the administration of justice with the implementation of the CJR whose underlying objectives are to ensure that the Court’s resources are distributed fairly (Order 1A, Rule 1(f)) and also to ensure that a case is dealt with as expeditiously as is reasonably practicable (Order 1A, Rule 1(b)) [paragraph 75(9)].

5) With that in mind, the non-expiry of any applicable limitation period should no longer be regarded as a factor militating against striking out for want of prosecution, because a plaintiff (who is guilty of inordinate and inexcusable delay and has abused the process of the court) should no longer be permitted to gain advantage of instituting another action at the expense of other, far more deserving litigants.  Further the parties to litigation are required to get on with the proceedings, by complying with the rules and orders of the Court [paragraph 75(9)].

6) In the same vein, since, post-CJR, all parties have the obligation to prosecute the proceedings and assist the Court in furthering the underlying objective, there is no place anymore for defendants to adopt the attitude of ‘letting sleeping dogs lie’.  No longer will it be possible (if it ever was) for a defendant to sit idly by and do nothing, in the hope that sufficient delay would be accumulated so that some sort of prejudice can then be asserted.  If it is sought to be argued that time has dimmed the memories of witnesses, the Court will usually want to know what steps have been taken by the defendant to take instructions, or proof or locate witnesses.  The Court will want to know what the true nature of the defence is, in order to assess the extent of the prejudice suffered by a defendant [paragraph 75(8)].

7) Striking out is a draconian measure and it remains to be the case that this application should only be used in plain and obvious cases [paragraph 65].

The defendants’ appeal

18.  Mr. Ambrose Ho SC (together with Ms Joyce Leung) presented a very attractive argument for the defendants. In gist he argued that the Judge having found abuse was wrong to proceed and considered the issue of prejudice on the defendants.  Instead, he argued that the Judge ought to have struck out the action by regarding the broader policy considerations such as ensuring an expeditious resolution of cases and ensuring that the resources of the Court are distributed fairly as stated in the objectives of the CJR.  By analogy he also relied on the restated principles regarding the limitation period, namely, where there is abuse, the Court ought to strike out the action for delay and leave it to the plaintiff to institute fresh proceedings.  If the plaintiff does that, he may well be met by an application to strike out or stay on the basis that the fresh proceedings, in view of the history, constitute an abuse and should not be permitted to continue. 

19.  In assessing the defendants’ conduct in the pre-CJR period, Mr. Ho argued that the then prevailing circumstances and statutory structure did not place a duty on the part of the defendants to actively pursue with the proceedings and to prepare or preserve evidence at such an early stage of proceedings.  He submitted inactivity on the part of the defendants may well be justified because it was a claim brought by the liquidators who may not have the resources to proceed with the case and with the plaintiffs in liquidation, the defendants may not be able to recover costs from them. 

20.  He further submitted that in respect of prejudice, since the matters in dispute happened 15 years ago, it is inevitable for witnesses to have lost memory on the details forming part of the circumstances giving rise to the underlying transaction.  This will put the defendants to a significant disadvantage and thus deny their chance to properly prove their case.  Further the plaintiffs had stated that two of their representatives who were involved with the transaction could no longer be located.  This would prevent the defendants from proving their case.

My view

1) The approach

21.  This being an appeal from the exercise of discretion by the Judge, this Court will not exercise the discretion afresh but to consider whether the discretion had been wrongly exercised in the first place, such as, for example, whether the Judge had erred on principles or had taken irrelevant matters into account or ignored relevant matters.  This principle needs to be emphasised because of the nature of the discretionary remedy.

2) Abuse

22.  Although Mr. Ho submitted that the Judge had already found abuse before she continued to consider the issue of prejudice, this is not plain from the judgment.  While the Judge had found that there was inordinate and inexcusable delay, she had not expressly stated that there was abuse. 

23.  Mr. Ho argued that there was abuse because in Wing Fai, a plaintiff who initiated proceedings without any intention to bring them to a conclusion was given as an example of abuse. In the present case there was abuse because the plaintiffs had decided in 2007 not to proceed with the present action but to institute a second action instead.

24.  In order to deal with this argument, one has to turn to the judgment.  Although the Judge held that, objectively considered, the plaintiffs’ decision in 2007 was to commence and continue with the 2007 Action and ‘effectively not to proceed with the [present action], or to bring it to conclusion’, in my view this was said in the context of delay.  She began the discussion by saying that ‘I consider there was inordinate and inexcusable delay.’  Although she went on to say that the liquidators permit the present action to languish for seven years and that this ‘constitutes a good example of abuse’, she did not expressly find this to be the case.  On the contrary, she said that ‘I should always consider such relevant factors as the prejudice to the Company and to the Director, as well as the conduct of the parties.’ 

25.  Mr. Ho tried to distinguish the present case from the usual ‘warehousing’ of cases which after their commencement had remained idle without progress.  In Wing Fai, it was held that prejudice is still very much a relevant consideration in such type of cases.  I suppose Mr. Ho’s argument is that in the ‘warehousing’ type of cases, there is simply no progress but in the present case there is a further indication that the plaintiff did not intend to bring it to a close.  But, if a plaintiff choose to ‘warehouse’ a case this may also be construed as him not intending to bring it to a close as well.  Yet prejudice is still required to be considered.  Hence I caution whether this is really a distinction in substance.  The matter has to be considered in its context. 

26.  In this case, the steps taken in 2007 cannot be looked at in isolation in deciding whether there was an intention in 2007 not to bring the present action to a close.  Proper regard must also be given to the further steps taken by the plaintiff.  Investigation was carried out in March 2011 on the assets of the 1^st defendant, counsel’s opinion was obtained in May 2011 and the plaintiffs then decided to proceed with the case and issued the notice of intention to proceed in July 2011.  After that, the plaintiffs offered in August 2011 to withdraw the Order 14 summons and to give security for costs up to the stage of the case management conference.  When the plaintiffs were ordered on 24 May 2012 to pay security for costs, they duly made payment into court on 20 June 2012.  These are relevant factors to be considered before one can say there was no intention to bring the present action to a close.

27.  In any event, even if the Judge had found abuse, Mr. Chan Chi Hung SC (together with Mr. Jeffrey Tam) had issued a respondent’s notice contending that the Judge ought to have held that there was no abuse.  Although they relied on the reason that ‘(a) considered legal advice by one’s legal representative on merits is entirely different from dilatory conduct and delay by one’s legal representative’, the relevance of the respondent’s notice is that the issue of abuse is at large as far as the appeal is concerned.  The issues of abuse and whether the plaintiffs had intended not to proceed with the present action were canvassed in argument.

28.  In any event I do not understand Mr. Ho had argued that it was not necessary to consider prejudice at all after abuse had been found.  His argument was that there were other compelling considerations as well which would preclude the Judge from allowing the plaintiffs to continue with the present case.

3)    Prejudice 

29.  In order to invoke the striking out jurisdiction based on abuse of process, the defendants are required to establish not merely inordinate or inexcusable delay but also a substantial risk that a trial would not be possible or there would be prejudice to the defendants.  These are conjoined requirements affirmed by Birkett v. James and restated in Wing Fai which repeatedly emphasized that mere delay is not sufficient.  In my view the Judge had not erred on principle at all when she proceeded to consider prejudice after she had found that there was inordinate and inexcusable delay or, based on the earlier discussion, if she indeed had found abuse by reason of the plaintiff not intending to bring the present case to conclusion.  The matters that she had taken into account are clearly relevant.  This is what the Judge said :

‘ 24. The issue for determination at the trial of the 2001 Action [the present action] is whether the Debt represented loans advanced under the loan agreements made between the parties, or capital contributions made by CNM [1^st plaintiff] under the series of the Share Investment Agreement and related contracts between CNM and the Company [1^st defendant]. The parties have referred in the affirmations to various written agreements and correspondence, which have been disclosed. The authenticity and contents of the documents are not in dispute, and these documents will be the main evidence relied upon by the parties to establish their case.

25.  The difficulty experienced by the liquidators in locating the officers of CNM and CNMG [2^nd plaintiff] was caused by the winding up proceedings.  Any prejudice that may be sustained by the Company and the Director [2^nd defendant], as a result of the officers of CNM and CNMG not being available, is not prejudice caused by the delay in the liquidators’ conduct of the 2001 Action.  The prejudice in this regard, if any, was present from the time when the winding up order was made, even if the liquidators had diligently progressed their claim in 2003.

26.  In any event, it had always been open to the Company and the Director to take steps to locate any witness who may assist their case, including any relevant officer of CNM and CNMG, to prepare their witness statements in good time before any lapse in their memory.  The same considerations apply in relation to the claim made that the Director or other officers of the Company may suffer from loss of memory by virtue of the delay brought about by the liquidators.  Due diligence and early preparation of the necessary evidence would have avoided such risks and minimized the possible prejudice.

27.  In all the circumstances of this case, I am not satisfied that there is any real risk that a fair trial is not possible.  The Director, who is a material witness for the Company, is still available to give evidence on the agreements in question, and whether the Debt is a loan, or capital contribution. As Leading Counsel for the liquidators pointed out, this distinction cannot be a matter which he might forget despite the lapse in time.  The underlying and supporting documents for the commercial transactions are all available.’

30.  In this case, in particular, the defendants were required to gather evidence in order to prepare for their defence because of the Order 14 summons for summary judgment which imposed the burden on them to show cause that there was a triable issue.  This is not a case, like a personal injury action, where the recollection of some fleeting moments plays a vital role.  The case turns on the construction of documents and the issue was either the money advanced was a loan or capital investment.  In this case the defendants had filed evidence in opposition to the Order 14 application and also served their defence after the Judge had given her decision on striking out.  In my view Mr. Ho had overemphasized the risk of the defendants not being able to provide details of the transaction.

4)    Argument based on limitation and policy consideration

31.  As to the analogous argument on limitation, I had already discussed the issue of the plaintiffs’ intention about the present case.  In any event, it clearly falls within the discretionary ambit of the Judge to decide whether to simply strike out the present action and let the plaintiffs continue with the 2007 action.  Further as pointed out in Wing Fai, post-CJR, the relevant consideration is no longer the ‘all or nothing’ approach of either striking out or not [paragraph 33] because the defendants in this case may also seek directions relating to case management in order to move forward the case or even require the plaintiffs to decide which of the two actions they wish to proceed to trial having regard to the objectives of the CJR.  

32.  There is clearly a tension between two equally important principles, namely, on the one hand, striking out a stale claim having regard to broader policy consideration of ensuring expeditious resolution of disputes and fair distribution of Court resources and, on the other hand, to allow a claim to continue so as not to drive the plaintiff from the judgment seat before the case is properly tried.  In my view, the resolution of this tension lies in the discretionary jurisdiction of the Court having regard to all relevant factors.  Striking out being such a draconian measure, the issue of prejudice to the defendant is clearly a relevant factor to be considered before one can properly accede to the application.  This is only a fair way to resolve the tension between two equally important principles.  The Judge was aware of the objective of the CJR.  She referred to them in the judgment.  Although she did not specifically address the issue of policy consideration, she must have done so when she decided not to strike out the action. 

33.  It is of note that parallel to the civil jurisdiction to strike out an action for reason of abuse, in the criminal jurisdiction, on an application to stay proceedings by reason of abuse, the Court will also take into the account whether the defendant has suffered prejudice notwithstanding the abuse : Warren v. Attorney General for Jersey [2012] 1 AC 22 per Lord Dyson JSC at paragraph 36.

5)     ‘Let sleeping dogs lie’ argument

34.  The inactivity on the part of the defendants was clearly a relevant factor considered by the Judge.  Mr. Ho also referred to the tension between, on the one hand, of not letting sleeping dogs lie and, on the other hand, not allowing a party to continue with the action if there is an abuse.  I think by now it is absolutely clear that the ‘let sleeping dogs lie’ approach is disapproved and each party to a case is under a duty to bring the case to a quick conclusion by applying for orders (including peremptory orders) to ensure the proper progress of the case.  As the Judge pointed out :   

‘28.  …… However, it was always open to the Company, the Director and their legal advisors to take steps to progress the 2001 Action.  They did not have to sit idly by.  They could have applied in 2003 to dismiss the Order 14 summons.  They could have applied for directions for the conduct of the 2001 Action.  If orders had been applied for to proceed with the 2001 Action, and the liquidators had failed to comply with these orders, the action might have been dismissed.  Instead, the Company and the Director chose only to apply in November 2011 for the 2001 Action to be struck out.  They were obviously happy until then to adopt a ‘let sleeping dogs lie’ attitude - even after the implementation of the CJR in 2009, when it was made clear that all parties to an action have the duty to assist the court to further the underlying objectives, and to ensure that a case is dealt with as expeditiously as is reasonably practicable.’

35.  In my view the Judge cannot be faulted and her decision not to strike out the action was properly exercised.

6)    Respondent’s notice

36.  In the light of my decision, it is not necessary to address the point raised by the plaintiffs in their respondent’s notice that any inaction arising out of the legal advice obtained in 2003 should not be considered as an abuse. 

Conclusion

37.  The appeal is accordingly dismissed.

Costs

38.  The plaintiffs are entitled to the costs of the appeal.

39.  The defendants issued a summons to adduce new evidence in response to the notice issued by the plaintiffs disputing the authenticity of some disclosed documents.  As the plaintiffs had withdrawn their dispute contained both in the notice and in their pleadings, no order is made on the summons.  There will be no order as to costs of the summons.

Hon Au J :

40.  I agree with Cheung JA’s judgment.