EAA SECURITIES LTD. v. CHAN LIN MUI AND ANOTHER

DCCJ 4015 of 2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4015 OF 2003

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REASONS FOR DECISION

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1. This is an application by the Plaintiff by summons dated 23^rd August 2005 to strike out 24 out of 28 paragraphs (paragraphs 4 to 24 and 26 to 28) of the witness statement of So Tai Fai (“Anita So”) filed herein on 3^rd May 2005 on behalf of the Defendants. The said statement as to fact was filed and served pursuant to an agreed memorandum of the parties dated 8^th December 2003 and intended to stand as the evidence in chief of Anita So at trial unless otherwise directed by the trial judge.

2. As stated in the margin note of the summons, the Plaintiff relies on the inherent jurisdiction of the Court to launch the application. The grounds for the striking out become apparent when one reads the affirmation of Heung Shuk Han Veronica filed on 23^rd August 2005. Basically, the Plaintiff submits that the paragraphs of the witness statement sought to be struck out suggested a conspiracy to defraud which the Defendants have never pleaded and are therefore irrelevant to the issues between the parties. These paragraphs of the witness statement only serve to embarrass the Plaintiff and prolong the trial unnecessarily, thus increasing the costs of both parties. According to the submission made by Miss Eling Lee, counsel for the Plaintiff, the said paragraphs of the witness statement are scandalous, frivolous, vexatious and/or otherwise irrelevant to the proceedings and thus offended the provisions of Order 38. Rule 2A of the Rules of District Court.

3. Mr. Simon Lui, counsel for the Defendants, contends that the main ground of defence is unauthorized trading in the account. The Defendants are therefore entitled to call evidence of how the Plaintiff dealt with the other accounts to show that such unauthorized trading is not an isolated incident. This evidence is relevant as to the background and has probative value. Further, evidence on why and how the unauthorized trading has occurred is important and relevant. The court has on many previous occasions allowed witnesses to give evidence on these areas.  It is noted that the jurisdiction of the court to strike out certain part of a witness statement is not disputed by the Defendants.

The Pleadings of the Plaintiff

4. The Plaintiff’s case against the two Defendants is simple. It is the Plaintiff’s pleaded case that it was a securities dealer. On 15^th February 2000, the two Defendants opened a cash account with the Plaintiff for securities investment by signing a Cash Client’s Agreement (paragraph 2 of the statement of claim). It was pleaded that by the said agreement, the Plaintiff would be the agent of the Defendants in effecting transactions in securities according to instructions of the Defendants who in return agreed to, inter alia, settle payments and pay interest on overdue payments. Between February 2000 and 17^th July 2001, there had been numerous transactions carried out in the said account and as at 31^st July 2001, the account had a debit balance of HK$438,640.83. Interest accrued on the outstanding sum and the alleged total outstanding sum under the said account ran up to HK$493,770.10 as at 17^th April 2003. Monthly statements were sent to the Defendants. No payment was made by the Defendants despite repeated demands.

The Defence

5. The gist of the defence, as appeared in the Amended Defence and Counterclaim filed herein on 26^th May 2005, is this. The Defendants wanted to buy shares but were ignorant of the operation of the stock market. The 2^nd Defendant therefore enlisted assistance from Anita So, who was her stepmother and who worked in a securities brokerage house. It is noted that there is no mention that this securities brokerage house in which she worked is the Plaintiff. They were asked by Anita So to sign some account opening papers for the purpose of depositing stocks they had purchased into such account. Neither had Anita So explained the said documents to them nor had she provided them with any photocopies. Apart from purchase on 3 occasions they had never traded any securities. Save and except the above the Defendants denied paragraphs 2 of the Statement of Claim. There was neither admission that Anita So was an employee of the Plaintiff nor the forms they had signed being those of the Plaintiff’s. By the Defence, the Defendants simply denied having signed the alleged Cash Client Agreement and given instruction to trade save and except on three occasions.

6. Furthermore, the Defendants pleaded having no knowledge of the terms of the Agreement and specifically denied having receipt any monthly statements from the Plaintiff.

7. However in the Counterclaim, the Defendants appeared to admit that the account which they had opened was “…a cash account opened with the Plaintiff…”(paragraph 16), although there is no express reference as to whether the said account and the one referred to by the Plaintiff was in fact the same account. The Defendants pleaded that the shares which they had bought on the 3 occasions together with the bonus shares had disappeared in the said account and therefore counterclaimed against the Plaintiff for return of the shares or alternatively, damages.

Subsequent Pleadings

8. A Reply and Defence to Counterclaim was served. It was pleaded, inter alia, that the shares acquired by the Defendants in their first purchase had not been deposited with the Plaintiff. The pleadings repeated the debit balance of the account as at 17^th April 2003. It was pleaded that only 100 shares of Tracker Fund were left in the said Cash Account. It was also pleaded that a repayment schedule was jointly signed by the Defendants in or about 13^th March 2001.  The Defendants served a Rejoinder dated 11 August 2005 saying, inter alia, that the signatures on the Schedule were forged.

Anita So’s Witness Statement

9. Anita So was a sales director of the Plaintiff as from February 1995. The first three paragraphs of the statement set out the background that after the 1997 financial turmoil, people had lost confidence in the economic future and had stopped investing in the shares market, resulting in financial difficulties to some brokerage firms. Some were forced to close down or cut staff.

10. Starting from paragraph 4, Anita So stated that in order to survive the financial crisis, her supervisor, one Elson Wong asked her to use clients’ accounts to trade. According to her, the purpose of using clients accounts was to fulfil buy/sell orders coming from some listed companies/brokerage firms and was “…mainly to prop up the price of a particular share or to dump a particular share in the market without drawing much attention.” (paragraph 4). She agreed to do so due to, allegedly, pressure on her by the Plaintiff.  She did not want to be laid off. A total of 27 accounts, including the Defendants’ account, were used by her. She indirectly said that such trading was with the Plaintiff’s financial support (paragraph 5). She was not entitled to any commission for handling these unauthorized transactions. Instead the commission which the clients were required to pay for these transactions was debited into the respective accounts and she had to make use of the profit (if any) arising out of these transactions to pay off the commission chargeable by the Plaintiff. This practice did not stop even after Miss Suzanne Choo of the Plaintiff took over the duties of Elson Wong as her supervisor. With knowledge of Miss Choo, the Plaintiff did not stop her from trading using clients’ accounts (paragraph 12).

11. In paragraph 13, Anita So went on to say that in fact, the trading using clients accounts by staffs of the Plaintiff was a widespread practice/phenomena in the Plaintiff.  It was with full knowledge of the Plaintiff who according to Anita So “tolerated” the unauthorized trading engaged by her (paragraph 14). From paragraphs 15 up to 24, Anita So stated that she was terminated by the Plaintiff in February 2002 and was asked to sign some letters of guarantee to cover the debit balance of her clients. Again, due to pressure exerted by the Plaintiff, she did sign on the documents and repay some of the amounts, notwithstanding that the activities were illegal and was masterminded by the Plaintiff.

12. In paragraph 26, Anita So, after acknowledging that the Defendants had not given any instructions to her to trade save and except the pleaded ones, admitted that all other transactions were carried out by her for the purpose of “…generating income by way of commission for the Plaintiff without knowledge and consent of the Defendants. Due to my [her] unauthorized trading I [she] had caused loss to their account”.

13. Paragraphs 27 and 28 stated how she was later arrested by the Police for suspected offence of false accounting but no charge was brought against her subsequently. It was said that the Plaintiff was severely reprimanded by the Securities and Future Commission for “…internal control failure allowing me [Anita So] to carry out unauthorized trades in clients’ accounts and the dispatch of forged statements to clients thereby causing the Plaintiff to write off bad debts of about 27.3 million”.

14. It appears what the pleader of the Defence is trying to say is that the Defendants have traded securities on three occasions only. Implicit in such allegation is that all other trading was carried without their knowledge and consent and the Defendants were therefore not liable for whatever loss under the account. When the pleader launched the counterclaim, he seemed to have forgotten what he had denied, and claimed that the securities they had bought were deposited with the account opened with the Plaintiff when they signed the papers brought by Anita So, as referred to in paragraph 2 (e) of the Defence. There may also perhaps be other minor mistakes such as the repeated reference to paragraph 2(k) in the Defence may in fact be a reference to 2(m). In any event, the Defendants had not pleaded who had carried out the transactions, nor was there the slightest indication that it was the Plaintiff who actually carried out such unauthorized transactions. In other words the defence of unauthorized trading simply put the Plaintiff to strict proof of the Defendants’ liability and quantum.

15. However by the evidence of Anita So, a positive case amounting to illegality and/or fraud and/or serious misconduct on the part of the Plaintiff is sought to be established. It was Anita So’s evidence that the trading, which was upon the request of the Plaintiff’s executive director, was for the purpose of “…prop up …or to dump …” the price of particular shares in the market for the purpose of fulfilling buy/sell orders from some listed companies/brokerage firms without drawing much attention (paragraph 4 of her statement). Although no further particulars are contained in her statement, her evidence discloses a case of serious illegal activities on the part of the Plaintiff, amounting to possibly, false trading under the Securities and Futures Ordinance, Cap 571 (“SFO”). It is a serious offence punishable by heavy fine and imprisonment term under the SFO.

16. Furthermore, the evidence in Anita So’s statement also suggested a direct involvement of the Plaintiff, either through other employee or Anita So in such unauthorized trading. The following is some of the allegations in the said statement:

i)	“He [Elson Wong] further asked me whether I had any available accounts of my clients which the Plaintiff could use to buy/sell order coming …” (paragraph 4);
ii)	“I would say that without the Plaintiff’s financial support, these trading could not be sustained.” (paragraph 5);
iii)	“Notwithstanding that, the Plaintiff did not stop me from using my client’s accounts to trade …” (paragraph 12);
iv)	“…No action nor demand was ever made by the Plaintiff to ask the account holders to settle payment as the Plaintiff knew they had no involvement in the trading. The Plaintiff was therefore fully aware of and tolerated the unauthorized trading engaged by me and other account executives….” (paragraph 14);
v)	“…the Securities and Future[sic] Commission had severely reprimanded the Plaintiff for internal control failure allowing me to carry out unauthorized trades …and the dispatch of forged statements to clients …” (paragraph 28).

17. It is apparent that Anita So’s statement has a serious implication on the Plaintiff. Pitching the Defendants’ case to the highest, it may amount to a conspiracy on the part of the Plaintiff with Anita So to defraud customers including the Defendants. However, none of such misconduct, nor alleged illegality nor any suspected fraud had been pleaded by the Defendants. Obviously the defences, as revealed by Anita So’s statement, are more than a mere denial or unauthorized trading. The Defendants could now identify the Plaintiff’s senior staff, Miss Anita So, as the one who did the alleged unauthorized transactions. Furthermore the Defendants go further by accusing that it was the Plaintiff who pressurized Anita So into such illegal acts. The Defendants are in fact advancing a positive case of illegal acts or misconduct on the part of the Plaintiff, rendering the Defendants not liable for any loss in the said securities trading account. These are serious allegations.

18. A plaintiff has the burden of proof. Facing with a defence of simple denial normally a plaintiff will try to come up with the necessary evidence to establish liability and quantum failing which its claim must fail.  Evidence of who actually carried out the transactions, or records kept in the normal course of the plaintiff’s business is expected to be adduced at trial. However, in the present case, if not for the allegations now contained in the Anita So’s statement, Elson Wong, the alleged supervisor of Anita So, may not necessarily be a witness. As correctly pointed out by the Plaintiff, Elson Wong has now become one of the star witnesses if the Plaintiff is going to rebut the serious allegation of Anita So.

19. The question is whether such evidence of Anita So can be led, and thus contained in her witness statement, without first having the material facts of which pleaded in the Defence.

The Applicable Principles  

20. It is a settled principle that issues are defined by pleadings of the parties, and only evidence relevant to determine such issues is allowed to be put in.  In the Court of Appeal decision in Wing Hang Bank Ltd v Crystal Jet International Ltd [2005] 2 HKC 638 at 647F - G, Lam J has this to say: 

“

A pleading must comply with the requirements set out in the Rules of the High Court. One must remember that the parameters of a trial are defined by the pleadings. In an ordinary civil action, generally speaking, an issue that has not been pleaded is not an issue before the court and subject to the exception alluded to by the Court of Final Appeal in Poon Kau Kei v Hsin Chong Construction Co. Ltd [2004] 2 HKC 235, [2004] 2 HKLRD 442, the court should not consider such issue.”

21. In the present case, the exceptions in Poon Kau Kei are not applicable.

22. In the same decision, Ma CJHC further stated at page 643G to 644B the following:

“	If I may, I take this opportunity to reiterate some basic principles:
	(1)	The purpose of pleadings is fairly and precisely to inform the other side of the stance of the pleading party so that proper preparation is made possible, and time and effort are not expended unnecessarily on other issues. The passage at para 18/12/1 of Hong Kong Civil Procedure 2004 Vol I sets out the rationale for proper pleadings.
	(2)	In a trial, particularly where evidence is given by witnesses, it becomes extremely important that each side knows exactly what are the lives issues. Where issues are sought to be introduced that have not been adequately or properly pleaded, amendments must be sought unless the consent of the other party or parties has been obtained. It will simply not do for unpleaded issues to be ‘slipped in’ when evidence is being given in the hope that the other side is not sufficiently alert to object. Much testimony given in the course of a trial may in truth relate to a number of possible aspects or may simply be background information. Obviously, counsel must be astute to object when necessary but the primary responsibility of ensuring that any issue is properly before the court is on the party seeking to advance that issue. He must do so clearly and not ambiguously, and the usual way of doing so is through the pleadings. Care must be taken to plead issues clearly, and not draft pleadings either vaguely or ambiguously perhaps in the hope that the other side might not readily or easily understand a party’s real case….
	(3)	On appeal, it will be extremely rare for the Court of Appeal to allow unpleaded issues of fact to be run for the first time. Save in exceptional circumstances (such as where documents can safely be assumed to speak for themselves), the court will often not be in a position to take the view confidently that the other side has not been prejudiced.”

23. Furthermore, Order 18. Rule 8(1) of the Rules of District Court requires that a party in any pleading subsequent to a statement of claim plead specifically matters (my emphasis) including, but not limited to, fraud or any fact showing illegality which he alleges makes any claim of the opposite party not maintainable or which if not pleaded, might take the opposite party by surprise or which raises issues of facts not arising out of the preceding pleading. The commentary at paragraph 18/8/1 of Hong Kong Civil Procedure 2006 Vol. I states that wherever a party has a special ground of defence or raise an affirmative case to destroy a claim, he must specifically pleaded the matter on which he relies for such purpose. The effect of such rule is, according to the learned author, for reasons of practice and justice and convenience, to require the party to tell his opponent what he is coming to court to prove. The authority of Re Robinson’s Settlement, Gant v Hobbs [1912] I Ch. 717 is cited.

24. In paragraph 18/8/2 of the Hong Kong Civil Procedure 2006 Vol. I, the learned author continues to state that it is often not enough for a party to deny an allegation in his opponent’s pleading. The pleader must go further and dispute its validity in law, or set up some affirmative case of his own in answer to it. All matter justifying or excusing the act complained of must be specially and separately pleaded. No evidence of such matters can, as a rule, be given at the trial if they are not expressly pleaded. Davie v New Merton Board Mills Ltd [1956] 1 W.L.R. 233 is cited. The “confess and avoid” rule should be followed as far as possible.

25. I consider that the learned author of the Hong Kong Civil Procedure 2006 has set out the correct position of the law in this respect.

26. As analyzed above, the Defendants are now advancing a positive case of misconduct or illegality or even a case of fraud against the Plaintiff. Counsel for the Defendants has expressly informed the court in the course of his submission that the Defendants are not running a case of fraud against the Plaintiff, and it is only a simple case of unauthorized trading. However, if the Defendants are relying on the grounds of defence as revealed in the said statement of Anita So, the Defence still offends Order 18 Rule 8(1). Issues such as it is the Plaintiff or its employee who has done such transactions for self-benefit have never been raised. This Order of the Rules of District Court is not only limited to illegality and fraud. It obviously has a wider application covering the present situation.

27. Counsel for the Defendants has contended that the test of whether certain part of the evidence in a witness statement should be expunged is “relevance”. He relied on Re: HY & HT Lee Brothers & Co., Ltd [1999] 4 HKC 212 and O’Brien v Chief Constable of South Wales Police [2005] UKHL 26. I do agree but cannot see how principles in the two cited authorities assist the Defendants. The relevance test is not inconsistent with the principles I have discussed above. Relevance must, and can only, be judged by reference to the issues which the court is called upon to decide. As can be seen from the authorities referred to above, these issues are not defined by witness statements nor by counsel’s submission but by pleadings. The main gist of the defence is that the Defendants had not carried out the transactions concerned. It follows that if there are really transactions carried out in the account these transactions must be unauthorized. However, it does not follow that it is the Plaintiff or its employees who did the transactions. There is no suggestion in the Defendants’ pleadings that it is the case. A denial without pleading a positive case will not entitle the Defendants to adduce positive evidence now contained in Anita So’s statement otherwise a plea of denial will be the best licence to any defendant to adduce whatever evidence he considers relevant so far as such evidence is not inconsistent with the denial. It cannot be right. It offends the Rules of the District Court and the principles which I have been set out in the preceding paragraphs.

28. In fact before hearing submissions, I have made enquiry with Mr. Lui, counsel for the Defendants, as to whether the option of amendment of pleadings had been explored by the parties. I am surprised to note that the Defendants’ stance was, when the Plaintiff at last was prepared to allow the Defendants to amend, to refuse amendment. Evidence will not be considered as scandalous even though the allegations are grave and conduct outrageous if the evidence is relevant to the issues between the parties. However, if facts of such matters have never, and indeed refused to be pleaded, such evidence is irrelevant and therefore is scandalous because it only serves to embarrass or prejudice the other side. The other side will be put in a difficult position for the simple reason that although the evidence is irrelevant to the pleaded issues, the evidence will adversely implicates its interest or reputation and must be rebutted. It therefore also serves to lengthen a trial unnecessarily. This evidence is liable to be struck out from the witness statement. I accept the submissions made by counsel on behalf of the Plaintiff.

Conclusion and Order

29. By reasons of the above, I order that paragraphs 4 to 24 and 26 to 28 of the witness statement of Anita So filed on 3^rd May 2005 be struck out. I also make the following order nisi as to costs: that unless either party applies to be heard on the question of costs within 14 days, the Defendants do pay the Plaintiff costs of the application together with a certificate for counsel, to be taxed, if not agreed. The Defendants’ own costs to be taxed in accordance with the Legal Aid Regulations.