PARON GLOVES INTERNATIONAL LTD v. WU WAI KIT AND ANOTHER

HCA 1357/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1357 OF 2007

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D E C I S I O N

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Background

1. The plaintiff (“Company”) is a limited company incorporated in Hong Kong in July 1986.  In these proceedings, it makes claims against the defendant (“WK”), a director of the Company until December 2006, for alleged misappropriation of funds of the Company totaling $44,266,315.31 (“Misappropriated Funds”).  The Writ was issued in August 2007, and the claim made against WK is for an account of the Misappropriated Funds, alternatively damages in the sum of $44,266,315.31, alternatively damages to be assessed. 

2. On 12 September 2007, a Defence was filed by WK.  Further pleadings were filed, and amendments were made to the pleadings, in the course of 2007 and 2008.  Witness statements were exchanged in May 2009.  As early as March 2010, an order was made by the Master that the case was ready to be set down for trial, but not much progress was made until May 2012, when Madam Leung Yuk Chun (“Leung”) applied to intervene in the action and to be joined as a defendant.  On 6 September 2012, the Master made an order granting leave for the joinder.  By Notice filed on 10 September 2012, the Company appeals against the Master’s decision.  On 23 November 2012, the Company further applied for leave to amend the Re-Amended Statement of Claim.

3. The appeal against the Master’s decision operates as a hearing de novo of Leung’s application to intervene in the action to be joined as a defendant. Such application was made under Order 15 rule 6 RHC.  Order 15 rule 6(2)(b) provides for the power of the court to order the joinder of:

“(i) party who ought to have been joined as a party or whose presence before the Court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, or

(ii)  any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.”

4. It is clear from the authorities that a person may be added as a party if he is directly affected, either legally or financially, by any order which may be made in the action (see the cases cited under paragraph 17/6/7 of Hong Kong Civil Procedure).  A person who is not a party to the action is entitled to intervene and be joined as a party, if he has some interest which is directly related or connected with the subject matter of the action (Wong Chun Loong Tony v Ada Ltd [1991] 1 HKC 86).  The interest of the intervenor must raise an existing issue, and not merely a contingent one (see Spelling Goldberg Productions Inc v BPC Publishing Ltd [1981] RPC 280).

5. In considering the “matters in dispute in the cause or matter”, and the “question or issue” arising out of or connected with the relief or remedy claimed in the cause or matter, as referred to in Order 15 rule 6(2)(b), one has to look at the pleadings in order to ascertain the issues to be determined by the Court at trial.  This is particularly important in the aftermath of the Civil Justice Reform, when the Court has to bear in mind the underlying objectives of the Rules of the High Court when exercising its discretion under the Rules and in the application of the Rules.  The relief and remedy sought by the parties in the action should always be defined by, and confined to, the pleadings, as the Court will not be furthering the underlying objectives of dealing with cases expeditiously, promoting reasonable proportion and procedural economy, ensuring fairness between the parties and the fair distribution of the resources of the Court, if parties should be permitted to raise at trial, or to introduce at a late stage in the proceedings when the parties are about to set the case down for trial, issues which may have been alluded to in witness statements but have never been properly pleaded.

The pleadings

6. The pleadings filed in this case are not complex.  The Company claims that WK had, during the time when she was a director of the Company and between 1995 and 2004, issued 340 cheques in her own favour and withdrawn the Misappropriated Funds from the Company’s bank accounts.  Despite the cheques being marked in the Company’s records to have been for the expenditure of Lifeng Factory and Liqiang Factory (“Factories”), in which the Company had interests as a joint venture partner in Mainland China, the Company claims that in truth, the Misappropriated Funds had been used for WK’s own benefit.  The Company thus claims that WK had acted in breach of her fiduciary duty and duty of good faith owed to the Company as its director, and that the Misappropriated Funds are held by WK on constructive trust for the Company. 

7. By its prayer in the Re-Amended Statement of Claim, the Company seeks from WK an account of the Misappropriated Funds, and damages, whether represented by the Misappropriated Funds or to be assessed.

8. By way of defence, WK claims that the alleged Misapropriated Funds had been utilized for the payment of the expenses of the Factory (paragragh 22 of the Amended Defence).  WK claims that the drawing of the cheques was all done under the direction of and advice by Wu Kwok Kwong (“KK”), the registered holder of 45% of the shares of the Company, who is also her brother and another director of the Company.  The balance of the shares are held as to 20% by WK, 15% by Leung and 20% by KK’s wife.

9. On the basis of the matters summarized in paragraph 8 above, WK denies that she had misappropriated any funds of the Company, and further denies that the Misappropriated Funds were held by her on trust, as alleged. 

10. Unfortunately, various other allegations were made by the parties in the pleadings which were not directly related to, but had distracted the attention of the parties from, the relief sought and as identified in the pleadings.  For example, WK claims in paragraph 20 (d) of the Amended Defence that a small part of the alleged Misappropriated Funds was for reimbursement of her business expenses or salary, and she counterclaims for unpaid salary or damages to be assessed. Her counterclaim for allegedly unpaid salary due from the Company was struck out by the Master on 30 November 2011.

11. As Leading Counsel for the Company acknowledges at the hearing on 20 December 2012, unnecessary references had been made in the Re-Amended Statement of Claim to the businesses of Paron International in Hong Kong (“HK Paron”), and Huizhou Paron in Mainland China (“Huizhou Paron”).  It is claimed that WK had used the Misappropriated Funds to set up Huizhou Paron as the wholly owned business of HK Paron.  Despite the fact that the Statement of Claim had been filed as early as August 2007, with amendments last made in February 2008, no claim has been made by the Company against WK, in respect of HK Paron or Huizhou Paron.  Nor has the Company made any claim against Leung, as the proprietor of HK Paron, in relation to either Huizhou Paron or the Misappropriated Funds.  The Company’s application to further amend the Re-Amended Statement of Claim is, in fact, to delete the paragraphs containing these references to HK Paron and Huizhou Paron, as well as to delete paragraph 18 of the Re-Amended Statement of Claim, in which the Company pleads that it “reserves the right to join HK Paron and Huizhou Paron as co-defendants in this action upon further investigation and discovery”.

12. In her Amended Defence, WK pleads that Leung, who is mother to WK and KK, had set up HK Paron in January 1985 to carry on the business of manufacturing labour gloves.  KK had assisted Leung in the management of the business of HK Paron.  The Company was incorporated with limited liability in July 1986, the shares of which were registered in the names of Leung, WK, KK and KK’s wife.  WK’s pleaded case is that Leung had provided the capital for the Company, and that after the setting up of the Company, the business hitherto carried on by HK Paron had been transferred and diverted to the Company.  According to WK, Lifeng Factory was owned by HK Paron, and Liqiang Factory was a joint venture partner of the Company.  Money had to be remitted by the Company and HK Paron to the Factories for their expenses, and WK claims that the alleged Misappropriated Funds were transferred from the bank account of the Company, to WK’s account, or to the joint account of WK and KK, all in accordance with the established practice and the knowledge of KK.

13. In its Reply to the Defence and Counterclaim, the Company claims that it had taken over the business of KK’s prior unincorporated company known as Paron International (which has the same English name as HK Paron), and not Leung’s business of HK Paron as WK claims.  The Company claims that HK Paron had in fact never operated any business at all.  The capital of the Company is claimed to have been provided by KK/Paron International, and not by Leung.  The Company further claims that WK had used the Misappropriated Funds from the Company to set up Huizhou Paron and to acquire land for Huizhou Paron in Mainland China.

14. In her affirmation filed to support the application to be joined as a party, Leung alleges that the material issue in dispute is whether the Company is beneficially owned by her, as she claims, or by her son KK, as he asserts.  Leung claims that as the beneficial owner of the Company, she holds a “direct and substantial proprietary interest” in these proceedings.  She sets out in her affirmation the history of how the businesses of HK Paron, the Factories and the Company were set up, and how she had financed these businesses by mortgaging her properties to the banks.  Leung claims that the shareholding in the Company does not reflect the beneficial interests in the Company, as she had provided all the capital of the Company, none of WK, KK or KK’s wife had paid for their shares, and the assets and business of the Company were all sourced or transferred from her business, HK Paron.

15. Notwithstanding the matters referred to in the witness statements of KK and WK, and in Leung’s affirmation, the fact remains that the only claim made by the Company and the only relief sought by the Company in these proceedings is that WK, as the only defendant named, holds the alleged Misappropriated Funds on trust for the Company, and that she should give an account of the Misappropriated Funds and alternatively, repay the Misappropriated Funds or pay damages to the Company.  WK has not asserted in her Amended Defence and Counterclaim any positive case (as she is required under Order 18 rule 13(5) to do) that the Misappropriated Funds belong to, or are or were at any time held on trust for, any party other than the Company.  There is a mere denial of the claim that WK had misappropriated the Misappropriated Funds, said to be the property of the Company and held on constructive trust for the Company.  Nor has Leung, in her affirmation, asserted any claims against the Company, or against WK as the defendant named, or against KK.  In response to this Court’s queries, counsel for Leung stated in court that it was Leung’s intention to make “some claim” in these proceedings, but these claims have not been identified.

16. At this late stage, when the parties had affirmed to the Court as early as in March 2010 that the case was ready to be set down for trial, the Court will not be sympathetic should the Company make a last minute application to raise claims against HK Paron, Leung or Huizhou Paron despite the earlier “reservation” of its rights to do so.  Leading Counsel for the Company made it clear at the hearing that the Company does not in fact wish to make these claims against Leung, as is evidenced by the Company’s application to delete paragraphs 13 to 18 of the Re-Amended Statement of Claim, as being irrelevant to the issues in dispute.

The question or issue in dispute in the cause or matter

17. Having considered the pleadings, I agree that the issue in dispute for determination at trial is simply whether WK had misappropriated funds of the Company, such that she should be liable to the Company. 

18. The relief or remedy claimed in this action is an account or payment by WK of the Misappropriated Funds of the Company.  The question or issue which arises out of or relates to or is connected with the relief or remedy claimed is whether the Misappropriated Funds were used for the purposes of the Company, namely for the expenses of the Factories as WK claims in the Amended Defence.  If, as WK claims, the Misappropriated Funds had been used for the legitimate purposes of the Company, by paying for the expenses of the Factories, then she is not liable to the Company for the relief sought.

19. Notwithstanding the assertions made by the parties as to the provision of capital for the Company, and the setting up of the businesses of the Company, the beneficial ownership of the Company or of the shares in the Company are not the issues for determination on the relief sought by the Company against WK in these proceedings.  I agree with Leading Counsel for the Company that it is not a defence for WK to simply claim that the Misappropriated Funds had been paid to or utilized in accordance with the instructions of the alleged beneficial owner of the Company, if there was indeed a breach of WK’s duties as a director of the Company in the use of the Misappropriated Funds.

Whether joinder should be allowed

20. Even if Leung’s claims, of being the beneficial owner of 100% of the shares in the Company, are accepted, she has no direct interest in the subject matter of these proceedings, namely the Misappropriated Funds.  They are the property of the Company, a separate legal entity, and not of Leung or any other party claiming to be the shareholder of the Company.  Leading Counsel for the Company has referred to well-established principles, as summarized in the judgment of Clough JA in Terrain Ltd v Oriental Peer Co Ltd, CACV 23/1987, unreported 30 July 1987:

“As the English Court of Appeal emphasized in Prudential Assurance Co Ltd v Newman Industries Ltd at p 223A-B, shares are merely a right of participation in the company on the terms of the articles of association. The same point was made by Lord Buckmaster in Macaura v Northern Assurance Co Ltd at p 626 where he indicated that the shareholder has no right to any item of the company’s property, but is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up.”

21. If the Company succeeds in its claims against WK in these proceedings, in proving that the Misappropriated Funds are funds of the Company and had been misappropriated, it is for WK to give the account and/or to pay the Misappropriated Funds to the Company.  Leung has not shown how she will be affected, directly or indirectly, by WK’s payment or account.  Nor will Leung be liable to satisfy any judgment that may be made against WK. 

22. On the pleadings as they now stand, the Court will not be deciding, at trial, issues as to whether WK holds the Misappropriated Funds on trust for Leung.  Further, and as analyzed in the earlier parts of this Decision, there is no pleaded claim that HK Paron, Huizhou Paron, or any of their assets are held on trust for the Company.  I fail to see how Leung can be affected or bound in any way by any judgment or findings that may be made on the pleaded issues in these proceedings.

23. On any view, Leung is not a person whose presence is necessary, as a party, for the matters in dispute in this cause or matter to be effectually and completely determined, or between whom and the parties to this action there exists a question or issue arising out of or relating to or connected with any relief or remedy claimed in this cause or matter.  She can be called as a witness to give evidence, if necessary, but there is simply no issue between Leung and the Company or WK which arises out of or relates to the subject matter of this action, which should be determined with the issues to be decided in this action between the Company and WK.

24. It was also argued on behalf of Leung that she, as the sole beneficial owner of the Company, had never given consent or authorization for the institution of these proceedings by the Company.  It was claimed that the proceedings may be liable to be struck out for want of authority.

25. It is trite that questions of a plaintiff’s authority to sue should be raised at an early stage of the proceedings.  It should not be raised by way of defence to dispute the authority, nor can a defendant dispute such authority only at trial (paragraph 18/19/24 Hong Kong Civil Procedure).  Despite the claims made by WK, as early as in May 2008, as to the businesses of HK Paron and of the Company and as to the shareholding of the Company, she has never raised questions as to the Company’s authority to commence these proceedings against her.  On WK’s own pleaded case (paragraph 5(c) of the Amended Defence), KK was the remaining director on the board of the Company, after Leung and WK resigned in December 2006, which was before the Company’s commencement of these proceedings.  The Company’s authority to sue WK is not an issue for determination in this action.

Conclusion

26. For all the above reasons, I refuse leave for Leung to intervene and to be joined as a defendant in these proceedings, and allow the Company’s appeal, with costs, including certificate for counsel.

27. I see no reason why the Company’s application to further amend the Re-Amended Statement of Claim should not be allowed.  The Company’s claims against WK remain the same after the deletion of paragraphs 13 to 18 of the pleading, and the amendment in fact clarifies the claims made and the relief sought.  I will accordingly grant leave to the Company, in terms of the Company’s summons issued on 23 November 2012, which provides for the costs of and occasioned by the application for amendment be to WK.  I will grant leave to WK to file a Re-Amended Defence, if so required.