HIGHFIT DEVELOPMENT CO LTD (In Liquidation) v. KOO SIU YING AND ANOTHER

HCA 494/2015

[2023] HKCFI 851

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 494 OF 2015

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D E C I S I O N

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1.  The contested applications before the Court are the summonses of the 1^st and 2^nd Defendants (referred to jointly as “Defendants”) for leave to amend their Re-Amended Defence, and for specific discovery of documents.

Amendment summons

2.  The Plaintiff objects to the amendments proposed to be made at paragraph 10(5) to (7) of the draft Re-Re-Amended Defence, which relate to the defence of laches, acquiescence and delay of the Plaintiff. On the Plaintiff’s case, these averments are bound to fail as the facts pleaded cannot support a viable defence of laches.

3.  The proceedings were commenced in March 2015 by the liquidator of the Plaintiff (“Company”), against the Defendants. The shareholders of the Company were Mr Lim (“Lim”), who died in 2005, Lim’s 3^rd wife the 1^st Defendant, and their daughter the 2^nd Defendant. Lim and the Defendants were directors of the Company, but Lim ceased to be a director in 2001.

4.  The claims made in these proceedings are that in August to September 2000, the Defendants had caused the Company to dispose of its main assets, being (i) the Company’s shareholding in a company (“HF”) which held the interests in a real estate project in Shanghai; and (ii) HF’s indebtedness to the Company; to the 3^rd Defendant, at an undervalue. The 3^rd Defendant was a company wholly owned and controlled by the Defendants.

5.  The claim against the Defendants is that the aforesaid impugned transaction in 2000 (“Impugned Transaction”) was made as a result of or constituted the Defendants’ breach of fiduciary duties as directors of the Company, in that the Defendants had failed to give the requisite notice to Lim of the board meetings and shareholders meeting at which the Impugned Transaction was approved, and had failed to disclose their interests in the 3^rd Defendant, with the knowledge that the Impugned Transaction was at an undervalue and was unreasonably favorable to the 3^rd Defendant, as the 3^rd Defendant did not have to pay the agreed consideration nor was the consideration actually paid to the Company.

6.  It is alleged that the Impugned Transaction constituted a breach of trust, and that the assets transferred were trust properties vis-à-vis the Defendants as directors of the Company.

7.  The Defendants deny breach of any fiduciary duties, and deny that the Impugned Transaction was at an undervalue. As Counsel for the Defendants pointed out, a key plank to their defence is that the Company was in fact a family arrangement, and that Lim, as the patriarch of the family, was in de facto control of the Company and of the 3^rd Defendant. The Defendants’ case is that it was in fact Lim who had decided the terms of the Impugned Transaction, had arranged for the Defendants to sign the papers in connection with the Impugned Transaction, and that the Defendants had simply followed the instructions and wishes of Lim.

8.  In answer to the claim of breach of fiduciary duties, that the Defendants had failed to give notice of the relevant meetings to Lim, that Lim had no knowledge of the meetings and had not attended them, and that the Defendants had failed to disclose their interests in the 3^rd Defendant, the Defendants had pleaded, at paragraph 7(3A) of their Amended Defence of 30 October 2017, that at all material times of the meetings, “Lim was in de facto control of the Plaintiff and the 3^rd Defendant”, and that there was no need for the Defendants to make any disclosure of their interests. By their amendments to the Defence introduced in November 2019, the Defendants pleaded that “at all material times, (Lim) was a shadow director, or alternatively, a de facto director, of the Company”, and that he had “engineered and/or procured the subject transaction” by determining the terms of the subject transaction and arranging for the Defendants to sign papers in connection therewith, including the resolutions for the shareholders and the board meetings, and the Share Sale Agreement in question for the Impugned Transaction.

9.  The plea of laches was set out in paragraph 10 of the original Defence dated 3 June 2015, by which the Defendants pleaded that the relief sought by the Plaintiff in respect of their alleged breaches “ought to be refused by reason of laches, acquiescence and delay of the Plaintiff”.

10.  By the proposed re-amendments now sought to be made to paragraph 10(5) to (7), and the particulars of the laches defence set out thereunder, the Defendants seek to plead that “various documents relevant to the issues in dispute in these proceedings have been destroyed prior to the Plaintiff commencing the Action”. Particulars are set out, of the fact that the bank accounts of the Company were closed in 2008, that the Defendants had brought third-party discovery applications against the banks at which the Company had held accounts, but that various designated banks had stated to the Defendants that documents had been destroyed or could not be located by virtue of their document retention policy (to retain account related information and documents for 7 years only after closure of the account, or 7 years from the date of transaction records).

11.  At paragraph 10(5)(ix) to (xii) of the proposed re-amendments, the Defendants plead as follows:

“(ix) In particular, it is averred that the Banks have destroyed contemporaneous bank documents relevant to the issue of whether Mr. Lim Por Yen was a shadow director, or alternatively a de facto director of the Company.

(x) Amongst the limited bank documents that have been preserved and disclosed in the present proceedings there is evidence that Lim was a shadow director and/or de facto director of the Company:

(a) The Internal Memorandum of Hang Seng Bank dated 5 March 2005 shows that Lim was and remained an authorized signatory of one of the Company’s Hang Seng Bank accounts even after he ceased to be a director of the Plaintiff, up until his passing away in 2005.

(b) In the internal memorandum of Hang Seng Bank dated 25 August 1992 concerning a Visa Gold Card application by the Plaintiff, the handwritten comments of the Hang Seng Bank staff show that Lim’s connection to the Company was the reason why the application was proposed to be approved.

(c) In the internal memorandum of Hang Seng Bank dated 25 September 1992 concerning a Visa Gold Card application by the Plaintiff, the handwritten comments of the Hang Seng Bank staff show that Lim’s connection to the Company was the reason why the application was proposed to be approved.

(d) The letter of comfort from Shanghai Commercial Bank dated 25 July 1992 confirms that Lim was a customer of the Bank and had often (“經常”) maintained a 9-figure bank account balance and, therefore, the bank believed Lim would be capable of supporting the Company with its development project at 41 Hengshan Road.

(e) The Questionnaire of Hang Seng Bank Limited dated 4 August 1992 which states that the opening of the Company’s account with Hang Seng Bank Limited was recommended or referred by Lai Sun Garment (International) Ltd, a company under Lim’s control as the introducer (介紹人).

(f) At the page marked “page 248” of the Time Deposit History Reports for the HSBC account no. 511-555393-003 covering the period from 31 January 2000 to 31 March 2005, it is stated “WARNING” … “LIM POR YEN DECD ON 180205”, showing that Lim was crucial to the Company account even though he did not personally operate the account.

(xi) In particular, given that the documents disclosed by the Banks include some which support the 1^st and 2^nd Defendants’ case, for example those pleaded at sub-paragraph (x) above, it can be reasonable inferred that where documents have been destroyed by the Banks due to the lapse of time, some such documents are ones that would have also supported the 1^st and 2^nd Defendants’ case. In the Schedule annexed hereto is a summary of the categories of documents (with reference to sub-paragraph (ii) above) which have or have not been disclosed by the Banks.

(xii)   The Company was would up by the Court on 10 September 2008, Messrs. Simon Blade and Bruno Arboit were appointed as joint and several liquidators on 29 April 2010, with Mr. Blade resigning as liquidator on 10 July 2013 and Mr. Arboit remaining as the sole liquidator since then. The liquidators failed to take steps to ensure that documents relevant to the proceedings and the liquidation of the Company were preserved or obtained. This is despite the fact that the joint liquidators wrote to the 1^st and 2^nd Defendants as far back as 22 June 2010 in relation to the subject transaction.”

12.  According to the Plaintiff, laches can only be established as a defence if it can be shown that (i) there was unreasonable delay in the commencement or prosecution of proceedings; and (ii) in all the circumstances, the consequences of delay render the grant of relief unjust (Spry: The Principles of Equitable Remedies (9^th ed) at para 233). Counsel highlighted the fact that the alleged delay must be excessive in that, in all the material circumstances, a reasonably assiduous person would have proceeded with substantially greater speed or diligence, and that the point of time as from which the reasonableness of delay is determined is the time at which the plaintiff came to know of the facts which had given rise to the ground of equitable intervention in question. Counsel also referred to the passage in Spry where the learned editors observed (at para 238):

“It is established by the course of authorities that proceedings for specific performance will not fail merely because the plaintiff has been guilty of unreasonable delay. In order that relief be refused, it is necessary that it should further appear that, as a consequence of that delay, it would be unjust that the plaintiff should obtain an order of specific performance.” (Emphasis added)

13.  Reference was made to Patel v Shah [2005] EWCA Civ 157, and the observations made by Mummery LJ (at para 33) that the establishment of laches would be “extremely rare” in a breach of trust scenario:

“In the case of an ordinary trust by way of gift to trustees for the benefit of the beneficiaries, where the beneficiary is not required or expected to do more than receive what has been given for his benefit, it will obviously be extremely rare for laches and delay on the part of the beneficiary to make it unconscionable for that beneficiary to assert his claim to the beneficial interest, or for the trustee to claim that he has been released from the equitable obligations that bind his conscience.”

14.  In relation to the Plaintiff’s primary objection, that there was no plea of unreasonable delay, or “why a reasonably assiduous person would have proceeded with substantially greater speed or diligence”, I accept the submissions made for the Defendants, that these are legal tests which do not have to be pleaded. What is required to be pleaded is the fact of delay and the facts supporting the claim of injustice caused.

15.  I also bear in mind the submission made for the Defendants, that resistance to an application for leave to amend is in effect “in the mirror image of a strike out”. Unless it is plain and obvious, that the pleading is unarguably bad, and it is impossible for the claim to succeed, such that the pleading should be struck out, the objective stated in Order 1A rule 2(2) RHC must be given effect. The primary aim in exercising the powers of the Court, including the power to allow pleadings to be amended, must be to secure the just resolution of disputes in accordance with the substantive rights of the parties. The aim is repeated in Order 20 rule 8(1) RHC, where the power of the Court to order an amendment is stated to be “for the purposes of determining the real question in controversy between the parties”. Unless there is prejudice which cannot be compensated in costs, the amendments should be allowed, rather than to shut a litigant out from trial.

16.  In essence, the objections made by the Plaintiff are that on the face of the pleadings sought to be made, any prejudice caused to the Defendants by the destruction of the bank documents cannot be seen to be a result of the Plaintiff’s alleged delay, but can only be seen to have been caused by the Defendants’ own delay in seeking the documents. The Plaintiff emphasized the fact that the Defendants only sought in November 2019 to plead that Lim was the shadow/de facto director of the Plaintiff, to which the destroyed bank documents are said to relate. The Plaintiff also asserted that the bank documents sought by the Defendant from the banks and which are now said to have been destroyed were not relevant to the Impugned Transaction, as the documents which related to the Impugned Transaction had already been preserved and disclosed by the Plaintiff. The Plaintiff claims that the Defendants had themselves refused to co-operate with the liquidator to obtain documents relating to the dispute. If the Defendants had not delayed making the claim of Lim being the shadow director, the Plaintiff argued that the relevance of the documents now sought would have been detected and the parties could have sought and obtained them from the banks before the expiry of the retention period. Accordingly, any prejudice complained of is the fault of the Defendants.

17.  Whilst it can be argued that the Plaintiff or the liquidator had preserved and produced documents which they claim related to the Impugned Transaction, it is open to the Defendants to seek from the banks production of documents to show that Lim had signed documents for, or relating to the accounts of the Company, after he had ceased to be a director of the Company, or had otherwise been acting as a controller or shadow director of the Company in its dealings with the bank. On the particulars sought to be pleaded in paragraph 10(5), the Defendants referred to documents obtained from the banks which referred to Lim, from which the Defendants claim an inference can reasonably be drawn that where documents had been destroyed by the banks due to lapse of time, some of such documents would also have supported the Defendants’ case that Lim was a shadow or de facto director of the Company.

18.  Whether the liquidator of the Company was at fault, or had delayed in seeking the preservation of the bank documents upon their appointment in 2010, are matters for argument at trial, rather than for debate at this stage of the amendment of the pleadings. I accept the submissions made for the Defendants that the plea of laches and delay was already made in the original Defence of June 2015, and that by the amendments made in October 2017, the Defendants already pleaded that Lim was in de facto control of the Plaintiff and the 3^rd Defendant. It was not only in November 2019, when the Defence was re-amended, that the claim of Lim being a shadow director or de facto director, was raised for the first time - as the Plaintiff alleged. In any event, whether the prejudice claimed by the Defendants was caused by the unreasonable delay of the Plaintiff, or by the delay of the Defendants themselves, is a matter for arguments to be made on the evidence produced at trial.

19.  I am not satisfied that the amendments sought to be made, to support the defence of laches, are unarguably bad, or that the claim is doomed to fail.

20.  As for the proposed amendment at paragraph 10(6), to plead the Defendants’ inability to make contact with witnesses as a result of the Plaintiff’s delay in the commencement of proceedings, the Plaintiff pointed out that on the face of the pleading at paragraph 10(6)(i), the accounting officer in question had ceased his employment with the Plaintiff in November 2001, and had subsequently moved to Korea. I accept the submissions made, that any inability to make contact with the witness was due to his having left employment as early as 2001, which was prior to Lim’s death in 2005, the winding up of the Company in 2008, and the closing of the bank accounts. Any prejudice cannot, on the face of the pleading, be said to have been caused by the delay in the commencement of proceedings by the liquidators, who were appointed in 2010. I disallow the proposed amendment, and agree with the Plaintiff that the amendment is not necessary either for disposing fairly of the cause or for saving costs.

21.  The proposed amendment to paragraph 10(6)(ii), relating to the Defendants’ inability to contact the auditors of HF, as a result of its dissolution in 2010, is disallowed for the same reason. The Defendants had been aware of the fact that the executor of Lim’s estate had commenced proceedings in 2006 against the Plaintiff (which was then still under the control of the Defendants), to set aside the Impugned Transaction as a fraudulent conveyance. The Defendants could, if they had so wished or considered necessary, have approached the auditors by 2006. Any prejudice caused by their inability to locate the auditors now cannot be seen to have been caused by any delay by the liquidator in the commencement of these proceedings.

Discovery summons

22.  The Defendants seek:

(1)  All correspondence between the liquidator and the former liquidator of the Company (“Liquidators”) on the one hand, and Vincent Cheung the former executor of Lim’s estate (“Former Executor”) and Peter Lam (the 2^nd Defendant’s brother) (“PL”) on the other hand, “in relation to these proceedings prior to its commencement”; and

(2)  All communications (including but not limited to emails, memos, notes and letters) in relation to the liquidation of the Plaintiff between the Liquidators and third parties in relation to the (a) preservation of documents; and (b) provision of documents to the Liquidators.

23.  The Defendants argued that the documents sought all relate to the liquidator’s delay in commencing these proceedings on 10 March 2015, over 5 years after the appointment of liquidators, and the delay in the liquidator’s preservation of documents. It is claimed that the discovery is relevant to the defence of laches, acquiescence and delay. On behalf of the Defendants, Counsel argued that after their appointment in April 2010, the Liquidators could easily have requested for and obtained from the banks all the relevant bank documents, including the account opening and operation documentation, which are all relevant not only to the Defendants’ claim that it was Lim who had controlled the Company, but also to the Impugned Transaction, bearing in mind the Plaintiff’s claim that payment had not even been made by the 3^rd Defendant to the Company for the transfer of the relevant assets.

24.  The Defendants also claimed that it is “highly likely” that the Liquidators, the Former Executor and PL had been in communication with each other “in respect of events leading up to the commencement of this action and in relation to the decision and timing of the decision to commence this action”. It was contended that the Former Executor and PL had been actively involved in the probate action in which the Defendants contest the validity of Lim’s will, and that numerous actions had been commenced by the Former Executor against the Defendants. Counsel for the Defendants also explained that the Liquidators had been nominated by the Former Executor, and that the Former Executor had invested substantial sums of money in paying for the Liquidators’ attempts to obtain judgment against the Defendants. It was argued that it was highly likely that PL had funded the Former Executor and the Liquidators, with the aim of exerting pressure on the Defendants to settle the probate action. The Defendants’ case is that given the likelihood that the Former Executor/PL had been funding the liquidator in these proceedings, and must have corresponded with the liquidator in relation to the action, the correspondence between the Liquidators and the Former Executor and PL “will shed light on why the Liquidator delayed commencing the action”.

25.  The categories of the documents sought are extremely wide, extending to firstly, “all correspondence” and “in relation to these proceedings prior to its commencement”; and secondly, “all communications in relation to the liquidation” and “in relation to the preservation and provision of documents”.

26.  The issues in dispute in this action are whether the Defendants were in breach of their directors’ duties, and (for the defence of laches) whether there was such delay on the part of the liquidator in the commencement of these proceedings as to have caused injustice to the Defendants, if relief was to be granted to the Plaintiff. Either there was delay on the facts and evidence, or there was no delay. In my judgment, documents establishing the motive of the liquidators in delaying the commencement of these proceedings are neither relevant, nor necessary either for disposing fairly of the cause or matter, or for saving costs. Discovery of these documents will only distract the Court and the parties from the main and real issues for determination at trial. If there was delay, but it can be justified, it is for the Plaintiff and the liquidator to do so. If there is no explanation proferred, then it is for the parties to argue whether there was excessive delay which would cause prejudice.

27.  As for the attempts made by the Liquidators to preserve and seek the production of documents, the matter for consideration in the defence of laches is either the Liquidators had been able to preserve and produce documents in this action, or they did not preserve or produce relevant documents, which caused the injustice complained of by the Defendants. The reason why the Liquidators had failed to preserve or produce documents is neither relevant nor necessary for determination of the issues in dispute at trial.

28.  Hence, I am not satisfied that the documents sought are necessary under Order 24 rule 8 RHC, and refuse to make the orders for  discovery.

Disposition

29.  Orders are made in terms of the summons for amendment, save that the amendment to paragraph 10(6) is disallowed. The costs of the summons are to be paid by the Plaintiff to the Defendants, with certificate for counsel.

30.  The summons for discovery is dismissed, with costs to the Plaintiff, with certificate for counsel.

31.  The above orders nisi shall be made absolute unless application for variation is made within 7 days from the date of handing down this Decision.