ASIA-PAC SECURITIES LTD v. MO CHUN WAI AND OTHERS

HCA 4863/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4863 OF 2002

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D E C I S I O N

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Applications

1. There are 5 applications before me:

(1)	The Summons filed on 7 April 2005 by the 1st Defendant for striking out the proceedings herein for want of prosecution and abuse of process.
(2)	The Summons of 14 April 2005 filed by the 2nd Defendant for a dismissal of the action on the same grounds.
(3)	The Time Summons filed on 24 August 2005 by the Plaintiff for leave to file and serve its Reply to the Defence of the 1st Defendant.
(4)	The Time Summons filed on 24 August 2005 by the Plaintiff for leave to file and serve its Reply to the Defence of the 2nd to 4th Defendants.
(5)	The Summons for Directions issued by the Plaintiff on 1 September 2005 asking for usual directions of discovery and so forth.

2. With the consensus from the parties, I adjourned the 2 Time Summonses as well as the Summons for Directions sine die with liberty to restore.  Costs thereof were reserved.  The parties therefore concentrated to deal with the Striking Out Applications.

Background

3. The Plaintiff was incorporated in about 1987.  It was and is a brokerage firm/a dealer and a member of the Stock Exchange of Hong Kong Limited.

4. The 1st Defendant and his wife were the founders of the Plaintiff.  They were the only shareholders and directors of the Plaintiff until about mid-1998.  The 1st Defendant was also at the material times the dealing director (“DD”) of the Plaintiff.

5. In about mid-1998, the 2nd Defendant, together with some other persons, joined the Plaintiff and became its shareholders.  He also acted as a director of the Plaintiff from 13 August 1997 to 20 March 1998.

6. On 30 January 1997 and 14 March 1997, the 3rd and 4th Defendant opened 2 margin accounts with the Plaintiff.  The Plaintiff said that the 3rd and 4th Defendants were and are at all times controlled by the 2nd Defendant by his directorship and shareholding therein.

7. At around 31 May 1998, the accounts of the 3rd and 4th Defendants suffered substantial loss in the respective sums of HK$13,342,546 and HK$4,763,046.

8. On 31 December 2002, the Plaintiff commenced the present proceedings against all the 3rd and 4th Defendants for the said sums.  The 2nd Defendant was also sued for the amounts under 2 bases: personal guarantee and/or lifting the corporate veil of the 3rd and 4th Defendants.

9. At the same time, the 1st Defendant was sued for the sums on the ground that he was breaching his duty of care owned to the Plaintiff as DD in the accounts of the 3rd and 4th Defendants.  Further, the Plaintiff also claimed the 1st Defendant for a separate sum of HK$520,796.35.

		Particulars	HK$
(a)	31/5/1997	overdrawn amount	373,960.86
(b)	30/7/1997	cheque drawn in favour of the 1st Defendant	16,940.49
(c)	6/97 to 5/98	rent/mesne profits and rates and management fees of Flat E, 30/F, Tung Shing Terrace 39 Bridges Street	129,895.00
			--------------------
			520,796.35

10. The 1st Defendant filed his Defence on 28 January 2003, and the 2nd to 4th Defendants did so on 18 February 2003.  On 29 April 2003, the Plaintiff filed its Answers to the 2nd to 4th Defendants’ Request for Further and Better Particulars of the Statement of Claim.

11. However, the action was then kept in abeyance for some 2 years until both the 1st and the 2nd Defendants took out their respective Summonses for Striking Out.  The substantive argument for these 2 Summonses were fixed to be heard before me on 2 September 2005.  Shortly before it, on 24 August 2005 and 1 September 2005, the Plaintiff issued 3 applications to seek directions as to future conduct of these proceedings.

Ruling

12. Having heard from Mr. A. Poon of Counsel for the Plaintiff, Ms. K.Y. Li of Solicitor for the 1st Defendant and Mr. B. Chain of Counsel for the 2nd Defendant, I reserved my decision to be handed down.  Upon consideration of all the evidence authorities and submissions from the parties, I have come to the conclusion that the applications for striking out are to be dismissed.  My reasons appear below.

Law

13. Mr. Poon had some arguments with Ms. Li over the applicable law relating to striking out.  I prefer the stance taken by Mr. Chain, i.e. the legal principles are well established and difficulty sometimes arises only in the application of the principle to the relevant facts.  For our purpose, I propose to set out the followings.

(a)	It is only in plain and obvious cases that the Court should exercise its summary powers to strike out.
(b)	The leading authority is Birkett v James [1978] A.C. 297 for the traditional approach.  For our purpose, the requirements are:
	“	…… (a) that there has been inordinate and inexcusable delay on the part of the plaintiff or his lawyers, and (b) that such delay will give rise to a substantial risk that it is not possible to have a fair trial of the issues in the action or is such as is likely to cause or to have caused serous prejudice to the defendants either as between themselves and the plaintiff or between each other or between them and a third party ……” (paragraph 25/L/4 at page 461, HKCP)
(c)	On the other hand, Grovit v Doctor [1997] 2 All ER 417 has identified a new approach.  Its allows the Court to be more readily strike out actions than heretobefore under the Birkett v James principles.  Lord Woolf said in at page 424 that:
	“	The courts exist to enable parties to have their disputes resolved.  To commence and to continue litigation which you have no intention to bring to conclusion can amount to an abuse of process.  Where this is the situation the party against whom the proceedings is brought is entitled to apply to have the action struck out and if justice so requires (which will frequently be the case) the courts will dismiss the action.  The evidence which was relied upon to establish the abuse of process may be the plaintiff’s inactivity.  The same evidence will then no doubt be capable of supporting an application to dismiss for want of prosecution.  However, if there is an abuse of process, it is not strictly necessary to establish want of prosecution under either of the limbs identified by Lord Diplock in Birkett v James.  In this case once the conclusion was reached that the reason for the delay was one which involved abusing the process of the court in maintaining proceedings when there was no intention of carrying the case to trial the court was entitled to dismiss the proceedings.”
(d)	Grovit v Doctor was considered in New China Hong Kong Group Ltd & Another v AIG Asian Infrastructure Fund LP & Others [2005] 1 HKLRD 3.  Both Woo V-P and Stone J. agreed that:
	“	(1)	As was decided in Grovit v Doctor, maintaining an action when there was no intention of carrying it to trial was an abuse of process which rendered the action liable to be struck-out.  This was a significant inroad into the principles on striking-out endorsed by Birkett v James in that the requirement to prove likely prejudice suffered by the defendant under the second limb had become unnecessary but might be regarded as an identification of a facet of abuse of process ……
		(2)	Another significant inroad on the Birkett v James principles was that the consequences of inordinate delay to other litigants and to the courts was an increasingly significant consideration ……
		(3)	However, mere delay, without more, would not amount to an abuse of process.  Disobedience of a  court order was capable of being regarded as contumelious conduct.  Where there was no disobedience of any court order, before inordinate and inexcusable delay in complete disregard of the rules of the court could properly be regarded as contumelious or abuse of process, there had to be full awareness of the consequences.  In addition, after being satisfied that the plaintiff’s conduct amounted to an abuse, the court still had to consider whether it was fair to strike-out the action ……” (page 384)
	Stone J. went further to remind us that:
	“	(11)	In striking-out applications of this nature, the court’s power to strike-out proceedings for wholesale disregard of procedural rule because it constituted an abuse of process should not be taken as a ready alternative to its power to strike-out for inordinate and inexcusable delay.  The abuse of process route was for cases of an exceptional nature where the conduct of the party in default amounted to an affront to the court and its rules.  The clear requirement for a significant further element within the factual equation, in addition to the inordinate and inexcusable delay, before such route could succeed, was likely to elevate the case in question to something sufficiently out of the ordinary so as to be “exceptional”.” (page 386)
(e)	After all, in the end, the Court retains an unfettered discretion to consider whether it is fair to strike out the action in the circumstances.

Birkett v James Approach

14. Bearing these principles in mind, I now turn to the application of these two approaches, one after the other, in the present case.

Inordinate and inexcusable delay?

15. Has there been inordinate and inexcusable delay on the part of the Plaintiff or its lawyers?  “Inordinate” means

“materially longer than the time usually regarded by the profession and Courts as an acceptable period (Birkett v. James, above).  It is easier to recognize than to define.” (paragraph 25/L/5 at page 461, HKCP 2004)

“Inexcusable” is to be:

“looked at primarily from the defendant’s point of view or, at least, objectively; some reasonable allowance, for illness and accidents may, be made.  But the best excuse is usually the agreement of the defendant or difficulties created by him.”  (paragraph 25/L/6 at page 461, HKCP 2004)

16. To sum up, Ms. Li and Mr. Chain complained that the delay was inordinate and inexcusable because:

(a)	It took almost five years for the Plaintiff to commence the proceedings.
(b)	The Plaintiff failed to issue the summons for directions for over 2 years from the close of pleadings in about March 2003.
(c)	Even facing with the applications for striking out, the Plaintiff still felt no proper sense of urgency and chose only to file the affirmation in opposition until the imposition of an unless order.
(d)	The affirmation in opposition is more telling on that it contained only the following:
	“	2.	My short answer is that the Plaintiff has been trying hard to locate the relevant witnesses and documents in order to support the Plaintiff’s claims as some of those witnesses were the Plaintiff’s former staff and they left no forwarding addresses when they departed.  Besides, a great deal of time has been spent on locating the relevant documents which were previously misplaced.  The delay in Court proceedings has not been deliberately caused by the Plaintiff.”  (Affirmation of Lam Lin Yin filed on 22 June 2005)

17. On the other hand, Mr. Poon argued otherwise.  In my view, the question can be resolved in the following ways.  As a matter of law, only delay after the issuance of the proceedings is irrelevant.  However, it is also true that the later the Plaintiff starts the action, the higher its duty to prosecute it with diligence.  So, I will bear in mind the some 5 years taken by the Plaintiff before the commencement of the present proceedings in assessing the conduct of the Plaintiff afterwards.  Further, it must be true that the explanation offered by the Plaintiff is far from satisfactory.  In short, objectively, it can never be denied that, the Plaintiff has not done anything for over 2 years after the filing of the Defences and the provision of certain particulars on its Statement of Claim.  The Plaintiff now apparently admits delay but attempts to explain that it has been busy.  However, as pointed out by Mr. Chain, the Plaintiff did not even see fit to inform us what efforts were made and the result hereof.  The Court is therefore left with a bare assertion.  In the circumstances, I agree that the delay is inordinate and inexcusable.

Prejudice

18.  Useful guidelines relating to the prejudice could be found in paragraph 25/L/7 Rules of High Court at 461:

“Prejudice to the defendant – This is a matter of fact and degree.  The effect of the lapse of time on the memory of witnesses or, in the course of such time of their death or disappearance are the most usual factors.  Their importance depends upon the circumstances, the issues and the other evidence that can be given.  Thus the lapse of time may be very prejudicial if the circumstances of an accident or oral contracts or representations are in issue, but is of much less importance in a heavy, well-documented commercial action.  Bald assertion of prejudice or of a substantial risk that a fair trial was not possible are insufficient.  There has to be some indication of prejudice, e.g. that no witness statement was taken at the time so that a particular witness who would have been called on a particular issue had no means of refreshing his memory or that a particular witness was of advanced age and no longer wished to give evidence or had become infirm or unavailable in the period of inordinate and unexcusable delay ……”

19. Ms. Li, for the 1st Defendant, argued that there were 7 items of prejudice:

“	(a)	No witness statements were taken from D1 or other potential witnesses.
	(b)	It is not difficult for the Court to infer after a period of over 7 years since 1998 that any witness would have difficulty recollecting events in any detail, or at all.
	(c)	Given such delay, and P’s inactivity, D1 has not compiled a list of prospective witnesses.
	(d)	The allegations of wrongful neglect of director’s duties, particularly, in dealing with securities accounts leading to loss of a substantial sum are serious and potentially damaging to D1’s reputations.  These have been hanging over D1’s head for over 2 years since action was instituted in 12/2002.
	(e)	P itself alluded to the damaging effect of the passage of time to P’s case; in Lam’s affirmation, he stated that P had difficulties in locating the former employee of P.  Even P’s own evidence suggests that P’s claim suffers from the effect of the passage of time.  There is no reason why D1’s defence will be immune from the damaging effect of time lapse; and
	(f)	As shown above, P’s claim is a speculative claim.  The lapse of time is more prejudicial to a defendant where the claim is speculative than to a defendant where the claim is particularized and well-formulated.  Nor of P’s claims against D1 are not particularized ……”

  (paragraph 19 of Ms. Li’s skeleton)

20. The 2nd Defendant deposed in paragraph 13 of his affirmation filed on 6 May 2005 that he has suffered from the following prejudice:

“	(a)	……, the alleged trading transactions took place from late 1997 to early 1998, that is to say some seven years ago and about five years before the commencement of this action.  It is unfair to ask me to cast back my mind and be cross-examined as to events which allegedly took place so many years ago and as to any surrounding circumstances that may be considered relevant to the issues.  Furthermore, in view of the lack of particulars of the Plaintiff’s allegations, no proofs of witnesses could have been taken and if the case is now allowed to proceed to trial, the memory of any witnesses to be called might turn out to be doubtful in view of the long lapse of time.
	(b)	I have been practicing as Certified Public Accountant since 1983 and am now practicing under the company name of Tai Kong CPA Limited (“Tai Kong”) …… The delay of the Plaintiff has not only caused great anxiety to me but has only seriously damaged my professional reputation and business interest.
	(c)	In July 2003, when Tai Kong applied for overdraft facilities for HK$1,000,000 from The Bank of China (Hong Kong) for general operation purposes, I was told by its manager Mr. Tsang that from credit checking, they discovered that there was a litigation against me (i.e. the proceedings herein) and Tai Kong’s application for overdraft facilities was rejected as a result.
	(d)	In November 2003, my overdraft facilities with The Hongkong and Shanghai Banking Corporation Ltd. was cancelled when it was due for renewal again for the reason of these proceedings which is pending against me ……
	(e)	In view of the above incidents, I verily believe that any further application by me or Tai Kong for banking facilities will not be favourably considered until after the disposal of these proceedings.
	(f)	In last summer, Mr. Samuel Wu, Group President and CEO of Autron Corporation Ltd. (“Autron”, a company listed in Singapore and Australia) approached me and requested me to act as Autron’s independent non-executive director because of my wealth of experience in the accounting field.  I had to turn down the request to avoid embarrassment in having to disclose these proceedings which is pending against me.”

21. Upon consideration of the alleged prejudice, I am not satisfied that they suffice for the test.  First, other than the Guarantee on the part of the 2nd Defendant, all the underlying transactions, including the opening and operation of the accounts of the 3rd and 4th Defendants should be documented.  It also applies to the separate sum of HK$520,796.35 incurred by the 1st Defendant.  Second, it is simply too general to make the complaints that no witness statements has been taken or that memory of the witness will fade out after years.  Although “potential” not necessarily “real” prejudice is good enough, bald assertion is insufficient.  Neither the 1st nor the 2nd Defendant has come up with specific instance or proof that a particular witness, which could have been assisted in 2004 or 2005, is no longer available now for whatever reasons.  Third, no causal link has been established by the Defendants.  It must be true that litigation “per se” will to a certain extent affect the life of the litigants involved.  The prejudice of the litigation is not enough, it must be “prejudice” caused by the “delay”.  Hence, though the 2nd Defendant could demonstrate certain specific examples, he still fails me because it has not been established that the litigation would have concluded within these few years. 

Grovit v Doctor Approach

22. The ratio decidendi of Grovit v Doctor (ibid) is that maintaining an action when there is no intention to carry it to trial is an abuse of process rendering the action liable to be struck out.  Upon the evidence before me, I do not consider that the 1st and 2nd Defendants have satisfied me with such burden.

(a)	The starting point is that the 3rd and 4th Defendants trade at a loss of HK$13,342,546 and HK$4,763,046.  It certainly has caused the Plaintiff to suffer.  However, these 2 Defendants are unlikely to be good for any payment.  The key question appears to be: could/should the 1st Defendant and/or the 2nd Defendant be liable?
(b)	I agree to accept that the background of the present proceedings is unique.  The 1st Defendant and his wife are founders of the Plaintiff and only directors/shareholders thereof for over 10 years.  At the material times, the 2nd Defendant was also a shareholder/director of the Plaintiff.  Probably, since the leaving of the 1st and 2nd Defendants from the Plaintiff and the change of personnel, the difficulties faced by the present management of the Plaintiff in conducting the litigation should not be under-estimated.
(c)	Despite the able arguments of Ms. Li and Mr. Chain, I cannot come to a conclusion that the Plaintiff does not intend to carry the proceedings herein to trial.  The Plaintiff probably cannot deny the “lateness” or “slowness” in its action, but it is definitely desirous of recovering the substantial amount of money.
(d)	I agree that the conduct of the Plaintiff looks bad because it always comply the court orders on the last minute after the imposition of an unless order.  However, it does not amount to a “wholesale disregard of the procedural rules”.
(e)	The Plaintiff has, albeit late, issued 3 summonses to put the matters in the right track.  Probably, the sleeping dog has been waken up and decided to prosecute its own case without further delay.

Discretion?

23. In light of my aforesaid ruling, I do not think I need step into the stage of exercising my discretion.  Nonetheless, in case that it is necessary for me to do so, I see no reason why this Court should not exercise its discretion in favour of the Plaintiff.

(a)	The Plaintiff suffered substantial loss.
(b)	There exists a very special relationship among the Defendants and the Plaintiff as aforesaid.
(c)	On or about 6 April 2001, the Securities and Futures Commission found the 1st Defendant having “impugned his fitness and properness” as a dealer and suspended his registration thereof for 7 weeks.
(d)	It is too early and premature to assess the merits of the parties’ case.  Further, even if it is true that the Plaintiff has only a weak case or an uphill battle to fight, it does not deserve a striking out of the whole action here, which will put an end to the claim because the limitation period has expired.

Costs

24. I do not have the benefit of hearing submissions on costs from the parties.  Although the 1st and 2nd Defendants have not been able to persuade me to strike out the action against them, I do not consider that the attempts are wholly unreasonable and unmeritorious at all.  I see fit that costs of the applications, including Certificate of Counsel for the hearing before me, if applicable, be costs in the cause.  I will make such an order nisi accordingly.