JOHNSON ELECTRIC INTERNATIONAL LTD v. BEL GLOBAL RESOURCES HOLDINGS LTD

CACV 36/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 36 OF 2013

(ON APPEAL FROM HCA NO. 1240 OF 2012)

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REASONS FOR JUDGMENT

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Hon Lam VP (giving the Reasons for Judgment of the Court):

1.  On 30 January 2013, To J [“the Judge”] granted summary judgment in favour of the Plaintiff in respect of its claim against the Defendant. The claim arose from a bond issued by the Defendant, initially in favour of a company called Elite Dragon Limited [“EDL”] as part of the consideration for the acquisition of the shares of another company called Honour Max Trading Limited. This acquisition was made for the purpose of acquiring the exclusive right to nickel resources in a mine at the District of Bunta in the Province of Sulawesi Tengah in Indonesia.

2.  The bond in question is one of those bonds which are referred to as the Tranche 2 Bonds.  It was issued on 6 May 2008 pursuant to the terms of the sale and purchase agreement [“the SPA”] of 18 September 2007 made between a subsidiary of the Defendant and EDL and another company called High Chance Investments Limited.  Clause 3.5(4) of the SPA provided:

“3.5 The provisions shall be applicable to the Tranche 2 Bonds, Tranche 3 Bonds, Tranche 4 Bonds and Tranche 5 Bonds to be issued following Completion:

…

(4) where the Final Quarterly Actual Output for the Relevant Quarter (as set out in the first column below) is not less than the respective Quarterly Target Output, the respective Post-Completion Tranche of Bonds applicable to that Relevant Quarter as set out in the second column below shall be issued to the Vendors (or their respective nominees) in accordance with Sub-clause (8):

	Relevant Quarter	Post-Completion Tranche
	Quarter 1	Tranche 2 Bonds
	Quarter 2	Tranche 3 Bonds
	Quarter 3	Tranche 4 Bonds
	Quarter 4	Tranche 5 Bonds

…” 

3.  Thus, the requisite condition must be fulfilled before EDL was entitled to have the bond issued, viz the actual output from the Mine in the quarter ending on 31 March 2008 had to reach at least 250,000 wet metric tonnes.  It is the defence case that the actual output did not reach that level and the purported evidence for such compliance (in the form of quarterly supply statement) was procured by fraud in that nickel ores from another mine were included to make up the supply to such level.  The principal perpetuator of the alleged fraud was Stephen Sy who controlled both the Defendant and EDL from early 2008 to early 2012.

4.  According to its terms, the bond was transferrable and on 29 September 2009, EDL assigned it to the Plaintiff to discharge a debt owed by another company of Stephen Sy to the Plaintiff’s holding company.

5.  The focus of this appeal is whether the Defendant has established a triable defence that the Plaintiff was implicated with the knowledge or notice of the fraud so that the Plaintiff took the bond subject to the equity of the Defendant to have the bond set aside.  The Defendant relied on evidence which had not been placed before the Judge to support its case and the Plaintiff objected to the admission of such evidence by reason of the rule in Ladd v Marshall.    

6.  For completeness, we mention that the Defendant also relied on the rule that an assignee takes an assignment of a chose in action subject to equity.  The Plaintiff contended that the rule was excluded in the present case by reason of the terms of the bond and the dealings between the Plaintiff and the Defendant after the assignment.  We do not find it necessary to decide the appeal by reference to the arguments in this respect.

7.  After hearing submissions from counsel, we allowed the appeal.  The judgment was set aside and unconditional leave to defend was given to the Defendant.  We now give reasons for our decision.

Admission of new evidence

8.  Though the “new” evidence had not been adduced before the Judge at the Order 14 hearing, the Judge had considered it in the subsequent application for stay of execution pending appeal.  Based on such evidence, the Judge granted a stay of the judgment on 18 March 2014.  In the context of the stay application, the Judge heard submissions on whether it is arguable that the conditions in Ladd v Marshall [1954] 1 WLR 1489 were met and whether the intended appeal had any prospect of success.  The Judge concluded in favour of the Defendant in these respects.

9.  Whilst we are not bound by the Judge’s decision on these issues and for our purposes, the admissibility question is not to be determined by reference to arguability on the satisfaction of Ladd v Marshall, we note the Judge’s observations on the difficulties faced by the Defendant at para 15 of his judgment on stay:

“15. This action was commenced in July 2012.  A special investigation committee was set up by the Defendant on 10 July 2012 to investigate the fraud committed by Stephen Sy.  Given the lapse of time on the one hand and the shortness of time between the application for summary judgment and the hearing on the other, the difficulties the Defendant faced could well be understood.  Furthermore, of the seven executive directors on the date on which the subject bond was issued, only two remained.  Stephen Sy, his son and his wife who are the key characters involved in this fraud were obviously uncooperative.  They left no documents after their departure from the Defendant.  The Defendant’s computer system also happened to be damaged at about the same time.  But for the late start in the investigation, I am satisfied that given the time constraint, the evidence could not have been obtained at the hearing of the Order 14 application with reasonable diligence.”

10.  Mr Joffe (appearing together with Mr Dawes for the Defendant in this appeal, but not below) submitted that there should be some flexibility in the application of Ladd v Marshall in the present case for two reasons:

(a) This is a case of fraud and once a prima facie case of fraud is made out, as long as the Defendant did not deliberately fail to raise the issue at trial and the other two conditions of Ladd v Marshall are satisfied, there would be miscarriage of justice if the new evidence were excluded.  He relied on Hamilton v Brodie Brittain Racing Ltd [1996] CLY 654; and

(b) For an appeal against a summary judgment, the standard of diligence required of a defendant preparing his case under pressure of time would not be as high as that required in the preparation of trial: Langdale v Danby [1982] 1 WLR 1123 at 1133D; Fortis Insurance Co (Asia) v Lam Hau Wah Inneo CACV 86 of 2010, 28 Oct 2010 at paras 18 and 19.

11.  Though Mr Burns SC (appearing together with Mr Ho for the Plaintiff) accepted that there is room for flexibility in appeals against summary judgment, he submitted that in the present instance the rule of Ladd v Marshall should be applied in its full vigour as there was ample time for the Defendant to put in evidence before the Order 14 hearing and the “new” evidence were within the knowledge (or at least should have been so) of Ms Pat Sze, the principal officer of the Defendant.

12.  In our judgment, there is no general exception to the rule of Ladd v Marshall in cases involving allegations of fraud, see Karaha Bodas Co v Persusahaan Pertambangan Minydak Dan Gas Bumi Negara [2007] 4 HKLRD 1002 at paras 148 to 153 where the relevant English authorities were examined.  At para 153, the following conclusion was reached:

“What can be derived from these cases is that when there is clear evidence of a judgment being obtained by fraud (in that conditions 2 and 3 of Ladd v Marshall are met), the court will apply condition 1 with flexibility to avoid any miscarriage of justice. An allegation of fraud per se is neither here nor there, much depends on the strength of the case as to fraud and its relevance.”

13.  In the context of an appeal from a first instance judgment granted under Order 14 (or Order 86), what was said by Lord Bridge in Langdale v Danby [1982] 1 WLR 1123 at p.1133 is still valid guidance notwithstanding the removal from Order 59 Rule 10(2) of the reference to cases “after trial or hearing of any cause or matter on the merits” at the second part of the sub-paragraph.  It is clear from that guidance that in general the rule of Ladd v Marshall is applicable to appeals from summary judgment and the Court of Appeal cannot admit fresh evidence in an Order 14 appeal without special grounds.  But some modifications are required and they were spelt out by Lord Bridge at p.1133 D to F:

“In the situation arising on an appeal to the Court of Appeal from a summary judgment, the application of these conditions and perhaps the conditions themselves will require some modification. It may well be that the standard of diligence required of a defendant preparing his case in opposition to a summons for summary judgment, especially if under pressure of time, will not be so high as that required in preparing for trial. The second and third conditions will no doubt be satisfied if the further evidence tendered is sufficient, according to the ordinary principles applied on applications for summary judgment, to raise a triable issue. But I can see no injustice at all in requiring a defendant to use such diligence as is reasonable in the circumstances to put before the judge on the hearing of the summons, albeit in summary form, all the evidence he relies on in defence, whereas it would be a great injustice to the plaintiff to allow the defendant to introduce for the first time on appeal evidence which was readily available at the hearing of the summons but was not produced.”

14.  This was the test applied in Fortis Insurance Co (Asia) v Lam Hau Wah Inneo CACV 86 of 2010, 28 Oct 2010 and it is the test which we respectfully adopt as the correct test to be applied in the present context.

15.  For reasons to be canvassed below in the discussion on arguable defence, we are satisfied that the “new” evidence put forward by the Defendant meet the second and third conditions of  Ladd v Marshall in Lord Bridge’s modified version.

16.  As regards the first condition, we agree with Mr Joffe.  In the special circumstances of the present case, namely the Defendant had been so handicapped by the difficulties facing it, we accept that the “new” evidence was not obtained and produced by the Defendant at the Order 14 hearing despite reasonable diligence within the time available.  We need not repeat the Judge’s observations in that regard which we have quoted above.

17.  Mr Joffe took us to the relevant evidence elaborating on the difficulties faced by the Defendant: Affirmation of Pat Sze at paras 162 and 169; Third Affirmation of Wong Wan Sing at paras 55 to 68.  Whilst Mr Burns was correct in pointing out that most of the evidence now relied upon was in the possession of the Defendant and could be said to be within the knowledge of Pat Sze, and that there were several months between the setting up of the Special Investigation Committee by the Defendant and the hearing of the Order 14 summons, and that the issue of lack of knowledge on the part of the Plaintiff had been flagged by it in its evidence, we do not think these pointed conclusively against the exercise of reasonable diligence by the Defendant.  The important issue is: should the Defendant have knowledge as to the significance of these information or documents which were accessible to it at the time of the Order 14 proceedings in light of the handicaps it suffered as mentioned above.  

18.  Ms Sze and Mr Wong explained how the discovery of some documents found at the work station of Ms Chong, the personal assistant of Sunny Sy after the Order 14 hearing led to a train of inquiry which unearthed records in the possession of the Defendant enabling it to put forward a case of knowledge against the Plaintiff: Affirmation of Pat Sze at paras 80, 104-132 and 169(f); Third Affirmation Wong Wan Sing at para 57.  The significance of these documents, as submitted by Mr Joffe, was that it was the first piece of the jigsaw which led to the other pieces to be found in order to build up a formidable picture.  This is a case where each piece of evidence, considered in isolation, is not enough directly or inferentially to establish a case of knowledge, but when they are considered collectively an arguable case emerged.

19.  We accept Mr Joffe’s submission that there was no reason why the Defendant should have searched the work station of Ms Chong or to examine the records of shareholdings and conversion notices prior to the Order 14 hearing.

20.  In the circumstances, even though some of the information is indeed within the knowledge of Pat Sze and the possession of the Defendant, in view of the scale of the operation of the Defendant and the difficulties it faced at the time the Order 14 application was made, we do not find it surprising that no effort had been made by the Defendant to produce the documents now put forward as “new evidence”.  Based on what it had uncovered at that stage, the Defendant did not have enough bases to raise a case of knowledge on the part of the Plaintiff.  Ergo, it also explains why there was no affirmation from Pat Sze for the purpose of the Order 14 hearing below.

21.  We are satisfied that on the special circumstances in this case, the “new evidence” should be admitted as evidence for the purpose of this appeal in accordance with the modified Ladd v Marshall test of Lord Bridge. 

Arguable defence

22.  At this stage, the Defendant only needs to show a believeable defence and the court should not embark on a mini-trial on the affirmation evidence.  Mr Burns characterised the Defendant’s case on the Plaintiff’s knowledge by reference to the famous passage from the judgment of Megarry V-C in Lady Anne Tennant v Associated Newspaper Group Ltd. [1979] FSR 298:

“A desire to investigate alleged obscurities and a hope that something will turn up on the investigation cannot, separately or together, amount to sufficient reason for refusing to enter judgment for the plaintiff. You do not get leave to defend by putting forward a case that is all surmise and Micawberism.”

23.  Is the defence case on knowledge mere surmise or speculations? As in most cases involving the proof of knowledge on the part of a party, there is no direct evidence in the present case showing that the Plaintiff was aware of the procurement by Stephen Sy for the bond to be issued by false statement.  Mr Joffe accepted that he is relying on circumstantial evidence.  In order words, it is ultimately a matter of inference.

24.  At the Order 14 stage, the court must bear in mind that the Defendant has not yet had the opportunity to conduct discovery against the Plaintiff and the evidence of the Plaintiff that the transactions relied upon were simply ordinary commercial transactions have not yet been tested by cross-examination.  The court should not attempt to determine whether an inference should be drawn.  What it should focus on is to ask itself whether the evidence now put forward by the Defendant raises a sufficiently credible foundation on which the inference of knowledge may (not must) be drawn at the trial.  Without in any way pre-empting what a judge may find after trial, we are of the view that the answer is affirmative.   

25.  Given our decision, the case will have to proceed to trial and we should not say more than what is necessary to explain our decision in granting unconditional leave to defend.  Instead of going into the details, we are content with saying that the “new evidence” of the Defendant does put forward a credible foundation for a plausible inference of knowledge by reason of the close association and dealings between the senior management of the Plaintiff (including Patrick Wang, Bernard Chu, Paul Yue and Philip Cheung) and Stephen Sy and the roles played by the various associated companies of the Plaintiff in financing the shipments of nickel ores both before and after the SPA.  The relevant transactions included the two problematic shipments which the Defendant relied upon to vitiate the bond, the issue of the Tranche 1 bonds to these people and the subsequent conversion of their bonds to substantial shareholdings in the Defendant.  Broadly speaking, subject to our observations at 24 above, we agree with what was said by the Judge in this regard at paras 17 to 26 in his judgment of 18 March 2014.

26.  Mr Burns submitted that these transactions occurred well before the assignment of the bond to the Plaintiff and it is inherently improbable that the Plaintiff would take up the assignment (for good consideration in terms of the settlement of the debt due to its holding company) if it had knowledge of the irregularity committed by Stephen Sy.

27.  As we said earlier, at this stage the court should not decide whether the inference of knowledge is to be drawn.  That is a matter for the trial judge.  And no doubt Mr Burns’ submission on inherent improbability (as with his other submissions) will have to be taken into account.  What we do say at this stage is that Mr Burns’ submissions failed to persuade us that the Defendant has not established a credible foundation for its case on knowledge and this is sufficient for the discharge of its burden in the Order 14 context.

28.  We are satisfied that conditions 2 and 3 of the modified Ladd v Marshall test of Lord Bridge are fulfilled and taking such evidence into account unconditional leave should be given to the Defendant.