WONG LUEN HANG AND ANOTHER v. CHAN YUK LUNG AND OTHERS

HCA 2654/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2654 OF 2007

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REASONS   FOR  DECISION

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1.  The 1^st and 2^nd Plaintiffs took out the summons dated 21 May 2008 for an order that:

(1)     Paras. 8, 9, 10 and 11 and 34 (except the first sentence that “Paragraph 13 [of the Statement of Claim] is denied”) of the Defence of the 1^st and 2^nd Defendant (“the Defendants”) be struck out on the grounds of:

(a)    scandalous, frivolous or vexatious;

(b)   prejudicing the fair trial of the action.

(2)     The Counterclaim of the 3^rd Defendant (“the Company”) be struck on the grounds of:

(a)    not disclosing a reasonable cause of action;

(b)   frivolous or vexatious;

(c)   abuse of the process of the Court;

(d)   that ought to be a separate action.

2.  The Company was brought in as nominal defendant in a derivative action by the Plaintiffs.  Since the issue of the summons, the Counterclaim was discontinued, but the relevant claims were resurrected in HCA 1322/2008 by the Company against the Plaintiffs.

3.  At the hearing, I ordered the impugned paragraphs of the Defence be struck out, and stated for the avoidance of doubt that the costs on the Counterclaim be reckoned up to the time of discontinuance, which included that part of the summons relating to the Counterclaim.

4.  I now give my reasons.

Background

5.  The Plaintiffs and the Defendants are the shareholders of the Company, each holding 25%.  The Defendants are directors in control of the Company.  Prior to 25 March 2006, the 2^nd Plaintiff was also a director of the Company, but had since been removed by the Defendants.

6.  The Plaintiffs brought the derivative action for and on behalf of the Company against the Defendants for breach of fiduciary duties and damages of over HK$2.3 million.  The Plaintiffs alleged that the Defendants had entered into a sham arrangement with Amax Inc, an US customer of the Company, for set-off of the invoiced price of over HK$2.3 million due to the Company against sums purportedly due to Amax for defective goods.  The Plaintiffs alleged there were no defective goods and the set-off was a sham.

7.  The Defendants filed the Defence that Amax had claimed against the Company for defective goods of over HK$2.7 million, and the 2^nd Plaintiff, who was previously in control of the Company, agreed to the set-off without the consent and knowledge of the Defendants.  The Defence also alleged separate breach of fiduciary duties and dishonest misappropriation (paras. 8 to 11) and failure to keep the register of assets by the 2^nd Plaintiff (para. 34).

8.  The Company filed a Counterclaim against the Plaintiffs, repeating the allegations of misappropriation and misconduct, claiming an account and payment up.  It also alleged wrongful retention of chattels by the 1^st Plaintiff, claiming delivery up or payment of over HK$1.5 million or damages.

9.  The Counterclaim was discontinued and the Plaintiffs are automatically entitled to costs under the rules.  There is no real argument on the Counterclaim at the hearing, and parties are content that the costs on the discontinuance be reckoned up to the time of the discontinuance.

Plaintiff’s case

10.  Mr. Tang, for the Plaintiffs, submitted that the impugned paragraphs of the Defence alleging misappropriation do not amount to any defence without any corresponding counterclaim, nor are necessary in the determination of the issues, and ought to be struck out as irrelevant and scandalous.  Even if they were marginally relevant as background, they were excessive in details and embarrassing in having to be pleaded to.

Defendant’s case

11.  Mr. Cheung, for the Defendant, submitted that the allegations of misappropriation (paras. 8 to 11) were set out as background in response to the allegation in the Statement of Claim that the 2^nd Plaintiff was removed from the board of the Company.  The allegations on the failure to keep the register of assets (para. 34) merely set out details of the correspondence referred to in para. 13 of the Statement of Claim.

12.  The Counterclaim was discontinued and fresh action commenced at the same time to avoid any unnecessary argument as to the propriety of a counterclaim by brought by a nominal defendant.  In any event, it is the intention of the Defendants to apply for the consolidation of the present action with HCA 1322/2008, and the same divers matters will be ventilated before the same judge trying the two causes.

Relevant principles

13.  The Court has a general jurisdiction to expunge scandalous matters in any record or proceedings.  Allegations of dishonesty, immorality and outrageous conduct are not scandalous if relevant or necessary to any issue in the action.  But if they are irrelevant or are for the sole purpose of abusing or prejudicing the other party, or if though relevant, unnecessary details are given, the pleading becomes scandalous and liable to be struck out (see Hong Kong Civil Practice 2008, Vol. 1, para. 18/19/7, citing Christie v Christie (1873) LR 8 Ch App 499; Blake v Albion Assurance Society (1876) 45 LJCP 663; and Brooking v Maudslay (1886) 55 LT 343).

14.  The mere fact that an opponent’s pleading contains some unnecessary matter is not sufficient ground for an application to strike out as tending to prejudice, embarrass or delay the fair trial of the action.  A statement will not be struck out merely because it is unnecessary, so long as it is otherwise harmless.  A pleading will not be struck out unless it is clear on the face of the allegations that they are irrelevant.  It is no duty of a party to reform the opponent’s pleading, but if wholly irrelevant matter be set out in such a way that the applicant must plead to it, and so raise irrelevant issues which may involve expense, trouble, and delay, then the irrelevant matter will be struck out, as it will prejudice the fair trial of the action (see Hong Kong Civil Practice 2008, Vol. 1, para. 18/19/9).

Discussion

15.  I see much sense in the eventual consolidation of the 2 actions, as the determination of the cases involve the calling of the same witnesses, and it is just and convenient that their credibility be assessed by the same tribunal to avoid multiplicity of suits and possible conflicting findings.  However, this is merely one consideration.  The 2 actions are under the reigns of different camps, and they are in their early stages of proceedings, without any indication as to synchronization of the pace of prosecution.

16.  In Christie v Christie, the plaintiff brought a passing off action against the defendant, and the bill also pleaded bankruptcy and charge of fraud before the magistrate of the defendant, on the ground that they tend to prove fraud.  The allegations were held scandalous and expunged.  Lord Selbourne LC held that the matter was irrelevant unless it tended to prove the fraud alleged by the bill.  Mellish LJ held that evidence tending to prove bad character is not admissible to show propensity. 

17.  In Blake v Albion, the plaintiff took out a life policy for the amount of the intended loan for the benefit of the lender but the loan was not made.  He sued the insurer to cancel the policy alleging conspiracy between the insurer and the intended lender to defraud him into taking out the policy.  He also alleged that the defendant was not a bona fide company but carried on such fraudulent business regularly.  The pleading was struck out as irrelevant.  Lord Coleridge CJ held that the fraudulent course of business was neither necessary nor sufficient to prove the claim.  Brett J held that the allegations were utmost mere evidence.  The rule is that facts which must be proved in order to substantiate a cause of action or defence may be stated in pleading, and also facts which may themselves be both facts to be proved, and are evidence of other facts.  There being evidence of the other facts cannot prevent them from being stated if they themselves are facts to be proved.  But where the facts are only evidence of the facts which must be proved in order to substantiate the cause of action, or for the defence, they are mere evidence, and cannot be pleaded.  They may be facts which upon cross-examination of the party or their witnesses might be brought out, but only upon cross-examination and in order to damage their credit.  They are not facts which the plaintiff would be entitled to prove.

18.  In Brooking v Maudslay, the plaintiff made allegations in his statement of claim of dishonest conduct against the defendant, but he stated in his reply that he sought no relief on that ground.  The allegations thus became immaterial, and were struck out as scandalous and embarrassing.

19.  Mr. Cheung submitted that acts of misappropriation (paras. 8 to 11) were pleaded in response to the pleading that the 2^nd Plaintiff was excluded from the management of the Company.  At any rate, they are relevant as background, and they are transaction between the parties and the present case is distinguishable from the cases cited. 

20.  The allegation of failure to keep the register of assets (para. 34) was taken from the contents of the correspondence referred to in para. 13 of the Statement of Claim where the Plaintiffs alleged that the Defendants failed to mention in their correspondence any unauthorized set-off or waiver between the 2^nd Plaintiff and Amax when they listed out other misconduct of the 2^nd Plaintiff.  The Defendants had denied the allegation of lack of communication, and the reference to the contents of the correspondence gave particulars to a bare denial.

21.  Mr. Tang submitted that the pleading of deprivation of management and control per se is sufficient to support a derivative action, and the right or wrongfulness of which is not relevant save in the context of a petition for winding up for unfair prejudice.  The issues in this case are: (1) whether the debts to Amax were bona fide; (2) whether the arrangement for set-off was bona fide.  Whether the 2^nd Plaintiff had dishonestly misappropriated the funds or failed to keep the register of assets of the Company would not resolve those issues.  Matters going to mere credit are not relevant matter to be pleaded.  In any case, the details are wholly excessive and any reply thereto would entail unnecessary expense and costs, and duplication of the efforts in HCA 1322/2008.

22.  As to the register of assets, the Plaintiff’s pleadings was on the lack of mention of any set-off or waiver in the Defendant’s correspondence.  Any reasonable and relevant response would be an indication of such mention in those correspondence or elsewhere, if any.  It is not relevant to refer to other matters mentioned in the correspondence. 

23.  I agree with Mr. Tang: the allegations of separate misconduct by the 2^nd Plaintiff are irrelevant, or excessive and embarrassing even as background.  I failed to see how the Defendants could prove rebut lack of mention of waiver in correspondence by referring to different subject matters therein.  The Plaintiffs may be cross-examined on the alleged misconduct, but they are not matters the Defendants are entitled to prove in order to succeed.  Granted those matters might become relevant in a consolidated trial, but it is premature to predict the progress of HCA 1322/2008, and good case management must guard against intentional or unwitting delay by inaction and/or prolixity in HCA 1322/2008. 

Conclusion

24.  The impugned paragraphs in the Defence were struck out.

Costs

25.  I ordered that the Plaintiffs be entitled to the costs of the summons on striking out part of the Defence, to be taxed if not agreed.

26.  For the avoidance of doubt, the Plaintiff’s entitlement to costs of the summons on striking out the Counterclaim be limited to the time of discontinuance.  The hearing on this summons related only to the striking out of the Defence.

27.  Lastly, I thank counsel for their helpful submissions.