JAPAN LEASING (HONG KONG) LTD v. SHUN KAI FINANCE CO LTD AND OTHERS

HCA 2027/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2027 OF 2003

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J U D G M E N T

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1. This is an application by the plaintiff to strike out the defence of the 2nd and 3rd defendants on the grounds that it is scandalous, frivolous or vexatious, and/or it is otherwise an abuse of the process of the court.

2. The relevant background concerns two previous proceedings namely, HCMP 4359 of 1998 ("MP 4359") where Japan Leasing (Hong Kong) Limited ("Japan Leasing") was the plaintiff and Fully Well Investment Limited ("Fully Well") was the defendant and HCA 4215 of 2000 ("HCA 4215") where Shun Kai Finance Company Limited ("Shun Kai") was the plaintiff and Japan Leasing (in creditors' voluntary liquidation) was the defendant.

3. Japan Leasing's claim in this action is to recover vacant possession of the premises being Apartment 10A, 10th Floor, and car parking spaces nos. 29 and 30, Carport no.1, No.3 Stubbs Road (formerly known as No. 2 Shiu Fai Terrace) ("the Premises") together with damages, interest and costs.

4. The Premises were the subject matter of a legal charge dated 10 December 1992 ("the legal charge") whereby Fully Well charged to Japan Leasing the Premises as security for loans advanced or to be advanced by Japan Leasing to Fully Well.

5. Under the legal charge Fully Well covenanted and undertook, inter alia, that until the charge was discharged and satisfied it would not except with the prior consent in writing of Japan Leasing part with the use occupation or possession of the Premises or any part thereof in any manner whatsoever whether by way of letting license lending sharing assigning or other means whereby any person other than Fully Well obtains the use occupation or possession of the Premises or any part thereof irrespective of whether any rental or other consideration is given therefor (Clause 6(2)(d)).

6. It was also provided by Clause 11 (1) of the legal charge that if Fully Well should be in default or any event of default shall have occurred then it shall be lawful for Japan Leasing at any time thereafter without any consent on the part of Fully Well or of any person to enter into and upon the Premises or any part thereof and to hold possess and enjoy the same and to receive the rents and profits thereof without any lawful interruption or disturbance by Fully Well or any other person.

7. 3 loans were granted to Fully Well pursuant to the legal charge. Fully Well defaulted in repayments of the loans from Japan Leasing on 10 February 1998, 23 January 1998 and 13 February 1998 respectively, in respect of the 3 loans granted. A default or an event of default had occurred under the legal charge and Japan Leasing was entitled to exercise its powers under the legal charge, including the power to enter into possession.

8. The Premises are occupied by the 2nd defendant, Mr Wong Shun ("Mr Wong") and the 3rd defendant who is his wife. At all material times they were both directors and shareholders of Shun Kai. Shun Kai and Fully Well were at all material times associated companies and Mr Wong was the person in control of both companies.

9. In MP 4359 Japan Leasing sought to exercise its powers under the legal charge against Fully Well and sought an order for, inter alia, recovery of all the monies due to Japan Leasing and an order for vacant possession of the Premises.

10. In or about September 1999 Shun Kai applied to join in those proceedings as a party as it alleged that it was the tenant of the Premises pursuant to various alleged tenancies entered into between Fully Well and Shun Kai in January 1994 and renewed annually up to 1998 when the tenancy agreement dated 15 January 1998 was entered into. At the hearing before the Master on 9 October 1999 it was ordered, inter alia, that vacant possession of the Premises be given by Fully Well to Japan Leasing and that Japan Leasing do recover the outstanding amounts due under the legal charge with interest. The Master did not allow Shun Kai to be joined.

11. There was an appeal to Suffiad J who substituted the order for the delivery of "vacant possession" with one for "possession" of the Premises "without prejudice to the rights of any alleged tenants." Shun Kai was never joined as a party in MP 4359.

12. On 26 April 2000 Shun Kai commenced as plaintiff HCA 4215 against Japan Leasing seeking a declaration, inter alia, that Shun Kai was entitled to possession of the Premises to the exclusion of all others including Japan Leasing and any purported purchaser. On 28 April 2000 Japan Leasing sold the Premises by auction, subject to the alleged tenancy of Shun Tak. However, the purchaser did not complete the sale and the transaction fell through.

13. In June 2000 Japan Leasing applied to strike out Shun Kai's statement of claim in HCA 4215. The matter was determined by Deputy Judge Whaley on 16 October 2000 when he struck out Shun Kai's statement of claim and ordered costs against Shun Kai on an indemnity basis. There was an appeal lodged against the decision of the judge but that was dismissed by consent on 5 March 2001.

14. As pleaded at paragraph 11 of the statement of claim in this action, Japan Leasing denies the validity of any alleged tenancy granted by Fully Well to Shun Kai. Japan Leasing has never given any prior written consent to such tenancy as required by Clause 6(2)(d) of the legal charge. As Mr Wong and his wife are occupying the Premises and have refused to deliver up vacant possession the plaintiff brought these proceedings against Shun Kai, Mr Wong and his wife.

15. The plaintiff's application by summons is dated 19 September 2003. Shun Kai has been wound up in HCCW 1325 of 2002 on 5 November 2003. There was an appeal against the winding-up order but the appeal was dismissed in April 2004 for non-compliance with an order for security for costs.

16. The effect of the winding-up of Shun Kai is that the proceedings against it are stayed. Japan Leasing does not seek to proceed against Shun Kai in this application but proceeds only against Mr Wong and his wife.

17. Mr Swaine, for Mr Wong and his wife, submitted that they claim to be entitled to remain in occupation of the Premises under a tenancy in favour of Shun Kai dated 15 January 1994 which was renewed periodically, the last one dated 15 January 1998. They claim no other right to occupation. It was submitted that Japan Leasing's dispute with Shun Kai was determinative of the action and that as the action has been stayed against Shun Kai, the only proper course was to adjudicate the claim against Shun Kai which Japan Leasing can do by seeking leave from the Companies Court to proceed with this action against the wound-up Shun Kai. In the circumstances, it was submitted that the application should be dismissed or adjourned until leave is given by the Companies Court to proceed against Shun Kai.

18. There is no merit in this submission. Japan Leasing is entitled to pursue the application against any of the defendants that it chooses. Japan Leasing does not seek to proceed against Shun Kai. It is not bound to proceed against Shun Kai which has been wound-up.

19. The defence that has been filed and served is a defence on behalf of all 3 defendants. The defence was settled by another counsel, not Mr Swaine. The relevant paragraphs are paragraphs 10 to 14. These are set out as follows:

"10. Paragraph 11 of the Statement of Claim is denied. The Defendants aver that by reason of the matters pleaded below:

(1) Japan Leasing has consented to and/or acquiesced in the [tenancy];

(2) Further and/or alternatively, Japan Leasing is estopped from denying it has so consented and/or acquiesced.

11. In or about May, 2000 Shun Kai commenced [HCA 4215] against Japan Leasing ........in which declaratory relief was sought in respect of the [Premises] including, inter alia, the following relief:

(1) Shun Kai is entitled to possession of the [Premises] as therein pleaded to the exclusion of all others including Japan Leasing and any purported purchaser;

(2) Japan Leasing is unable in law to assign to any other party any better right to possession and/or to rent in respect of the [Premises].

12. Whilst [HCA 4215] was struck out on Japan Leasing's application by summons dated 30 June 2000 by Deputy Judge Whaley on 16 October 2000, the Learned Judge did so on the basis, inter alia, that the relief sought by Shun Kai was premature or that there was no live issue between Japan Leasing and Shun Kai in respect of the declaratory relief sought.

13. In the course of his Judgment, whether expressly or implicitly, Deputy Judge Whaley found and/or accepted as a matter of fact the following matters:

(1) Japan Leasing did not take any issue as to Shun Kai's right of occupation of the [Premises];

(2) Shun Kai, in the person of [Mr Wong] , has at all material times been and still is in occupation of the [Premises] and Japan Leasing has not sought to challenge Shun Kai's right to do so;

(3) The matters pleaded in subparagraphs (1) to (2) above took place after Japan Leasing took possession of the [Premises] in [MP 4359].

(4) The Defendants aver that the matters pleaded in paragraphs 11 to 13 above constituted consent and/or acquiescence on the part of Japan Leasing in respect of the [tenancy]. Further and/or alternatively, Japan Leasing is estopped from denying such consent and/or acquiescence."

20. It is beyond dispute that in MP 4359 Japan Leasing obtained an order for, inter alia, possession of the Premises by the order of Suffiad J of 4 January 2000. On appeal from the Master, Suffiad J substituted the order for "vacant possession" with an order for "possession" of the Premises "without prejudice to the rights of any alleged tenants".

21. In MP 4359 Japan Leasing never accepted the validity of the alleged tenancy of the Premises held by Shun Kai. There was no need for Japan Leasing to do so as by the order of Suffiad J it obtained only an order for "possession" instead of an order for "vacant possession" of the Premises. As the mortagee, Japan Leasing was entitled to the order for "possession" against the mortgagor who defaulted under the legal charge. Also, the order for possession was "without prejudice to the rights of any alleged tenants". As Deputy Judge Whaley found in HCA 4215, the significance of the amended order made by Suffiad J on appeal was obviously to protect the alleged rights of Shun Kai as alleged tenant of the Premises (page 3 J-K of his judgment).

22. Japan Leasing then sold the Premises by auction subject to any alleged tenancy. It was not selling the premises with "vacant possession". Japan Leasing still did not accept the validity of the alleged tenancy of the Premises held by Shun Kai. Again, there was no need for Japan Leasing to do so as it was not selling the property with "vacant possession".

23. On 26 April 2000 Shun Kai brought Action 4215 against Japan Leasing seeking declaratory relief including a declaration that "[Shun Kai] is entitled to possession of [the Premises] to the exclusion of all others including [Japan Leasing] and any purported purchaser". It is significant that Shun Kai was not seeking a declaration that the alleged tenancy was a valid tenancy. Not surprisingly, Deputy Judge Whaley struck out Shun Kai's statement of claim.

24. In his judgment at page 4 Deputy Judge Whaley said:

"In my view it is clear that there is not, and there was not, at the time the Writ was issued, any live issue between the parties as to [Shun Kai's] right to occupy the premises. There is, therefore, no basis for [Shun Kai] to seek the Declaration in question, nor jurisdiction in the court to grant it."

He held that the Court had no jurisdiction to grant the declaration sought as there was no live issue between the parties.

25. Apart from the question of jurisdiction, the judge also held that on the merits Shun Kai could not even arguably be entitled to the declaration sought. He said at page 5 of his judgment:

"In any event, quite apart from the jurisdictional point, [Shun Kai] could not, in my view, even arguably be entitled to the Declaration sought. If by "possession of the [Premises]" is meant the right to immediate occupation of the premises, this right is specifically preserved by the Order of Suffiad J on 4 January 2000 by the addition of the words "without prejudice to the rights of any alleged tenants", and it is completely otiose and indeed an abuse of process of the court for [Shun Kai] to now seek a Declaration to the same effect.

If, on the other hand, what is meant is possession in the full legal sense of the term, [Shun Kai] is clearly not entitled to such a declaration as against [Japan Leasing] since such possession was specifically granted to [Japan Leasing] by the Order of Suffiad J which granted to [Japan Leasing] (as mortgagee) possession of [the Premises] together with the exclusive right to the use and enjoyment of it, subject only to the rights of any alleged tenants in the [Premises]."

26. Thus both on the question of jurisdiction and on the merits the judge struck out the statement of claim in HCA 4215.

27. The plea at paragraph 13 of the defence in this action that the judge found and/or accepted as a matter of fact that Japan Leasing did not take any issue as the Shun Kai's right of occupation of the [Premises] is in my judgment unsustainable. The averment in paragraph 14 of the defence that the matters pleaded in paragraphs 11 to 13 of the defence constituted consent and/or acquiescence on the part of Japan Leasing in respect of the tenancy and that Japan Leasing is estopped from denying such consent and/or acquiescence are also unsustainable.

28. In my judgment the pleaded defence is unsustainable. In the course of his submissions to the Court, Mr Swaine did not seek to support the pleaded defence. He submitted that the Court should give leave to amend the defence. It seems to me that unless the Court gives leave to amend the defence as proposed by Mr Swaine, the defence ought to be struck out.

29. There are two proposed amendments to the defence. The first is contained in Mr Swaine's skeleton submissions dated 30 March 2004 as the proposed paragraph 17A. The second was a belated attempt to plead res judicata and/or issue estoppel and was only formulated in the course of Mr Swaine's submissions at the resumed hearing on 29 July 2004 as the proposed paragraph 14A. I shall deal with each of these in turn.

30. The proposed paragraph 17A is as follows:

"17A. Further or alternatively, the Plaintiff is estopped from asserting the matters pleaded in paragraph 11 of the Statement of Claim, by virtue of the following:

(i) Throughout negotiations which took place in or about November 1992, conducted between [Mr Wong] and Mr Ronald Leung ("Mr Leung") as sales director of and for the Plaintiff, which negotiations resulted in the financial arrangements of which the Legal Charge is part, the Plaintiff well knew that the [Premises] were and would continue to be occupied by [Mr Wong] and [his wife] and their family. In particular, Mr Leung had such knowledge personally, having inter alia visited the [Premises] on a number of occasions, once specifically to view it and the decorating work that was being done there at the time for [Mr Wong] and [his wife] and their family as their home, on which occasion he was accompanied by another senior member of the Plaintiff's staff.

(ii) During the same period, the Plaintiff produced an internal document relating to the [Premises], which stated inter alia that "The [Premises] will be occupied by [Mr Wong]", upon which the Defendants rely as an admission against interest.

(iii) The aforementioned tenancy agreement in favour of Shun Kai was entered into with the Plaintiff's express approval. In particular, shortly prior to the execution thereof on or about 15th January 1994, Mr Leung orally expressed to [Mr Wong] that the Plaintiff's position was that the said tenancy would improve Fully Well's income, since Fully Well would thereby earn rent from Shun Kai, and that this would be advantageous viz a viz its standing as a borrower from the Plaintiff.

(iv) All renewals of the said tenancy were supplied to the Plaintiff as part of its annual review, as were accounts showing Fully Well's rental earnings from the [Premises].

(v) By virtue of the above pleaded matters, the Plaintiff represented, prior to the Legal Charge being executed by Fully Well and thereafter, that ongoing occupation of the [Premises] by [Mr Wong] and [his wife] and their family was acceptable to it, and that ongoing tenancy of the [Premises] by Shun Kai was likewise acceptable to it, in reliance upon which representations, and not otherwise:

(a) Fully Well entered into the Legal Charge;

(b) Shun Kai and Fully Well entered into and periodically renewed the said tenancy; and

(c) [Mr Wong] and [his wife] continued to occupy the [Premises] as a family home."

31. Thus it is asserted that because of the above matters, Japan Leasing is estopped from asserting the matters pleaded at paragraph 11 of the statement of claim namely, that Japan Leasing denies the validity of the alleged tenancy and/or denies that the alleged tenancy is binding on Japan Leasing as mortgagee, and that Shun Kai has never given any prior written consent of any tenancy pursuant to clause 6 (2) (d) of the legal charge.

32. It is important to bear in mind that no such estoppel has been pleaded or relied on by Shun Kai, the alleged tenant. Although Mr Wong and his wife have been the occupiers of the Premises, they claim to be entitled to remain in occupation only under the alleged tenancy. They claim no other right to occupation. It was clearly stated in Mr Wong and his wife's solicitors' letter dated 29 November 2003 addressed to Japan Leasing solicitors that Mr Wong and his wife "are nominal parties in these proceedings as their defence is intertwined with that of [Shun Kai]."

33. Mr Swaine submitted that the underlying facts pleaded in the proposed paragraph 17A can be found in Mr Wong's affirmation made on 20 September 1999 in MP 4359. The representations allegedly made by Mr Ronald Leung are set out in that affirmation. It is, however, significant that Mr Wong's affirmation was made by him not in his personal capacity but as a director and with the authority of [Shun Kai]. It seems to me that any purported representations made by Mr Ronald Leung was to Mr Wong in his capacity as a director of Shun Kai. It is for Shun Kai to raise the alleged estoppel. Shun Kai has not done so. Mr Wong and his wife's defence relies entirely on the defence of Shun Kai. They do not have any rights of occupation independent of the rights of the alleged tenant Shun Kai. As Mr Ng rightly pointed out, there is no privity of estate between Japan Leasing and Mr Wong and his wife. In the absence of such a plea of estoppel by Shun Kai, it seems to me that Mr Wong and his wife are not entitled to independently rely on it.

34. I would also observe that Mr Wong and his wife being shareholders of Shun Kai do not have any rights as shareholder to the assets of Shun Kai. It is trite law that a shareholder has no rights to the assets of a company which belong to the company and not to the shareholders. On the assumption that the tenancy is an asset of Shun Kai, Mr Wong and his wife can lay no claim to the tenancy. Furthermore, the effect of the winding-up of Shun Kai is to divest Shun Kai of the beneficial interest in its property although the legal title remains in Shun Kai (para. 7.07 McPherson's Law of Company Liquidation 1st Edn).

35. It seems to me that leave should not be granted to Mr Wong and his wife to amend the defence to plead the proposed paragraph 17A.

36. The proposed paragraph 14A is as follows:

"14A. Further or alternatively, the Plaintiff is estopped by reason of res judicata and/or issue estoppel from litigating in these proceedings the allegations pleaded in paragraph 11 of the Statement of Claim, such issues being ones which were and/or ought to have been litigated in [Action 4215]"

37. There is no merit in the plea that the allegations in paragraph 11 of the statement of claim were litigated in Action 4215. It is plain that in that action the Court did not make any decision or finding on the validity of the alleged tenancy. It was not necessary for the Court to do so. Mr Ng in his submissions to Deputy Judge Whaley made it plain that the tenancy was an "alleged" tenancy and that is borne out in the transcript to which I was referred.

38. In the judgment of Deputy Judge Whaley the judge clearly said at page 6 L to O:

"Following the Order of Suffiad J, [Japan Leasing] is quite entitled to sell the [Premises], subject to [Shun Kai's] alleged rights of occupation as tenant. If in doing so [Japan Leasing] were to attempt to frustrate or diminish [Shun Kai's] alleged rights as tenant, the plaintiff would then have the opportunity to assert its rights, and the validity of the lease could then be fully investigated."

This makes it abundantly plain that there was no finding on the validity of the alleged tenancy. The judge himself referred to Shun Kai's "alleged rights as tenant" and that if Japan Leasing were to attempt to frustrate or diminish such alleged rights as tenant the validity of the tenancy could then be fully investigated.

39. Thus, the validity of the alleged tenancy was never determined in HCA 4215 and there is no merit in the plea that it was litigated on.

40. As to whether the validity of the alleged tenancy ought to have been litigated in HCA 4215, Mr Swaine relied on what is contained in 18/19/11 of the Hong Kong Civil Procedure 2004 where it is stated that:

"It may be an abuse of procedure to litigate matters which have, or could have, been decided in earlier proceedings. The basic rule is that, where a matter becomes the subject of adjudication, the court requires the parties to put forward their whole case and will not (except under special circumstances) permit them later to re-open matters which might have been brought forward as part of already concluded litigation (see Henderson v. Henderson (1843) 3 Hare 100,115 (Wigram V.C.); Yat Tung Co. v. Dao Heng Bank [1975] A.C. 581, at 590B-D (Lord Kilbrandon)"

41. Mr Swaine submitted that the validity of the tenancy was an issue which could have been decided in HCA 4215 and the matter is, therefore, res judicata and/or there is an issue estoppel.

42. Mr Ng referred me to another passage at 18/19/11 Hong Kong Civil Procedure 2004 where it is stated:

"But the basic rule must be applied with caution.............................................................

Thus, where a plaintiff brought a second action on matters which constituted a separate and distinct cause of action not going to the "root" of her original claim, the court refused to strike out the plaintiff's claim as an abuse (Tang Kin Wah v. Cheng Choy Kam Chee Connie [2002] 1 HKC 552, Suffiad J.)".

43. It must be remembered that Japan Leasing was the defendant in HCA 4215 and was defending the claim of Shun Kai for declaratory relief. Japan Leasing was not making any claim. Japan Leasing successfully applied to strike out the statement of claim.

44. The validity of the alleged tenancy was never an issue in those proceedings. It was not necessary for Japan Leasing to raise it as an issue and ask the Court to determine that as an issue. The validity of the alleged tenancy did not go to the root of the successful strike out application. As I have said, the Court proceeded on the basis that the tenancy was only an alleged tenancy and struck out the statement of claim. If Shun Kai had sought a declaration that the alleged tenancy was a valid tenancy then that would have been an issue to be determined in Action 4215. But Shun Kai made no such claim as that was not the declaration sought by Shun Kai. Deputy Judge Whaley struck out the statement of claim, dismissed the action and also awarded indemnity costs to Japan Leasing.

45. Mr Swaine relied on SCF Finance Co. Ltd v. Masri and another (No 3) (Masri, garnishee) [1987] 1 All E.R. 194. That case provides no assistance to Mr Wong and his wife. In that case the plaintiffs claimed a sum of money from the defendant and obtained a Mareva injunction pending trial. The assets made subject to the injunction included a dollar bank account in the name of the defendant's wife. She applied to set aside the injunction so far as it related to the dollar account on the ground that she, and not the defendant, was the beneficial owner. The sole issue raised by her application was the ownership of that account. When the wife's application on the merits came on for hearing she decided, without formally withdrawing it, not to proceed with the application. She stated through counsel that she did not concede the issue of ownership of the dollar account and expressly reserved that issue but acknowledged that the consequence of not proceeding would be that her application would be dismissed. The application was then dismissed. The plaintiffs having obtained judgment against the defendant applied for a garnishee order against the wife to attach the dollar account. It was held that an order dismissing proceedings, even where there had been no argument or evidence directed to the merits of the case, was capable of giving rise to an issue estoppel if the litigant had put forward a positive case as the basis for applying for the relief sought in the proceedings but at trial had declined to continue with the proceedings and had submitted to the order dismissing them. The fact that on the dismissal of the proceedings the litigant had expressly reserved the very issue that was to have been tried did not necessarily prevent the general rule of res judicata applying, namely, that it was an abuse of process to raise in subsequent proceedings an issue which could have been litigated in earlier proceedings. Accordingly, the res judicata rule applied, notwithstanding her reservation of the issue of ownership of the dollar account. The wife was prevented by issue estoppel from contending in the garnishee proceedings that the dollar account belonged to her and thus was not available for attachment. That case is clearly distinguishable and does not assist Mr Wong and his wife. There was clearly an issue estoppel in that case.

46. There is no merit in the plea that Japan Leasing is estopped by reason of res judicata and/or issue estoppel from denying the validity of the alleged tenancy.

47. It seems to me that leave should also not be granted to Mr Wong and his wife to amend the defence to plead the proposed paragraph 14A.

48. In my judgment the defence should be struck out. I make an order that the defence of the 2nd and 3rd defendants dated 15 July 2003 be struck out. I also give judgment for the plaintiff against the 2nd and 3rd defendants as claimed and that it be declared that the 2nd and 3rd defendants are trespassers of the Premises. I also order that they deliver up vacant possession of the Premises to the plaintiff. As the plaintiff is entitled to damages to be assessed I also give judgment to the plaintiff for damages against the 2nd and 3rd defendants to be assessed by a Master.

49. I also make an order nisi that the 2nd and 3rd defendants do pay the plaintiff its costs of the application and of the action such costs to be taxed if not agreed.