CTO (HK) LTD v. LI MAN CHIU AND OTHERS

HCA5165/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5165 OF 2001

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D E C I S I O N

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1. The 1st defendant has applied for an amendment to the Defence and Counterclaim.

2. In this case, the plaintiff is claiming against the 1st to the 3rd defendant as constructive trustees in respect of misappropriation of the plaintiff's funds.

Background

3. With due deference to Madam Chu J, I shall adopt the background appearing in paragraph 2 to paragraph 6 of her reasons for decision in discharging the Mareva injunction obtained by the plaintiff against the three defendants.

"2. The plaintiff is a freight forwarder. The 1st defendant used to be its managing director. The 2nd defendant is his wife and is the former customer services manager of the plaintiff. The 1st and 2nd defendants each holds one of the two shares of $1 each in the 3rd defendant and are its directors. The 3rd defendant is a non-trading entity and functions as the designated exporter for one of the plaintiff's customers, Rustan Commercial Corporation ('Rustan').

3. In June 2001, the 1st and 2nd defendants resigned from the plaintiff following the discovery of certain misdeeds committed by the 1st defendant in respect of payments concerning Rustan. The matter was settled, and the 1st defendant executed a Deed of Undertaking dated 7 June 2001 ('the Deed') in favour of the plaintiff and paid approximately HK$1 million to the plaintiff. The 1st and 2nd defendants left the plaintiff's employment thereafter.

4. In September 2001, the plaintiff moved office. In the course of removal, a box of documents relating to the 3rd defendant was found. Investigations into the documents led the plaintiff to commence this action and to apply for the ex parte Order on 1 December 2001.

5. The plaintiff's complaints herein are twofold. Firstly, it says that the 1st defendant had caused the plaintiff to short-invoice Rustan and caused the 3rd defendant to invoice Rustan for the services not covered by the plaintiff's invoices. Secondly, it is said that the 1st defendant had caused the 3rd defendant to invoice and obtain payments from the plaintiff for expenses and charges that had not been incurred.

6. The plaintiff claims against all the defendants as constructive trustees and in money had and received. The relief sought include account and tracing remedies."

The defence

4. It is not in dispute that payment has been made by Rustan and by the plaintiff to the 3rd defendant. The defence was that those moneys were received pursuant to a joint venture agreement between Mr Uria on behalf of the plaintiff, and the 1st defendant on behalf of the 3rd defendant.

Amendments sought

5. The amendment sought falls into three categories. The first one is paragraph 11 of the Defence and Counterclaim. That relates to the illness of the 2nd defendant at the material time. It has been allowed on terms by consent and I shall not repeat the matter here.

6. The second matter relates to the knowledge and involvement of the 2nd defendant in the joint venture agreement between the plaintiff and the 3rd defendant. The 2nd defendant seeks to delete from paragraph 12 of the Defence and Counterclaim the pleading that she assisted in the carrying out of the joint venture agreement for both the plaintiff and the 3rd defendant, and to plead in various subsequent paragraphs that she had no knowledge or involvement in dealing with either the joint venture agreement or the Rustan account.

7. The third category of amendment relates to paragraph 39A. Paragraph 39A was concerned with denial of knowledge or involvement with the 3rd defendant, but in the last sentence it was pleaded that: "Further or in the alternative, if the alleged dishonest acts as pleaded in the statement of claim had been committed, which are not admitted, the 2nd defendant had reasonable ground to believe the said acts were authorized by the plaintiff." The particulars given were matters to the effect that all the alleged transactions have gone through the computer accounting system of the plaintiff and the plaintiff could have found out those discrepancies.

8. I shall first deal with the knowledge and involvement point. Mr Law, for the plaintiff, objected to the amendment on the basis that it amounted to withdrawal of admissions previously made: Firstly, in paragraph 12, it was pleaded that the 2nd defendant assisted in carrying out the joint venture for the plaintiff and the 3rd defendant. That is now sought to be deleted. Secondly, in Answers to Requests for Further and Better Particulars under paragraph 12, the 2nd defendant stated that she knew the existence and terms of the joint venture agreement, and she had carried out liaison work with customers, including Rustan.

9. Further, in the witness statement of the 2nd defendant, she said she knew about the joint venture agreement but she had little involvement with it. And also in the witness statement of the 1st defendant, it included a statement in the same terms of paragraph 12 of the defence and counterclaim. It was further pointed out that the 1st and 2nd defendants had verified the Defence and Counterclaim in an affirmation filed in opposing the Mareva injunction.

10. Mr Law submitted that the 2nd defendant is now saying that she has no knowledge or involvement, and she had never assisted the 1st defendant or the 3rd defendant in respect of Rustan. It amounted to withdrawing the admission.

11. Mr Law further submitted there has been absolutely no explanation as to why such a mistake of error was made in the pleadings. Mr Law referred me to the practice of the court in Tse Yuk-tim, administrator of the estate of Tse Yat-hung, deceased v. Chee Cheung Hing & Co. Ltd. [1984] HKLR 391, per Hunter J (as he then was) at p.395 E to G :

"Conversely it seems to me equally wrong to say that the court never allows a party second thoughts: never allows a fundamental change of direction even after conscious decision. My understanding of the practice is and always has been, that the court allows a party to withdraw an admission deliberately made or to resile from the conscious choice for good reason, and if good reason is shown. In particular, it expects the party to put before it a convincing credible explanation of the circumstances in which the admission was in fact made, which is sought to be said to have been made under a mistake. A typical sort of case is where a party is able to say 'Yes, when I said this, or when I admitted this, I believed that to be the case. I have now got some totally fresh evidence in my possession which if true suggests that it was not the case, and I want to advance that proposition'. In those circumstances the court, I think, can readily give leave to withdraw the admission and does so. Conversely if no credible or convincing explanation is given, that is a powerful factor in favour of the exercise of discretion against the application."

12. Miss Lau, for the defendants, did not argue against that there were inconsistencies or contradictions between the pleadings and what the 2nd defendant is now going to say, but she said that the 2nd defendant had said it all along in her previous witness statement. Hence, it did not really amount to withdrawing admissions. Further, even if it amounted to withdrawing admissions, the court should balance the prejudice to both parties.

13. Miss Lau has referred me to Re Chung Wong Kit (a bankrupt) [1999] 1 HKC 684 at p.688C to E, the judgment of Rogers JA (as he then was) :

"Mr Fitpatrick relying upon the authority of Tse Yuk Tin, administrator of the estate of Tse Yat Hung, deceased v Chee Cheung Hing & Co. Ltd. & Anor [1984] HKLR 391 argued that the respondents should not have been allowed to rely upon this affirmation as it constituted a withdrawal of an admissions which was made without proper explanation. This however is not a rule of law in itself but just an example of the proposition that a party should not be permitted to resile from an admission unless it was just to allow it to do so having regard to the interests of both sides. There are answers to the objection, it seems to me. The first is that as shown in another case to which Mr Fitzpatrick drew our attention (Gale v Superdrug Stores PLC [1996] 1 WLR 1089) in determining whether it is fair to allow the party to resile from an admission, it is not sufficient for the court to presume prejudice to the opposing party but it is necessary to balance the prejudice suffered by the admitting party if deprived of this right to resile against any prejudice which the other party has specifically established he will suffer if the admission is withdrawn."

14. Miss Lau referred me to the witness statements of the 2nd defendant where she said she had little knowledge about the joint venture transactions, and also to her affirmation filed on 6 December 2001 where she said she was a mere nominee director of the 1st defendant and took no active part in this transaction.

15. Miss Lau said the present application does not go much further than what has been before the court, and it was merely to correct an error in the pleadings. The error is so obvious that it is self-explanatory that there has been a mistake.

16. As to the paragraph 39A amendment, it is now alleged that the discrepancies or the short billing of Rustan by the plaintiff were discoverable from the plaintiff's own computer system prior to the year 2001. The particulars set out attributes of the account system in order to support the allegation of discoverability of the discrepancies.

17. So far, the plaintiff's case was on the basis that it had no knowledge of the discrepancy. It was not found out until after the 1st defendant had left the plaintiff's employment, a box belonging to the 1st defendant was accidentally found to have been left behind and it was discovered that the 3rd defendant had issued invoices to Rustan for the now alleged misappropriated amounts. The plaintiff formulated its case on information obtained from Rustan about the short billing.

18. Miss Lau, on the other hand, drew to my attention an affirmation of Tsang Hing Tai filed on 8 April 2002 where he said the auditor should have come into notice of the mismatch, i.e. the discrepancy.

19. Mr Law pointed out that discovery in the present case has been skimp. No joint venture agreement has been discovered, nor any joint venture account. The case went on without examination as to the accounting system of the plaintiff. If one were to allow the amendment now and to admit its particulars, it will open up an issue as to the examination of the plaintiff's accounting system and the trial has to be adjourned. The trial has been fixed on 1 April 2003.

Conclusion

20. Now I come to my conclusion on the matter. As to the amendment of lack of knowledge involvement and assistance of the 2nd defendant in the joint venture agreement, I find that it does amount to withdrawal of admissions because before the amendment there was an admission of knowledge of existence and terms of joint venture assistance. The witness statement was to the effect that there was little knowledge or little involvement in the transactions, but what is now sought to be put forward is there was no knowledge and no involvement whatsoever.

21. There has been no explanation. Miss Lau's submission that it is self-evidentiary, with respect, is untenable. The mistake itself is self-evidentiary, but not why it was made and repeated in pleadings and affirmation, which points to a conscious act on the part of the 2nd defendant.

22. Bearing in mind the trial date as well as the issues before me, it would be grossly unfair to allow that withdrawal, in particular, in the absence of a convincing, credible explanation of the circumstances in which the admissions were in fact made. I will not allow the amendment as to the assistance, knowledge and involvement point.

23. As to the amendment in paragraph 39A, although it was put as a rider or an alternative to the paragraph dealing with the 2nd defendant's knowledge, it is in fact prima facie relevant for the issue in dispute, i.e. the existence of the joint venture agreement.

24. Only last week when the parties came before me on a pre-trial review, the defendants had sought specific discovery as to the plaintiff's accounting system for the 6 years' period as to which the joint venture agreement was alleged to be in existence. Such application for specific discovery was withdrawn by the defendants in view of the plaintiff's intimation that it would seek an adjournment on costs.

25. Miss Lau, on the last occasion, stated that the defendants wanted the trial to go ahead on 1 April, and it would be harsh on the defendants to order them to pay costs, hence the withdrawal. Miss Lau is now maintaining the same application, but through the back door, and now she is still resisting an adjournment and payment of costs. She submitted that three weeks would be sufficient for the plaintiff, not in so much as making discovery, but to deal with all the matters which were the substance of the discovery application.

26. I also bear in mind that there has been no explanation as to delay of raising the matter, save that Miss Lau submitted that because the Mareva injunction was freezing the defendants' assets, it would be grossly unfair on the defendants.

27. I find that further discovery or at least going through all the documents of the 6 years' period would be necessary if those particulars under paragraph 39A were allowed and three weeks are surely insufficient. On the basis that an adjournment on costs would be resisted, hence this application, which comes in so late in the day without explanation, is refused.

28. Hence, apart from paragraph 11 of the draft amendment, all the other amendments are refused.