C.A. PACIFIC FINANCE LTD (In Liquidation) v. SIN MEI CHUN NADIA

HCA838/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.838 OF 1998

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J U D G M E N T

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1. The plaintiff issued a Writ and Statement of Claim against the defendant on 17 January 1998.  It claimed $3,342,777.03 being the amount due on the defendant’s margin trading account with the plaintiff as at 14 January 1998, plus interest.

2. At that time the plaintiff’s solicitors were Messrs Sin, Wong & Mui, who had issued demands for payment to the defendant on 15 and 16 January 1998.  On 7 February 1998 Messrs Ricky S.P. Ng & Co. filed a Notice to Act on behalf of the defendant, acknowledged and stated that she intended to defend.  The action then went to sleep for more than seven years, until 29 July 2005, when Messrs Heller Ehrman filed a Notice of Change of Solicitors and a Notice of Intention to Proceed.

3. Messrs Leo K.W. Lok & Co. were appointed as the defendant’s new solicitors.  On 18 August 2005 they took out a summons to strike out the Statement of Claim for want of prosecution and/or on the ground that the plaintiff’s claim was time-barred, and also on the grounds that there is no reasonable cause of action and/or it is scandalous, frivolous or vexatious and/or it is otherwise an abuse of process.  The summons was brought under Order 25 rule 1(4) and Order 18 rule 19 of the Rules of the High Court, section 4 of the Limitation Ordinance, and the inherent jurisdiction of the court.  It was heard by Master Levy on 13 December 2005, and she dismissed it.  Now the defendant appeals against that dismissal.

Background

4. The plaintiff is a private company incorporated in Hong Kong.  It is related to CAP Securities Ltd (in liquidation) (“CAP Securities”), which carried on the business of a stockbroker and was a registered investment dealer.  On or about 27 November 1997, the defendant opened a securities account with CAP Securities, and a securities finance account with the plaintiff.  The plaintiff claims that the defendant carried on margin trading with CAP Securities using funds, advances or credit provided by the plaintiff, until the plaintiff’s demands for payment were made on 15 and 16 January 1998.

5. Petitions for the winding-up of both CAP Securities and the plaintiff were filed on 20 January 1998.  The court ordered the winding-up of the plaintiff on 4 June 1998.  It appointed two partners of the accounting firm PricewaterhouseCoopers as the joint and several liquidators of both companies.  Mr John Dennis Roden of the same firm gives evidence on affirmation on the plaintiff’s behalf.  There is nothing to contradict what he says about the course of the liquidation thereafter and I take it to be true.

6. According to Mr Roden, the liquidations of CAP Securities and the plaintiff were large-scale and complex.  A major problem was that a shortfall existed between the available shares held by CAP Securities and the claims to shares of clients of CAP Securities to those shares.  A number of complex legal issues required resolution by the court, before any securities could be allocated.  In December 1998, Yuen J held that the clients had a proprietary interest in the securities acquired for them and that the securities were held by CAP Securities on trust for the individual beneficiaries.  Thereafter, an application was made to the court for tracing of the individual entitlements of the clients to the existing shares, and the court ruled on that application and made directions as to how the tracing and allocations were to be carried out.  The various applications to the court took until March 2003 when the last relevant decision was handed down.

7. On 30 June 2003, clients with claims to securities were sent a letter from the two companies setting out their allocation of securities, outstanding debt and other relevant information.  Clients were told that any outstanding debt including accrued interest must be paid within 120 days, failing which the allocated shares would be sold, and the plaintiff would seek recovery of any outstanding amounts due thereafter.  One such letter, Exhibit JDR-8, was sent to the defendant at the address she had given when she opened the account.  The appended allocation statement showed a balance due from the defendant of $5,058,192.87.  The liquidators then proceeded to sell off the allocated shares and in April 2004 they sent her a distribution statement purporting to show that she owed $5,189,408.41.  The defendant did not pay; she says that she had by then changed her address and did not receive either of these letters.

8. The plaintiff then, on 15 December 2004, issued proceedings against the defendant in HCA2846/2004.  It is their evidence that they did not know about the present action until, after service of the second action, the defendant notified them of it.  In any event the second action was discontinued.

9. After the defendant had taken out her summons, the plaintiff on 8 September 2005 amended its Statement of Claim.  Pursuant to an order dated 18 December 2005, the defendant has filed her Defence.  In brief, her case is that, although she opened an account with CAP Securities, she never commenced any dealings in or traded in the account, nor borrowed any money from the plaintiff.  Nor did she authorise anyone else to trade or borrow on her behalf.  She refused to sign an account mandate to authorise CAP Securities’ representative to trade on her behalf.  Some other person has wrongfully intermeddled with her account.

The plaintiff’s case for dismissal/striking out

10. The plaintiff’s primary case is prejudice arising from the delay.  She says that she did not operate the account, and wants documents from the liquidators to show who gave the instructions to trade, and without them, she cannot defend the case against her.  Further, she is prejudiced by being unable to call two witnesses to support her case, because one of them is dead and the other has disappeared.

11. It is also said that the claim became statute barred on 16 January 2004, and further that, in the absence of documents going with the account, the defendant will not be able to prove her counterclaim which arises from mutual dealings.  In fact at present no counterclaim is pleaded.

12. The plaintiff’s secondary case is based on mutual dealings.  In brief, it is said that because of these, section 35 of the Bankruptcy Ordinance, Cap.6 applies, so that the value of the stock at the date of the liquidation has to be set off.  The value of that stock makes the defendant a net creditor.  Various other ancillary matters are raised but I will deal with those below. 

Prejudice because of delay

13. Dismissal is a matter of discretion.  There is a plethora of case law, which is not always of assistance, because each case depends on its own facts.  The principles are set out in Allen v. Sir Alfred McAlpine& Sons Ltd [1968] 2 QB 229, as approved in Birkett v. James [1978] AC 297.  Per Lord Diplock at page 318 :

“The power … should be exercised only where the court is satisfied either (1) that the default has been intentional and contumelious, e.g. disobedience to a peremptory order of the court or conduct amounting to an abuse of the process of the court: or (2) (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 serious prejudice to the defendants …”

14. We are not dealing with intentional and contumelious default here, so far as I can see.  It appears that this action must have been overlooked, otherwise the liquidators would not have issued the second action.  There is no specific explanation from Mr Roden on this point.  Nor is there any evidence as to whether Messrs Sin, Wong & Mui advised the liquidators, once they took over, that the proceedings had been issued, or whether the solicitors acting for the liquidators at that stage took any steps to find out if there were any actions already raised by either company.  Presumably they did not.  In any event, there is no evidence of any conscious delay which might be regarded as abuse of process following Grovit v. Doctor [1997] 1 WLR 640.  But lack of knowledge, if that resulted from failure to make necessary inquiries, may be relevant to the question of culpability for the delay.

15. That there has been long delay is obvious.  Nothing happened until the second writ was issued, 6 years and 11 months after the cause of action arose; and of course that was out of time, under the Limitation Ordinance.

16. The first question is whether the delay was inordinate and inexcusable.  The plaintiff commenced the proceedings early, so there is no question of delay before issuing the writ.  Such delay is, following Burkitt v. James, not culpable.  All the delay came later.  But delay, post-writ and pre-limitation can be relied on in support of an application to strike out after the limitation period has expired; see Rath v. C.S.Lawrence & Partners [1991] 1 WLR 399 at 406 where Farquharson LJ said :

“Once a plaintiff has issued his writ and set the treadmill of litigation into motion, he is bound to observe the rules of the court.”

17. Mr Roden explains at some length the legal problems which the liquidators faced, and the various applications made to the High Court to deal with them.  These were, I think, inevitable.  The liquidators could not do anything until all the various objections had been considered by the court, and the final judgment given in March 2003.  Thereafter the liquidators sent out the allocation letters to the various clients, dealt with the claims and sold the remaining securities.  They had to do this in accordance with directions given by the court.  When they had done that, they sent the defendant their Client Distribution Statement on 30 April 2004, and demanded payment within 14 days.

18. No doubt the delay from 20 January 1998 to 30 April 2004 was inordinate, but it is difficult to see why it should be regarded as inexcusable.  There was nothing else the liquidators could do.  They were faced with various complex legal problems and they had to sort them out, under the supervision of the court.

19. Is the failure of the liquidators, or their solicitors, to discover the existence of the action culpable?  I have some difficulty with this.  It would no doubt have been easy enough to search the High Court register and find out what writs the plaintiff had issued.  However, once the provisional liquidators were appointed on 20 and 21 January 1998, the action was stayed and could only proceed with the leave of the court.  It is difficult to see how, given the problems with the court had to iron out concerning the claims, such leave would have been given.  So if there was a culpable failure to discover the action it is difficult to see that that would have made any real difference.  At the same time, it may be that if the liquidators had known of the action, they would have taken steps to identify documents in support of the claim.

20. I do not think the delay is to be regarded as inexcusable, but in case I am wrong I must consider the second limb; whether the delay gives rise to a substantial risk that it is not possible to have a fair trial, or is such as to cause serious prejudice to the defendant.  She relies on two grounds here, the absence of documents and the unavailability of witnesses.

21. As to the absence of documents, it seems from the 2^nd affirmation that the documents which concern her are recordings of telephone conversations, faxes, e-mails, authorisations or standing instructions.  She points to the lack of disclosure of any of those, bearing to come from herself; but presumably she also hopes that if such documents are disclosed, they will show that the trading instructions, which she denies making, came from someone else.

22. The action has not reached the discovery stage.  It is not known what documents, if any, will be disclosed.  If documents are disclosed, either they will show that the defendant ordered the transactions, in which case her defence will fail, or they will show that someone else did, in which case her defence will succeed, or they will be equivocal.  If they are equivocal, or if there are no documents at all, either way it will be a matter for the judge to decide.  I do not see that there cannot be a fair trial or that the defendant will be seriously prejudiced.

23. As to the witnesses, one dead and one missing, the plaintiff says that she was working closely with each of them for about six days between 9 a.m. and 6 p.m. daily, plus working on into the evenings, at different locations on the Mainland, while she was there from 8 to 20 December 1997, to supervise the setting up of factories there for her employer, the Magician Industries Group.  She worked with Mr Ge Guo Jun, who has since died in a road accident, at Hangzhou, and she worked with Mr Meng Gong Ming, who cannot now be traced, at Xian.  She says that these persons would have been able to confirm that she was too busy, and would not have been able to take the time to telephone, e-mail or otherwise place purchase orders for shares with a stockbroker.

24. I note from Exhibit JDR6 that 13 orders in respect of Billion International shares were placed on seven dates in the relevant period.  The witnesses could not possibly give evidence relevant to the other orders for Billion International shares, or to the orders for Magician Industries shares which were also traded.  It is difficult to see that their evidence would assist much, because in the nature of things, neither of them could be expected to have been watching the defendant, monitoring her calls and so on, throughout the whole of any working day.

25. It is also relevant that the defendant took no action to gather evidence herself.  She had legal advice.  Her solicitor, Mr Ng, says that she instructed him that she had neither traded nor borrowed money.  He knew that the police and the Securities and Futures Commission were investigating the collapse of the two companies.  He expected the investigation, and the action of the liquidators to wind up the affairs of the companies to take a long time, and he advised his client to await the turn of events.  He was expecting her to be interviewed by the police, and he could then have advised her on that.  He also waited to see if the plaintiff’s solicitors would be authorised by the liquidators to pursue the action, and then he would have taken further instructions, as well as statements from any relevant witness.  But neither the police nor the liquidators ever contacted the defendant.

26. I would have thought it prudent, if the defendant considered that her account had been put into debt through the action of some fraudsman, for her to complain to the police herself, rather than wait to be contacted, and to take some action to find evidence to support her defence.  The plaintiff relies on the case of Hymer v. MTRC & Ors [2000] 2 HKLRD 589 and in particular on the passage by Ribeiro JA at page 610 :

“Miss Eu argued that a defendant should not be regarded as under a duty to take ‘elaborate proofs from their potential witnesses’ upon first being told of an intended or freshly instituted action (per Harman J in Shearing v. Cinven Ltd (unrep.), The Times, 24 November 1997)).  I agree if the stress is on the word ‘elaborate’.  As soon as someone, particularly a professional person, is told that he is to be sued for negligence, it seems to me a matter of commonsense that he should use all reasonable diligence to review his position, to secure any evidence that may be relevant (by preserving documents and proofing witnesses) and to seek advice if necessary.  Such a defendant can reasonably be regarded as being just as aware as anyone else that time is likely to dim his recollection of the events in question and that witnesses may disperse and documents lost.  He can therefore be expected, particularly when considering the claim with his advisers, to record any relevant recollections at that stage and to take at least some basic steps to preserve relevant evidence.”

27. In that case the facts were totally different from the facts here, but the principle is surely the same.  What amounts to reasonable diligence will vary on the facts, but it seems to me that anyone who is sued must use reasonable diligence, at an early stage, to secure any evidence that may be relevant.  The defendant had just been in touch with the witnesses, the month before.  I do not think it would have taken much for her, or, better, her solicitor to have got some kind of proof from them.  I think she must now accept responsibility for not having taken any steps to set up her defence at an early stage.

28. As far as the witnesses are concerned, therefore, I do not consider that their absence means that the plaintiff cannot have a fair trial or is seriously prejudiced, but that if that is so, the plaintiff’s delay was not the cause of it.

Mutual dealings

29. As I understand it, the argument here is basically that when the account was closed off, the liquidator was fixed with the status of the account, because there were mutual dealings on the account.  Section 35 of the Bankruptcy Ordinance applies, and by section 264 of the Companies Ordinance the same rule applies to a company.  Therefore the valuation of the stock at the date of liquidation has to be set off.  As the proceedings had been issued, the shares were fungibles which were held as security for the margin and could be sold to reduce or extinguish the balance on the account.  The plaintiff held them on trust for the defendant.  The value of the shares so held would have made the defendant a net creditor on the set-off.  The claim is an abuse of process.  Further, the liquidators should have searched the court register and found the writ; their failure to do so has prejudiced the defendant.

30. I do not think it is necessary to go into the legal arguments.  There is no dispute that the provisions of section 35 are mandatory once the pre-requisites are satisfied.  It is however necessary to look at the figures.

31. According to Exhibit JDL-6, the defendant held 16,735,000 Billion International shares as at 19 January 1998 which was the date of the petition.  According to the Client Allocation Statement dated 30 June 2003, the total number of shares claimed at 19 January 1998 was 18,735,000 and the total number allocated was 14,394,212. 

32. There is now before the court the 2^nd affirmation of Mr Roden which exhibits historical searches of stock price information.  These show that the value of Billion International (later known as Northern International) Ltd common stock crashed from 51 cents to 8.4 cents per share on 12 January 1998.  Trading was suspended on 13 January.  Trading resumed on 2 February 1998 when the value was 0.61 cents.  It closed on 27 February 1998 at 0.92 cents.

33. Mr Bartlett, counsel for the plaintiff, has calculated that if the defendant was entitled to 18,735,000 shares with a value as at the date of commencement of the liquidation of 8.4 cents per share, her liability on set-off would still amount to $1,585,437.90.  If her entitlement was to 14,394,212 shares, her liability on set-off would be $1,950,064.10.  The defendant’s counterclaim would not extinguish the claim and there would be no abuse of process in continuing the action.

34. Mr Pirie, for the defendant, says that she should be entitled to the value of the shortfall of 4,340,788 shares at the date of the writ, i.e. $2,213,801.88.  That was what was ordered, but not bought by the brokerage so the plaintiff should reimburse that figure.

35. I do not see how this can work.  The last buy order on the account is dated 8 January 1998.  If it be assumed that CAP Securities had been instructed before that date to buy 4,340,788 shares on the plaintiff’s behalf, which of course she says it was not, and had bought them, their value would still have fallen before the date of the writ and before the liquidation petition.  What the plaintiff held on trust at the date of the writ would have been the total of the shares at the value they had at that date.  In any event, it seems to me, the counterclaim would not extinguish the claim.

36. In any event, the question of abuse of process would surely only arise, at best, if the plaintiff knew that the counterclaim would extinguish the claim.  In order to strike out, the claim must be found “incontestably bad”.  See Yue Xiu Finance Co. Ltd v. Dermot Agnew&Ors [1996] 1 HKLR 137 at 141.  Even if the plaintiff failed to take into account the possible set-off I do not see that that makes its claim incontestably bad.  Nor do I see that the such failure has made it impossible for a fair trial, or produced serious prejudice.  If there is a right of set-off to the extent shown on the figures above I do not see why it cannot now be taken into account.

Result

37. In the result the summons is dismissed with costs (nisi) to the plaintiff in any event.