HARVEST INDUSTRIAL (HK) CO LTD v. NG NG YEUNG AND ANOTHER

DCCJ 175/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 175 OF 2010

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Reasons for Decision

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1.  These are my reasons for decision.

Application

2.  This is the 1^st Defendant’s application to strike out the statement of claim on three limbs: no reasonable cause of action; frivolous and vexatious; and abuse of process.

3.  If I may begin with the first limb, no reasonable cause of action.  The 1^st Defendant submitted that if the 1^st Defendant is to be held liable by lifting the corporate veil of the 2^nd Defendant, there must be evidence that the 1^st Defendant benefited from the wrongful acts.  However, Counsel for the 1^st Defendant failed to provide any legal authorities to suggest the said legal proposition, especially there must be someone benefit from the wrongful acts.  However, I am of the view that one must not ignore the concept of alter ego.  Alter ego is a concept within the branch of the law of lifting the corporate veil, so if I may briefly cover this point. 

The law on lifting the corporate veil

4.  Paragraph 9C of Gore-Browne on Companies which states as follows:

“It would seem that the veil of incorporation will only be pierced or circumvented by the UK courts so as to treat the rights and liabilities of a company and its parent (or indeed any members) as one for any purpose in just three circumstances:

(1) where the construction of a statute, contract or other document requires such an approach;

(2) where the company is a mere façade for some fraud or improper purpose;

(3) where the company is an authorized agent of its parent or other members.”

5.  In Jones v Lipman [1962] 1 WLR 832, it is expounded that the company is to be used as the alter ego of the defendant when in that case the company was described as “a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eyes of equity.”

6.  Some other decisions also discussed on lifting the corporate veil:

(a) Salomon v A. Salomon and Co. Ltd [1897] AC 22;

(b) Ord v Belhaven Pubs [1998] BCC 607; and

(c) Adams v Cape Industries plc [1990] Ch 433

7.  One common thread which has run through all the cases in which the courts have seen fit to lift or pierce the corporate veil is that there must be some impropriety, wrongdoing, concealment, sham or fraud involved.

8.  This can readily be seen in the words of Hobhouse LJ in the case of Ord v Belhaven Pubs when he said at page 615:

“On the question of lifting the corporate veil, the Court of Appeal in Adams v Cape Industries plc [1990] BCLC 479 at 519-520, [1990] Ch 433 at 544 expressed themselves similarly, but it is clear that they were of the view that there must be some impropriety before the corporate veil can be pierced.”

9.  Indeed, it was due to the lack of impropriety in Salomon v A. Salomon and Co. Ltd, Ord v Belhaven Pubs and Adams v Cape Industries plc that the courts in those cases declined to lift or pierce the corporate veil, thereby distinguishing those decisions from the present case.

10.  It must be noted on what has been pleaded by the Plaintiff in this case.  There are five factors and it seems that the 1^st Defendant failed to traverse by its defence.  The first factor is that 1^st Defendant is the sole director and shareholder of the 2^nd Defendant; the 1^st Defendant is the directing will and mind of the 2^nd Defendant; thirdly, the 1^st Defendant is the sole authorized signatory of the 2^nd Defendant’s relevant account; and the 2^nd Defendant seems to be insolvent at the material time; and the 1^st Defendant signed as sole signatory of the 2^nd Defendant’s six cheques purported to pay for the goods of more than $600,000 and these six cheques were subsequently dishonoured.

11.  If the above factual matrix are established, inference may be drawn as to whether the 1^st Defendant was making use the 2^nd Defendant as a vehicle to obtain goods, knowingly the 2^nd Defendant was at the brink of being wound up.  That is the likelihood of impropriety.

12.  I do not eliminate the possibility that the Plaintiff may or may not be able to advance sufficient evidence to infer such impropriety.  But insofar as the test of striking out on the first limb is concerned, I am of the view that the 1^st Defendant failed to establish that the claim is obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed: Hong Kong Civil Procedure 2011 edition paragraph 18/19/4.

13.  I now come to the second limb and the third limb, frivolous, vexatious and abuse of process.  Regarding these two limbs, affidavit evidence can be looked into, of course, including the pleadings as well. 

14.  Likewise, I do not see how the 1^st Defendant said that the 2^nd Defendant was not insolvent at the material time.  Although the bank statements show that the 2^nd Defendant had 3 million overdraft facilities, the accounts show a consistent debit from 1.7 million to 2.4 million.   Further, some bank statements were not produced such as December 2008 and January 2009.  Those are the periods when the cheques were bounced upon presentation.    Although Counsel for the 1^st Defendant, Ms Mak, made a point that the relevant time is the time of issuance of the cheque, my view is that it is also relevant to see the financial condition of the 2^nd Defendant at the time the cheque were presented for payment.  Because the cheques were post dated cheques and the 1^st Defendant should have known the financial status of the 2^nd Defendant both at the time of issuance of the cheques and at the time the cheques were presented for payment.  The full picture including subsequent months’ bank statements, the balance sheet and account are yardstick to measure or rebut the Plaintiff’s allegations of the 2^nd Defendant’s insolvency but the 1^st Defendant failed to produce them. 

15.  As a result, there seems to be a live question as to whether there is sufficient evidence to show that the 2^nd Defendant was solvent or insolvent at the material time.  This must be a question for trial. 

16.  I am of the view that the 1^st Defendant is also having a pleadings’ hurdle.  Simply put, under the new rule, Order 18 rule 13.   New provisions were introduced since the implementation of CJR that a defendant who wishes to deny an allegation must state the reasons for the denial and his own version.  It seems that a pleading can no longer contain a bare denial, there should be a positive averment as to the reason why one denies the allegation.   

17.  And at the end of the day if the defence remains as it now stands, the trial judge may not allow the defendant to put forward a contrary version.  It seems to me that this is the purpose of the new provision. 

18.  Having said that, whether there is sufficient evidence to infer improper purpose is a matter for trial.  Therefore, I do not see how, having bound by the pleading and in light of the question of sufficiency of evidence, this claim can be said to be frivolous, vexatious or abuse of process.  Therefore, the 1^st Defendant’s summons must be dismissed with costs to the Plaintiff, assessed summarily in the sum of $12,600, payable by the 1^st Defendant forthwith.

19.  I also make consequential directions as follows.  Parties are directed to take out any and all interlocutory applications on or before 23 November 2010, including applications for amendment of pleadings and/or specific discovery.

20.  The Case Management Summons hearing fixed on 23 November 2010 remains unchanged.

21.  Parties do file and serve the timetabling questionnaire on or before 16 November 2010.

22.  The Plaintiff do draw up, file and serve this order.

23.  If any of the parties is in breach or unable to comply with my directions, the party shall report to me as soon as practicable with detailed reasons.