A-1 BUSINESS LTD v. CHAU CHAM WONG PATRICK AND ANOTHER

CACV 137/2009

 IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 137 OF 2009

(ON APPEAL FROM HCA 1868 OF 2008)

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J U D G M E N T

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Hon Cheung JA :

1. The plaintiff applied for summary judgment against the defendants.  At the hearing before Mr Bharwaney S.C. sitting as a Deputy Judge of the Court of First Instance, the parties agreed to have a preliminary issue being determined first, namely, whether the plaintiff’s claim is excluded by Order 14 rule 1(2)(b) which does not allow a summary judgment application to be made in an action which includes a claim based on an allegation of fraud.  The Judge ruled against the plaintiff.  The plaintiff now appeals.

Order 14 rule 1(2)(b)

2. Order 14 rule 1(2)(b) provides that

‘(2)      Subject to para.(3) this rule applies to every action begun by writ other than:

...

(b) an action which includes a claim by the plaintiff based on an allegation of fraud, or’

Harmutty Ltd

3. There is no dispute by that parties that the construction of the rule has been determined by the recent decision of this Court (Rogers VP and Le Pichon JA) in Pacific Electric Wire & Cable Co. Ltd v. Harmutty Ltd [2009] 3 HKLRD 94 where Rogers VP stated that :

‘19.    The wording of O.14 r.l(2)(b) makes quite clear that what is excluded is an action where there is a claim which is based on an allegation of fraud.  Two matters are clear from that.  The first is that there may be one or more claims in the action and the rule envisages that one of the claims may not be based on an allegation of fraud but another may be.  In those circumstances it is clear that an application for summary judgment under O.14 will not lie.  Secondly, the rule is not confined to excluding actions in which one of the claims is a claim for damages for fraud, what is excluded is any action where there is a claim in respect of which the underlying allegations on which the claim is based constitute an allegation of fraud.  It is clear that if r.1(2)(b) applies there is no jurisdiction for the court to entertain an application for summary judgment.’  (emphasis added)

His view was agreed to by Le Pichon JA. 

4. Rogers VP disagreed with the earlier approach of this Court (Nazareth VP, Godfrey and Liu JJA) in Tan Eng Guan and Another and Southland Company Limited and others [1996] 2 HKLR 117 in which Godfrey JA expressed the view that he should follow the then English approach which imposed a narrow construction on the rule which was confined to actions based on a claim founded on fraud as strictly defined in Derry v. Peek (1889) 14 App. Cas 337.  Godfrey JA disagreed with some earlier first instance decisions that for the purpose of the rule, allegations of dishonesty were to be equated with allegations of fraud.

5. Godfrey JA’s view was agreed to by Liu JA, although Nazareth VP preferred not to express a view on this issue.

6. England had since June 1992 removed the exclusion rule all together.

7. The Court of Final Appeal (FAMV No. 28 of 2009) on 14 September 2009 has refused to grant leave to appeal in Harmutty Ltd.  Although the Court considered that the scope of the fraud exception was reasonably arguable and of importance, it refused to grant leave to appeal having considered the merits of the case.

Basis of the claim

8. In this case, the plaintiff’s cause of action against the defendants was based on misappropriation of the plaintiff’s assets in breach of their fiduciary duties as the directors of the plaintiff.

9. The plaintiff had acquired interest in a company called SFT Holdings de Finance et de Technologie (‘SFT’).  The acquisition was financed by a loan granted by ABN Amro Bank Limited (‘ABN’) to the plaintiff’s holding company, A-One Investments Limited (‘A-One Investments’).  A-One Investments was controlled by the two defendants.  ABN made margin calls under the loan.  To meet the demand the 1^st defendant arranged a personal loan from another bank, namely, DBS Bank (‘DBS’) and sold the plaintiff’s interest in SFT.  Later on, however, DBS also called upon the 1^st defendant to repay the personal loan.  In order to meet the demand, the action taken by 1^st defendant was to divert CHF 19,999,993 being the proceeds of sale of SFT from the account of the plaintiff to his personal account with DBS from which the latter used the money to reduce the 1^st defendant’s indebtedness. 

10. The plaintiff pleaded that the transfer of CHF 19,999,993 was made for an improper purpose, namely, to benefit the 1^st defendant personally.  The plaintiff further pleaded that the 1^st defendant had provided security for the DBS loan, the security was made for an improper purpose, namely to benefit himself personally.  The plaintiff further pleaded that the defendants had concealed the documents relating to the provision of security for the DBS loan.

The defence

11. The defendants admitted that there was transfer of funds but their defence was in essence that the transfer was payment of dividend to A-One Investments which it directed A-One Business to pay over to the 1^st defendant.

The plaintiff’s response

12. The plaintiff’s response to this defence is that it was a fabrication after the event in order to give the misappropriation a cloak of legitimacy.

The Judge’s view

13. The Judge held that

‘ 30.       No matter how hard the plaintiff tries to divorce a consideration of the defence relied upon from a consideration of the plaintiff’s claim, I conclude that it is not right or proper to do so and that the plaintiff’s claim based on misappropriation can only succeed if the Court rejects the defence put forward.  It is therefore implicit in the plaintiff’s case that the defendants acted fraudulently, or, to put it another way, that the plaintiff’s case contained underlying allegations which constituted allegations of fraud on the part of the defendants, namely, the after the event falsification of documents to create a fictitious declaration of dividend from the plaintiff to A-One Investments which was used by A-One Investments to repay a loan obtained from the 1^st defendant.

31.           Even if I were able to view the plaintiff’s pleaded case of misappropriation in isolation, I would conclude that it was implicit in the plaintiff’s pleaded case that the 1^st defendant dishonestly misappropriated the proceeds of sale from the account of the plaintiff.  Absent a justification for the appropriation, the act of the 1^st defendant in doing so must be regarded as a dishonest act.  If “fraud” within the meaning of Order 14 rule 11(2)(b) includes the use of fraudulent means, it must include dishonest misappropriation, and I so conclude.’

The plaintiff’s argument

14. Ms Linda Chan, counsel for the plaintiff, also argued in this appeal that this Court should consider the plaintiff’s claim separately from the defence and the plaintiff’s response to it in order to determine whether the plaintiff’s application is excluded by the rule.  In respect of the plaintiff’s claim alone, she submitted that a claim for breach of fiduciary duties does not have to be based on an allegation of fraud.  It is sufficient if ‘the action of the majority and the directors, though without fraud, confers some benefit on those directors and majority shareholders themselves’(Daniels v Daniels [1978] Ch 406 at 414A-C); the essence of the claim is an abuse or misuse of power (Estmanco (Kilner House Ltd) v Greater London Council [1982] 1 WLR 2 at 12C-G); the liability to account does not depend upon proof of mala fides (Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 at 137G-138G, 147A-F, 149A-150B); if a director gave away the company’s asset for no consideration to a company of which he was also a director (a fortiori, to his personal account), it was prima facie an abuse of his powers as a director for an improper purpose.  Ms Chan submitted that the burden is on the director to demonstrate the propriety of the transaction and to raise a triable issue (Bishopsgate Investment Management Ltd, at 139F-140H, 143D-H).

My view

15. I agree with the Judge that the plaintiff’s claim based on misappropriation cannot be viewed in isolation and divorced from the plaintiff’s response to the defence that the transfer was for a legitimate purpose.  In order to establish that the transfer was a misappropriation of the plaintiff’s assets, the plaintiff clearly has to address the defence and this clearly will involve allegation of dishonesty on the part of the defendants.  In substance, allegations of fraudulent conducts are involved in the plaintiff’s claim and this is caught by the exclusion rule.

16. The reliance by Ms Chan of Bishopsgate Investment Management Ltd v. Maxwell [1993] BCC 120 does not assist the plaintiff.  In that case summary judgment was obtained by a company against a former director alleging that he was in breach of fiduciary duty in misapplying the company’s assets.

17. The first matter to be observed in that case is that no jurisdictional challenge was raised, apparently because the application for summary judgment was issued after the English exclusion rule was abrogated on 1 June 1992 (for the date of abrogation see Tan Eng Guan v. Southland Company Limited and Others [1996] 2 HKLR 117 at 121). 

18. Second, I accept that a claim based on breach of fiduciary duty resulting in a duty to account may not necessarily involve dishonesty, but each case is based on its own facts.  Although Ralph Gibson LJ at 143 had stated that if the directors had indeed misapplied the company’s assets then they have to ‘replace the property or make good the loss and it matters not that in so acting they acted honestly’, in that case the issue of dishonesty did not arise.  As Hoffmann LJ (as he then was) observed at 139 that

‘ The transfers by the company were not authorised by the board.  Furthermore, no grounds have been put forward upon which it could honestly have been thought that the transactions were for the benefit of the company as trustee of the pension funds.’

19. The present case is different.

20. Even if one is to view the case strictly from the plaintiff’s claim, the plaintiff’s pleaded case also clearly involves allegation of dishonesty and hence fraudulent acts.  This is apparent from the plea that the transfer was made for an improper purpose, namely to benefit the 1^st defendant personally; the security granted by the 1^st defendant for his personal loan from DBS was also made for an improper purpose, namely, to benefit the 1^st defendant and the concealment by the defendants of the documents relating to the security.

21. Accordingly the case is within the exclusion rule and the Judge was correct to rule against the plaintiff.

Arguments on the merits

22. The plaintiff had sought to argue that if the exclusion was decided in its favour, this Court should proceed to hear the merits of the application for summary judgment and impose an order for conditional leave to defend.  It is said that the Judge had indicated at the hearing that he would have granted conditional leave to defend if not for the issue of jurisdiction.

23. As the issue before the Judge was a determination of the preliminary point only, even if the jurisdiction issue is to be decided in the plaintiff’s favour, my view is that the Judge should expressly rule on the merits of the application for summary judgment before this matter is to be considered by this Court.  It is not for this Court to determine at the first instance whether there should be conditional leave to defend or not.

Conclusion

24. Accordingly the appeal is dismissed with costs to the defendants.

Hon Yuen JA :

25. I agree.