CACV 64/2014
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF APPEAL
CIVIL APPEAL NO. 64 OF 2014
(ON APPEAL FROM HCMP NO. 7711 OF 1999)
____________
IN THE MATTER of the Property known as Ground Floor and Garden thereof and the First Floor of the Building erected on The Remaining Portion of Lot No. 1203 in Demarcation District No. 19 (“the Property”) and more particularly set out and the subject of a charge dated 29th January 1996 and registered in the Tai Po New Territories Land Registry by Memorial No. 482125 entered into between the Defendant as the Mortgagor of the one part and the Plaintiff as the Mortgagee of the other part (“the Charge”)
and
IN THE MATTER of a Further Charge dated 12th May 1997 and registered in the Tai Po New Territories Land Registry by Memorial No. 528699 entered into between the Defendant as the Mortgagor of the one part and the Plaintiff as the Mortgagee of the other part (“the Further Charge”)
and
IN THE MATTER of Order 88, Rule 1 of the Rules of the High Court
____________
BETWEEN
THE KWANGTUNG PROVINCIAL BANK
Plaintiff
and
CHUNG SUN KWAN
Defendant
WAN HANG PING
Third Party
____________
Before: Hon Lam VP and Yuen JA in Court
Date of Hearing: 31 July 2014
Date of Judgment: 15 August 2014
_____________
JUDGMENT
______________
Hon Lam VP:
1. I agree with the judgment of Yuen JA.
Hon Yuen JA:
2. 1 This is an appeal from a decision of Hon. L. Chan J dismissing the third party’s application to strike-out the third party proceedings instituted by the defendant in 2000.
2.2 The third party had asked the court to strike-out the third party proceedings on the bases that:
(1) the defendant has been guilty of inordinate and inexcusable delay in the prosecution of the third party proceedings, and that he (the third party) has suffered prejudice, with the result that there is a substantial risk that a fair trial is not possible; and
(2) there has been “warehousing” of the third party claim, constituting an abuse of the process of the court.
3. The strike-out application was first heard by Master Ho who refused to strike-out but ordered that each party should bear his own costs.
4. 1 The third party appealed the master’s order refusing to strike-out, and the defendant appealed the master’s costs order (“the cross-appeal ”).
4.2 The judge dismissed both the appeal and the cross-appeal, with costs.
5. 1 The third party sought leave to appeal from the judge, which was granted.
5.2 At the hearing of that leave application however, the defendant made an oral application for leave to appeal the judge’s order on the cross-appeal. This was also granted by the judge. However before the order was sealed, the judge became aware that the defendant’s application for leave to appeal his order on the cross-appeal was out of time. Consequently on 21 March 2014 the judge revoked leave by reason of lack of jurisdiction (see Hong Kong Civil Procedure 2014, Vol.1, para.59/2B/2).
5.3 Thereafter, instead of applying by summons to this court for leave to appeal out of time, the defendant directly filed a “Respondent’s Notice” for the purpose. As noted in Hong Kong Civil Procedure 2014, Vol.1,para.59/0/50, this is improper. In the absence of leave, the cross-appeal is incompetent and accordingly we will not deal with it. In any event, for the reasons given below, we will make the costs order set out at the end of this judgment.
Background
6. As with all applications of this type, it is necessary to examine the background facts and the history of the proceedings.
7. 1 The defendant and the third party were involved in developing small houses in the New Territories in the 1990’s. They were involved in developing two smaller pieces of land and also formed a joint venture company by the name of Bright Wide Investment Ltd (“BWI ”) to develop a larger piece of land. The defendant denies that BWI was involved in these third party proceedings but at one stage he had applied for leave to add BWI as a 2nd third party. In any event, it seems that these projects overlapped in point of time.
7.2 There was only a brief one-page agreement in Chinese entitled “Co-operation Agreement” regarding the development of one of the smaller pieces of land, and it is common ground that there were only oral agreements involving the other projects. The various development projects led to outgoings being incurred for construction and other expenses, but also resulted in money being received from deposits paid by potential purchasers and from subsequent sales of units in the completed projects.
7.3 In 1996 and 1997 respectively, the defendant had borrowed certain sums from the plaintiff bank (“the bank ”) on the security of a charge and further charge on a property he owned.
7.4 The parties are in dispute as to the purpose of the charges. The defendant said they were to finance the projects. The third party said they were to ease the defendant’s personal cash flow problems. He said he had made advances to the defendant for the latter’s share of contributions to the projects.
7.5 The parties are further in dispute as to the application of funds received from the bank. The defendant said he transferred $1m to the third party by way of loan, whereas the third party said this was by way of repayment, as the defendant had kept funds paid by potential purchasers of units in the projects. Similarly, the defendant said he had on another occasion transferred $1.5m to the third party by way of loan, whereas the third party said this was also by way of repayment. Mr Chain, counsel for the defendant, agrees that there are disputes on the “nature” of transferred funds. In the event, mortgage repayments to the bank were terminated.
8. 1 At the end of December 1999, the bank sued the defendant for money due and owing on the charges.
8.2 On 6 March 2000, the bank obtained judgment against the defendant for a sum of about $3.05m and delivery up of the charged property.
9. 1 On 14 March 2000 the defendant obtained leave from the court to issue third party proceedings.
9.2 The defendant’s case was that he had entered into the transactions with the bank having relied on the third party’s oral promises that he would bear full responsibility for the mortgage repayments and that the third party’s father would guarantee repayment. He claimed an indemnity from the third party to cover his liability to the plaintiff, and also profits from the projects which he said the third party had failed to pay him.
9.3 In the Third Party Defence and Counterclaim, the third party alleged that the parties had agreed to contribute working capital equally, that he and BWI had advanced funds to the defendant for the share payable by the latter, and that the defendant had kept deposits paid by potential purchasers which he should bring into account. After deducting the amounts of $1m and $1.5m respectively, the third party counterclaimed for the balance.
10. The parties’ material inter-actions in the third party proceedings can be listed chronologically as follows (certain important events are in bold print):
nd third party.
15.5.2002 Master Ho adjourned the above summons to date to be fixed for the defendant to supply further materials.
18.12.2002 Defendant adjudicated bankrupt (on the bank’s petition).
17.12.2006 Defendant discharged from bankruptcy.
ex gratia payment to Defendant - not accepted.
22.9.2012 OR assigned right of action in the third party claim to Defendant.
12.12.2012 Defendant filed case management summons.
Principles
11. This is a “straddle” case, i.e. a case where the proceedings were begun before the Civil Justice Reforms (CJR) took effect in April 2009 and continued thereafter. It has been held that in an application to strike-out for delay, the court’s approach to the application must take into account the Reform that has taken place, whilst also taking into account the contemporaneous circumstances when evaluating the conduct of the parties (Wing Fai Construction Co Ltd (in liq) v Yip Kwong Robert [2012] 1 HKLRD 589 at para.29).
12. The principles guiding the court in determining applications to strike-out for delay have been set out extensively in Wing Fai at para. 75. In the present case, the third party has sought to strike out the present proceedings for delay on two of the grounds set out in para. 61 of that judgment, viz. (1) the second limb of Birkett v James (inordinate and inexcusable delay, coupled with prejudice, which includes a substantial risk that a fair trial is not possible); and (2) “warehousing”, constituting abuse of process. In fact, abuse of the process of the court is the common feature that connects both grounds (paras. 66, 68).
13. I recognize that striking-out should only be used in plain and obvious cases (para. 65) and is a remedy of last resort (para. 75(1)). It is also well-established that an appellate court should think long and hard before it can disturb a judge’s decision in a striking-out application as it is made in the exercise of his discretion, and we should interfere only if there has been an error in law and/or the decision is “plainly wrong”. Nevertheless, with all due respect to the judge, I believe this is a clear case for the application of a strike-out on the basis of the second limb of Birkett v James and for abuse.
Discussion
14. 1 It is clear from the chronology set out above that the last procedural step taken in the third party proceedings was in May 2002 (when the defendant’s summons to amend the Third Party Statement of Claim was adjourned to a date to be fixed). It was not until December 2012 that the defendant filed a case management summons.
14.2 The master found that there was inordinate and inexcusable delay. With respect this must be right. No steps were taken in the third party proceedings in a period of 10 years. Whilst it is true that in the two months after November 2006, the third party made a couple of exploratory attempts to put an end to the matter, he did not get a substantive reply at all. Then a few months after that, the OR sent out a settlement “feeler” to the third party whilst at the same time asserting that she had not adopted the proceedings. Unsurprisingly the third party (by this time acting in person) did not reply. In my judgment, these sporadic, short-lived acts did not detract from the overriding failure to advance the third party proceedings during that lengthy period.
15. 1 It would appear from the learned judge’s judgment that he did not make a finding on whether there had been inordinate and inexcusable delay.
15.2 This appears to be because the judge accepted the submission made on the defendant’s behalf that the court should not “look at the conduct of the official receiver, but only the conduct of the defendant” (para.41). The judge held (para. 42):
“It is beyond dispute that the defendant had all along been pushing for the progress of the third party proceedings, but the official receiver, for reason of not wanting to expose public funds, did not move the proceedings ahead. The position of the defendant was thus in opposition to that of the official receiver on the progress of the proceedings. To make the defendant liable for the delay of the official receiver would sound unreal. It is contrary to reality. I therefore find that the defendant is not liable for any inexcusable delay”.
15.3 The judge then said that he did not “want to make any finding of whether the delay by the official receiver is inexcusable as the official receiver has not been given any opportunity to submit on her situation” (para. 43).
16. 1 With respect, it seems to me that that approach ignores the principle of law that a right of action of this nature is a type of property. On a bankruptcy, s.58 Bankruptcy Ordinance Cap. 6 operates to vest the bankrupt’s property in his trustee in bankruptcy. Put colloquially, the trustee stepped into the bankrupt’s shoes. The trustee’s conduct (i.e. what he did/failed to do) and the effect of that conduct on the property (i.e. the right of action) bound the assignee of the property, whether the assignee likes it or not (and whether the bankrupt, as the predecessor-in-title of the property, liked it or not). That, unfortunately for the defendant, was the reality of the situation as a matter of law. See for instance, Upper Like Investments Ltd v Sino-Rank International Ltd HCA17637/1999, unrep. 19 Nov 2012, at paras. 35-37.
16.2 Of course when I say “whether the bankrupt liked it or not”, that must be read as being subject to the right that the bankrupt had, to apply to the court under s.83 Bankruptcy Ordinance if he was aggrieved by any act or decision of the trustee. The court could then have confirmed, reversed or modified the act or decision complained of. However the defendant did not make such an application, so what the trustee did/failed to dostood and is binding on the assignee.
16.3 In these circumstances it cannot be gainsaid that when the defendant had the right of action assigned to him in 2012, he was “saddled” with the trustee’s action/inaction and the effect of that conduct on the third party proceedings. With respect the judge fell into error when he held that the defendant could be insulated from the action/inaction of his predecessor-in-title, the OR.
17. 1 For the same reason, if the OR had any submissions as the judge remarked at para. 43 (presumably meaning explanations or further explanations for her action/inaction), they should have been put forward by the defendant at the hearing.
17.2 Pausing here, it would be noted that in para. 42, the judge referred to the exposure of public funds as a reason for the OR not advancing the third party proceedings. I would point out that all liquidators/trustees in bankruptcy are under the same legal duty to get in the assets of the insolvent company/bankrupt in a financially prudent manner. It should not be thought that a different set of considerations applies simply because the liquidator/ trustee in bankruptcy happens to be the OR. In all cases, the court can take into account lack of funds, but that must be balanced against the prejudice suffered by the other party in the litigation (Nathaniel Hymer v The Mass Transit Railway Corporation [2000] 2 HKLRD 589, at 607).
18. Had the judge not erred in considering only the defendant’s conduct instead of the conduct of the third party proceedings as a whole, I take the view that he would have arrived at the same decision as the master, i.e. that there had been inordinate and inexcusable delay in the prosecution of the third party proceedings between 2002 and 2012.
19. 1 With respect I do not accept the defendant’s argument that the third party had also been guilty of inordinate and inexcusable delay. Prior to the CJR, the “let sleeping dogs lie” practice had been regarded as acceptable. At the end of 2006 the third party’s solicitors wrote to the defendant’s (former) solicitors and were told that they had no instructions and that the OR had taken over the proceedings.
19.2 The third party then discharged his solicitors, at the latest in May 2007, before the commencement of the CJR. The third party did not instruct solicitors again until after October 2012, after the defendant sought to revive the proceedings. A lay person cannot be expected to understand the nuances of the post-CJR duty of a defendant (here, in a third party action) not to “let sleeping dogs lie”. Accordingly I do not think it can be said that the defendant’s fault of delay should be shared with the third party.
20. 1 In my view there is a substantial risk in this case that there will not be a fair trial. It is only common sense that when time passes, memories fade. When the defendant sought to revive the third party proceedings at the end of 2012, nearly 20 years had elapsed from the time the first oral agreement was made in 1993. The risk posed to a fair trial by fading memories is particularly relevant in a case like the present, where the parties’ cases are based on oral agreements (and in the defendant’s case, on an alleged oral promise of indemnity and provision of a guarantor). The written agreement, which referred to one project only, consisted of only a one-page document. And it would appear that the parties did not correspond with each other contemporaneously.
20.2 It is common ground that there were many financial transactions between the parties regarding the projects.
20.2.1 The third party has deposed that he had made personal loans on many occasions to the defendant and that it is now impossible to set out the details of those loans or to locate the relevant documents.
20.2.2 BWI documents were stored in a location which suffered sewage water damage after the middle of 2010. (Although the defendant says that BWI was not involved, it is notable that in 2002 he had made an application to amend the third party statement of claim to add BWI as a 2nd third party).
20.2.3 BWI’s accountants and bank have stated that they have disposed of their records.
20.2.4 The third party has deposed that due to the lapse of time, he doubts if he can retrieve the records of funds which the defendant had withdrawn from deposits received which he had put to personal use.
20.2.5 As some of the projects did not proceed, refunds were made to some purchasers, the documents of which are no longer in the third party’s possession.
In light of the above, it is only common sense that there would be difficulty identifying the nature of financial transactions after so many years.
20.3 The lacunae in the evidence illustrated above which have been caused (or at least exacerbated) by the delay are very likely to cause prejudice to the third party’s preparations for trial and would pose a serious risk to a fair trial. The defendant’s counsel has argued that the third party has himself caused at least part of the prejudice suffered as he failed to obtain full proofs of evidence in 2001 and obtain and maintain documents afterwards. However one must consider the facts of this case. We are dealing with accounts between parties involving many financial transactions. It is difficult to have a full and detailed proof of evidence until the issues are crystallized and all relevant documents obtained, collated and examined by the parties with the assistance of legal advisers and possibly, forensic accountants. In 2002 there was still a pending application by the defendant to join BWI, so the issues in the third party proceedings cannot be regarded as crystallized. As for the criticism that the third party should have obtained and maintained documents better in the decade between 2002 and 2012, when the defendant was so inactive in prosecuting proceedings, it is only natural for the third party to be lulled into a state of complacency, especially when the main proceedings have been concluded so long ago.
20.4 It is also important to note that in the present case, the defendant has alleged that some documents bearing his signature have been forged. This is a serious allegation which requires close examination of the circumstances in which the documents were said to have been signed. Witnesses’ recollections of events are therefore of particular significance in this case.
21. For the reasons set out above, I take the view that the judge had fallen into error of law when he held that only the defendant’s individual conduct should be taken into account, and having considered the matter afresh, in my judgment there has been inordinate and inexcusable delay in the prosecution of the third party proceedings by the defendant, andthe third party has suffered prejudice, with the result that there is a substantial risk that a fair trial is not possible.
22. As for the third party’s counterclaim, section 12(1) Bankruptcy Ordinance operated to stay all proceedings upon the defendant’s bankruptcy, so we need not deal with it.
23. As for the “warehousing” ground, I do not think it is necessary to consider this at any length. As I understand it, the term “warehousing” normally (although not necessarily) applies to a situation where a plaintiff had commenced a number of actions against various people, and for whatever reason (usually tactical), selects some actions to proceed with, and yet keeps the other actions “alive” although he has no intention of proceeding with them. In the present case, the defendant has commenced only one action against the third party, so I do not think this is a typical “warehousing” situation, but given that the main consideration is whether a party had any intention to prosecute the action to its conclusion, it would appear from the evidence before this court that the OR did not have an intention to proceed with the third party proceedings when it became apparent that there would not be any outside funding for this purpose.
24. For the reasons set out above, I would make an order striking out the third party claim and dismissing the third party action. As for costs, I would make an order nisi that the defendant is to pay the third party the costs of the third party action (excluding the costs of the third party counterclaim, for which there should be no order as to costs). The defendant should pay the third party the costs before the master. As he was in the position of defending/responding to the third party’s appeals to the judge and this court, there will be no order as to those costsin view of the provisions of the Legal Aid Ordinance. The defendant’s own costs are to be taxed in accordance with Legal Aid Regulations.
(M H LAM)
(MARIA YUEN)
Mr Chan Chi Hung, S.C. and Mr Derek J Y Chan, instructed by Kenneth Woo & Co, for the third party (Appellant)
Mr Benjamin Chain, instructed by Ho Tse Wai, Philip Li & Partners, assigned by Director of Legal Aid, for the defendant (Respondent)