NG YEE WAH v. LAM CHUN WAH AND ANOTHER

CACV 309/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 309 OF 2008

(ON APPEAL FROM HCA NO.2457 OF 2007)

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REASONS   FOR   JUDGMENT

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Hon Rogers VP:

1.  I agree with the Reasons for Judgment of Stone J.

Hon Le Pichon JA:

2.  I also agree with Reasons for Judgment of Stone J.

Hon Stone J:

The Order as made

3.  At the conclusion of the hearing of this appeal, the Court ordered that this appeal be allowed, that the judgment below be set aside, and that the costs here and below were to be to the appellant, to be taxed if not agreed, with written reasons to be delivered later.

4.  These are those Reasons.

This Appeal

5.  This was an appeal by the 1^st defendant, Mr Lam Chun Wah, against the judgment of Mr Justice Poon dated 22 September 2008, wherein upon the hearing of an amended Order 14A application initially taken out by the plaintiff by summons dated 11 March 2008, the learned judge answered in the affirmative the two questions raised in that summons; he also struck out two paragraphs, paragraphs 3 and 4, of the 1^st defendant’s defence, and proceeded to enter judgment for the plaintiff (in what purported to be a derivative action taken by the plaintiff on behalf of the 2^nd defendant company, hitherto jointly beneficially owned by the plaintiff wife and the 1^st defendant husband) in terms of paragraphs 1-8 of the Statement of Claim, together with an order that the 1^st defendant do pay the costs of the Order 14A application, as amended by summons dated 28 August 2008 (which amendment sought judgment to be entered against the 1^st defendant in terms of the relief prayed for in the Statement of Claim.).

6.  The net result of this ambitious application, as the Order of Poon J dated 22 September 2008 makes clear, was that the 1^st defendant was ordered to pay to the plaintiff, his former wife, the sum of HK$7 million, together with damages to be assessed.  It was further ordered that there should be an account of all dealings between the 1^st defendant, purportedly on behalf of the 2^nd defendant, and one Pacific Bright Limited, that there was to be an injunction against the 1^st defendant “from acting in breach of his fiduciary duties and/or breach of trust”, together with an account of all profits, alternatively equitable damages, arising from such breach of fiduciary duty and/or breach of trust; interest on all sums found due was ordered, as were the costs of the action.

7.  At first blush, therefore, this result appeared to be no less than ‘game, set and match’ to the plaintiff wife, and on an entirely summary basis at that.

The factual background

8.  Notwithstanding its appearance, essentially this action represents the latest instalment of an obviously hotly-disputed divorce case, albeit a case which is characterized by recourse to extensive (and no doubt expensive) High Court litigation rather than by application of a generous dose of old-fashioned common sense.

9.  Be that as it may.  If the parties wish to continue to render financial assistance to the legal profession that is their concern; the immediate concern of this court lies solely in evaluation of the legal propriety of the judgment under appeal.

10.  As the learned judge below recounted in his Decision, the 1^st defendant, Mr Lam and the plaintiff, Ms Ng, formerly were husband and wife, and are registered as equal shareholders of the 2^nd defendant, Grand Sino International Limited.

11.  In November 2007, the plaintiff, Ms Ng, commenced the present proceedings, described by the learned judge as a ‘derivative action’.  Notwithstanding the registration of legal interest, one of the issues in this action is who beneficially owned what shareholding within the 2^nd defendant company, which in happier times presumably had been a corporate vehicle utilized by the couple.

12.  Hence the Order 14A (as subsequently amended) with which Poon J was seized.

13.  This Order 14A summons as issued by the plaintiff against the 1^st defendant asked for determination of two questions of law, which the plaintiff wished to be answered (as indeed proved to be the case) in the affirmative; these questions were in the following terms:

“(1)  whether the 1^st defendant is estopped from re-litigating the issue (‘the 1^st Issue’) as to whether the 1^st defendant is the beneficial owner of the plaintiff’s 50% shareholding in the 2^nd defendant by reason of the doctrine of res judicata; and

(2)  whether the 1^st defendant is estopped from re-litigating the issue (‘the 2^nd Issue’) as to whether the 1^st defendant is the beneficial owner of the 2^nd defendant’s 35% shareholding in June Just Company Limited by reason of the doctrine of res judicata”.

In addition, the plaintiff asked that if the questions were to be answered in the affirmative, paragraphs 3 and 4 of the Defence, which purported to raise these two issues, be struck out, and – as earlier indicated – by amendment also asked for monetary relief in terms of the prayer in the Statement of Claim.

14.  In his judgment the learned judge below recited that the doctrine of res judicata was said to have arisen from an earlier derivative action commenced by the plaintiff in 2003, namely HCA 3349 of 2003, wherein, on behalf of the 2^nd defendant, the plaintiff had claimed against the 1^st defendant damages for breach of fiduciary duty and trust in the sum of some $HK6.836 million, and had pleaded, inter alia, that the 2^nd defendant had acquired a 35% interest in a company known as June Just Ltd from the 1^st defendant in 1991, and that in 2000, the 1^st defendant wrongfully had diverted to his own account the balance of a dividend declared by June Just in the sum of HK$107,788 to which the 2^nd defendant was entitled.

15.  However, in HCA 3349 of 2003, the 1^st defendant had denied liability and had pleaded that he alone was the beneficial owner of all the shareholdings of the 2^nd defendant in the present action, and also of the 2^nd defendant’s 35% interest in June Just.

16.  In fact, the learned judge records that HCA 3349 of 2003 had been settled by Consent Order dated 28 December 2005, wherein judgment was entered for the plaintiff against the 1^st defendant in the sum of HK$3,418,091.20 “as agreed damages”, together with interest thereon, whilst the Consent Order further provided that upon receipt of such sum the plaintiff would transfer to the 1^st defendant her shares of and in the 2^nd defendant at a price to be determined by a written valuation report.

17.  However, the plaintiff alleged that notwithstanding the terms of this earlier Consent Order, the 1^st defendant, her former husband, had disposed of the 2^nd defendant’s shares in June Just in September 2005 without her knowledge or consent, and also that in September 2005 the 1^st defendant’s cousin had become the sole shareholder and director of one ‘Pacific Bright Limited’, to whom the 2^nd defendant’s shareholding in June Just was wrongfully transferred by the action of the 1^st defendant, and that shortly thereafter these shares in June Just were themselves transferred from Pacific Bright to a newly-incorporated company named ‘Huge Loyal Investment Limited’.

18.  Accordingly, in November 2007 the plaintiff began the present action, HCA 2457 of 2007, on behalf of the 2^nd defendant against the 1^st defendant, pleading his breach of fiduciary duty in disposing of the 2^nd defendant’s shares, and also claimed, inter alia, the sum of HK$7 million.

19.  By his Defence, the 1^st defendant repeated his earlier plea in HCA 3349 of 2003 that he was the beneficial owner of the plaintiff’s 50% shareholding in the 2^nd defendant, and of the 2^nd defendant’s 35% shareholding in June Just; although the transfer of the 2^nd defendant’s shares in June Just for the sum of HK$7 million was admitted, it was denied that the transfer was made without authority as the plaintiff had alleged.

20.  The plaintiff took the view that the doctrine of res judicata arose out of the earlier Consent Order, thereby, so it was alleged, debarring the 1^st defendant from re-litigating the so-called ‘1^st and 2^nd Issues’ in these proceedings.

21.  An additional complication in this litigation sequence is that, in July 2008, the 1^st defendant himself had commenced his own action, HCA 1324 of 2008, to set aside the Consent Order which appeared to have settled HCA 3349 of 2003, relying on the grounds of misrepresentation and undue influence.

22.  Against this tendentious background the learned judge took the view, against which the 1^st defendant now appeals, that not only should the questions posed by the plaintiff under Order 14A as to res judicata be answered in the affirmative, but also that the 1^st defendant should pay to the plaintiff the amount of HK$7 million, and in addition that injunctive relief and an order for an account of profits also should be granted, together with interest and costs.

23.  The Order as engrossed makes no reference to the strike out of the paragraphs of the 1^st defendant’s Defence raising the 1^st and 2^nd Issues – presumably this was regarded as impliedly encompassed within the affirmative judicial response to the Order 14A questions posed in the plaintiff’s application.

The argument on this appeal

24.  In moving this appeal on behalf of his client, the 1^st defendant/appellant, Mr Benjamin Chain fundamentally took two points: first, that this Order could not possibly be a proper form of Judgment in a ‘derivative action’ properly so-called; and second, that in coming to the conclusion that he did the learned judge below had been wrong effectively to ignore the existence of the 1^st defendant’s action, HCA 1324 of 2008, the gravamen of which was to seek to set aside the Consent Order in HCA 3349 of 2003.

25.  In responding, Mr Lawrence Ng, appearing for the plaintiff together with Mr Harry Liu, steadfastly refused to countenance any criticism of the approach of the learned judge below, and pressed upon the court the submission that this represented an appeal against the exercise of a judicial discretion by the learned Judge below, and that the 1^st defendant “cannot even begin to show that the learned Judge was wrong, let alone plainly wrong”, and that it was “unarguable” that the doctrine of issue estoppel/res judicata had not arisen from the terms of the Consent Order as engrossed in HCA 3349 of 2003.

26.  Accordingly, Mr Ng asked the Court to reject the 1^st defendant’s appeal, and to uphold the decision of the learned Judge.

Reasons for allowing the appeal

27.  For my part, I considered that this appeal should succeed for three main reasons.

28.  First, unless the learned judge had come to the conclusion that the 1^st defendant’s new action, HCA 1324 of 2008, was frivolous, vexatious and an abuse of process – which he pointedly had not, since on the face of his judgment he appears not to have applied his mind to this point at all – with due respect I fail to see how and why he thought it appropriate to proceed with an Order 14A determination as to the existence of ‘issue estoppels’ relating to two issues said to arise as a consequence of the earlier Consent Order, and notwithstanding that the underlying premise for these very issues, the Consent Order in question, itself now was subject to collateral attack in HCA 1324 of 2008.

29.  What, one might rhetorically ask, will be the situation if the 1^st defendant’s action were to succeed?  In that case the Consent Order in HCA 3349 of 2003 would have to be set aside, and co-terminous with such setting aside the entire basis of the questions as presently posed under the amended Order 14A application must also go.

30.  The learned judge nevertheless chose to entertain the plaintiff’s application, in its amended form to provide for additional monetary relief, and not only responded to the Order 14A questions in the affirmative, but also summarily awarded the plaintiff a very significant monetary judgment, plus other orders including an order for injunctive relief (unparticularised, I note, on the face of the Order), and an order for an account of profits (which in any event represents relief which can only stand in the alternative, and not cumulatively with any specific monetary judgment, and is a remedy available solely at the election of the successful plaintiff, such election generally being exercised, at the earliest, post-discovery).

31.  In his judgment the learned judge correctly commented (at paragraph 32) that “unless set aside…an order remains valid and binding on the parties” and thus that the Consent Order presently remained a valid order, and then proceeded to record (at paragraph 33) Mr Chain’s submission that the Order 14A application would be a “futile exercise” on the assumption that the 1^st defendant succeeds in setting aside the Consent Order in HCA 1324 of 2008, only to observe (once again correctly) that “whether the 1^st defendant would be so successful remains to be seen” – without, however, apparently considering that if indeed this were to be so, it followed that the exercise with which he then was seized would be rendered nugatory.

32.  To the contrary, the judge took the view that the Order 14A would not be “futile” because “it will help expedite the present action by disposing of the 1^st defendant’s defence on beneficial ownership at this very early stage of the proceedings” and that (at paragraph 34) “the rhetorical question posed by Mr Chain [as to the success of the 1^st defendant’s action] is simply hypothetical”, that this action was still at an early stage, that the plaintiff already had taken out an application to strike it out, and that whether it will proceed to trial “is too early to say”.

33.  I am unable to share the opinion of the learned judge that in the circumstances prevailing it was appropriate to proceed with the Order 14A application.

34.  True it is that as yet the result of HCA 1324 of 2008 is unknown, but this dismissive approach to an action presently on foot wholly (and in my view entirely wrongly) serves to ignore the ramifications which will enure if indeed the 1^st defendant’s action does prove successful in setting aside the Consent Order – in which eventuality everything that the learned judge now has purported to do in this judgment will be of no effect, and the Order giving effect thereto would have to be unravelled; moreover such ‘unravelling’ would have to take place notwithstanding the high probability that, with present judgment in hand, by then the plaintiff already will have embarked upon the process of execution thereof, a process which in turn would necessitate an application for a stay of execution pending the trial of HCA 1324 of 2008.

35.  Accordingly, with respect I do not consider that the learned judge’s ‘blinkered’ approach to these actions can be upheld, and that on this ground alone this appeal must have succeeded. 

36.  That which in my judgment the learned judge legitimately could and should have considered – which would have avoided the problems I have outlined, given that nothing can be summarily so determined whilst the Consent Order grounding the plaintiff’s application remains under legitimate attack – would have been to have ordered a stay of the plaintiff’s Order 14A application pending trial and resolution of the 1^st defendant’s action in HCA 1324 of 2008, and at the same time ‘case managing’ the process by laying down a strict timetable for the prosecution of this new action, as indeed the new ‘case management’ regime embodied in the forthcoming new Civil Procedure Rules would mandate.

37.  The second reason for allowing this appeal – in principle perhaps as important as the first – is that this is (or is said to be) a derivative action brought by the plaintiff on behalf of the 2^nd defendant, which on the plaintiff’s case is a family company equally owned by herself and the 1^st defendant, and yet the Order which has emerged from the hearing below, and which presently stands engrossed and (subject to this appeal) remains available for execution of the monetary sum appearing on the face thereof, is an award which has been given in favour of “the plaintiff for and on behalf of the 2^nd defendant”, which is a curious and, in the circumstances, inapposite formulation.

38.  In my view this is no mere arid or ‘technical’ point. 

39.  A plaintiff can sue on behalf of a company, but on the established authorities the judgment must be entered in favour of the company, and on the face of the present judgment it remains unclear precisely how it is envisaged that it will operate: as Mr Chain rhetorically asked, is the plaintiff, Madam Ng, now entitled to enforce it in her own right, and what now is the position, for example, in terms of the utilisation of other enforcement procedures, such as, for example, the issuance of Charging Orders?

40.  It strikes me, with respect, that this whole action, and indeed the very manner of the framing of the dispute as was placed before the learned judge below, serves only to ‘blur’ the necessary demarcation between personal interests on the one hand and corporate interests on the other, which lack of clear distinction, whilst perhaps understandable in the context of a bitter dispute as to ownership of matrimonial assets, nevertheless potentially causes considerable problems – in this connection I note that the 1^st defendant’s case is that he understood that the Consent Order in HCA 3349 of 2003, which he now wishes set aside, clearly was intended to represent an overall settlement of the parties’ differences, which sadly has not proved to be the case, and that this represents one of the matters upon which he relies upon in HCA 1324 of 2008 in order to attempt to set aside this Consent Order.

41.  Third, and finally in terms of the reasons why this appeal peremptorily was so allowed, is that for my part I am remain unsatisfied that in any event the Consent Order underpinning the amended Order 14A application in fact gives rise to an ‘issue estoppel’ at all. 

42.  Putting to one side for present purposes the conceptual difficulties inherent in ‘issue estoppels’ being said to arise from Consent Orders, and to what extent a Consent Order in itself can constitute ‘res judicata’ – given that in many instances a court approving such Consent Order has not canvassed all relevant issues arising in an action between the parties – it is clear in the present case that on its face the instant Consent Order clearly does not suffice, since it fails to reflect all the pleaded issues, in particular admissions which are alleged to have been made by the 1^st defendant in the pleadings in HCA 3349 of 2003. 

43.  In this context it will not do, as Mr Ng valiantly attempted to submit, that omissions on the face of the Consent Order can be supplemented – the Order ‘construed’, in effect – with reference to the background pleadings; if anything, the very content of such pleadings serves only to reinforce this third objection.

Finally

44.  The foregoing statement of the reasons for allowing this appeal in this case – which in my view now should stand adjourned pending an expedited hearing of the 1^st defendant’s action in HCA 1324 of 2008 – should not obscure the hard reality that the extended litigation such as these parties now are conducting represents an unproductive, and most certainly a prohibitively expensive, way of effecting a fair distribution of a couple’s financial assets, and that in this area more than most there is much to commend mediation and a sensible and non-confrontational resolution of contentious financial issues which unhappily arise upon divorce.