KP FINANCIAL SERVICES LTD v. LI KA MAN AND OTHERS

HCA 1919, 1922, 2525/2015
& 429/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1919 & 1922 OF 2015

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2525 OF 2015

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 429 OF 2016

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(Heard together)

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D E C I S I O N

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INTRODUCTION

1.  KP Financial Services Limited (“KPFS”) is a money lender.  It lent monies to various borrowers.  The relevant loans were secured by legal charges over real properties executed, or purportedly executed, by attorneys or authorised representatives of the registered owners of those properties.  The borrowers defaulted in repayment. When KPFS sought to enforce repayment of the loans and the securities by action, it was met by the defence that the relevant loan documents, including loan agreements, powers of attorney and legal charges were forged documents. Counterclaims were brought against KPFS seeking declarations that the loan documents were invalid or unenforceable.  KPFS then commenced third party proceedings against Alan Ho & Company (“AH&Co”), KPFS’s solicitors in the loan transactions.  In the third party proceedings, KPFS wishes to have various questions or issues relating to or connected with the authenticity or validity of the loan documents being determined not only as between it and the borrowers/chargors, but also as between either or all of them and AH&Co.

2.  The principal issue which arises for determination in this decision is whether the court should order KPFS and AH&Co to exchange pleadings in the third party proceedings.

BASIC FACTS

3.  The following brief summaries of the facts of the 4 cases should suffice for the present purpose. 

4.  HCA 1919/2015:

(1) The 1^st and 2^nd defendants are husband and wife, and the 3^rd defendant is the son of the 1^st defendant.  The three of them are also the registered owners of the property known as No 213C Shek Wu Tong, Pat Heung, Yuen Long, New Territories, Hong Kong.

(2) KPFS lent HK$6 million to the 1^st, 2^nd and 3^rd defendants pursuant to a facilities letter and a memorandum of agreement upon the security of a second legal charge over the property all dated 12 February 2015.

(3) The memorandum of agreement and second legal charge were signed by the 3^rd defendant on his own behalf and also on behalf of the 1^st and 2^nd defendants pursuant to a power of attorney executed, or purportedly executed, by the 1^st and 2^nd defendants in favour of the 3^rd defendant dated 2 September 2014.

(4) As a result of the 1^st, 2^nd and 3^rd defendants’ default in making repayment of the loan, KPFS commenced an action against them on 21 August 2015 seeking repayment of the outstanding principal and interest thereon and vacant possession of the property.

(5) In their defence and counterclaim dated 30 August 2016, the 1^st and 2^nd defendants alleged that the 3^rd defendant forged the signatures of the 1^st and 2^nd defendants on the power of attorney, and he signed the memorandum of agreement and second legal charge purportedly on behalf of the 1^st and 2^nd defendants without their knowledge or consent.  They counterclaimed against KPFS for a declaration that the memorandum of agreement and second legal charge were void and/or unenforceable.

(6) The 3^rd defendant has not filed any defence.

(7) On 28 September 2016, KPFS issued a third party notice against AH&Co pursuant to Order 16, rule 1(1)(c) of the Rules of the High Court, Cap 4A (“the RHC”), requiring that certain issues relating to or connected with the original subject matter of the action should be determined not only as between KPFS and the 1^st and 2^nd defendants but also as between either or all of them and AH&Co.

(8) On 20 February 2017, KPFS applied to amend the third party notice to narrow down the issues as follows –

(a) whether the power of attorney dated 2 September 2014 was a forged document; and

(b) whether the 1^st and 2^nd defendants knew of and agreed to the 3^rd defendant making a joint loan application to KPFS using the property as security for the loan.

5.  HCA 1922/2015:

(1) The parties are the same as in HCA 1919/2015.

(2) The 1^st and 2^nd defendants are the registered owners of another property known as Flat F, 8/F, Block 3, Bayview Garden, 633 Castle Peak Road, Tsuen Wan, New Territories.

(3) KPFS lent HK$3 million to the 1^st and 2^nd defendants pursuant to a facilities letter and a memorandum of agreement upon the security of a second legal charge over the property all dated 9 January 2015.

(4) The memorandum of agreement and second legal charge were signed by the 3^rd defendant on behalf of the 1^st and 2^nd defendants pursuant to a power of attorney executed, or purportedly executed, by the 1^st and 2^nd defendants in favour of the 3^rd defendant dated 26 November 2014.

(5) By a deed of guarantee dated 9 January 2015, the 3^rd defendant guaranteed the due and punctual payment of all general credit facilities granted by KPFS to the 1^st and 2^nd defendants, including the said loan of HK$3 million.

(6) As a result of the 1^st, 2^nd and 3^rd defendants’ default in making repayment of the loan, KPFS commenced an action against them on 21 August 2015 seeking repayment of the outstanding principal and interest thereon and vacant possession of the property.

(7) In their defence and counterclaim dated 12 September 2016, the 1^st and 2^nd defendants alleged that the 3^rd defendant forged the signatures of the 1^st and 2^nd defendants on the power of attorney, and he signed the memorandum of agreement and second legal charge purportedly on behalf of the 1^st and 2^nd defendants without their knowledge or consent.  They counterclaimed against KPFS for a declaration that the memorandum of agreement and second legal charge were void and/or unenforceable.

(8) The 3^rd defendant has not filed any defence.

(9) On 7 October 2016, KPFS issued a third party notice against AH&Co pursuant to Order 16, rule 1(1)(c) of the RHC requiring that certain issues relating to or connected with the original subject matter of the action should be determined not only as between KPFS and the 1^st and 2^nd defendants but also as between either or all of them and AH&Co.

(10) On 20 February 2017, KPFS applied to amend the third party notice to narrow down the issues to (inter alia) the following[1] –

(a) whether the 1^st and 2^nd defendants had knowledge of and consented to the 3^rd defendant making a loan application to KPFS using the property as security for the loan; and

(b) whether the power of attorney dated 26 November 2014 was forged.

6.  HCA 2525/2015:

(1) The 1^st defendant is a limited company incorporated in Hong Kong, and the registered owner of a property known as 10/F (Apartment 2 on 10/F), Kiu Kin Mansion, 566 Nathan Road, Kowloon, Hong Kong.

(2) The 2^nd defendant was, or purported to be, the sole director and shareholder of the 1^st defendant.

(3) KPFS lent HK$5.4 million to the 1^st defendant pursuant to a facilities letter and memorandum of agreement upon the security of a legal charge over the property all dated 18 March 2015.

(4) The memorandum of agreement and legal charge were executed on behalf of the 1^st defendant by the 2^nd defendant acting as its sole director.  The company chop and/or common seal of the 1^st defendant were also affixed on various loan documents.

(5) By a deed of guarantee dated 18 March 2015, the 2^nd defendant guaranteed the due and punctual payment of all general credit facilities granted by KPFS to the 1^st defendant, including the said loan of HK$5.4 million.

(6) As a result of the 1^st and 2^nd defendants’ default in making repayment of the loan, KPFS commenced an action against them on 30 October 2015 seeking repayment of the outstanding principal and interest thereon and vacant possession of the property.

(7) In its defence and counterclaim dated 14 January 2016, the 1^st defendant alleged that the 2^nd defendant was a complete stranger, and it did not authorise the 2^nd defendant to execute the memorandum of agreement, facilities letter or legal charge on its behalf.  It counterclaimed against KPFS for a declaration that the memorandum of agreement and legal charge were of no effect, void and unenforceable.

(8) The 2^nd defendant has not filed any defence.

(9) On 1 November 2016, KPFS obtained the leave of Master M Wong to issue a third party notice against AH&Co requiring that certain questions or issues relating to or connected with the original subject matter of the action should be determined not only as between KPH and the 1^st and 2^nd defendants but also as between either or all of them and AH&Co.

(10) A total of 6 issues (containing many sub-issues) are set out in the third party notice.  It is not necessary to recite those issues and sub-issues in this decision, save to point out that they relate (inter alia) to the question of the authenticity of various corporate documents of the 1^st defendant and loan documents, and whether the 2^nd defendant had authority to enter into the memorandum of agreement and legal charge on behalf of the 1^st defendant.

7.  HCA 429/2016:

(1) The 1^st and 2^nd defendants are husband and wife, and the 3^rd defendant is their son.  The 1^st and 2^nd defendants are the registered owners of the property known as Flat F, 6/F, Block 5, Belvedere Garden, Phase 3, 625 Castle Peak Road, Tsuen Wan, New Territories.

(2) KPFS lent HK$2.5 million to the 1^st and 2^nd defendants pursuant to a memorandum of agreement and a facilities letter upon the security of a legal charge over the property all dated 11 May 2015.

(3) The memorandum of agreement, facilities letter and legal charge were signed by the 3^rd defendant on behalf of the 1^st and 2^nd defendants pursuant to 2 powers of attorney dated 22 April 2015 executed, or purportedly executed, by the 1^st and 2^nd defendants respectively in favour of the 3^rd defendant.

(4) By a deed of guarantee dated 11 May 2015, the 3^rd defendant guaranteed the due and punctual payment of all general credit facilities granted by KPFS to the 1^st and 2^nd defendants, including the said loan of HK$2.5 million.

(5) As a result of 1^st, 2^nd and 3^rd defendants’ default in making repayment of the loan, KPFS commenced an action against them on 19 February 2016 seeking repayment of the outstanding principal and interest thereon and vacant possession of the property.

(6) In their defence and counterclaim dated 30 April 2016, the 1^st and 2^nd defendants alleged that they did not request for the loan, did not execute any power of attorney in favour of the 3^rd defendant, and did not confer any authority on the 3^rd defendant to create the legal charge. They counterclaimed against KPFS for a declaration that the powers of attorney, the memorandum of agreement and legal charge were null, void and unenforceable.

(7) In his defence dated 24 May 2016, the 3^rd defendant, while admitting that he received a loan in the net amount of HK$2,087,000 from KPFS, alleged that the loan documents that he signed at KPFS’s office and the solicitors’ office had not been explained to him and he did not understand the contents of the same, he did not execute any document or enter into any loan agreement as attorney for or on behalf of the 1^st and 2^nd defendants, he did not agree to provide any personal guarantee for any loan advanced by KPFS to the 1^st and 2^nd defendants, and the 1^st and 2^nd defendants did not sign any power of attorney appointing him as his/her attorney.

(8) On 18 January 2017, KPFS obtained the leave of Master S Lo to issue a third party notice against AH&Co requiring that certain questions or issues relating to or connected with the original subject matter of the action should be determined not only as between KPH and the 1^st, 2^nd and 3^rd defendants but also as between either or all of them and AH&Co.

(9) A total of 5 issues (including a number of sub-issues) are set out in the third party notice.  It is not necessary to recite those issues and sub-issues in this decision, save to point out that they relate (inter alia) to the question of the authenticity of the powers of attorney, and whether the 3^rd defendant had authority to enter into the memorandum of agreement and legal charge on behalf of the 1^st and 2^nd defendants.

8.  As confirmed by Mr Pow SC on behalf of KPFS at the hearing on 27 September 2017, KPFS’s position in respect of the allegations of forgery and lack of authority raised by the various defendants in the 4 actions is that it would put them to strict proof of those allegations, but KPFS wishes the court’s findings on those allegations to be binding also on AH&Co.

9.  In each of the 2 case management summonses issued by KPFS in HCA 1919 and 1922/2015 dated 20 February 2017, KPFS seeks leave to amend the third party notice as well as the following directions from the court (amongst others):-

(1) filing and service of lists of documents (paragraphs 2 and 8 of the summons);

(2) exchange of witness statements (paragraphs 3 and 9 of the summons);

(3) the issues listed in the amended third party notice be tried as between the KPFS, the 1^st and 2^nd defendants and AH&Co at the same time (paragraph 6 of the summons); and

(4) leave to AH&Co to appear at the trial and to call witnesses and to cross examine witnesses relevant to those issues (paragraph 7 of the summons).

10.  KPFS also took out summonses in HCA 2525/2015 on 17 February 2017 and HCA 429/2016 on 21 February 2017 seeking similar directions in those actions.

11.  On the other hand, AH&Co took out a third party summons in each of HCA 1919 and 1922/2015 on 23 March 2017 and in HCA 429/2016 on 30 March 2017 seeking (amongst others) the following directions:-

(1) the documents and witness statements to be served by KPFS and the defendants in the main action be served also on AH&Co (paragraph 1 of the summons);

(2) filing and service of statement of claim, defence and reply as between KPFS and AH&Co (paragraphs 2 to 4 of the summons);

(3) filing and service of lists of documents as between KPFS, the defendants and AH&Co (paragraph 5 of the summons);

(4) filing and service of witness statements as between KPFS, the defendants and AH&Co (paragraph 7 of the summons); and

(5) leave to AH&Co to appear at the trial of the action between KPFS and the defendants and to call and cross-examine witnesses (paragraph 8 of the summons).

12.  Pursuant to the order of Mr Registrar K W Lung dated 10 April 2017, the aforesaid summonses came before this court on 27 September 2017, with the defendants in the 4 actions having been excused from attending the hearing.

13.  At the hearing, the parties focused on the question of whether the court should direct pleadings to be exchanged between KPFS and AH&Co.  This is the issue that I shall deal with in this decision, leaving the rest of the matters mentioned in the various summonses to be dealt with on another date to be fixed in the event that the parties (including the defendants) cannot reach agreement on those matters.

discussion

14.  Order 16, rule 1(1) of the RHC permits a defendant, who has given notice of intention to defend, to issue a third party notice in three different situations, namely:-

(1) where the defendant wishes to claim against a person not already a party to the action any contribution or indemnity (sub-paragraph (a));

(2) where the defendant wishes to claim against such a person any relief or remedy relating to or connected with the original subject-matter of the action and substantially the same as some relief or remedy claimed by the plaintiff (sub‑paragraph (b)); or

(3) where the defendant requires any question or issue relating to or connected with the original subject-matter of the action should be determined not only as between the plaintiff and the defendant but also as between either or both of them and a person not already a party to the action (sub-paragraph (c)).

15.  By virtue of Order 16, rule 11, where in any action a counterclaim is made by a defendant, the provisions of Order 16 shall apply in relation to the counterclaim as if the subject-matter of the counterclaim were the original subject-matter of the action, and as if the person making the counterclaim were the plaintiff and the person against whom it is made a defendant.  Accordingly, KPFS, being a person against whom a counterclaim has been made in each of the 4 actions, may issue a third party notice against AH&Co under Order 16, rule 1(1).

16.  It is clear that under Order 16, rule 1(1), a defendant may issue a third party notice even though it is not making any claim against the third party (whether for contribution or indemnity under sub‑paragraph (a) or for any relief or remedy under-paragraph (b)), but merely for the purpose of having some question or issue relating to or connected with the original subject-matter of the action to be determined not only as between the plaintiff and the defendant but also as between either or both of them and the third party under sub-paragraph (c).  The purpose of permitting a defendant to issue a third party notice under this sub‑paragraph is to ensure that the relevant question or issue will be determined once and for all amongst the plaintiff, the defendant and the third party, thereby avoiding multiplicity of proceedings on the same point with possibly different results.  Thus, in Chatsworth Investments Ltd v Amoco (UK) Ltd [1968] 3 WLR 343 at 356-357, Russell LJ stated as follows:-

“We were referred by the defendants to the comments of Scrutton L.J. in Barclays Bank v. Tom[2] on the function of third party proceedings. He made three points, of which the first and leading one was the desirability of binding the third party as against the defendant to the court’s decision on a point between the plaintiff and the defendant, avoiding the burden on the defendant of proving against the third party the case of the successful plaintiff against the defendant. Put another way, third party proceedings avoid multiplicity of proceedings on the same point with possibly differing conclusions.”

17.  In the present case, KPFS has potential negligence claims against AH&Co in respect of the loan transactions, but does not wish to bring a claim against AH&Co for any relief or remedy at this stage pending the determination of various issues regarding the authenticity or validity of the relevant loan documents.  If those loan documents are ultimately found by the court to be valid and binding on the borrowers and chargors, there would be no need for KPFS to make any claim against AH&Co.  On the other hand, if those loan documents should be found by the court to be invalid and unenforceable, such findings would not, by themselves, be admissible against AH&Co unless it is brought in as a third party to the main actions.  See Myers v Sherick (N&J) [1974] 1 All ER 81, at 85-86 per Goff J:-

“Counsel says there are no common issues, and provided the defendants do not compromise without the consent of the firm, but properly fight the action and lose, then the judgment will be conclusive against the firm as to the defendants’ liability to the plaintiff and the quantum of damage. In my judgment, however, that is not so. In their claim for breach of duty, the defendants must prove their loss, and the firm, if not brought into the main action as third parties will not be bound by the judgment in it, but will be free to dispute the extent of the defendants’ true liability. In particular, in my view, it will be open to the firm to argue afresh the point taken in the defence to the main action that the plaintiff is not entitled to sue on the implied covenants, because of alleged illegality in connection with the statement of the consideration and the stamping of the transfer.”

18.  In my view, it is, in principle, open to KPFS not to make any claim against AH&Co at this stage, but to utilise the third party procedure to ensure that the court’s findings on the authenticity and validity of the relevant loan documents will be binding on AH&Co in any future professional negligence claims that KPFS may bring against the latter.

19.  Where a third party notice is issued under Order 16, rule 1(1)(c), there should, generally speaking, be no necessity for any pleadings to be exchanged between the defendant and the third party because the issues which the defendant wishes to be determined not only as between the plaintiff and the defendant but also as between either or both of them and the third party ought already to be have been stated with precision.  The issues so stated would define the scope of the evidence and discovery and enable the parties to decide what points of law should be taken.  It would, indeed, be incongruent to require the defendant in such a situation to serve a statement of claim (which, by virtue of Order 18, rule 15(1) of the RHC, must state specifically the relief or remedy being claimed) on the third party when the defendant is currently not making any claim against it.  It is also difficult to see how the third party can be required to serve a “defence” on the defendant in the absence of some claim being made against it by the defendant.

20.  Mr Pang SC on behalf of AH&Comakes a number of points in support of his contention that KPFS and AH&Co should be required to exchange pleadings.  First, he says that it is highly unfair that KPFS should drag AH&Co into the litigations without even making it clear whether KPFS is alleging that AH&Co was professionally negligent, and if so how. In my view, KPFS is quite entitled to require that questions regarding the authenticity and validity of the relevant loan documents should first be determined amongst all the parties concerned, leaving the question of professional negligence to be determined at a later stage, if necessary.  As earlier mentioned, adopting this course has the advantage of avoiding multiplicity of proceedings on the same issues with possibly different results.  It will also save unnecessary costs from being incurred on the question of professional negligence should the court uphold the authenticity and validity of the relevant loan documents.

21.  Second, Mr Pang argues that the “common issues” listed in the various third party notices are deficient in particulars.  I have examined the issues as set out in the third party notices.  By and large, I consider the issues to be clearly and properly defined.  In any event, if some of the issues are lacking in particulars as submitted by Mr Pang, the remedy lies in refining the issues instead of ordering pleadings to be exchanged.   If there are any particular issues which AH&Co considers ought to be further or better defined, appropriate third party directions can be sought under Order 16, rule 4(4), which gives the court wide powers to “give such directions as appear to the Court proper for having the rights and liabilities of the parties most conveniently determined and enforced and as to the extent to which the third party is to be bound by any judgment or decision in the action.”

22.  In passing, I should mention that Mr Pow accepts that some of the issues currently listed in the third party notice in HCA 2525/2015 do not strictly arise out of the pleadings in the main action, but arise out of the affidavits or affirmations exchanged between KPFS and the defendants in the course of a previous strike out application.   In my view, where Order 16, rule 1(1)(c) is invoked, the issues that the defendant wishes to be determined not only as between the plaintiff and the defendant but also as between either or both of them and the third party ought to be confined to issues arising strictly out of the pleadings between the plaintiff and defendant, for the simple reason that issues outside those pleadings will not, or will not necessarily, be determined as between the plaintiff and the defendant at the trial.  I shall leave this matter to be considered at the further hearing mentioned in paragraph 27 below.

23.  Third, Mr Pang submits that it is unfair to AH&Co to have to defend itself, make discovery, challenge factual evidence, and put forward a positive case without knowing what the real case against it is or is going to be.  I am unable to accept this submission.  Subject to possible refinement and cutting down of issues as mentioned above, I believe that the issues currently set out in the third party notices are sufficiently clear to enable AH&Co to decide what discovery it is required to make, what evidence it needs to put forward or challenge, and what cases it wishes to advance in respect of those issues.

24.  At the hearing on 27 September 2017, Mr Pang said that, instead of a full statement of claim, KPFS should at least be ordered to file and serve a document similar to a statement of claim but without the prayer for relief so that KPFS’s stance on the various issues listed in the third party notices would be clearly set out.  The court has, undoubtedly, jurisdiction to order the parties to exchange succinct statements of the nature of their respective cases where there are genuine difficulties in ascertaining the parties’ cases or for the purpose of narrowing down the scope of the disputes between the parties as much as possible.  In the present cases, subject to the point mentioned in paragraph 22 above, KPFS’s stance on the issues listed in the third party notices should be readily ascertainable from the pleadings already filed in the 4 actions.  As earlier mentioned, Mr Pow has also confirmed that KPFS’s position is basically that it would put the defendants to strict proof of the allegations of forgery and lack of authority.  KPFS’s solicitors previously proposed to AH&Co’s solicitors by a letter dated 6 April 2017 that the parties should file and serve an agreed statement of issues in dispute in order that the issues could be property formulated.  AH&Co’s solicitors did not, however, respond to that proposal.  I consider that there are merits in requiring KPFS and AH&Co to exchange succinct statements of their respective cases, or prepare an agreed statement of issues in dispute (with their respective stances on each issue being clearly set out in the document), but do not consider that it is necessary to order the parties to exchange formal pleadings. 

25.  Fourth, Mr Pang says that AH&Co may be prejudiced on the issue of costs because (as I understand his submissions), in the absence of any claim being made by KPFS against AH&Co, it will not be possible to make an order that costs should follow the “event”.  When determining the question of costs, the court will have to consider, amongst other things, whether the defendants have succeeded in challenging the authenticity and validity of the various loan documents and what (if any) cases have been advanced by AH&Co in respect of the issues set out in the third party notices.  I do not consider that the court will be unable to make a costs order at the end of the day which will fully reflect the justice of the case as amongst all the parties concerned.

DISPOSITION

26.  For the foregoing reasons, I decline to order pleadings to be exchanged between KPFS and AH&Co.

27.  Since the defendants will be affected by the rest of the directions sought in the summonses mentioned in paragraphs 9 to 11 above, I direct that the summonses be restored for a further hearing before this court with 1 hour reserved, unless all parties (including the defendants) can agree on the directions to be made, in which event a consent summons should be submitted for the court’s approval. For the avoidance of doubt, at the restored hearing of the summonses, the court will also deal with the question of amendments of the third party notices, objections (if any) to the issues as currently listed in the third party notices, as well as the matters mentioned in paragraphs 22 and 24 above.

28.  On the question of costs, I make an order nisi that AH&Co shall pay KPFS its costs of the hearing on 27 September 2017, to be taxed if not agreed with certificate for senior counsel.

29.  Lastly, it remains for me to thank counsel for their assistance rendered to the court.