CHEONG HING INTERNATIONAL LTD v. YU YUEN WAI AND OTHERS

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AND

HCA 2521/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2521 OF 2007

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(Consolidated by Order of the Hon Mr. Justice Fung on 10 September 2008)

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REASONS   FOR   JUDGMENT

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1.  There were 4 summonses before the Court:

(1) the plaintiff’s summons dated 29 may 2008 for judgment in default of defence against the 3^rd defendant;

(2) the plaintiff’s summons dated 17 September 2008 for summary judgment against the 1^st and 4^th defendants;

(3) the 1^st defendant’s summons dated 15 October 2008 to strike out, or alternatively, for Further and Better Particulars of the Amended Statement of Claim;

(4) the 4^th defendant’s summons dated 16 October 2008 to strike out the Amended Statement of Claim and the action against it. 

2.  At the hearing, the plaintiff conceded unconditional leave to defend against the 1^st defendant.  I declined to enter default judgment against the 3^rd defendant, and dismissed the application for summary judgement against the 4^th defendant.  The 2 striking out summonses were adjourned on directions to be agreed.  I now give my reasons.

Background

3.  For the present purpose (and without prejudice to further investigations), the following are taken to be the background of the case.

4.  The plaintiff is a Hong Kong company with Mainland shareholders.  It is the parent company of the 3^rd defendant, holding 99% of the shares, with the other 1% held by First Shine Development Ltd.  The plaintiff also holds 99% of First Shine, with the other 1% is cross held by the 3^rd defendant.

5.  Sometime in 2000, Global Information Technologies Ltd, parent company of  the 4^th defendant, entered into an agreement with the shareholders of the plaintiff for the purchase, inter alia, of First Shine.  Global alleged that it had paid the total consideration of $102 million and is the beneficial owner of First Shine.  However, the shares transfer has not been duly registered by First Shine.

6.  Until their removals, the 1^st and 2^nd defendants were directors of the plaintiff, the 3^rd defendant and First Shine.

7.  The plaintiff alleged that the 1^st and 2^nd defendants were previously in control of the plaintiff, the 3^rd defendant and First Shine and they failed to keep proper accounts, convene meetings and report to the shareholders of the plaintiff.  The shareholders regained control of the plaintiff by removing the 1^st and 2^nd defendants and appointing new directors.  However, they had not moved at the same time to regain control of the 3^rd defendant.

8.  On 22 September 2006 before the appointment of the new directors to the plaintiff, the 1^st and/or 2^nd defendant caused the plaintiff to assign its landed property at Seymour Road (“Property”) to the 3^rd defendant for $4,860,000 without any prior written agreement for sale and purchase (“1^st Assignment”).  The 1^st defendant signed the 1^st Assignment for both the plaintiff and the 3^rd defendant.  The plaintiff alleged that it had not received the consideration of the 1^st Assignment.  The plaintiff alleged that the purpose of the 1^st Assignment was to remove the property from the reach of the plaintiff and/or the shareholders. 

9.  On 8 November 2006, the plaintiff issued the writ herein against the 1^st, 2^nd and 3^rd defendants (“1^st Writ”).  The general indorsement claimed the declaration, inter alia, that the 1^st Assignment was null and void, and the 1^st and 2^nd defendants were in breach of trust and/or fiduciary duty towards the plaintiff in effecting the 1^st Assignment. 

10.  On 9 November 2006, the 1^st Writ was duly registered as a lis pendens with the Lands Registry.

11.  On 9 January 2007, the 1^st defendant caused the 3^rd defendants (as landlord) to enter into a 5 year tenancy of the Property with First Shine at $4,000 per month.  The plaintiff alleged the rent was substantially below market value.

12.  In April 2007, the plaintiff attempted the requisitions of General Meetings of the 3^rd defendant and First Shine.  The requisite quorum is 2.  The plaintiff’s requisitions were challenged by the respective 1% shareholders, i.e. the 3^rd defendant and First Shine.

13.  The plaintiff obtained an order from the Company Judge to convene a meeting of the 3^rd defendant.

14.  Shortly after service of the notice for General Meeting of the 3^rd defendant on 29 October 2007, the 1^st defendant caused the 3^rd defendant to enter into a provisional sale and purchase agreement to sell the Property for $5,300,000 to the 4^th defendant.  The Assignment was executed on 16 November 2007, expressly subject to the lis pendens (“2^nd Assignment”).  The consideration of the 2^nd Assignment was stated to be partly in cash and partly by way of waiver of debt owed by the 3^rd defendant to the 4^th defendant.

15.  Eventually, the plaintiff regained control of the 3^rd defendant.  The plaintiff alleged that the 3^rd defendant had not received the consideration under the 2^nd Assignment.

16.  On 4 December 2007, the 4^th defendant took out a writ in HCA 2521/2007 for an order that the lis pendens cease to have any priority over the property, or alternatively that the lis pendens is null and void.  The Statement of Claim in HCA 2521/2007 averred the 1^st Writ was not served on the 3^rd defendant within the validity period of 1 year, and on 26 November 2007 the plaintiff had issued another writ in HCA 2469/2007 (“2^nd Writ”) with identical indorsement of claim as the 1^st Writ.  Hence, the lis pendens on the 1^st Writ ceased to have priority. 

17.  On 10 September 2008, the parties appeared before me on the application of default judgment against the 3^rd defendant.  The 3^rd defendant indicated consent to the application.  At that stage, the 1^st defendant had not properly been served, and no contact could be established all along.  But on the day before the last hearing, counsel for the 1^st defendant filed skeleton submissions objecting to the application for judgment against the 3^rd defendant.

18.  Service of the 1^st Writ was attempted on the 1^st defendant in April 2007 by post at the Property and was returned.  On 25 October 2007, Messrs Pang Wan & Choi (“PWC”) filed a notice to act for the 1^st defendant without acknowledging service.  Solicitors for the plaintiff made an appointment with PWC for service of the 1^st Writ.  However, service was not accepted on the appointed day and the 1^st defendant filed a Notice to act in person on the same day.  The plaintiff applied to effect “deemed service” on PWC but was refused by the Master.  No further step was taken against the 1^st defendant.

19.  The skeleton arguments by the 1^st defendant objecting to default judgment against the 3^rd defendant raised only the point that the plaintiff was not the proper party and the action should have been brought in the name of the 3^rd defendant as fraud on the minority under the rule in Foss v Harbottle (1843) 2 Hare 461. 

20.  The 4^th defendant also applied to be joined as defendant in the action herein, alleging bona fide purchase without notice.  Joinder was allowed by consent at the last hearing. 

21.  An Order was also made to consolidate HCA 2469/2007 (on the validity of the 1^st Writ as lis pendens). 

22.  The hearing of the default judgment was adjourned for the plaintiff to take out applications for summary judgment against the 1^st and 4^th defendants, so that all matters could be dealt with together.

23.  Thereafter, the 1^st defendant filed evidence alleging that the consideration of the 1^st Assignment was by way of a waiver of debt owed by the plaintiff to the 3^rd defendant.

24.  The plaintiff had since conceded unconditional leave to defend on the part of the 1^st defendant.  What remained between the plaintiff and the 1^st defendant is the issue of costs.

Plaintiff’s case against the 3^rd and 4^th defendants

25.  The Amended Statement of Claim pleaded fraud against the 1^st, 2^nd and/or 3^rd defendants based on the facts stated above, and lack of consideration and knowing receipt on the part of the 4^th defendant. 

26.  Mr Wong, for the plaintiff, indicated that he is not relying on any fraud against the 3^rd defendant for the purpose of the default judgment, nor lack of consideration or knowing receipt against the 4^th defendant for the summary judgment.

27.  The Amended Statement of Claim alleged that the 1^st Assignment was null and void by reason of lack of consideration (paras. 9A and 9C).  Mr Wong clarified the plea as follows:

(1) Upon its true and proper construction, the 1^st Assignment was subject to the condition precedent of payment of the consideration of $4,860,000;

(2) The 1^st defendant admitted that the $4,860,000 was never paid as such as the consideration was, if at all, by waiver of debt;

(3) As the condition precedent was not fulfilled, title never passed;

(4) 1^st Assignment was null and void by reason of failure of condition precedent;

(5) Hence, the plaintiff remained the legal and beneficial owner of the Property.

28.  The Amended Statement of Claim pleaded that the 2^nd Assignment was “null and void” and the 4^th defendant did not obtain legal title to the Property (paras. 9D and 9E).  Mr Wong explained the plea as follows:

(1) The 2^nd Assignment was expressly subject to the lis;

(2) Upon the entering of default judgment against the 3^rd defendant for the declaration of retention of beneficial ownership of the Property by the plaintiff, the 2^nd Assignment was subject to the plaintiff’s right;

(3) Hence, The 4^th defendant loses priority to the plaintiff.

29.  Mr. Wong further explained the traverse to bona fide purchase without notice as follows:

(1) The allegation of waiver of debt by the 4^th defendant towards the 3^rd defendant was contradicted by comtemporaneous documents;

(2) The 4^th defendant had notice of the lis (as opposed to knowledge of breach of fiduciary duties by the 1^st and/or 2^nd defendants) constituting notice.

30.  Be that as it may, Mr Wong is not relying on lack of bona fide purchase without notice point in seeking summary judgment against the 4^th defendant.

Applicable principles

31.  The relevant principles on judgment in default of defence are set out in Hong Kong Civil Procedure 2009 paras. 19/7/13 and 19/7/20: The Court retains its discretion whether to give judgment.  It may, for instance, where there are matters affecting other parties waiting to be decided, order the motion to stand over until trial (Verney v Thomas (1888) 36 WR 398).  It is not the normal practice of the Court to make a declaration without a trial, particularly where the declaration is that the defendant in default of defence has acted fraudulently (Wallersteiner v Moir (No 1) [1974] 1 WLR 991).  However, this is only a rule of practice and should only be followed when the plaintiff can obtain the fullest justice to which it is entitled without the declaration he seeks (Lam Shing Shou v Lam Hon Man & ors [2002] 1 HKLRD).

32.  In Lam Shing Shou v Lam Hon Man, Chu J held thatin the absence of a judgment reached after hearing evidence, a declaration could be based only on unproved allegations and the Court ought not declare as fact that which might not have proved to be such had the facts been investigated (Wallersteiner v Moir (No 1) ob. cit. and Patten v Burke Publishing Co Ltd [1991] 1 WLR 541 followed).

Discussion

33.  As the 3^rd defendant is controlled by the plaintiff, the real purpose of seeking default judgment against the 3^rd defendant is to lay the foundation for the summary judgment against the 4^th defendant under the lis pendens.

34.  In reality, the allegation of fraud is against the 1^st and 2^nd defendants and the 3^rd defendant is merely a corporate vehicle controlled by them with no separate mind and soul.  Whereas the plaintiff has conceded unconditional leave to defend on the part of the 1^st defendant, it should ordinarily be convenient that any application for default judgment against the 3^rd defendant be, so to speak, stood over to the trial.

35.  However, Mr Wong submitted that if judgment against the 3^rd defendant were given on the narrow issue of construction of the 1^st Assignment, there is no need to involve the 3^rd defendant in any claim of breach of fiduciary duties against the 1^st and/or 2^nd defendants.  The proprietary claim against the 3^rd defendant and the personal claim against the 1ast and/or 2^nd defendants should remain distinct and separate.

36.  The consideration clause in the 1^st Assignment is as follows:

“In consideration of the sum of [HK$4,860,000] paid by the Purchaser to the Vendor (the receipt whereof is acknowledged) the Vendor as beneficial owner assigns to the Purchaser the property …”

37.  The clause was couched in standard terms without reservation of passing of title be conditional upon payment.  In fact, receipt of the consideration was expressly acknowledged, which suggests the condition was fulfilled.  Hence, it militates against the construction of condition precedent.  Mr Wong submitted that if payment were by waiver of debt, it means the acknowledgement clause is inaccurate.  A fortiori, the alleged inaccuracy of the receipt clause means that the 1^st Assignment should be construed in the relevant surrounding circumstances including the indebtedness between the plaintiff and the 3^rd defendant.

38.  In the premises, I declined to enter the default judgment against the 3^rd defendant.  The application for summary judgment against the 4^th defendant on the narrow basis that the 2^nd Assignment is taken subject to the lis also falls through.

Costs between the plaintiff and the 3^rd defendant

39.  Although the 3^rd defendant filed a consent to default judgment and was absent at the hearing,  the plaintiff has to make the application and satisfy the Court in the exercise of the discretion In any case.  I made no order as to costs as between the plaintiff and the 3^rd defendant.  I apportion 3/5 of the time of the oral hearing on the default judgment summons.

Costs between the plaintiff and the 4^th defendant

40.  I have ordered the costs of the dismissed application for summary judgment against the 4^th defendant be in the cause.  No doubt the plaintiff had failed, but before I called upon Mr Leung, counsel for the 4^th defendant, to address the Court, I have indicated the position in favour of the 4^th defendant and asked whether he had anything useful to add.  Mr Leung made further submissions but had unfortunately unravelled Mr Wong’s elucidation on the claims and confused the issues without adding anything to the position before he started.  With respect, time has been wasted without contribution to the resolution of the dispute.  Hence, I ordered costs be in the cause to mark the Court’s dismay.  I apportion 1/5 of the time of the oral hearing on this summons.

Costs between the plaintiff and the 1^st defendant

41.  O. 14, r. 1 of the Rules of the High Court (“RHC”) provides that:

“(1)   Where in an action to which this rule applies a statement of claim has been served on a defendant and that defendant has given notice of intention to defend the action, the plaintiff may, on the ground that that defendant has no defence to a claim included in the writ, or to a particular part of such a claim, or has no defence to such a claim or part except as to the amount of any damages claimed, apply to the Court for judgment against that defendant.

(2) Subject to paragraph (3) this rule applies to every action begun by writ other than-

(a)  an action which includes a claim by the plaintiff for libel, slander, malicious prosecution, false imprisonment or seduction,

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

(c)  an Admiralty action in rem.

(3) …”

And O. 14, r. 7(1) of RHC provides that:

“(1) If the plaintiff makes an application under rule 1 where the case is not within this Order or if it appears to the Court that the plaintiff knew that the defendant relied on a contention which would entitle him to unconditional leave to defend, then, without prejudice to Order 62 and in particular to rule 4(1) thereof, the Court may dismiss the application with costs and may require the costs to be paid by him forthwith.”

42.  O. 62, r. 4(1) excepted the order of payment of costs forthwith before conclusion of the proceedings in case of legally aided persons.

43.  Mr Wong submitted that at the last hearing, when counsel then acting for the 1^st defendant filed his skeleton arguments in answer to the plaintiff’s claims on breach of fiduciaries and lack of the consideration under the 1^st Assignment, all that was put up was the Foss v Harbottle point without mentioning any waiver of debt.  The plaintiff was entitled to assume that was the defence in all.  The Foss v Harbottle point was misconceived, just as Mr Mak, counsel now acting for the 1^st defendant, (who has disclaimed authorship of it) so conceded.  Hence, the summary judgment application.  Upon seeing the allegation of waiver of debt, the plaintiff conceded unconditional leave to defend.  It was not a defence the plaintiff had known about, and the proper order is one of costs in the cause.

44.  Mr Mak, on the other hand, submitted that the plaintiff’s action against the 1^st defendant includes a claim based on an allegation of fraud and it is not open for the plaintiff to seek summary judgment on it.

45.  Mr Wong referred to Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd [2007] 2 HKLRD 262 (“PEWC case”) where Saunders J held that the exclusion in O. 14, r. 1(2)(b) is to be construed narrowly, and is confined to an action based on fraud as strictly defined in Derry v Peek (1899) LR 14 App Cas 337.  In the PEWC case, although the statement of claim pleaded conduct of the former executives of the plaintiff in diverting funds from the company by false accounting and may be characterised as fraud, the causes of action upon which the plaintiff relied to seek summary judgment were based on resulting trust, constructive trust, and money had and received but not one based on fraud (see paras. 17-19).  Hence, it did not come within the bar to summary judgment.

46.  Clerk and Lindsell on Torts (19^th ed, 2006) at para. 18-17 referred to the essentials of fraud in the tort of deceit as laid down byLord Herschellin Derry v Peek:

“… fraud is proved when it is shown that a false representation has been made (i) knowingly, (ii) without belief in its truth, or (iii) reckless, careless whether it be true or false.”

47.  Mr Wong submitted that the proof of fraud requires the proof of the mental element, whereas allegation of breach of fiduciaries duties by the 1^st defendant is not necessarily so.

48.  While the Statement of Claim in the PEWC case did not use the word “fraud”, the Amended Statement of Claim expressly pleaded fraud against the 1^st defendant et al.  The conduct of the 1^st defendant in relation to the 1^st and 2^nd Assignments and also circumstances suggesting an inference of fraud were pleaded under the Particulars of Fraud.  The claim of breach of fiduciary duties included an allegation of fraud.  In seeking summary judgment, the plaintiff had not made it clear that it was not relying on an allegation of fraud.  The proposition was only made clear, if at all,  upon argument on costs.

49.  Even if the plaintiff’s claims do come within the bar to summary judgment, costs is nevertheless in the discretion of the Court.  The fact remains that when faced with the allegation of fraud, all the 1^st defendant came up with was the Foss v Harbottle point.  It is not surprising that the plaintiff has sought judgment albeit on the possible assumed bases of constructive admission or disposal on a point of law.  The subsequent claim of waiver of debt did not alter the status ex ante.   The plaintiff could not have anticipated such defence if it were not raised when so vividly expected. 

50.  Hence, I ordered the costs of the dismissed application for summary judgment be in the cause.  I apportion 1/5 of the time of the oral hearing on this summons taken out against the 1^st defendant.

Summonses for striking out

51.  The 2 summonses for striking out were adjourned because of lateness of issuance.

52.  Having heard the submissions by Mr Wong on the true bases of the plaintiff’s claims, the Amended Statement of Claim is perhaps infelicitously worded.  Save as to the knowing receipt claim against the 4^th defendant, the matter could probably be dealt with by amendments along the lines elucidated by Mr Wong.  As to the knowing receipt point, more serious thought on the true basis of the claim beckons as any pleading that is not supportable by evidence should not be unreasonably pursued.  If due consideration be had to the signalled amendments, the summonses should likely be capable of resolution without a hearing.