CHAN KWOK MAN v. MARK C FONG AND OTHERS

Courts, practice and procedure - partnership - Receiver appointed in action - whether a fresh action against Receiver warranted.

A person who is prejudiced by the conduct of a Receiver should normally seek relief in the action in which the Receiver was appointed. The court will give leave for a fresh action to be brought against him only where the circumstances so require.

The practice and procedure for the passing of accounts provided in R.S.C. Orders 30, 43 and 44 should be followed wherever possible for they tend to shorten proceedings and reduce costs.

Until the Master has signed his certificate passing the Receiver's account, he is not functus officio. Resort to a Judge, piecemeal, should not be allowed on matters dealt with by the Master in a receivership.

The Statement of Claim in the second action was an abuse of the process of the court and should have been struck out.

Appeals allowed.

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JUDGMENT

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Fuad, J.A.:

1. These are appeals from orders made by Mayo, J. on 29th January this year in relation to two actions filed in the High Court: No. 4209/82 and No. 7984/84. The matter has a somewhat checkered history into which it is necessary to go, however, briefly.

2. The story starts in September 1976 when a partner-ship was formed between Madam Chan Yiu Ling and three others who are not now concerned with the issues before us. These four people formed the partnership (to trade under the firm name of Hang Tat Company) whose main object was to promote and sell water heaters under the brand name "Berlin" which were manufactured by the Hang Tat Engineering Company Limited. Madam Chan Yiu Ling would provide all the capital but the profits would be shared between the four partners. Later, Mr. Chan Kwok Man was admitted as the fifth partner.

3. A writ was issued in Action 4209/82 on the 20th May 1982. The lst Plaintiff was Mr. Kwok Hang Tat, the majority shareholder and a director of Hang Tat Engineering Company. The 2nd Plaintiff was his wife, Madam Chan Yiu Ling. The Defendant was Mr. Chan Kwok Man. By this time the other partners had left the partnership.

4. The relief sought by that action, very briefly, was that there should be a declaration that the partnership had been dissolved as from 20th May 1982; that the affairs of the partnership should be wound up; that a proper person be appointed as Receiver and/or Manager of the partnership, and that for these purposes all necessary accounts and enquiries be taken. An injunction was also asked for but we are not concerned with that.

5. On the 21st May a summons was taken out by the Plaintiffs in that action to appoint a Receiver and Manager of the partnership and seeking various consequential orders. Jackson-Lipkin, J., on the 28th May 1982, made an order on the summons and, inter alia, appointed Mr. Mark Fong Chung and Mr. Chow King Fook as Joint Receivers and Managers. This was varied slightly by an order on the 13th July 1982.

6. The Defence to this action, which included a counterclaim, was filed on the 17th June. The main relief claimed by the counterclaim was a declaration that the partnership was dissolved from 20th May 1982 and a declaration that the partnership was jointly owned by the 2nd Plaintiff and the Defendant, each holding 50% of the shares. An order was sought for the appointment of a Receiver and for accounts and enquiries to be taken. There was also a specific request for an enquiry as to the value of the goodwill.

7. On the 8th July Jackson-Lipkin, J. discharged Mr. Chow King Fook, leaving Mr. Mark Fong Chung as the sole Receiver and Manager. This was an order made by consent because security had not been furnished in time in respect of Mr. Chow.

8. On the 29th November 1982 Mantell, J. heard Action 4209/82 and granted a declaration that the partnership was dissolved as from the 20th May as well as a declaration that the two remaining partners each held 50% shares in the partnership. By the time Mantell, J. came to give his judgment there was no live dispute on these matters.  He decided it was not necessary to make any further orders in the receivership.

9. On the 25th July 1984 a notice was filed by the Plaintiffs that the accounts of the Receiver were lodged with the court, and giving notice of an appointment before the Master to proceed on the account. This was expected to take place on the 20th September 1984. The accounts were brought up to date by another notice issued on the 3rd September 1984, and in due course two affidavits were filed by the Receiver stating that they were full and true accounts. All this was done under 0.30 r.4 of the Rules of Supreme Court, which are the rules that were in force in the United Kingdom until they were changed in 1985. We have had no changes in the relevant rules in Hong Kong.

10. On the 23rd October the Defendant filed his grounds of objection to the Receiver's accounts and a summary of both parties objections was also filed. On the appoint-ment that had been adjourned from the 20th September 1984, Master Barnett made an order passing the Receiver's accounts save for five disputed items; and he issued directions that there be a hearing on those five items, with further directions regarding evidence etc.

11. We have been supplied with a copy of the notes that Master Barnett took on this occasion and it is necessary to refer to what he said towards the end of that day's proceedings. His notes read (as regards the guarantee cards that were in issue) that the opposing party had argued that these were valuable assets for which the Receiver had given no credit. The Master recorded that while he agreed that they may have been valuable assets this did not affect the accounts. The Defendant might disagree with the Receiver disposing of them for nothing and also with the way he had settled the claims or disposed of other assets; then the Master noted as follows:

I will return to this shortly.

12. On the 7th November 1984 the Defendant filed a notice of appeal against Master Barnett's order and gave notice of an application to a Judge in Chambers for an order that the accounts be accepted save for those objections raised in his grounds of objection.

13. If the Master's order on the 23rd October was truly a certificate for which provision is made in the R.S.C., then what the party aggrieved should have done was to apply to a Judge "in person" (within 8 days of the filing of the Master's certificate) under 0.44 r.22(1). The rule continues by saying that the certificate is binding on the parties unless it is varied by the Judge. But the Judge has power to vary a certificate in special circumstances even though it has become binding.

14. Although the learned Master made a formal order which was later drawn up to the effect that I have mentioned, it seems to me quite clear that this was not a certificate within the meaning of the R.S.C. The 1982 White Book explains on page 744 how a certificate should be prepared and stresses that apart from the actual decision, the certificate should contain a list of the affidavits read; any witnesses examined; any specific findings of fact by the Master, and his reasons for his decision.

15. In my judgment, it is quite wrong to permit a matter before the Master to be heard piecemeal like this, in the sense that resort should be allowed to a Judge of the High Court before the Master has completed his examination of the accounts and made all necessary enquiries. Be that as it may, as I have noted, an appeal was filed.

16. On the 23rd November 1984 the "appeal" came before Mantell, J. who gave an extension of time that had been sought but in view of the new action which had been filed earlier the same day, he adjourned the hearing of the "appeal" until the 6th December 1984.

17. The new action was instituted by a writ on the 23rd November, as I have mentioned, and was given the number 7984 of 1984. Mr. Chan Kwok Man, who was the Defendant in the earlier action, was the Plaintiff, and he sued the 1st Defendant - Mr. Mark C. Fong who was the Receiver in the earlier action, Madam Chan, Mr. Kwok (husband and wife) and two of Mr. Kwok's Limited Companies. So there were five Defendants in this action.

18. On the 30th November 1984 the Defendant in the old action, Mr. Char. Kwok Han, issued a summons seeking the following:

There were supporting affidavits from the Defendant's solicitors explaining how they had come to issue the new writ inadvertently without first asking leave of the court.

19. On the 6th December 1984 the matter came before Mantell, J. again who granted an application for a firm of solicitors to act for the Receiver in the first action, 4209/82, and he adjourned the hearing of the summons to a date to be fixed.

20. On the 23rd January 1985 a summons was taken out in the new action, 7984184, by the 2nd to the 5th Defendants to strike out the Statement of Claim under 0.18 r.19, and the inherent jurisdiction of the court. Then the matter came before Mayo, J. on the 29th January. It will be seen that he had three matters before him, first the adjourned "appeal" against Master Barnett's order. Then there was the summons for leave to continue the new action, (or to institute a new one, and for leave to stay the earlier action, if necessary) and the summons to strike out the new Statement of Claim.

21. Mayo, J. made an order on the same day. It is here necessary to point out that those responsible for drawing up the orders of the court must exercise greater care, otherwise confusion may occur. The following orders were all apparently made by the learned Judge in the old action, 4209/82: the Defendant was given leave to continue Action 7984/84; the Plaintiff was given leave in that action to amend the Statement of Claim to include certain items in the grounds of objection; an order was made staying further proceedings in Action 4209182 and, still in the same order, an order was made dismissing the summons to strike out the Statement of Claim in 7984/84.

22. On the same day it seems that another order was made, this time in H.C.A. 7984/84, dismissing the summons of the 2nd to 5th Defendants to strike out the Statement of Claim with the addition of the words "with right of appeal". It need hardly be said that an order can only be made in the action itself and it is quite wrong to bring together orders affecting different, and unconsolidated, proceedings before the High Court in one order.

23. On the 27th February 1985 the 2nd to 5th Defendants in H.C.A. 7984/84 filed a Notice of Appeal against Mayo, J.'s refusal to strike out the Statement of Claim, and on the 28th February the Receiver in H. C. A. 4209/82, (who it will be recalled was the 1st Defendant in the new action) filed a Notice of Appeal against the Judge's order of the 29th January, broadly on the grounds that he had no jurisdiction to allow the new action to be continued, or if he did, he had wrongly exercised his discretion to allow its continuance. There was another Notice of Appeal filed by the Receiver in the new action or the same day.

24. For the Receiver in the old action, Miss Yuen submitted that as a rule a person who feels prejudiced by the conduct of a Receiver ought to seek relief in the action in which the Receiver was appointed. Among the authorities she cited to us was Searle v. Choat⁽¹⁾ and Re Maidstone Palace of Varieties Limited ⁽²⁾.  Reference was also made to Aston v. Heron ⁽³⁾. I will read part of the judgment of the Court of Appeal in Searle v. Choat⁽¹⁾- from Cotton, L.J.'s judgment beginning at page 726:

25. The cases also show that leave should be sought from the court before instituting an action against a Receiver and the court will grant leave only when it considers that the best course for disposing of the issues would be by a fresh action. An example cited to us by Counsel was L.P. Arthur (Insurance) Ltd. v. Sisson⁽⁴⁾. Miss Yuen took no point that leave had not been sought before the action had actually been instituted, relying on the contention that in any event the proceedings should not be allowed to proceed.

26. The Judge was obviously of the opinion that it was a case that fell within the principle exemplified by L.P. Arthur v. Sisson⁽⁴⁾ for what he said in his short judgment was this:

"I am satisfied that the issues are such that it is necessary for the dispute between the parties to be ventilated by separate litigation. I do not see any basic objection to the new action which has been commenced by the defendant. However it would appear to constitute a satisfactory vehicle for the resolution of the dispute concerning the guarantee card. I am prepared to order that leave be granted retrospectively to enable the new action to continue in its present form. This means there must be a stay of the passing of the accounts.

27. Miss Yuen, for the Receiver, contended that the new writ (accompanied with a Statement of Claim) repeated nearly all the grounds of objection of the Defendant to the accounts and did not add anything new; that the amended writ had included items that had been considered and passed by Master Barnett; that Master Barnett's order, until it was varied, remained binding; and that extra costs would be incurred unnecessarily if the new action was allowed to proceed. She submitted that the two new parties-these were Mr. Kwok Hang Tat's companies - had only been brought in through their connection with Mr. Kwok and his wife, Madam Chan, and only in respect of the guarantee cards. She argued that the new Statement of Claim was frivolous and vexatious and should have beer struck out.

28. Mr. Tong, for the 2nd to 5th Defendants in H.C.A. 7984/84 submitted that the Statement of Claim filed in that action should have been struck out as being an abuse of the process of the court in that the matters raised therein had either already been determined by a competent court or were pending before such a court. He said that even if the new action was not an abuse of the court's process, the Judge should not have granted leave to continue the action for there were no special circumstances to justify it.

29. Mr. Tong took us carefully through the Rules of Court which set out the practice and procedure for the passing of accounts. He drew our attention particularly to O.30 rr.4,5 and 6; O.43 rr. 3, 4, 5, 6 and 8; O.44 rr.21 to 25; and he also referred us to the helpful account of the proper procedure in ATKIN'S COURT FORMS: in Volumes 1 and 33 of the 2nd Edition. He submitted that there was no issue raised in the new action which could not be dealt with in the former action, within the embrace of these comprehensive provisions.

30. I have no doubt that it is desirable that the English practice should be followed. There is no indication in the proceedings which culminated on the 23rd October that this was done. Quite apart from the practical value of a work of the high authority of ATKIN'S COURT FORMS, there are gaps in the rules and these are filled in by practice which has been in force in England as far as know for many years and, as my Lord Kempster, J.A. reminded us during the hearing, section 17 of the Supreme Court Ordinance expressly enjoins us in circumstances where the matter is not expressly covered by local rules to follow the practice and procedure of the Supreme Court in England.

31. Before I take leave of what the Master said on the 23rd October, with respect, I think he was wrong to suggest that the Defendant's remedy against the Receiver was by separate proceedings. It seems to me plain that the rules that have been referred to us give the court ample jurisdiction and a wide discretion to deal with each case on its peculiar facts, and the practice should be that these powers are used as far as possible, for they tend to shorten procedure and help to reduce costs to the minimum.

32. I think the learned Master erred, too, in holding that he was unable (if he decided that the guarantee cards did have some value) to go on and pass the accounts showing this as an asset of the partnership. He would have been perfectly correct to go into the matter and so decide if the evidence warranted it.

33. I entertain no doubt that Miss Yuen's and Mr. Tong's contentions are correct and that the rules provide for every eventuality. Even where there has been "wilful default" (as understood by the cases) by the Receiver, the remedy is in the action.

34. I would emphasize that the procedure provided for in the R.S.C. for the passing of accounts ought to be followed unless there are reasons why a separate action needs to be brought. The Master has full power to give directions. These can include, of course, arrangements in the nature of discovery. He can allow the cross-examination of deponents. He can hear evidence and arguments and there is no reason to suppose that his determination on the accounts would be less effective than a determination at the end of a trial.

35. The reasons given by the solicitors acting for Mr. Chan as to why the decision was taken to institute the new proceedings are set out in an affidavit. I will not take time in reading the grounds put forward, but they appear in paragraphs 5(a) to (f) of the affidavit which was filed on the 30th November 1984: at pages 331 to 333 of our appeal record. I would only say that, in my judgment, they are totally misconceived; they put the cart before the horse - the cart being the new action and the horse being the old one. They do not begin to make out a case for the new action in the light of the receivership that was continuing.

36. In examining the Statement of Claim in the new action, 7984/84, Mr. Tong took us through (as indeed Miss Yuen had done to a certain extent) all its paragraphs to indicate where the matters pleaded could be dealt within the receivership. It was, if I may say so, a helpful and formidable examination. All I will say about the new Statement of Claim is that Mr. Woo (who held a difficult brief in this matter) himself found it difficult to divine what cause of action would be relied upon. As regards the Receiver, he suggested that professional negligence could be raised; also breach of fiduciary duty; and fraud and conspiracy. But the pleading fell so far short of that which is necessary to found any of these pleas that ore must regard it as quite hopeless. Indeed, I do not think it necessary to say any more than that it cried out to be struck out, as being frivolous and vexatious, or as an abuse of the process to the court. Whether or not other proceedings had been pending, it was not in a form that was fair to any defendant to have to face.

37. The cause of action pleaded against the two companies owned by Mr. Kwok Hang Tat is tenuous and vaguely pleaded. I can see no justification for the new proceedings even if it is said that these two new parties had to be brought in for they would not be bound by any decision made in the receivership. It should be noted that no relief is claimed whatever against the 2nd Defendant in the new action and why Mrs. Kwok was brought into it, apart from the fact of her being married to Mr. Kwok, I cannot imagine.

38. With the utmost respect to the learned Judge (who did not have the assistance of Counsel), in my view he was wrong to make the orders that he made. This court will not interfere readily with the discretion of a Judge-and it was entirely a matter of discretion. But when he does not give fuller reasons than those he gave (and I make no criticism about this) we are entitled to exercise our own discretion where it appears that certain matters may not have been taken into account. Points that the Judge may have overlooked, for they are not mentioned in his judgment, are the additional costs and the anxiety that the Defendants would face by having to defend the new proceedings; and the fact that good grounds had not been made out (certainly not in the affidavit filed by the solicitors responsible) for instituting the second action.

39. I have already commented upon what the Master said on the 23rd October 1984. I merely wish to emphasize that in my opinion the Master had not completed his work in the passing of the accounts and in pursuing the enquiries that were necessary and, therefore, that he was not functus officio. The parties are free to go back to him to continue the enquiry and follow the directions he has already given. His decision on the guarantee cards, and indeed on any of the matters, must not be regarded as final and binding. In my judgment, it is only when he has given the certificate for which provision is made in the rules, in the form required, that the accounts become binding.

40. For the reasons I have given, I would allow both appeals. I would refuse leave to the Plaintiff, Mr. Chan Kwok Man, in H.C.A. 7984/84 to continue that action, and strike out the Statement of Claim (and the writ) as an abuse of the process of the court. I would remove the stay in the receivership in the old action, 4209/82.

(1) [1884] 25 Ch. 723

(2) [1902] 2 Ch. 283

(3) (1834) 39 E.R. 993

(4) [1966] 1 W.L.R. 1384

Cons, J.A.:

41. I agree with my Lord. The proceedings which have culminated in these two days before this court have a most unsatisfactory and unhappy history. Possibly the first effective error was the comment by the Master that the principal matter of which Mr. Chan now complains - that is the matter of the guarantee cards - could only be dealt with in proceedings separate from the receivership proceedings. Thus led astray, perhaps, Mr. Chan, and those who have been advising him, cannot be criticized too heavily for initiating this separate action, and of course there may be occasions when such a course is justified and the leave of the court will be given for it to be done. Unfortunately Mr. Chin was not content with just a separate action. He also appealed from the order made by the Master, an appeal which in my view is completely misconceived. The Master, although he may have thought otherwise, remained seized of all the matters before him until he gave or refused his final certificate. Once the stay or the receivership proceeding is removed his jurisdiction will revive and although he initially refused to do so on wrong grounds he may, and indeed must if asked to do so, deal with the guarantee cards.

42. When the matters came before the judge below the proceedings, by reason of the various events to which my Lord has already referred, become thoroughly and quite unnecessarily complicated. It is difficult not to have sympathy with the Judge who found himself faced with that position. However, at the same time I cannot avoid the feeling that had he approached the Statement of Claim more critically he would have realized that in itself it disclosed no reasonable cause of action and ought never to have found place on any court file. Mr. Woo has very bravely defended the Statement of Claim and has suggested five or perhaps six causes of action which could be spelt out from the facts alleged therein, and which, given time to frame suitable amendments, could be put forward to save it from being struck out. However the question before the Judge, although formally framed as an application to strike out the Statement of Claim, was not really that. It was in substance an application for leave to bring by way of a separate action matters which, in my view, could be quite conveniently dealt with in the receivership proceedings. Before a Judge gives leave to bring a separate action of that kind, he must be satisfied that the Statement of Claim is a good and proper one.

43. In any event I see no reason, despite Mr. Woo's persuasive arguments, to think that the matters could be more satisfactorily dealt with by ordinary action. It seems to me there are ample provisions for them to be dealt with by the Master in receivership proceedings.

44. I too would allow both the appeals, refuse leave to continue the new action, order it to be struck out if it does not automatically fall by the refusal of leave to continue, and remove the stay on the receivership proceedings.

Kempster, J.A.:

45. I agree with the orders proposed by my Lords and with the reasons they have given for so doing. I would only add that Mayo, J. clearly erred in principle in the exercise of his discretion in making the orders appealed against. It might, too, be appropriate for me to emphasize the point made by my Lord Fuad, J.A. that in the absence of a certificate under O.30 r.4 of the Rules of the Supreme Court, the order of Master Barnett dated the 23rd October 1984 does not conclude the matters therein referred to or raise any matters of estoppel. The issue relating to the guarantee cards can therefore be reopened. I would add, too, that it was singularly unfortunate that the Master's comment on the possibility of separate proceedings may have given rise to the unhappy procedural imbroglio that we have had to face.