AKAI HOLDINGS LTD (IN COMPULSORY LIQUIDATION) v. DOMINE KO CHEONG WING AND OTHERS

HCCL 20/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 20 OF 2005

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J U D G M E N T

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The application

1. This is a strike out application taken out pursuant to the provisions of Order 18, rule 19.

2. By summons dated 6 April 2006 the 2^nd and 3^rd defendants herein, Mr Simon Fung and Miss Pansy Nip, seek to strike out or dismiss the plaintiff’s writ and/or Statement of Claim, alternatively that (in the case of the 2^nd defendant) paragraphs 20, 35, 38,45, 46, 58, 61, 64, 71, 74, 77, 83, 84-93 be struck out, and (in the case of the 3^rd defendant), that these same paragraphs, in addition to paragraphs 94-97 be struck out also.

3. It is said that the Points of Claim disclose no reasonable cause of action (subrule (1)(a)), alternatively that the pleading of the Claim is embarrassing (subrule (1)(c)), and in the further alternative that it is abusive of the process (subrule (1)(d)).

4. The sole evidence before the court is a short affidavit sworn on behalf of the 2^nd and 3^rd defendants by Mrs Susan Liang, their solicitor. 

5. No evidence has been filed by or on behalf of the plaintiff liquidators.

These proceedings

6. The generally-endorsed Writ in these proceedings was issued on 29 June 2005, but was served on the 2^nd and 3^rd defendants only on 9 February 2006.  It is unclear why this delay occurred, particularly since, as Mr Barlow has pointed out, during the period May-July 2004 the liquidators had been interrogating the 2^nd defendant consequent upon the winding up of Akai.

7. The Points of Claim, running to some 38 pages, was filed on 17 March 2006, and (presumably) was served on that date also.

8. This action is one of several actions arising out of that which generally has become known as ‘the Akai liquidation’, which recently has achieved some profile in terms of litigation before the Hong Kong High Court.

9. Prior to 30 November 1999 the 1^st defendant, Mr Ko, and the 2^nd defendant, Mr Fung, were employees of Akai Holdings Limited (‘Akai’).  Mr Ko is not a party to this strike out application.

10. The 3^rd defendant, Miss Nip, is the wife of Mr Fung, and, it is common ground, never has been an employee or officer of Akai.

11. Between 1991 and July 1997 Mr Fung, the 2^nd defendant, was employed by Akai at its Toronto office as the accounting manager, and from July 1997 to 30 November 1999 he acted as the Financial Controller of Akai.

12. Mr James Ting, who is described in the Points of Claim in this action as “the directing and controlling mind and will of Akai” and as someone who “had sole executive and management control over the day to day conduct of all aspects of the business affairs of Akai”, is not a party to this action. 

13. However, I have been told from the bar table, by Miss Linda Chan, counsel for the plaintiff, that Mr Ting was not joined to this action by reason of a ‘settlement agreement’ entered into between the liquidators and Mr Ting, whom, I am also told, currently is serving a term of imprisonment in Hong Kong consequent upon his earlier trial and conviction, before the High Court upon charges of fraud.

14. The present proceedings represent an attempt by the liquidators of Akai to recoup from the 2^nd and 3^rd defendants the sum of HK$4.6 million which, it is said, were funds belonging to Akai which wrongfully were channelled into the pocket of Mr Fung in 4 tranches (itemized at page 29 of the Points of Claim) of $2 million on 26 August 1997, $300,000 on 2 February 1998, $300,000 on 9 February 1998, and a further sum of $2 million on 23 March 1999.

15. Mr Fung’s wife, the 3^rd defendant, Miss Nip, is pursued because it is alleged that the matrimonial home, now in the 3^rd defendant’s name, is said to have been funded by these sums, and it is alleged, inter alia, that the plaintiff liquidators are entitled to a declaration that a lien exists over the 3^rd defendant’s beneficial interest in this property.

16. It is against this factual background that the present pleading is attacked by Mr Barlow, counsel for the 2^nd and 3^rd defendants. 

17. It is to the broad structure of this pleading that I now turn.

The Points of Claim

18. The reader of this pleading might be forgiven for thinking that Mr Ting was the main target of this recovery action, although, of course, he has not been joined.  Certainly a very considerable part of this document is taken up with a lengthy recitation of his personal defalcations and breaches of duty via the use of companies owned and controlled by Mr Ting.

19. As against the 2^nd defendant, Mr Fung, the fundamental basis of the pleading originates with paragraph 20 thereof, this key paragraph reciting, in a manner which Mr Barlow castigates as classic ‘rolled up’ fashion, that by virtue of his position as Financial Controller and the fact that at all material times he was a member of Akai’s senior management Fung knew or ought to have known of Mr Ting’s position and duties owed to Akai, the fact that three particular private companies (Everwin, Evora and Goaltop) were companies owned/controlled by Ting, and – at paragraph 20.4 – of “the misappropriation of Akai’s assets by Ting, as described in paragraphs 21-83 below.”

20. The following 63 paragraphs plead the misappropriation by Mr Ting of various sums, out of which Mr Fung is said wrongfully to have received the four sums in question, amounting to a total of $4.6 million.

21. The style adopted by the pleader in terms of the liability of Mr Fung is typified by the manner in which the initial sum of $300,000 is dealt with : paragraph 35 recites that out of a sum of $40 million wrongfully abstracted by Mr Ting from Akai into a HSBC account via intermediary deposit into an Everwin account, Mr Fung received from Ting a cheque for 300,000. Thereafter, at paragraph 45, it is asserted that “By reason of the matters set out in paragraphs 20, 33-42 above”, Mr Fung knew that these were Akai monies, “knew that the HK$300,000 were monies misappropriated by Ting in fraudulent breach of fiduciary duties and fraudulent breach of trust”, and that he was a constructive trustee of such monies and was liable to repay Akai accordingly.

22. A similar pleading pattern is repeated with regard to the other sums at issue in the case against the 2^nd defendant, save with regard to one sum of $2 million which it is said was applied by Fung in payment of part of the price of a property acquired in the name of MQL, the service company of Fung and his wife; in this connection a specific letter dated 30 June 1999 is pleaded wherein Mr Ting purportedly waived repayment of that which it is said was a housing loan from Akai to Fung, and whilst on its face this letter is unsupportive of an allegation of dishonesty, nevertheless it is asserted that Fung unlawfully misappropriated this sum from Akai’s assets.

23. The causes of action asserted against the 2^nd defendant are pleaded in conversion and as money had and received (paragraph 84), and in terms of accessory liability, under the heads of ‘dishonest assistance (at paragraph 90) and ‘knowing receipt’ (at paragraph 93) for Mr Ting’s fraudulent breaches of fiduciary duty and breach of trust.

24. As to the 3^rd defendant, Miss Nip and Fung’s wife, the pleader alleges that by reason of their relationship that (at paragraph 94.4) Nip knew that the monies paid to Fung was misappropriated by Ting in fraudulent breach of fiduciary duty/trust, alternatively (at paragraph 95) that she “consciously and recklessly decided not to make any inquiries which would have resulted in actual knowledge” of the facts, by reason whereof she dishonestly assisted the said fraudulent breaches of duty/trust, and became liable to account to Akai as a constructive trustee, alternatively she was a knowing recipient of these monies, part of which were used to pay the price of the matrimonial home.

25. As to the latter property, which was sold by MQL to Nip personally on 18 December 2002, a lien/beneficial interest is claimed thereover (at paragraphs 86-89).

26. The foregoing brief summary is not, of course, exhaustive, but is intended to be descriptive of the broad approach which is criticized upon this application to strike out.

Relevant principles

27. The principles to be invoked upon a strike out on the basis of Order 18, rule 19(1)(a) are well settled, and are, I apprehend, essentially common ground.

28. A defendant is entitled ex debito justitiae to strike out an incompletely pleaded cause of action; equally, strike outs of this nature are only for ‘plain and obvious cases’, disputed facts are to be taken in favour of the party whose pleading is sought to be struck out, and the burden is on the party seeking to strike out to demonstrate the plain and obvious nature of the case.

29. Moreover, if an incompletely pleaded cause of action is capable of curative amendment, the court generally will accommodate an application so to do, although if no useful purpose would be served by permitting an amendment (because, for example, the limitation period has expired) then the proceedings should be dismissed : see Ronex Properties Ltd v. John Laing [1983] 1QB 398, at 408 (CA).

30. In terms of principles concerning Order 18, rule 19(1)(b) and (c), it cannot seriously be disputed that it is potentially abusive of the process to issue a writ in the knowledge that the limitation period for the cause of action has expired (see Ronex Properties, op cit).

31. Equally, in terms of the pleading of fraud it is well established that, in addition to the requirement of properly particularized pleadings – see Order 18, rule 12(1) – there was a “special rule” that allegations of fraud be pleaded with the “utmost particularity” : see ADS v. Wheelock Marden & Co. Ltd [1994] 2 HKC 264, whilst ‘speculative pleading’ absent proper particularization will not be entertained : see Wharf Properties Ltd v. Eric Cumine Associates [1991] 2 HKLR 154 (PC).

The defendants’ attack

32. On behalf of the 2^nd and 3^rd defendants, Mr Barlow mounts two principal lines of attack: first, he says, that it is clear on the face of the pleading that, on the date that the writ was issued, the plaintiff and its legal advisers were aware that all of the claims made against his clients were time-barred; second, that the pleading of the causes of action against his clients, with particular reference to the unacceptable use of the ‘rolled up’ plea of knowledge, are insufficient, incomplete, and embarrassing.

33. I take briefly each broad line of argument.

(i)      Limitation

34. Given that the writ in this action was issued on 29 June 2005, at face value the 6 year limitation period ‘bites’, and the claims as pleaded are prima facie time-barred.

35. To this Miss Chan has two main responses.

36. First, she disputes the notion that in respect of the cause of action based upon ‘dishonest assistance’ (and also I apprehend, although less emphatically so, in respect of ‘knowing receipt’) that, as a matter of law, any period of limitation applies, maintaining that where a claim is based upon “a fraudulent breach of trust to which the constructive trustee was a party or privy”, it falls within the purview of section 20(1)(a) of the Limitation Ordinance, Cap. 347.

37. Second, she submits that even if, contrary to her primary submission, limitation periods in fact are applicable to accessory liability, the claim is governed by section 20(2) of the Limitation Ordinance and thus subject to the 6 year limitation period, and that this period can be postponed by virtue of the operation of sections 26(1)(a) and (b), that is, in instances in which the action is based on fraud and the deliberate concealment thereof.

38. As to the first issue, I am unable to agree with Miss Chan’s bold assertion that there is no applicable limitation period, and thus that the pleading is unconstrained by such procedural bar.

39. In this regard I accept the contention of Mr Barlow that this issue now effectively is settled as the result of the decision in Paragon Finance plc v. D B Thakerar & Co. [1999] 1 All ER 400, in particular the judgment of Millett LJ (as he then was).  See also HKCP Vol 2, M/N G1/20/1, in the context of commentary on section 20 of the Limitation Ordinance, under the carriage of a note on actions for breach of trust and actions for breach of statutory duty, after citing Paragon Finance, op cit, the editors note (at (b)) :

“In the case of constructive trustees who become such by reason of a transaction that is impeached, the applicable limitation period, whether the case be put against them in damages at common law or in equity for an account as constructive trustee, is six years, although the start of the period may be deferred pursuant to other provisions of the Limitation Ordinance.”

40. I should mention at this juncture that subsequent to the hearing and in the course of preparation of this judgment my attention was drawn, by the solicitors acting on behalf of the plaintiff, to a recent decision of Mr Justice A Cheung in Peconic Industrial Development Ltd v. Chio Ho Cheong & ors, unrep., dated 1 June 2006, in which the learned judge, in the course of a lengthy and meticulous judgment, came to the conclusion that in terms of a constructive trustee within Millett LJ’s ‘second category’, that is, the “remedial mechanism by which equity gave relief for fraud”, that no limitation period is applicable, and that the case of a ‘dishonest assister’(and also, I apprehend, that of the ‘dishonest receiver’) falls within the purview of section 20(1)(a) of the Limitation Ordinance, and thus is subject to no period of limitation. 

41. Whilst I have not had the benefit of argument upon this new case, for my part, and notwithstanding the force and erudition of the argument employed in this respect by the learned judge, I respectfully do not share the conclusion thus reached as to the inapplicability of a limitation period within this ‘second category’ situation; indeed, this seems to me to be an area which within this jurisdiction most usefully could be the subject of appellate clarification.

42. Miss Chan’s second argument, namely postponement of the running of the period pursuant to sections 26(1)(a) and (b) of the Limitation Ordinance, is that in instances in which the action is based upon the fraud of the defendant and any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant, the period of limitation does not begin to run until the plaintiff has discovered the fraud or concealment, or could with reasonable diligence have discovered it.

43. In this context Miss Chan says that if, which is denied, as a matter of law the plaintiff has to be concerned with limitation in instances of ancillary liability, then let the defendants take the limitation point in their Defence, and the plaintiff thereafter will plead to it : “No doubt, once D2 and D3 raise their limitation defence, P will plead the factual matters in support of the application of s 26(1)(a) and (b) in its Points of Reply.”

44. In her skeleton argument, Miss Chan adds that Akai was put into compulsory liquidation in Hong Kong on 23 August 2000, and that the misappropriations, in so far as they relate to the 2^nd defendant, were concealed by false accounting entries; she also says that the 2^nd defendant was examined by the liquidators on matters relating to the misappropriations in May and July 1994.  Accordingly, she submits from the bar that the plaintiff is entitled to rely upon the postponement of the limitation period under sections 26(1)(a) and (b) of the Ordinance because the period (if applicable) began to run only sometime after this examination.

45. I regret that I do not find this ‘we will plead it later’ approach to limitation to be satisfactory.

46. The position on this application is that, on the pleading presently before the court, a number of causes of action are asserted, all of which appear, ex facie, to be statute barred.  No attempt has been made to acknowledge this fact within the pleading and to plead matters on the face of the Points of Claim which would, for example, permit argument to be mounted in terms of the postponement provisions within the Limitation Ordinance.

47. I assume, from that which counsel has said from the bar table, that such matters are known and would have been capable of being thus pleaded, although Mr Barlow asserts that he has grave doubts that this in fact is the case; he says that had the plaintiff possessed material which would permit it conscientiously to advance this allegation, use already would have been made of it, most probably in terms of an application to amend the Points of Claim.

48. As it is, not only is such material not pleaded, which in my view represents the preferable position, but in addition no affidavit evidence has been filed by or on behalf of the liquidators to put into evidence matters now merely asserted by counsel during argument; whether this is the result of conscious decision or oversight I know not.

49. Mr Barlow opened this application with the initial observation that the court might think that the pointed absence of any evidence on the part of the liquidators was significant, and in the circumstances and with the benefit of reflection I am minded to agree. 

50. It seems to me that the least that could have been done in this situation, when faced with a strike out in the present terms, and absent a specific plea covering the ‘postponement issue’, would have been for the liquidators to depose that, for reasons therein set out, there was material available which could be used to answer the limitation argument, and to provide particulars thereof – the court having rejected the assertion that, as a matter of law, no limitation period is applicable. 

51. I do not regard this as acceptable.  If matters are permitted thus to proceed, the defendants are left ‘hanging’ in the position of having to plead to claims which on their face are time-barred, and will have to wait to see what, if anything, is pleaded in the Reply which will/may be curative of the situation.  More particularly, the defendants are placed in a situation, upon this application, of not being able either to examine or to submit upon the matters which, apparently, will/may be prayed in aid to combat that which on the face of the case represents an accrued limitation defence.

52. Not only should the defendants not be put in this position, but in my view upon a strike out application of this nature the court equally should not likewise be left in ‘limbo’, which is a position entirely of the plaintiff’s own making. 

53. Support for this view may be derived from the judgment of Stephenson LJ in Ronex Properties, op cit, at 408B-D, wherein the judge observed :

“There are many cases in which the expiry of the limitation period makes it a waste of time and money to let a plaintiff go on with his action.  But in those cases it may be impossible to say that he has no reasonable cause of action.  The right course is therefore for a defendant to apply to strike out the plaintiffs’ claim as frivolous and vexatious and an abuse of the process of the court, on the ground that it is statute-barred.  Then the plaintiff and the court know that the Statute of Limitations will be pleaded; the defendant can, if necessary, file evidence to that effect; the plaintiff can file evidence of an acknowledgment or concealed fraud or any matter which may show the court that his claim is not vexatious or an abuse of process; and the court will be able to do, in I suspect most cases, what was done in Riches v Director of Public Prosecutions [1973] 1 WLR 1019: strike out the claim and dismiss the action…”

54. However, since currently there is nothing in this regard before the court from the plaintiff, and thus there is no material upon which I am able to exercise my discretion in terms of the issue of fraudulent concealment, it seems to me that for the purpose of the current application the court has no option but simply to work on the basis of what currently is before it, no more and no less.  And, as I have indicated, in terms of limitation I do not find this to be satisfactory.

55. Nor do I grasp how the plea in conversion/money had and received can be anything but time-barred, unless it be suggested that the postponement provisions within section 26 of the Limitation Ordinance also have effect, and I wait to see the manner with which this plea is dealt in such revised pleading as may be forthcoming.

56. For present purposes there also is no necessity, I think, to come at a concluded view as to the applicability – also stoutly asserted by Miss Chan during this application – of the postponement provisions within the Limitation Ordinance to the cause of action based upon ‘knowing receipt’.

57. On the basis of the limitation argument alone, therefore, I am prepared to grant the applicants relief on this application, albeit not to the extent of dismissal of the action, as Mr Barlow submitted should be the case.

(ii)     Pleading of knowledge and dishonesty

58. Given that effectively I have decided this application on the foregoing basis, there is no necessity to deal in great detail with Mr Barlow’s critical observations as to the manner in which this pleading has addressed the issues of knowledge and dishonesty on the part of the 2^nd and 3^rd defendants.

59. Suffice it to say that in my view the ‘rolled up’ nature of the plea of knowledge, to which earlier I have alluded, lends force to the argument now advanced on behalf of the 2^nd and 3^rd defendants, and for my part, and making due allowance for forensic embellishment which is part and parcel of strike out arguments, I consider that there is some substance in the criticisms advanced as to the manner in which knowledge and dishonesty have been pleaded.

60. There is no doubt but that the cause of action for accessory liability in the case of ‘knowing assistance’ requires that the plaintiff plead a case in dishonesty – see, for example, Belmont Finance Corporation Ltd v. Williams Furniture Ltd (No 1) [1979] 1 Ch 250 (CA) – with the pleading requirements that this necessarily imports, and I am persuaded of the validity of the criticism pressed upon the court that the current plea of ‘knowing assistance’ is devoid of specificity as to the necessary unequivocal dishonest intent, is rendered embarrassing by the use of the ‘rolled up’ plea of actual or constructive knowledge, is based upon allegations of intermediate transfer through the accounts of third parties absent allegation as to the 2^nd defendant’s knowledge of such intermediate transactions as conducted by Ting, and are based upon the highly questionable assumption that, as a matter of company law, the transactions are void and not voidable – in which latter context Mr Barlow makes the additional point, with some force, that as at the date of the issue of the writ, on 29 June 2005, there had been no avoidance, by the company, of the ‘housing loan waiver’ of 30 June 1999, and thus at the date of the issuance of these proceedings this cause of action was incompletely constituted.

61. I bear in mind, of course, that liquidators are in a difficult position, and that inference from circumstance is in many cases the best that responsibly can be done.

62. Having said that, however, it strikes me that this pleading in its present form strains acceptable limits in terms of the established principles governing the pleading of knowledge, dishonesty and fraud; the high watermark of criticism of the present pleading, it seems to me, is to be found in the lack of specific allegations against the 3^rd defendant, who appears to have been impleaded, and accused either of actual knowledge or of ‘Nelsonian blindness’, predominantly by reason of the existence of the marital union with the 2^nd defendant : “By reason of their relationship, Fung would have divulged to or discussed with Nip all aspects of the transactions referred to above in which Fung was involved.” (at paragraph 94.3)

63. It may be that it was as a consequence of the criticisms aimed at her pleading that during argument Miss Chan was constrained to accept that the cause of action based on ‘knowing receipt’ was “the main plank of our claim”, given that, as Lord Millett pointed out in Twinsectra Ltd v. Yardley [2002] 2 AC 164, that knowledge of the breach of trust was not necessary to found liability :

“Liability for ‘knowing receipt’ is receipt-based.  It does not depend on fault.  The cause of action is restitutionary and is available only where the defendant received or applied the money in breach of trust for his own use and benefit…There is no basis for requiring actual knowledge for breach of trust, let alone dishonesty, as a condition of liability.  Constructive notice is sufficient, and may not even be necessary.  There is powerful academic support for the proposition that the liability of the recipient is the same as in other cases of restitution, that is to say strict but subject to the change of position defence.”

64. If this is the view which is held as to the strength of the liquidators’ case, and certainly I can appreciate why this should be so, it is not altogether clear why the pleader has purported to spread the net as wide as is presently the case, and why (subject always to any residual limitation argument) ‘knowing receipt’ has not been made the major thrust of the claim. 

65. Be that as it may.  Given the opportunity for amendment, and at least the possibility of another strike out application being mounted by the defendants at some future date, I am disinclined presently to say a great deal more under this head.

Application to adjourn/amend

66. This conveniently brings me to the issue of potential amendment.

67. At one stage during her address, in response to queries from the Bench, Miss Chan made an application to adjourn the hearing in order to consider suitable amendments in light of the raft of criticisms that had been mounted of her pleading.  She had no draft amendments to place before the court, but, I apprehend, had in mind securing an adjournment in order to produce such a draft, the court having indicated that it was not prepared simply to grant general leave to amend ‘in blank’, as it were.

68. In response to this adjournment application Mr Barlow did not immediately oppose the application in itself, but confined himself to inquiring whether in making this application that Miss Chan in fact accepted as well-founded the deficiencies in the pleading as now were the subject of this application.

69. Miss Chan, however, did not accept this to be the position, maintaining that the pleading was wholly supportable in itself, and in light of this stance the court declined to grant the adjournment thus sought, indicating that in the circumstances the application would have to be decided on the basis of the pleading presently before it.  Hence the necessity for this judgment.

Order

70. On the basis of the foregoing, therefore, in the exercise of my discretion I have concluded that this application is to succeed, at least in part, and that the plaintiff is to have the opportunity of repleading its claim against these defendants.  I have considered, but rejected, the notion of attempting to preserve some parts of the pleading as against the 2^nd defendant, and at the end of the day I have concluded that the most appropriate course in these circumstances is that the case against the 2^nd and 3^rd defendants should be repleaded in toto.

71. Accordingly, I order that the 2^nd defendant is to have the alternative relief specified in paragraph (1) of his summons, namely that paragraphs 20, 35, 38, 45, 46, 58, 61, 64, 71, 74, 77, 83, 84-93 of the Points of Claim be struck out, and that the 3^rd defendant is to have the alternative relief specified in paragraph (2) of the summons (as amended), which is that the paragraphs specified in paragraph 1 are to be struck out in addition to paragraphs 94-97 of the Points of Claim, which are solely referable to Miss Nip.

72. I can see no reason in the circumstances why costs should not follow the event, and accordingly I make an order nisi that the 2^nd and 3^rd defendants are to have the costs of this application in any event, such costs to be taxed if not agreed.