PECONIC INDUSTRIAL DEVELOPMENT LTD AND ANOTHER v. YU KA HONG PAUL AND ANOTHER

HCA4555/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4555 OF 2001

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 J U D G M E N T

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1. I have dismissed the defendants’ appeal against Registrar Chan’s decision in refusing the defendants’ application for security for costs from the plaintiffs.  In giving my reasons therefor, a little bit background is necessary.

Background

2. The 1^st plaintiff herein (“Peconic”) acquired two agricultural lots in the Deep Bay area between October 1991 and January 1993 at the cost of $515 million.  The properties fall within the Mai Po and Fairview Park district.

3. The original purpose of the purchase was for a quick resale of the properties to apparently certain Taiwanese buyers for a huge profit of about $200 million.  That anticipated resale did not materialise.  Peconic then tried to develop the properties into a golf course or low-rise residential development.  However, the long and short of what happened thereafter was that Peconic failed to obtain the necessary town planning permissions for the development since it is just next to the well-known Mai Po Nature Reserve the area which has been zoned as “Site of Special Scientific Interest” (“SSSI”) since 1976.  Thus for all practical purposes, the properties cannot be used for any purpose other than as fish ponds.  The open market value of the properties was assessed as of October 2001 at $85 million and later in May 2004 at $69.4 million.

4. The acquisition of the properties was actually funded by the Agricultural Bank of China through the Foshan Sub-branch.  The bank’s injection of money into the joint venture was partly done through the 2^nd plaintiff herein (“Star Glory”).

5. The two plaintiffs instituted one previous action namely HCA16255/1999, and later Peconic also instituted HCA3083/2002.  In the first action, Peconic was against one Chio Ho Cheong, also known as Chan Kai Kit, as the 1^st defendant and his girlfriend Elise Chan Yik Sze, and Wong Hing Hang, and three others.  The main causes of actions were fraudulent misrepresentations and secret profits.  The original acquisition of the properties was made by one Asiagreat Limited who was owned and controlled actually by Chio and his associates.  It was at the cost of only $160 million and Asiagreat acted as the confirmor in the transaction of sale to Peconic.

6. In the second action, the 1^st defendant Danny Lau Kwok Fai was a practising solicitor and partner in a firm of solicitors known as Albert K.K. Luk & Co., the 2^nd defendant therein.  At all material times, Danny Lau was advising Asiagreat and the defendants in the first action.  The 3^rd defendant K.F. Lau & Co. was a firm of solicitors of Danny Lau started by him after he left the 2^nd defendant in 1992.

7. The first and second actions were tried before A. Cheung J between November 2005 and March 2006.  Judgment was delivered on 1 June 2006.

8. In the 235-page judgment, A. Cheung J gave judgment for Peconic against all defendants in both actions.  (Judgment had already been obtained by default against the 1^st, 3^rd and 6^th defendants in first action.)  After trial, he gave judgment in the first action against :

(i)      the 2^nd defendant Elsie Chan for the sum of $350,534,416;

(ii)      the 4^th defendant Leung Hiu Ling for the sum of $92,307,341.70; and

(iii)     the 5^th defendant Wong Shiu Wai for the sum of $27,800,000.

9. In the second action, judgment was also entered for Peconic against Danny Lau for the same sum of $350,534,416 and other sums to be agreed against the two firms of solicitors i.e. the 2^nd and 3^rd defendants therein.

The present action

10. In the present action, the two same plaintiffs instituted proceedings against their own solicitor Paul Yu Ka Hong and his firm Johnson Stokes and Master for dishonest assistance, breach of fiduciary duty, negligence and/or breach of duty in contract.  Paul Yu was acting for the plaintiffs in the aforesaid acquisition of the properties.  In fact, the plaintiffs’ companies were shell companies incorporated by the defendants.

11. In the present application, the defendants applied for an order that the plaintiffs should give security for the defendants’ costs on the following grounds :

(i)      The two plaintiffs were incorporated with minimal capital of only $10,000 each.

(ii)      The two plaintiffs owed to their creditor who supplied the purchase price of $515 million odd.

(iii)     Those judgments obtained against various defendants in the previous first two actions were just empty judgments and it is doubtful whether the plaintiffs could obtain any payments against anyone of them.  In any events, the plaintiffs could only realise insignificant amount from those defendants, some of whom have already absconded, in particular Chio.

12. Peconic no doubt is still holding the properties which are assessed as at 15 October 2001 at $85 million.  However, this only asset for the company would not be sufficient to pay their own creditors.

13. Thus, the defendants apply under section 357 of the Companies Ordinance for security of their costs.

The plaintiffs’ submission

14. Mr C.W. Ling, counsel for the plaintiffs, submitted that this court should not exercise its discretion in favour of the defendants for the following reasons, namely :

(i)      a binding agreement has been made between the parties’ solicitors in November 2004 whereby an undertaking was given and accepted, namely that the plaintiffs should not sell or encumber the properties, in lieu of providing security for costs; and/or

(ii)      serious unexplained delay on the part of the defendants in making this application.

Binding agreement?

15. By a letter dated 25 October 2002, the solicitors acting for the defendants, Messrs Richards Butler wrote to the plaintiffs’ solicitors and referred to Order 23 rule 1(b) of the Rules of the High Court and section 357 of the Companies Ordinance, which deal with security for costs of a limited company.

16. They pointed out that the paid-up capital of Star Glory was only $10,000 and the same amount for Peconic.  Thus, they contended that the defendants have reason to believe that the plaintiffs would be unable to pay the defendants’ costs if they are successful in their defence.  They, therefore, requested copies of the accounts of the plaintiffs.

17. By a letter wrongly dated 16 July 2002 (which should be dated as or about 31 October 2002), the defendants’ solicitors replied to the previous letter and pointed out that the properties was valued at $85 million on 15 October 2001 and the properties were not encumbered in anyway.

18. By a letter dated 4 November 2004, the defendants’ solicitors further enquired whether the plaintiffs’ solicitors would be prepared to give an undertaking that Peconic would not encumbrance the properties until trial and the plaintiffs have satisfied all orders for costs which might be made in favour of the defendants in these proceedings.

19. By a reply letter dated 22 November 2004, Robert Ip of plaintiffs’ solicitors gave the undertaking as requested.  On 21 April 2006 at the request of the defendants’ solicitors, the plaintiffs’ solicitor again confirmed that he would continue the validity of the undertaking when he was due to move to his present firm of solicitors where he would practice as a consultant.

20. The defendants in the present appeal sought to argue that the undertaking was only given gratuitously and therefore there was no binding contract between the parties.  However, I accept the plaintiffs’ submissions that the correspondences had clearly shown that the undertaking was given when the defendants’ solicitors were referring to the question of security for costs under the RHC and the Ordinance.  The only irresistible inference was that the plaintiffs’ solicitors were giving an undertaking in lieu of security for costs and this is a binding agreement for valuable consideration.  Thus, it cannot be said that the undertaking was only a gratuitous undertaking.

Rescission?

21. The defendants then sought to argue that if there was a binding contract between the parties, the contract is liable to be rescinded by way of misrepresentation of the plaintiffs and it had been rescinded by their solicitors’ letter of 27 July 2006.

22. The allegation of misrepresentation of the plaintiffs’ solicitor was based on omission in that it was alleged that the plaintiffs’ solicitor did not say the plaintiffs have no sufficient assets to cover costs.

23. Here Mr Bullett, counsel for the defendants, relied on paragraph 6-016 of Chitty On Contracts, Twenty-Ninth Edition, as follows :

“Partial non-disclosure.  Although total non-disclosure does not amount to a misrepresentation, a partial non-disclosure may do so.  This may happen in a number of different ways.  Thus a statement may be a misrepresentation even though it is literally true if it implies certain additional facts which are themselves false. ….”

24. Mr Ling in reply submitted that the defendants being the solicitors instrumental in setting up the plaintiffs’ limited company should have known that both of them had capital of only $10,000 each and the fact that the company had paid more than $515 million for the properties and therefore would have been indebted to their creditors.

25. In reply to that, Mr Bullett relied on paragraph 6-039 and submitted that it is not open to the plaintiffs to say that the defendants could have discovered the truth as follows :

“Representee could have discovered truth: rescission.  If the representee did not know that the representation was false, it is no defence to an action for rescission that the representee might have discovered its falsity by the exercise of reasonable care. ….”

26. However, in my view, it is not a case where Paul Yu and JSM could have discovered the plaintiffs’ lack of financial resources.  The actually knew of the situation clearly since they were instrumental to the setting up of the shell companies and acted for them in the $515 million transaction.

27. Mr Ling for the plaintiffs further submitted that restitutio in integrum is now impossible because the defendants have already enjoyed the benefit of the plaintiffs’ honouring of the undertaking for the last two years.  Further the plaintiffs have already incurred substantial costs in inter alia defending the striking-out proceedings in the Court of First Instance and in the Court of Appeal.

28. Furthermore, the defendants have already affirmed the contract by their letter of 30 March 2006 and the letter of reply dated 9 August 2006 from the plaintiffs’ solicitors.

29. In any event, the defendants should be held to have estopped from rescinding the contract.  Mr Ling relied on paragraph 6-123 of Chitty as follows :

“Estoppel.  A party may, however be held estopped from rescinding or avoiding the contract even where he does not know the facts or his rights, but in this event, he must have led the other to believe, by unequivocal statements or actions, that he does intend to affirm the contract, and the other party must show that he has acted on the statement or conduct to his prejudice.”

Lapse of time and serious and unexplained delay

30. The plaintiffs further submitted that since the long lapse of time between the first undertaking given in November 2004 and the application for security of costs in September 2006, it must be evidence of affirmation and thus the defendants should be precluded from making the application for security of costs (see paragraph 6-124 of Chitty).

31. Closely connected with the lapse of time, the plaintiffs further submitted that there was serious and unexplained delay on the part of the defendants and there is no answer by the defendants to say that they have devoted to their effort in the striking out proceedings in which eventually the Court of Appeal allowed the appeal and decided in favour of the plaintiffs.

32. In the aforesaid judgment of A. Cheung J, he observed that the 1^st plaintiff alleged insolvency was “pretty obvious to anyone paying any real attention to the situation in question”.  Mr Ling for the plaintiffs submitted that it is particularly so when the defendants was the one who was instrumental in setting up the 1^st plaintiff as a shelf company with a view to using it as a single purpose vehicle for the acquisition of the properties.

33. Although the plaintiffs have not provided the defendants with the plaintiffs’ audited account, yet upon having sought and obtained the solicitors’ aforesaid undertaking in November 2004, the defendants were contented not to press for further information.

Rescission on misrepresentation?

34. I accept the submissions of counsel for the plaintiffs and I consider that there is no misrepresentation on the part of the plaintiffs.  Even if there were, the defendants could not rescind the contract on the ground of misrepresentation because of affirmation of the contract, estoppel and lapse of time as aforesaid.

Merits of the plaintiffs’ case

35. Counsel for the defendants then invited the court to examine the merits of the plaintiffs’ case.  However, there is a well-established principle that parties should not go into the merits unless it can be demonstrated one way or another that there is a high probability of success or failure as submitted by counsel for the defendants.  Accordingly I would not venture into such an exercise which in my view would be entirely unfruitful in this case.

Conclusion

36. For the aforesaid reasons, I came to the conclusion that it is unfair and unjust to allow the defendants to go back on their agreement made in November 2004 whereby the plaintiffs have given them their aforesaid undertaking and it must be taken as an undertaking given in lieu of the defendants’ application for security of costs.

37. Further, the delay on the part of the defendants is so serious and justifiable when the defendants are now relying on information which was available to them in either 2001 or 2002 to justify their application.

38. For the aforesaid reasons, I have dismissed the appeal of the defendants with costs to the plaintiffs in any event.