HIGHFIT DEVELOPMENT CO. LTD (IN LIQUIDATION) v. KOO SIU YING AND OTHERS

HCA 494/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 494 OF 2015

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D E C I S I O N

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1.  This is an appeal against the Order made on 10 March 2017 by Master J Wong (Order) allowing an application by the Plaintiff (Development) to join Highfit Holdings Ltd (Holdings) as the 3^rd Defendant in these proceedings and to amend the Statement of Claim (SOC).

Background

2.  This action concerns a dispute over a transaction which took place in August to September 2000 (Transaction) whereby Development sold its shares in Shanghai Huifa Property Co Ltd (Huifa) to Holdings.

3.  Development commenced this action by a specially endorsed Writ dated 10 March 2015, alleging breach of fiduciary duties and/or trust on the part of the 1^st and 2^nd Defendants (Koo and Ling).  The parties have filed their pleadings, completed discovery and exchanged their witness statements by January 2016.  On 2 June 2016, Development took out the application in question.

4.  The material facts can be stated briefly.  Mr Lim Por Yen (Lim) was a well-known person in Hong Kong.  He was the patriarch of the Lai Sun Group of companies.  Lim funded a property development called Gee House in Shanghai through a loan in excess of HK$551 million to Development (a Hong Kong company), which in turn advanced the funds to a Huifa (a Mainland company) which holds the development.

5.  Development’s assets comprised of its 100% shareholding in Huifa (Huifa Shares) and Huifa’s indebtedness to it (Indebtedness).

6.  At the material times, Development had 3 shareholders, namely, Lim (1 share), Koo (949,999 shares) and Ling (50,000 shares).  Lim had a relationship with Koo and Ling is their daughter.  All 3 of them were directors of Development.  Although they were not the only directors, it is not clear from the evidence how many other directors there were.  Lim passed away in February 2005.

7.  According to the SOC, on 8 September 2000, pursuant to a board resolution of Holdings on 31 August 2000, a company resolution of Development on 7 September 2000 and a board resolution of Development on 8 September 2000, Development entered into an Agreement to sell to Holdings the Huifa Shares at the consideration of about HK$192 million. According to Huifa’s audited accounts for the year ended 31 December 1999, the value of the owners’ equity was about RMB164 million and the value of the Indebtedness was around RMB309 million.  It is averred that the total value of the Huifa Shares plus Indebtedness was around RMB473 million, which was equivalent to nearly HK$446 million.

8.  According to one of amendments of the SOC, the EGM which produced the company resolution on 7 September 2000 mentioned above was convened by a board meeting on 24 July 2000 which was attended by, “inter alia”, the Defendants.  The same applies to the board meeting of Development on 8 September 2000. 

9.  It is alleged in the SOC that Holdings (a BVI company) was under control of the Defendants who were its shareholders and directors.  In the amendments, it is added that they were the only shareholders and directors of Holdings.

10.  It is averred in the SOC that the Transaction constituted a breach of the fiduciary duties of the Defendants in that: (i) they failed to disclose their interest in Holdings; (ii) they did not procure any independent valuation of Development’s investment in Huifa; (iii) the terms of the sale was unreasonably favourable to Holdings; and (iv) the consideration of HK$192 million was far short of the value of Development’s investment which stood at RMB473 million, and it was not paid.

11.  It should be noted that there is no allegation of fraudulent or dishonest breach of fiduciary duties or trust made against the Defendants in the SOC.  However, there is an allegation that the sale was at an undervalue “or a fictitious consideration” (para 22 of the SOC), but there is no particulars of that alternative averment.   

12.  The Company became insolvent and was eventually wound up by the court in September 2008.  Liquidators were appointed in April 2010.

13.  In their Defence, the Defendants deny any wrongdoing as alleged or at all.  It is right to say that there is no positive case advanced in the Defence.  However, in their witness statements it is said that they had limited involvement in the Transaction, which was Lim’s idea and handled by him.

14.  There is a limitation defence advanced by the Defendants.  It is apparent that the amendments to the SOC are mainly to counter that defence with a plea of fraud.

15.  There are 4 arguments in this appeal, one in respect of the joinder of Holdings and 3 relating to the amendments.

Joinder

16.  The Defendants, represented by Ms Seto and Mr Kwan, submitted that by reason of the relation-back rule (see Limitation Ordinance, Cap 347, s.35(1)(b) and Global Bridge Assets Ltd v Sun Hung Kai Finance Ltd [2012] 4 HKLRD 474, §§20-21) Holdings would be deprived of an accrued limitation defence which is reasonably arguable.

17.  With respect, I agree with Mr Mok SC, appeared with Mr Hui for Development, that the argument is misconceived in that despite the relation-back rule Holdings is free to argue its limitation defence because this action was brought more than 14 years after the Transaction and, prima facie, the action is time-barred. 

18.  Notwithstanding Mr Mok’s submission, Ms Seto said that Holdings would still be prejudiced by being joined in this action due to the exposure to higher costs as compared to being sued under a fresh action.  The reason is that this action has been on foot for over 2 years and a substantial amount of costs have been incurred. 

19.  I am not convinced that the additional costs, if any, are significant.  In any event, it will be open to Holdings to make submissions to the court in respect of any costs for which it should not be responsibility by reason of being joined at a late stage.  Further, I do not believe that the additional costs, if any, would justify the refusal of a joinder application which is otherwise appropriate.

Amendments

20.  A number of the amendments are not opposed by the Defendants[1]. The opposition concerns the allegations of fraud introduced in the amendments. Ms Seto’s primary argument is that such allegations are not properly particularised. 

21.  As submitted by Mr Mok, the thrust of Development’s case on fraud is that the Defendants planned to sell to themselves Development’s interest in Huifa behind Lim’s back, and they succeeded without paying anything to Development. 

22.  In my view, the amendments do not fundamentally alter the shape of Development’s case as originally pleaded (see para 10 above), although they seek to improve and flesh out the existing allegations, and plead a case of fraud based on those improved allegations.

23.  I agree with Mr Mok that in the present context fraud simply means dishonesty (see Armitage v Nurse [1998] Ch 241, at 251B-F). 

24.  Ms Seto, drawing support from Three Rivers District Council v Governor and Company of the Bank of England (No 3) [2003] 2 AC 1, §184, has criticised the amendments in terms of whether a case of fraud can be made out.  For instance, she pointed out that other directors were present at the 2 board meetings held on 24 July and 8 September 2000; and that the Transaction was approved by the Defendants who were the majority shareholders by an overwhelming margin and were in a position to ratify the Transaction. 

25.  It is trite that the court does not for the present purpose engage in any in depth examination of the merits of the proposed amendments.  Amendments will not be disallowed on merits unless it is readily apparent that they are bound to fail (see Natamon Protpakorn v Citibank NA [2009] 1 HKLRD 455, §25).  I do not believe that such a case has been demonstrated. 

26.  I should mention that I am puzzled by the alleged value of the Huifa Shares relied upon by Development (see para 7 above).  It appears to me that the value of owners’ equity should be net of the Indebtedness and therefore represented the value of the Huifa Shares.  Hence, Ms Seto submitted that there was no undervaluation of the Huifa Shares.  Mr Mok was unable to explain why this is not a correct understanding but simply submitted that the Liquidator, who has the carriage of these proceedings, is an expert in these matters.  However, this point alone does not render the case of fraud unsustainable.

27.  In deference to the arguments, I should also mention that, in the absence of any authority cited by Ms Seto, I am inclined to agree with Mr Mok that it is doubtful whether the ratification argument can be deployed to cheat a minority shareholder or to the prejudice of the creditors.

28.  With the exceptions of 2 averments, I do not find the pleading on fraud (para 24C of the Amended SOC) insufficiently particularised.  Those averments appear in paras 24C(1)(iv) and (vi) as follows :

“… The Defendants at all material times intended to conceal the Impugned Transaction from Lim.

  … At all material times, the Defendants never intended to cause HHL to pay the Consideration.”

29.  These averments suggest that the fraud was premeditated, but there is no particulars at all about the alleged intention. Mr Mok recognised these fragilities and submitted that they are matters of inference arising from the factual averments pleaded in the Amended SOC.  He proposed that the omissions can be remedied with the provision of particulars or by way of further amendments.

30.  On the other hand, I agree with Ms Seto that: (i) it is no answer to an objection that a proposed amendment lacks particulars to say that they can later be given (see Perak Pioneer Ltd v Carrian Holdings Ltd, CACV 59 of 1985, 13 June 1985, p.5); and (ii) the requirement for properly particularised amendments is a matter of obligation for the amending party if they are proposed at a late stage (see Swain-Mason v Mills & Reeve LLP [2011] 1 WLR 2735, §73). 

31.  I therefore would not allow the proposed amendments in respect of the 2 averments identified in para 28 above.  In the event that Development sees fit to make another amendment application along the line suggested in para 29 above, I expect that the parties would be able to agree to the same with the view to saving costs. 

32.  The remaining 2 arguments of Ms Seto can, with respect, be dealt with swiftly.  Firstly, it is said that the amendments give rise to prejudice which cannot be compensated for by costs because the Defendants are unable after so many years to recall if notices of the 2 board meetings and EGM of Development were given to Lim.  I am not attracted by this argument. According to the Defendants’ case, they never really participated in the affairs of Development, which were under the control of Lim.  These are matters for trial. 

33.  Secondly, it was submitted that the basis for the allegation of undervalued sale is only clarified in the amendments, and it is now highly difficult to obtain a proper valuation for the Transaction which took place many years ago.  I am unable to agree with the submission.  The basis on which it is alleged that the sale was at an undervaluation is reasonably clear from the SOC, namely, that Development relies on a comparison between the sale price of HK$192 million and the aggregate of the owners’ equity and the Indebtedness of HK$446 million (see paras 7 and 26 above).  The amendments do not change that case.  Whether it will succeed is a matter for the trial Judge. 

Conclusions

34.  For these reasons, I allow the appeal only to the extent of excluding the averments identified in para 28 above.  An appropriate draft order should be submitted for approval of the court. 

35.  I make an order nisi that the costs of the hearing before the learned Master on 10 March 2017 (Hearing Below) and this appeal be apportioned between the parties in that Development and the Defendants are respectively entitled to 80% and 20% of their costs, to be taxed if not agreed (with the exception of Development’s costs of the Hearing Below which had been summarily assessed).  The costs of the amendments, as well as the summary assessment of Development’s costs for the Hearing Below, as per paras 6 and 7 of the Order, should stand. 

36.  Last but not least, I am grateful to counsel for their assistance.