SINOCARD TECHNOLOGY LTD v. LEE CHI KEUNG AND OTHERS

HCA 2022/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2022 OF 2005

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J U D G M E N T

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Introduction

1.  On 3 April last Master Christopher Chan gave the Plaintiff leave to amend its Statement of Claim in the terms of the draft attached to its summons.  This is the Defendants’ appeal from that order.

2.  The Plaintiff’s case is that there had been a joint venture agreement between it and the Defendants which operated between  1 December 2003 and 19 July 2005.  The Plaintiff and the 3^rd Defendant (“OPT”) were in the business of manufacturing and selling inlays for a variety of smart cards which are commonly in use throughout the world.  These were manufactured, in the Plaintiff’s case at its factory in Dongguan, and in the case of OPT at its factory in Shenzhen and sold throughout China and overseas.  The two companies were in competition with each other and therefore it was considered that they might do better if they pooled their resources by means of a joint venture.

3.  The joint venture is pleaded at paragraph 5 of the Statement of Claim as having been concluded partly orally, partly in writing and partly by conduct which is specified in 27 sub-paragraphs at paragraph 7 of the pleading [Bundle 98-7 to 98-11].  For the purposes of this judgment it is not necessary to go into these matters in any detail.  It is sufficient to say that as part of the arrangements that the parties had put into place, the Plaintiff transferred 8 of its key staff and 6 sales staff to the 3^rd Defendant’s Shenzhen factory.  Part of these arrangements included the transfer to Shenzhen of Mr Fordhan Ng, the Plaintiff’s general manager, where he worked and drew a salary from Pioneer Oriental Engineering Limited (“POE”), an associate company of OPT.  Thereafter, Mr Ng became an executive director and subsequently managing director of OPT.  In the result the Plaintiff’s business became subsumed into that of OPT and the Plaintiff has now ceased operating and having a separate existence of its own.

4.  In respect of its case that there was a completed joint venture agreement which had been carried into effect, the Plaintiff says that the Defendants are now in breach of that agreement.  By reason of the arrangements which had brought the joint venture into being the Plaintiff became owner of one third of the shares in OPT.  Precisely how that came about need not be recited here.  Suffice it to say that these facts and matters, which are said to give rise to this state of affairs have been pleaded in the Statement of Claim.  The breach that the Plaintiff complains of comes about by virtue of the sale by the shareholders of E-Pilot (“the 2^nd Defendant”), who were the majority shareholders in OPT, to a company called On Track Innovations Limited (“OTI”).  As a result of that sale OTI assumed control over OPT.  This sale of shares had been done without the knowledge or consent of the Plaintiff.  Additionally, the Defendants are said to have wrongfully refused to perform the joint venture agreement by refusing to issue to the Plaintiff its one third of all the issued shares in OPT.  The Plaintiff’s case is that once the joint venture had been put into effect, which gave the Plaintiff its one third shareholding in OPT, those shares were held by the Defendants has constructive trustees for the Plaintiff’s benefit.

5.  By refusing to execute the transfer of that one third shareholding to the Plaintiff and the Defendants then selling their shares in E-Pilot to OTI the Defendants have in effect robbed the Plaintiff of its shareholding in OPT.  The relief that it seeks is for specific performance to direct the Defendants to carry out the joint venture agreement by executing the transfer to it of one third of OPT’s shares.  There is also a claim for a declaration as to the one third of OPT’s shares being beneficially owned by the Plaintiff and an order for rectification of OPT’s share register to reflect the Plaintiff’s ownership of one third of OPT’s shareholding.  There is also a claim for an injunction, basically to preserve the position until trial in respect of any further dealing in OPT’s shares and also, in lieu of all of that relief, damages for breach of contract.

6.  That is a brief account of the Plaintiff’s primary case based on a concluded joint venture agreement as it emerges in much more detail in the Statement of Claim.  From that I move to the alternative case, in the event that the court finds that there was no such concluded joint venture agreement and it is this which is the subject of the amendments which the Master allowed and which the Defendants, by this appeal, would wish me to refuse.

A description of the proposed amendments

7.  The case put is that by virtue of the transfer of the Plaintiff’s production assets to OPT’s Shenzhen factory and the use of those assets as well as the use of the Plaintiff’s staff which resulted in the close-down of the Plaintiff, the Defendants have become unjustly enriched at the Plaintiff’s expense for which the Plaintiff requires to be compensated.

8.  The real dispute concerns the addition of sub-paragraphs (g) to (j) to the particulars of unjust enrichment and the Plaintiff’s resulting loss which in its original form comprised sub-paragraphs (a) to (f) of paragraph 14.  This new (g) to (j) seeks to establish a quantified claim of $45 million as the amount which the Plaintiff should receive based on the Defendants’ unjust enrichment.

9.  The basis of the unjust enrichment is said to come from the acquisition of the Plaintiff’s assets and the business goodwill by OPT which in term would inevitably have increased the value of OPT’s shares when it came to sell its shares to OTI.  A value of $45 million is placed on this by the Plaintiff which in turn now seeks to be compensated in this amount.  The way that this is arrived at has been set out in sub-paragraphs (g) to (j) of paragraph 14 [the amendments].  It is not necessary to recite these amendments here.  They are there to be read.

10.  The calculation of the $45 million appears in an expert accountant’s report from Mr Horace Man whose report is at pages 247 to 264.  He has adopted as his methodology what is called, certainly by him, a “Discount Cash Flow Approach” which I believe to be a standard system of valuation in the accountancy profession when valuing a company that is a going concern.  Mr Man has presented his calculation in detail and the relevant arithmetic is at pages 260-261.  His conclusion is that the value to OPT’s business as contended by the Plaintiff is $44,863,374, now rounded up to $45 million.  It is in this case that the amended pleading seeks to advance and the Plaintiff would wish to call this evidence in support of it at the trial.

The objections

11.  Mr Hudson, who appears for the Defendants, has taken the sharpest objection to these amendments.  He has summarised his objections as follows:  Firstly, that the amendments have not been properly and exactly formulated.  In this regard he submits that the Plaintiff has failed to include particulars of facts which would show how the claim for $45 million has been calculated, and in having failed to do so the Defendants are in no position to know the case that they have to meet.  In such circumstances, Mr Hudson submits that this would put the Defendant in the position of having to administer a Request for Further and Better Particulars which will result in both a waste of time and costs which would run counter to the underlying objectives of the Civil Justice Reform provisions (“CJR”) as expressed in the new Order 1A of the Rules of the High Court.  Secondly, Mr Hudson complains that these proposed amendments in effect amount to particulars of particulars which would not be right and lastly, that the claim for unjust enrichment lacks particulars and contains a number of errors.

12.  Mr Hudson has drawn attention to a number of authorities on amendment.  These really relate back to what Fuad JA said in Perek Pioneer Ltd v Carrian Holdings Ltd Civil Appeal 59/1985.  I will set out the passage that Mr Hudson has drawn attention to in a moment but what this amounts to is that when a party wishes to amend its pleading and in doing so is asking the court to extend to it an indulgence it should at least ensure that the proposed amendments come with full particularity.  The passage relied on is this:

“An applicant, who seeks to amend a petition or other pleading is seeking an indulgence and has to comply with the relevant Rules.  The opposing party is fully entitled to object to the amendments on principles laid down by practice and the R.S.C.  It was incumbent on the judge to decide, once he did not adjourn the matter, each issue raised as to the propriety of the amendments, on its merits.

As regards particulars, in my view, it is no answer to an objection that a proposed amendment lacks particulars, to say that particulars can later be given.  Of course, if a pleading lacks particulars, particulars can be asked for in the usual way and ordered by the Court if necessary, but where an amendment is applied for it would be an unusual case where the Court would consider it appropriate to allow an amendment to be made which lacks particularity, and might cause embarrassment.” (emphasis added)

13.  This being the approach to take I will need to examine the proposed pleading to see whether it passes muster in terms of providing the necessary particularity, to which I will shortly return.

14.  Mr Hudson has also submitted at some length that the application to amend, coming quite late in this already stale litigation, the writ having been issued in 2005, should not be allowed.  To confirm the Master’s order allowing these amendments would run counter to the underlying objectives of the CJR and more particularly to the court’s duty to further the underlying objectives by active case management which under Order 1A r.4(2) requires the court to:

(a)  identify issues at an early stage;

(b)  decide promptly which issues require full investigation at trial and which can be summarily disposed of;

(c)  consider whether the likely benefits of taking a particular step justify the cost of taking it; and

(d)  deal with as many aspects of the case as practicable on the same occasion.

15.  In regard to the timing of these proposed amendments I think it should be remembered that the case on unjust enrichment, which the amendments go to support as further particulars of that plea, first appeared in the Statement of Claim as long ago as October 2005 when this alternative case was advanced at paragraph 14.  And so this is not a new case being put forward four and a half years later.  Mr Man’s expert report, to which I have already referred, is dated January 2009 and it seems very clear therefore that the proposed amendments represent an attempt to advance what Mr Man has said by means of the pleaded case.

Conclusions

16.  Whilst Mr Hudson has put forward stout resistance to these amendments on the broadest possible front, I am satisfied that the Master was right to have allowed them.  It seems to me that in terms of particulars these have been sufficiently provided save for a reference to Mr Man’s calculations and how he arrives at those calculations.  Mr Andrew Mak, whose pleading this is, says that to incorporate what appears in the report by Mr Man would amount to pleading evidence, but I would have thought that his calculation at paragraphs 50 and 51 of his report [260-261] should be added to paragraph (j) 8 of the Particulars of Benefit of at least $45 million and also by making reference to his report.  This after all is the calculation which will be advanced at the trial and the Defendants can therefore have no complaint that they do not know how the quantum of the Plaintiff’s case is calculated.  I propose to allow the amendments as currently proposed and allowed by the Master but I also require the additions that I have just indicated.

17.  In respect of Mr Hudson’s other objections concerning the incorrect formulation of the case on unjust enrichment, it seems to me that this is a matter for argument at the trial.  An amendment will not be allowed if it can be shown to be unarguably bad and bound to fail with the result that there would be no purpose in letting it go to trial.  In this case Mr Mak has amply demonstrated that he has a perfectly arguable basis for saying that the Defendants have been unjustly enriched.  This is not to say that he is likely to succeed or anything of that sort but that is not the test – all he needs to show is that the matter sought to be advanced is fairly arguable which in this case it is.  Mr Hudson’s other objections as to a mismatch between the pleaded numbers and the claim for $45 million now goes once the references to Mr Man’s report are added as I have directed.  The complaint that the pleading and Mr Man’s report do not match is something for the trial.  All that I am concerned with is whether these pleas are viable which, in my judgment, they are.

18.  Finally, whilst Mr Hudson’s references to the CJR are well-intentioned and should have been drawn to my attention as he has done, it strikes me that I am also required to find a proper balance which will provide a just outcome to the trial itself.  These amendments, which support a case first pleaded in 2005 will achieve that.  The Plaintiff had laid out its stall on unjust enrichment over four years ago, it wishes to further particularise it now and, in my judgment it should be allowed to do so.  The lateness of these amendments can be addressed in costs.

19.  Accordingly, the appeal must be dismissed.  The Master’s orders, including those on costs, will stand and the costs of this appeal, which will be an order nisi, will have to be borne by the Defendants and taxed on a party and party basis if they cannot be agreed.