TAIHAN ELECTRIC WIRE COMPANY LTD AND ANOTHER v. LEE CHI YUEN ARCTIC AND OTHERS

HCA 454/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 454 OF 2013

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DECISION

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1.  This is an application by the 1^st, 3^rd to 7^th defendants to strike out the Statement of Claim and to dismiss the 2^nd plaintiff’s claim against them.

Background

2.  There used to be two plaintiffs in this action.  The former 1^st plaintiff, Taihan Electric Wire Company Limited (“TEC”), is a Korean listed corporation specialising in manufacturing and supplying various types of cables, including a specialised type of cable used for electrical wire and communication applications known as SCR Copper Rods (“Copper Rods”).  The former 2^nd plaintiff, Taihan Global Holdings Ltd (“TGH”), is a wholly owned subsidiary of TEC in Hong Kong.  Since November 2008, it has managed the sales business of the TEC group in Hong Kong and Southern China. TGH is now the only remaining plaintiff in this action.

3.  TGH had engaged one Mr Lau Siu Ming (“Lau”) as its agent to promote the sale of Copper Rods in the Pearl River Delta market. It is the plaintiffs’ case that Lau was involved in a sophisticated fraud perpetrated against TGH, and Lau had misappropriated a substantial amount of the plaintiffs’ Copper Rods and the proceeds of sale thereof for his own benefit.

4.  In September 2011, TGH commenced High Court Action No 1687 of 2011 against Lau as the 1^st defendant to claim for, inter alia, damages and account for sums received resulting from the alleged wrongful conduct of Lau (“the 2011 Action”).

5.  The 3^rd defendant herein, Yuanzhi International Trading Company Limited (“Yuanzhi”), is a company in Hong Kong owned by Lau and the 1^st defendant herein, Mr Lee Chi Yuen Arctic (“Lee”), each holding 50% of the shareholding.  The 4^th defendant herein, Winful Holding Limited (“Winful”), is a company in Hong Kong with 60% of its shareholding owned by Lee.  Lee is one of the three directors of Winful.

6.  In the 2011 Action, TGH claims that Lau had, through Yuanzhi and Winful, received some of the proceeds of sale of the Copper Rods supplied by TGH and so they are liable to repay the sums received to TGH. Yuanzhi and Winful were therefore joined as the 2^nd and the 3^rd defendants in the 2011 Action.

7.  On 6 October 2011, TGH obtained a Mareva injunction against Lau, Yuanzhi and Winful in the 2011 Action which remains in force today.

8.  In respect of the alleged fraudulent scheme, Lau was charged with 3 counts of using a copy of a false instrument with a view to deceive TEC or TGH.  On 5 October 2012, he was acquitted after trial.

9.  After the criminal trial, TGH settled the case with Lau in respect of the claim in the 2011 Action.  Pursuant to the settlement agreement, TGH entered judgment against Lau on 22 May 2013. However, TGH agreed not to enforce the judgment provided that Lau would offer assistance to TGH about the investigation of the fraudulent scheme.

10.  As a result of the information provided by Lau, TEC and TGH on 14 March 2013 commenced the present proceedings (“the Present Action”) against 11 defendants including, inter alia:

(i) Lee as the 1^st defendant;

(ii) Lee’s wife as the 2^nd defendant;

(iii) Yuanzhi as the 3^rd defendant;

(iv) Winful as the 4^th defendant;

(v) the 5^th defendant which is a company controlled by Lee; and

(vi) the 6^th and 7^th defendants which are two companies controlled by Lee’s wife.

11.  The plaintiffs applied for ex parte Mareva injunction against the defendants but it was dismissed by Anthony Chan J on 9 April 2013.  The writ was served on the defendants on 9 April 2013.  On 15 April 2013, the plaintiffs made another ex parte on notice application for a Mareva injunction but the same was dismissed by Au-Yeung J.  TGH then made an inter parte application for a Mareva injunction which was again dismissed by Au-Yeung J on 1 November 2013.

12.  On 29 April 2013, some of the defendants in the Present Action took out a summons to strike out the Statement of Claim (“the Summons”). After the issuance of the Summons, the plaintiff filed two Notices of Discontinuance dated 21 June 2013 with the effect that only TGH and the 1^st, 3^rd to 7^th defendants remain as the parties to the proceedings.

13.  Mr Barlow, SC, counsel for the remaining defendants, now seeks to strike out the Statement of Claim in the Present Action on the grounds that:

(i) the Present Action is an abuse of the court’s process, vexatious and embarrassing because it is a parallel concurrent action to the 2011 Action; and

(ii) the Statement of Claim discloses no reasonable cause of action and is embarrassing, in particular in respect of the claims against the 5^th to 7^th defendants.

14.  I will deal with these grounds in turn.

Multiplicity of proceedings and abuse of process

15.  Mr Barlow submits that it is prima facie an abuse of the court’s process to bring two actions based upon the same facts involving the same, or substantially the same, parties if both cases could have been, and therefore should have been, brought within one action.  In support of his submission, Mr Barlow relies on the dicta of Kay LJ in Poulett v Hill [1893] 1 Ch 277 and the dicta of Sir John Donaldson MR and Griffiths LJ in Buckland v Palmer [1984] 1 WLR 1109.  In the latter case, Sir John Donaldson MR said the following (at p 1114H):

“Whilst I dislike procedural technicality … … in reality there are wider issues involved. The public interest in avoiding any possibility of two courts reaching inconsistent decisions on the same issue is undoubted and this alone would suggest that two actions based upon the same cause of action should never be allowed. Equally clear is the public interest in there being finality in litigation and in protecting citizens from being ‘vexed’ more than once by what is really the same claim. Against this must be set the public interest in seeing that justice is done. … … These competing public interests will be differently reconciled on the differing facts of particular cases and this is best achieved if we hold, on principle and on the authorities to which I have referred, that (1) it is an abuse of the process of the court to bring two actions in respect of the same cause of action but (2) where there has been no judgment in the first action, that action can, in appropriate circumstances, be revived and amended so as to enable there to be an adjudication upon the whole of the plaintiff’s claim.”

16.  Mr Barlow submits that the same principle should apply, a fortiori, after the implementation of the CJR.  With the underlying objectives, there is now a duty on the parties to litigate in an efficient, cost-effective, procedurally proportionate and economic manner.  According to Mr Barlow, TGH should have amended the claim in the 2011 Action to include the new claims against Lee and the related parties.  Multiplicity of proceedings would only increase the costs of litigation and result in further delay in the adjudication of the disputes.  In such circumstances, the institution of the Present Action is an abuse of the process of the court.

17.  It may be an abuse of procedure to litigate matters which have, or could have, been decided in earlier proceedings.  The basic rule is that, where a matter becomes the subject of adjudication, the court requires the parties to put forward their whole case and will not, except under special circumstances, permit them later to reopen matters which might have been brought forward as part of already concluded litigation.  Res judicata for this purpose is not confined to issues which the court was actually asked to decide in the original litigation, it also covers issues or facts which are so clearly part of the subject-matter of the original litigation and so clearly could have been raised then that, it would be an abuse of process to allow new proceedings to be started in respect of them.  This principle is sometimes referred to as “res judicata in the wider sense”. The rule aims to achieve finality in litigation so that a party shall not be twice vexed in the same matter.  Similarly, a party in a subsequent action can apply to have that second action struck out against him as an abuse of process, where it could have properly been joined into the original action but was not. But the basic rule must be applied with caution.  It does not necessarily follow that, because a matter could have been raised in earlier proceedings, the raising of it subsequently constitutes an abuse.  The crucial question is whether in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it an issue which could have been raised before.  The basic rule assumes that the court has made a final determination on an issue in the earlier proceedings, and different considerations may apply if that is not the case (see: Hong Kong Civil Procedure 2014, §18/19/11).

18.  In the affirmations, TGH has explained why it had not sued Lee and the related parties in 2011.  When TGH was by then investigating the whereabouts of the proceeds of sale of TGH’s Copper Rods, Lee denied any involvement and shifted the blame to Lau, who absconded shortly before the commencement of the 2011 Action.  On 22^nd January 2013, TGH entered into a settlement agreement with Lau.  As a result of the evidence provided by Lau under the settlement agreement, TGH knew about the involvement of Lee in the alleged fraud, and it therefore commenced the Present Action against Lee and the related parties in 2013.  There is no basis for me to query the genuineness of such explanation.

19.  Considering the background of this claim, it is clearly not a case of abuse of process.  Except for Yuanzhi and Winful, the parties in the 2011 Action and the Present Action are different.  As there has been no final adjudication of the issues in the earlier proceedings, I am not aware of any legal requirement that a plaintiff cannot bring a new action against some new parties even though the issues in the two actions may be related.  In fact, the law may sometimes require a plaintiff to institute a new action, because the amendment of the claim in the earlier proceedings to join new parties may deprive such new parties to rely on some of the defences such as limitation (see: Hong Kong Civil Procedure 2014, §15/6/3).  This is also why the procedures provide for consolidation of different actions, so that same or similar issues in different actions can be determined at the same time.

20.  There is also no issue of res judicata in the wider sense.  First, there is no final adjudication of the issues in the earlier action.  Second, TGH did not know the full involvement of Lee in the alleged fraud back in 2011, and so it provides a justification as to why TGH had not sued Lee and the related parties in the 2011 Action.  Third, allowing TGH to bring the Present Action does not offend the rationale for the rule against re-litigation, ie the aims to avoid inconsistent findings of fact and to achieve finality in litigation so that a party shall not be twice vexed in the same matter.

21.  Despite that, it is clearly an abuse of process to join Yuanzhi and Winful in the Present Action.  In fact, Au-Yeung J made the same observation in §39 of her Reasons for Decision dated 15 April 2013 refusing the plaintiffs’ ex parte on notice application for a Mareva injunction:

“With regard to Yuanzhi and Winful, who are parties to the 2011 action, the immediate question that springs to mind is why they are joined in the present action. A Mareva injunction is already in place against them. Here Mr Barlow SC points out that there is a complete duplication of action and an abuse of process. Yuanzhi and Winful have already pleaded to [TGH’s] case, engaged in multiple interlocutory hearings and Lee has filed 14 affirmations. It is an abuse of court process to sue them here, especially both actions are premised on similar facts.”

22.  It is trite law that a plaintiff cannot bring two claims against the same defendant for the same cause of action.  Although TGH seeks to justify the institution of the Present Action by saying that the claims against Yuanzhi and Winful in the two actions do cover different periods of time (the 2011 Action relates to the period between June to September 2011, whereas the Present Action relates to the period from 2008 onwards), it cannot alter the fact that the complaints and the causes of action in the two actions are the same.  It is certainly embarrassing for these defendants to defend two same actions against them, and I would have no hesitation in striking out the claims against Yuanzhi and Winful in the Present Action.

23.  Mr Barlow has relied on the underlying objectives introduced by the CJR in support of the striking out application. Despite his able submission, I do not accept that these underlying objectives have changed the law about re-litigation and multiplicity of proceedings.  From the case-management point of view, it is certainly desirable for the 2011 Action and the Present Action to be consolidated or to be heard together. However since there is no such application before me, these matters will have to be dealt with in some other time.

Reasonable causes of action and defects in the pleading

24.  I then turn to the second ground for the striking out application, which relates to whether the Statement of Claim discloses any reasonable cause of action against the remaining defendants and whether there is any defect in the pleading.

25.  The main attack about the pleading relates to the claims against the 5^th to 7^th defendants.  According to Mr Barlow, the 5^th to 7^th defendants are not the subject of any identifiable or meaningful claim.  The 6^th and 7^th defendants are companies controlled by Lee’s wife, but TGH has already discontinued the claim against Lee’s wife in this action.  The 5^th defendant is a company controlled by Lee, who used it as a successor trading company to Winful since Winful’s business was destroyed by the Mareva injunction granted in the 2011 Action.

26.  Relying on the case of Belmont Finance v Williams Furniture [1979] Ch 250, Mr Barlow argues that, in order for TGH to succeed in the claims against the 5^th to 7^th defendants, TGH has to plead that there was dishonest assistance in Lau’s or Lee’s breaches of trust.  Dishonestly, which is an element of knowing assistance, has not been pleaded in the Statement of Claim and so the claims against these defendants must fail.

27.  On the other hand, Mr Hughes, counsel for TGH, submits that TGH is not relying on the claim for knowing assistance against the 5^th to 7^th defendants.  According to him, TGH’s case against these defendants is summarised in §47(vi) of the Decision of Au-Yeung J dated 1 November 2013:

“D5 to D7 were nominee companies holding assets. [TGH] is seeking proprietary remedy against them. [TGH’s counsel] submits that once TGH establishes that its money has been paid into these companies, the burden will be on D5 to D7 to show that they were bona fide purchasers of the relevant property for value without notice: Foskett v McKeown [2001] 1 AC 102, at 108F-109E. TGH does not run a case of dishonest assistance against D5 to D7 and it is not necessary to prove that they had knowledge of TGH’s equity: Chan Chun Chung v PBM (Hong Kong) Ltd (2004) 7 HKCFAR 178 at para 14.”

28.  In Foskett v McKeown, supra, a number of purchasers entrusted a sum of money to M and an associate for a property development scheme in Portugal.  The scheme was never carried out.  M, in breach of trust, used some of the purchasers’ money to pay the annual premiums of a life insurance policy.  M later committed suicide, and the purchasers brought an action claiming the proceeds of the policy.

29.  The House of Lords held that the remedy claimed by the purchasers was a proprietary remedy, and the purchasers were able to follow their money into the policy when the premiums were paid and from there into the hand of the trustees when the death benefit was paid to them.  Since the beneficiaries of the policy were volunteers and had not themselves contributed to the premiums, the purchasers were entitled to a share in the policy proceeds proportionate to the premiums paid out of the trust money.

30.  In Chan Chun Chung, supra, T, an employee, stole large sums from the plaintiff.  T and TP entered into an agreement and acquired all the shares in a company, C.  C’s sole asset was a flat, which was purchased by T and TP and financed by a bank mortgage with the balance financed by the use of the misappropriated funds.  After the completion of the flat purchase, T and TP assigned the shares of C to the 1^st defendant and his wife at a gross under-value.  The Court of Final Appeal affirmed the decisions of the lower courts that the plaintiff was entitled to trace into the net proceeds of sale of the shares.

31.  According to the judgment of the Court of Final Appeal, unless the 1^st defendant and his wife were bona fide purchasers for value of the shares in C without notice of the underlying equity in favour of the plaintiff, they would have acquired C subject to the plaintiff’s equity.  The burden of proof fell on the defendants to show that the 1^st defendant and his wife were bona fide purchasers for value without notice and this was not discharged, and that was why the plaintiff was able to trace the misappropriated funds into the proceeds of sale of the shares of C.  In §19 of the judgment, Litton NPJ went on and said that, not only were the 1^st defendant and his wife not bona fide purchasers for value without notice, they were not purchasers at all and they remained the nominees for T in respect of the shares.

32.  In the Present Action, TGH claims that Lee had transferred the misappropriated funds to the 5^th to 7^th defendants for the purchase of various properties.  Since they are not bona fide purchasers for value, they hold the properties as nominees for Lee, and TGH is entitled to trace the misappropriated funds from the sale of the Copper Rods into these properties.

33.  Based on the said authorities cited by Mr Hughes and the allegations advanced by TGH, I agree that that TGH would have a reasonable cause of action against each of the 5^th to 7^th defendants and so the claims against them should not be struck out.  Despite that, the case as now pleaded is embarrassing.

34.  As mentioned above, a victim whose properties have been misappropriated by a constructive trustee can bring two kinds of claim against a related third party who received the misappropriated money.  The first one is knowing assistance in the breach of trust.  For such kind of claim, a plaintiff has to give particulars of dishonesty and knowing assistance as stated in Belmont Finance, supra.  The second kind of claim is a proprietary claim based on tracing.  For such claim, the plaintiff has to plead that: (i) he is the owner of the misappropriated funds and not just that it was the “expectation and impression” of the plaintiff that he would receive the funds; and (ii) the third party is not a bona fide purchaser for value in respect of the sums received (with full particulars given), and so such third party is holding the sums received as a nominee for the constructive trustee.

35.  In the existing Statement of Claim, it is not clear whether TGH is relying on the first or the second kind of claim or both. Although it is pleaded that Lee’s wife was a housewife with no substantial income, TGH has not specified which cause of action it seeks to rely upon.  In particular, it has not been pleaded that the 5^th to 7^th defendants are volunteers in respect of the sums received from Lee or that they were holding the subject properties as nominees for Lee.  This would cause embarrassment to the 5^th to 7^th defendants as they do not know precisely the nature of the claim that they have to defend.  In my judgment, if TGH seeks to rely on the second kind of claim, it has to be pleaded clearly in the Statement of Claim.  For these reasons, the pleading has to be amended.

36.  Mr Barlow has also made some other complaints about the pleading.  Now with the claims against Yuanzhi and Wilful already struck out, I only need to focus on the claim pleaded against Lee.

37.  In §§38 to 46 of the Decision of Ay-Yeung J dated 1 November 2013, the learned judge had summarised Mr Barlow’s complaints about the existing pleading.  I do not want to repeat the same allegations here.

38.  In the hearing of the inter parte Mareva injunction before Au-Yeung J, TGH had clarified its case against Lee (see: §47 of the Decision of Au-Yeung J dated 1 November 2013).  According to TGH, Lee and Lau were its agents in respect of the sales business and they received the sales proceeds on behalf of TGH.  They therefore held the sales proceeds as trustee for TGH.  By misappropriating the sales proceeds, Lee was in breach of his duty as trustee, and further or in the alternative, Lee had dishonestly assisted Lau in the breach of trust.

39.  Au-Yeung J made the following observations about the existing pleading (see: §49 of the Decision):

“I have to say that there is much room for improvement of the statement of claim. What TGH is purporting to do is to sweep every purchaser of its goods under the umbrella of Lee and Lau’s agency so that all proceeds of sale should go to TGH as principal. This is despite the fact the pleader himself used distinct terms for agent, sub-agent, traders and end-customers. At this stage, I can only say that the statement of claim is capable being read in the way advanced by [TGH’s counsel]. The bone of contention lies in whether Lee, Yuanzhi and Winful acted as agents or were trading as principals. This is a matter of fact and law that cannot be resolved in an interlocutory application like this. Paragraphs 50 to 52 of the statement of claim did plead dishonest assistance [in respect of the claims against Lee, Lau Yuanzhi and Wilfil]. I do not think it can be said that reading the statement of claim with the evidence, there is no sustainable cause of action … …”

40.  I agree entirely with such observations.  Although there is some confusion in the pleading itself, in particular about the role of Yuanzhi and Winful in the alleged fraudulent scheme, the pleading is capable of being read in the way as advanced by TGH.  As this is not a clear and obvious case for the striking out of the claim against Lee, I refuse to do so here.

41.  Further, it is alleged that Lee had transferred the misappropriated funds to the 5^th and 7^th defendants for the purchase of various properties pleaded in the Statement of Claim. Subject to the appropriate amendment of the Statement of Claim as mentioned above, TGH does have reasonable causes of action against the 5^th to 7^th defendants.

42.  For the above reasons, I make the following order:

(i) the Statement of Claim against Yuanzhi and Winful be struck out and the claims against these defendants be dismissed; and

(ii) subject to the aforesaid, leave be granted to TGH to amend the Statement of Claim and TGH do file and serve the Amended Statement of Claim within 21 days.

43.  I also make the following order nisi:

(i) TGH do pay to Yuanzhi and Winful the costs of the action including the costs of the Summons; and

(ii) TGH do pay to the 5^th to 7^th defendants the costs of the Summons; and

(iii) there be no order as to costs of the Summons as between TGH and Lee.

44.  The order nisi shall be made absolute 14 days after the date of the handing down of this Judgment.