CHINA NONFERROUS METALS (HONG KONG) FINANCE CO LTD (In Liquidation) AND ANOTHER v. SOUTH-EAST ASIA INVESTMENT HOLDING CO LTD AND ANOTHER

HCCL 20/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 20 OF 2002

____________

_____________

D E C I S I O N

_____________

Background

1.  It cannot be denied that this action has had a long history.  The writ was issued in December 2001 by the 1st plaintiff (“CNM”) and the 2nd plaintiff (“CNMG”) against the defendants, South-east Asia Investment Holding Company Ltd (“Company”) and Ng Hon Leung (“Director”), who is a director and shareholder of the Company.  It is claimed that under a loan agreement dated 27 May 1997 (“1st Loan Agreement”), CNM made a loan of HK$70 million to the Company, to be repaid on 6 December 1997.  By an agreement dated 5 December 1997 (“2nd Loan Agreement”) made between CNM and the Company, the repayment date under the 1st Loan Agreement was extended to 6 March 1998.  CNM and CNMG claim that the principal loan under the 2nd Loan Agreement was HK$75,012,282.86 (“Loan”). 

2.  On 8 May 1998, CNMG entered into an agreement (“Loan Repayment Agreement”) with the Company and the Director, whereby in consideration of CNMG agreeing to procure CNM’s forbearance from exercising its rights to demand immediate repayment of the Loan and interest accrued, the Company and the Director agreed that they were jointly and severally liable to repay the Loan and interest to CNM, on the terms and in the manner set out in the Loan Repayment Agreement. 

3.  CNM and CNMG claim that as at 30 September 2001, the total amount due from the Company under the 2nd Loan Agreement was HK$123,349,888.82 (“Debt”), less repayments which had been made by the Company to CNM.  According to the Statement of Claim filed on 11 December 2001, CNM claims the Debt and interest from the Company, whereas CNMG claims against the Director damages for breach of the Loan Repayment Agreement.

Progress from December 2001 to 15 August 2004

4.  After commencement of the proceedings in December 2001, on 28 January 2002, CNM and CNMG applied for summary judgment to be entered against the Company and the Director.  Evidence was filed in January and February 2002.  In essence, the Company claimed that the advance made under the 1st Loan Agreement was not in fact a loan, but CNMG’s capital contribution to a company known as Traffic Stream Infrastructure Holdings Company Ltd (“Traffic Stream”), pursuant to a Share Investment Agreement dated 31 August 1996 (“Share Investment Agreement”), and other contracts related thereto, made between CNMG and the Company.  Traffic Stream was claimed to be the vehicle set up pursuant to agreements made between the Company and CNMG for investment in and development of toll roads and infrastructures in Mainland China. 

5.  A petition was filed in January 2002 for the winding up of CNMG.  By order made on 21 March 2002, this action was transferred to the Commercial List, and on 8 May 2002, an order was made for the winding up of CNMG.  Shortly thereafter, on 24 June 2002, a petition was made for the winding up of CNM.  On 18 September 2002, a winding up order was also made against CNM.  In the meantime, an order was made on 28 June 2002 for the action to be stayed, pursuant to section 186 of the Companies Ordinance.

6.  As a result of the winding up proceedings, no further step was taken in these proceedings until 16 August 2004, when CNM and CNMG filed notice of their intention to proceed with the action.

Progress from 16 August 2004 to 28 July 2011

7.  According to the evidence filed on behalf of the liquidators, legal advice was taken by the liquidators in February 2003 on the merits of the plaintiffs’ case and on their application for summary judgment.  On a preliminary basis on 30 April 2003, and as confirmed on 16 July 2005 and 30 November 2005, Counsel advised the liquidators that she was not confident that the liquidators could succeed at trial, and that they were “a long way off from showing on a balance of probabilities that the loan of $70 million was a straightforward loan”.  The liquidators were advised to consider instead a claim against the Company for refund of a sum of $180 million, under the Share Investment Agreement between CNMG and the Company.

8.  Hence, the liquidators of CNMG commenced a separate action, HCA 683/2007 (“2007 Action”), in April 2007 against the Company.  A defence was filed in April 2007, and witness statements were filed in 2008, all in the 2007 Action.

9.  No step was taken in these proceedings (“2001 Action”) until 29 July 2011, when the liquidators filed notice of their intention to proceed.  The liquidators explained that it was only in May 2010 that they were made aware of the need to ascertain if the Company had assets, to make any judgment in the 2007 Action worthwhile.  Investigation agents were engaged on 16 March 2011, and on 28 April 2011, the liquidators received the agents’ report on the assets of the Company and of the Director.  It was discovered that whereas the Director held substantial assets, there was “insufficient indicator of substantial assets being held by (the Company)”.  Senior Counsel’s advice was obtained on 31 May 2011 on the merits of the 2001 Action and the 2007 Action, and pursuant to such advice, the 2001 Action was reactivated in July 2011 by the filing of the notice of intention to proceed.

Progress from 29 July 2011 to 7 November 2011

10.  In August 2011, the liquidators’ solicitors offered to withdraw the application for summary judgment in the 2001 Action and to give security for costs up to the stage of the case management conference.  Without prejudice negotiations ensued.

11.  On 7 November 2011, the Company and the Director applied to dismiss the 2001 Action for want of prosecution.  They also applied for security for costs on 18 April 2012.  On 24 May 2012, CNM and CNMG were ordered by Reyes J to pay security for costs in the sum of HK$700,000.  Payment of such security was made into court on 20 June 2012.

Should the 2001 Action be struck out?

12.  The issue for determination is whether the claims made by CNM and CNMG in the 2001 Action should be struck out for want of prosecution, on the ground of inordinate delay and/or for being an abuse of the process of the court, as claimed by the Company and by the Director. 

Applicable legal principles

13.  In Wing Fai Construction Co Ltd (in liquidation) v Yip Kwong Robert [2012] 1 HKLRD 589, Ma CJ re-evaluated the approach to striking out actions for delay and for want of prosecution, and set out a restatement of the principles applicable to such striking out applications after the Civil Justice Reform (“CJR”).  It is clear from the Chief Justice’s judgment (see paragraphs 66 and 68) that abuse of process is the foundation for the jurisdiction of the Hong Kong court to strike out for delay.  It was also emphasized by the Chief Justice that under the objectives of the CJR, the primary responsibility of the court is to secure the just resolution of disputes in accordance with the substantive rights of the parties.  As such, “striking out should only be used in plain and obvious cases: it must be plain and obvious that by reason of his delay, a plaintiff should be deprived of the opportunity to go to trial for the resolution of his dispute with the defendant” (p 615, paragraphs 64 and 65 of the judgment of Ma CJ, Wing Fai Construction).

14.  The applicable legal principles are clearly set out in paragraph 75 of the Chief Justice’s judgment, and there is no need to repeat them here.  I will only summarize the main points which are relevant to the present case:

(1)  Delay should be both inordinate and inexcusable, and abuse has to be shown.  Mere delay will not be sufficient to justify an order to strike out.

(2)  If abuse is clearly demonstrated, proceedings can be struck out even where prejudice to the defendant cannot be shown, but in the majority of applications to strike out for delay, prejudice to the defendant will often be extremely relevant.

(3)  A party’s mere commencement of proceedings, followed by delay, will not necessarily amount to an abuse justifying an order to strike out an action.

(4)  The conduct of the parties is a relevant consideration both on the question of abuse as well as on the question of the overall justice of the case. Any failure on the part of the parties in their obligation to prosecute the proceedings and to assist the court in furthering the underlying objectives will be considered.  It is no longer possible for a defendant to adopt the attitude of “letting sleeping dogs lie”, and to sit idly by and do nothing.

(5)  Non-expiry of the limitation period is no longer a factor which will militate against an order for striking out.

(6)  Any delay caused by the plaintiff’s legal representatives will not be relevant to the exercise of the court’s discretion, i.e.  acts done or omitted to be done by a party’s legal representatives will be attributable to that party.

15.  It should also be clear from a reading of the judgment in Wing Fai, and the observations made on the vast jurisprudence spawned from the decisions in Birkett v James [1978] AC 297 and Grovit v Doctor [1997] 1 WLR 640 and the confusion arising therefrom, that the court discourages the adoption of a strait-jacket and compartmentalized approach hereafter to applications for striking out for delay and abuse.  In determining such applications, the court should take into consideration the underlying objectives of the CJR, in particular the primary aim of the court exercising its powers to secure the just resolution of disputes in accordance with the substantive rights of the parties.  The court should identify the abuse that is alleged to exist, and give heed in its usual balancing exercise to matters such as delay, prejudice, the conduct of the parties in the light of their duty to assist the court in the furtherance of the objectives of the CJR, whether a fair trial of the dispute is possible, and whether overall justice demands that the proceedings should be struck out.  As the power to strike out is discretionary, the court should exercise its discretion with regard to all relevant facts of the case, and not read judicial decisions as a statute.  In the balancing exercise, some factors may carry more weight, and some factors have less weight, all depending on the different circumstances of each case.

The principles applied to the present case

16.  It can hardly be disputed that there has been inordinate delay in the 2001 Action.  The first period extends from the issue of the writ in December 2001 to 15 August 2004, just before CNM and CNMG filed their first notice of intention to proceed.  The delay and inactivity can be explained by the winding up proceedings which led to the appointment of the liquidators of CNMG in June 2002, and the liquidators of CNM in November 2002.  The proceedings were stayed by the order of 20 June 2002.  The consequent delay was, to a large extent, outside the control of CNM and CNMG until the appointment of the liquidators.  Thereafter, the inevitable delay occasioned whilst the liquidators collated information relating to the affairs and business of the companies, and the difficulties they experienced in the process, is somewhat understandable.

17.  Nevertheless, there was a delay of 2 years from the appointment of the liquidators until the filing of the notice of intention to proceed with the 2001 Action in August 2004.  The liquidators explained that they took legal advice in February 2003, were advised in July and November 2005 that their chances of success in the 2001 Action were effectively slim, and that they should consider claiming against the Company for refund of HK $180 million under the Share Investment Agreement instead.  On the liquidators’ evidence, they thus commenced the 2007 Action in April 2007, “and turned their attention to the 2007 Action” instead. 

18.  The liquidators realized some time after May 2010 that they should ascertain whether the Company had assets, but it was only in March 2011 that they engaged agents to carry out investigations.  At the end of April 2011, the liquidators received the investigation report, to the effect that only the Director was worth suing as he had substantial assets.  Senior Counsel’s advice was obtained at the end of May 2011, and the second notice of intention to proceed was filed in the 2001 Action on 29 July 2011.

19.  In the interim of 7 years, between the filing of the first notice of intention to proceed in August 2004 to the filing of the second notice of intention to proceed in July 2011, there was no action taken in the 2001 Action. From the effective date of the CJR in April 2009 to 29 July 2011, when the second notice of intention to proceed was filed, there was an interim of 2 years 3 months.

20.  I consider that there was inordinate and inexcusable delay, even bearing in mind the difficulties faced by liquidators appointed to a company in the process of winding up.  If the liquidators considered that they had insufficient evidence and resources to proceed with the 2001 Action, they should take steps to discontinue the action.  Objectively considered, when the liquidators obtained legal advice in 2003 that the prospects of obtaining judgment at trial of the 2001 Action were dim, and that the alternative was for CNM to proceed against the Company under the Share Investment Agreement, their decision was to commence and continue the 2007 Action (which they did), and effectively not to proceed with the 2001 Action, or to bring it to a conclusion. This was notwithstanding the fact that an application for summary judgment had been made, and been left pending in the 2001 Action since 2002.  The liquidators could (and should) have agreed to the dismissal of the Order 14 summons, or agreed to directions for the defence to be filed and the 2001 Action to be continued in the usual manner or otherwise discontinued, but they did not.  Instead, they permitted the 2001 Action to languish, and to languish for 7 years.  I am satisfied that this constitutes a good example of abuse.

21.  Is it just to strike out the action of CNM and CNMG, and deprive them of the opportunity to go to trial for the resolution of their dispute over a very substantial sum? As emphasized in Wing Fai, the jurisdiction to strike out should only be used in plain and obvious cases.  In the exercise of my discretion, I should always consider such relevant factors as the prejudice to the Company and to the Director, as well as the conduct of the parties.

22.  The question of prejudice to a defendant and the risk to a fair trial must be considered in the light of the nature of the dispute and the state of the preparation of documentary evidence.  The burden is on the defendant to show prejudice.

23.  The Director claims, in his evidence filed on behalf of the Company and himself, that as a result of the delay in the conduct of the 2001 Action, the witnesses to be called for both parties would have lost a substantial part or all of their memory and recollection concerning the details of the matters in dispute.  It was also alleged that their defence of the case is prejudiced because the liquidators have referred in the evidence to their difficulties in locating the relevant directors or officers of CNM and CNMG, to verify the claims made by the Company and the Director in the 2007 Action.  The Director claims that officers of CNM and CNMG had played a role in the transactions under dispute, and the Company and the Director have now been deprived of the opportunity to either cross-examine these witnesses, or to properly establish their defence.

24.  The issue for determination at the trial of the 2001 Action is whether the Debt represented loans advanced under the loan agreements made between the parties, or capital contributions made by CNM under the series of the Share Investment Agreement and related contracts between CNM and the Company.  The parties have referred in the affirmations to various written agreements and correspondence, which have been disclosed.  The authenticity and contents of the documents are not in dispute, and these documents will be the main evidence relied upon by the parties to establish their case. 

25.  The difficulty experienced by the liquidators in locating the officers of CNM and CNMG was caused by the winding up proceedings.  Any prejudice that may be sustained by the Company and the Director, as a result of the officers of CNM and CNMG not being available, is not prejudice caused by the delay in the liquidators’ conduct of the 2001 Action.  The prejudice in this regard, if any, was present from the time when the winding up order was made, even if the liquidators had diligently progressed their claim in 2003.

26.  In any event, it had always been open to the Company and the Director to take steps to locate any witness who may assist their case, including any relevant officer of CNM and CNMG, to prepare their witness statements in good time before any lapse in their memory.  The same considerations apply in relation to the claim made that the Director or other officers of the Company may suffer from loss of memory by virtue of the delay brought about by the liquidators.  Due diligence and early preparation of the necessary evidence would have avoided such risks and minimized the possible prejudice.

27.  In all the circumstances of this case, I am not satisfied that there is any real risk that a fair trial is not possible.  The Director, who is a material witness for the Company, is still available to give evidence on the agreements in question, and whether the Debt is a loan, or capital contribution. As Leading Counsel for the liquidators pointed out, this distinction cannot be a matter which he might forget despite the lapse in time.  The underlying and supporting documents for the commercial transactions are all available. 

28.  So far as conduct is concerned, no doubt the liquidators are guilty of inordinate and inexcusable delay.  However, it was always open to the Company, the Director and their legal advisors to take steps to progress the 2001 Action. They did not have to sit idly by.  They could have applied in 2003 to dismiss the Order 14 summons.  They could have applied for directions for the conduct of the 2001 Action.  If orders had been applied for to proceed with the 2001 Action, and the liquidators had failed to comply with these orders, the action might have been dismissed.  Instead, the Company and the Director chose only to apply in November 2011 for the 2001 Action to be struck out.  They were obviously happy until then to adopt a “let sleeping dogs lie” attitude - even after the implementation of the CJR in 2009, when it was made clear that all parties to an action have the duty to assist the court to further the underlying objectives, and to ensure that a case is dealt with as expeditiously as is reasonably practicable.

29.  After the notice of intention to proceed was filed on 29 July 2011, the liquidators offered in August 2011 to withdraw the Order 14 summons and to give security for costs up to the stage of the case management conference. When the liquidators were ordered on 24 May 2012 to pay security for costs, they duly made payment into court on 20 June 2012. 

30.  At this stage, having carefully considered all the relevant matters, I am not satisfied that this is an appropriate case for striking out.  However, any further delay on the part of the liquidators and any non-compliance on their part with the orders or rules of the court will obviously not be looked upon favourably by the court. 

Orders

31.  There should be no further delay on the part of the parties to bring this action to trial.  By reason of the liquidators’ failure to duly prosecute the Order 14 summons, I will dismiss the application for summary judgment, with costs to the Company and the Director.  The parties are directed to submit agreed directions within 7 days of the handing down of this Decision, for the further conduct of this action, including directions for the filing of the Defence, discovery and exchange of witness statements, all to be completed within 20 weeks from the handing down of this Decision.  The directions should also include the time for a case management conference to be held within 22 weeks from the handing down of this Decision.  In default of agreement on the directions to be made, the parties should forthwith apply to the court for directions.

32.  The security for costs of HK$700,000 ordered on 24 May 2012 was up to the hearing of the striking out application.  To ensure the due progress of the action, and to give security for costs hereafter to the Company and the Director, I will order a further sum of HK$500,000 to be paid by the liquidators into court within 28 days.  This should cover the costs to be incurred up to the case management conference in accordance with the time table I have set down.

33.  On the general question of the costs of the striking out application, since both sides are culpable of delay, instead of ordering costs to follow the event of the unsuccessful application for striking out, I consider that a fair order would be for each party to bear its own costs and make an order nisi to such effect.