DELCO PARTICIPATION B.V. v. CHIHO ENVIRONMENTAL GROUP LTD AND OTHERS

CACV 107, 108 & 109 /2020
(Heard together)

[2020] HKCA 950

CACV 107/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 107 OF 2020

(ON APPEAL FROM HCA NO 2939 OF 2016)

________________________

________________________

AND

CACV 108/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 108 OF 2020

(ON APPEAL FROM HCA NO 2943 OF 2015)

________________________

________________________

AND

CACV 109/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 109 OF 2020

(ON APPEAL FROM HCA NO 3040 OF 2015)

________________________

________________________

(Heard together)

________________________

D E C I S I O N

________________________

Hon Kwan VP:

1.  On 31 December 2019, Coleman J handed down a judgment (“the Judgment”) refusing to give leave to amend those parts of the defence filed in each of these three actions – HCA 2943/2015 (“A2943”), HCA 3040/2015 (“A3040”) and HCA 2939/2016 (“A2939”) – to which objection was taken by the plaintiff in those actions, Delco Participation BV (“Delco”). HWH Holdings Ltd (“HWH”; the defendant in A2943 and the 3^rd defendant in A2939) and Fang Ankong (“Fang”; the 2^nd defendant in A3040 and the 4^th defendant in A2939) brought an appeal against the refusal to amend pleadings in each action, with leave granted by the judge on 16 April 2020 (“the Leave Decision”).

2.  Delco raised an issue of limitation in opposing the amendments. The pertinent questions in these appeals are: (1) whether section 35(1) of the Limitation Ordinance, Cap 347^[1] is engaged in that a “new claim” is made in the course of an action outside the limitation period; and (2) if so, whether the new claim comes within sections 35(5) and (6) in that it “arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment”.  In disallowing the amendments, the judge answered (1) in the affirmative and (2) in the negative.

Background

3.  For present purpose, the relevant background matters are taken from the Judgment, the decision of G Lam J in the three actions on 26 July 2019^[2] and the decision of Deputy High Court Judge Hall-Jones in A3040 and A2939 on 30 October 2019^[3].

(1) General background

4.  In the 1990s, two Dutch businessmen, Herman de Leeuw (“HDL”) and Stephanus van Ooijen (“SVO”), through their group of companies called “Delco”, regularly sold scrap metals to Fang’s companies, which ran a scrap metal recycling business in Mainland China.  The business grew and the relationship developed, eventually to such a point that, in 1999, the two sides decided to set up a joint venture in the metal recycling business.  The joint venture vehicle was a company incorporated in the Mainland called Taizhou Chiho-Tiande Metals Co, Ltd (“CT Metals”).  The Dutch side set up a company called Delco Asia Co Ltd (“Delco Asia”) in 2001 to hold their investment in CT Metals.  In 2002/2003, there was a restructuring so that Hefast Holdings Corporation Ltd (“Hefast”), equally owned by the two sides, became the holding company of CT Metals.

5.  The joint venture was successful.  In about 2008, the two sides decided that it should go public.  For that purpose, a company, Chiho-Tiande Group Ltd (“CT”), was incorporated in the Cayman Islands to be the listed company.

6.  Prior to the listing, there were various sums owed by the companies within the joint venture group to Fang and Delco Asia respectively recorded as shareholders’ loans.  As part of the listing exercise, part of these shareholders’ loans were by agreement capitalised into shares in CT, with the uncapitalised portion to be repaid by CT.  Delco Asia’s uncapitalised portion of the shareholders’ loans was in the amount of HK$57,827,118.

7.  On 12 July 2010, CT was successfully listed in Hong Kong, with the two sides each holding a 34.5% shareholding interest in CT and another 3% through a BVI company.  The Delco side held its interest via Delco, which is the plaintiff in each of the three actions herein, while Fang used HWH, the defendant in A2943 and the 3^rd defendant in A2939, to do so.

8.  In October 2011, there was a restructuring on the Dutch side, as a result of which Delco acquired all the assets and liabilities of Delco Asia as at 31 December 2010. 

9.  From 2012 onwards, Delco took steps to exit from the listed company.  HWH also began to dispose of part of its interest in CT. In January 2012, Delco and HWH sold an aggregate of about 16% of CT shares to a third party.  Delco and HWH also agreed to re-invest into CT about two-thirds of the proceeds of sale by subscribing for convertible bonds (“CB”) issued by CT.  The principal amount of the CB subscribed for by Delco was HK$312.6 million, with interest at 4% per annum.  At the same time, by a Transfer Agreement between Delco and HWH, Delco sold approximately 1% of the shares in CT to HWH at HK$4.50 per share.

10.  In April 2014, Delco sold part of its shareholding in CT to a third party.  In January 2015, Delco sold the remainder of its shareholding in CT to HWH.  Subsequently in 2015, HWH transferred most of its shareholding in CT to a third party which has since controlled CT.

(2) The three actions

11.  The three actions brought by Delco may be summarised as follows.

(a) A2943:

Delco claims against HWH for the sum of approximately HK$46.8 million, being the alleged outstanding consideration for the transfer of shares under the Transfer Agreement of January 2012.  Subject to an argument about a 10% discount, which would reduce the claim to approximately HK$41.9 million, HWH’s defence is one of set-off as referred to below.  There is a corresponding counterclaim.

(b) A3040:

Delco claims against CT alternatively Fang the undercapitalised portion of shareholders loans in the sum of approximately HK$57.8 million under a capitalisation agreement.  CT defends the claim on the ground (with which Fang agrees) that Fang had personally taken up CT’s liability to pay that uncapitalised portion of Delco’s loans.  Subject to an argument about an adjusted figure, where Fang says the adjusted figure should be approximately HK$55.5 million, Fang’s defence is one of set-off as described below.  There is a corresponding counterclaim.

(c) A2939

Delco claims, amongst other things, approximately HK$6.25 million being the first half yearly interest payment of the CB due on 1 September 2012, which was due from CT but was paid by CT wrongfully to HWH on Fang’s instruction on the basis that Fang/HWH would repay that amount to Delco.  Fang’s and HWH’s defence is one of set-off.  In this action, there is no corresponding counterclaim.

(3) The defence of set-off as pleaded

12.  Prior to the proposed amendments being the subject of the application, Fang and HWH relied on two alleged debts for the purpose of set-off, the total amount of which is approximately HK$104 million.  They were described in the pleadings as the “Fang Debt” (HK$31,772,969) and the “HKM Debt” (HK$72,345,000), and the details are as follows.

13.  The Fang Debt was said to arise in this way. From 2002 to 2005, Fang advanced loans to Delco Asia totalling HK$45,134,110.59 and in 2010 a further loan of HK$5,267.  These loans had no fixed term and were unsecured, interest-free and repayable on demand.  In 2002 and 2003, Delco Asia made partial repayments to Fang in sums totalling HK$13,366,408.80.  By an audit confirmation in August 2011, Delco Asia confirmed that it owed Fang the sum of HK$31,772,969.19.

14.  As for the HKM Debt, it was alleged that on 11 dates in 2007 and 2008, HKM Metal Ltd (“HKM Metal”), a company owned by Fang, advanced loans to Delco Asia in the total sum of US$9,275,000, equivalent to HK$72,345,000, for the purpose of assisting Delco Asia’s business operations and development.  These loans also had no fixed term and were unsecured, interest-free and repayable on demand.  The loans were orally assigned by HKM Metal to Fang in around June 2013.

15.  The defendants averred that in June 2010, Fang and SVO orally agreed that the debts of Delco Asia should be repaid (a) as and when Fang demanded, so long as the payment is in satisfaction of Fang and/or the companies beneficially owned by Fang (“Fang’s group”); or (b) when Delco Asia had sufficient funds (referred to in the defence as “2010 Agreement”). In particular, they also agreed that the funds available to the Delco group in the form of repayment by CT of the uncapitalised portion of the shareholders’ loans would be used to repay the said debts in part.  Therefore, when CT did make repayment of the shareholders’ loans in July 2010, the amounts due to Delco Asia were paid to Fang instead (in the sum of HK$55,501,079.97).  The set-off was not, however, effected in the accounts which recorded a receivable from Fang in relation to his receipt of repayment of the uncapitalised portion of Delco Asia’s shareholders’ loans, and separately recorded an amount payable to Fang in relation to the debts or part thereof.

16.  The defendants pleaded that the practice had been adopted in about July and August 2011 as a conventional basis of the dealings between Fang’s group and the Delco group that their mutual receivables and payables would not be immediately set off against each other, but would instead be recorded separately as receivables and payables (as the case may be) in the accounts, but if either party was to demand payment at any time, there would be a set-off and only the net balance would be payable. This was referred to in the defence as “the Convention”.

17.  In January 2012, on the basis of the 2010 Agreement, the consideration payable under the Transfer Agreement for the 1% shareholding in CT was not paid to Delco but, as was the Convention, entered into the accounts as a sum receivable by Delco from HWH, while Delco remained indebted to Fang.

18.  On the basis of the 2010 Agreement also, in August 2012, the first coupon interest on the CB due from CT to Delco in the sum of HK$6,252,000 was paid to HWH instead of to Delco, in part payment by Delco of its debts aforesaid.  Following the Convention, there was no immediate set-off effected in the accounts, which instead recorded a receivable by Delco from Fang arising from this interest payment, as well as the amounts payable by Delco in respect of the debts aforesaid.

19.  In short, therefore, the defendants pleaded that while Fang or HWH owes Delco the three sums of HK$41.9 million, HK$55,501,079.97 and HK$6,252,000, Delco in turn owes Fang or his companies the Debts in the sum of HK$104,117,969.19.  The net result is that Delco owes Fang HK$464,889.22.

(4) The Scheme pleaded in the reply

20.  In response to the defence of set-off, Delco denied that the alleged debts existed in fact, and pleaded in its reply in each action “the Scheme” in order to explain how the alleged debts found their way into the books of accounts of Delco Asia including certain audit confirmations.  In essence, Delco’s case appears to be as follows:

(1)  From around 2000, the profits generated by the operating companies of the joint venture in the Mainland, including Taizhou Chiho-Tiande Foundry Co Ltd (“CT Foundry”) and CT Metals, were significantly under-reported in their accounts.

(2)  The unreported profits proportionate to the Delco group’s interest in the joint venture were transferred from those operating companies to Fang or his associates and subsequently routed to the Delco group and reinvested in the joint venture, and/or reinvested in the joint venture directly or via other entities associated with Fang.  Delco is not aware of the detailed methodology but says that the under-reporting of profits was achieved by various methods which it then seeks to particularise.  In gist, there was from 2001 onwards systematic under-invoicing by Delco Europe BV of shipments to CT Metals. Delco Europe BV would issue an invoice which was paid by CT Metals and entered into the books of Delco Europe BV.  But Delco Europe BV would issue a second invoice of a higher amount which was sent to CT Metals and recorded in its books as the acquisition cost.  The goods were sold to purchasers at the market price.  The difference between the two invoices formed the unreported profit. 

(3)  It was averred that the Scheme was implemented by Fang with the knowledge and assistance of the Delco group.

(4)  As a result of the Scheme, Delco Asia was reported as having contributed a total sum of HK$169,681,118 to the joint venture by way of shareholders’ loans (to Hefast and CTHK).  This amount represented the unreported profits reinvested into the joint venture on the Delco group’s behalf. 

(5)  In the accounts of Delco Asia, however, it was necessary to show liabilities corresponding to such shareholder’s loans (especially given the audit to be conducted before the listing exercise).  Accordingly, Delco Asia booked a number of payables totalling HK$169,843,599 (HK$31,772,969.19 owed to Fang, HK$72,345,000 owed to HKM Metal, and HK$65,730,897 owed to one Chern Shyn Kang), which were not in fact genuine debts required to be repaid but a sham.

(5) The proposed amendments

21.  The proposed amendments plead a further alleged debt as a further set-off in the sum of HK$65,730,897, said to be owed by Delco Asia to Chern Shyn Kang (as an alleged nominee of Fang).  This is referred to as the “Chern Debt”, and has already been mentioned in the reply. The Fang Debt, the HKM Debt and the Chern Debt together amounted to HK$169,848,866 and are defined collectively in the proposed amended pleadings as the “Debts” which are relied on in the defence of set-off that has been pleaded and all are alleged to be subject to the 2010 Agreement and the Convention.

22.  The Chern Debt was recorded in Delco Asia’s audited accounts for 2008 and was a sum in US$8,271,000[4] made up of US$5,021,000 and US$3,250,000.  They are alleged to be capital injections which ought to have been made by Delco Asia into CT Metals and Hefast from 2001 to 2005 but were made instead by Fang through his companies at the request of Delco Asia.

23.  Taking into account the Chern Debt with the other two debts, it is pleaded that the total of HK$169,848,866 owed by Delco to Fang and Fang’s group ought to be set off against the total of the amount recorded as owing by Fang’s group to Delco in the sum of HK$152,598,079.97.  So the net result is that Delco owes Fang $17,250,786.40.

24.  In A2943, the proposed amendments of the counterclaim plead that pursuant to the 2010 Agreement and the Convention, after the setting off of the mutual debts between Delco’s group and Fang’s group, Delco is liable to pay $17,250,786.40 and HWH counterclaims for that sum instead of $464,889.22 as pleaded before.

25.  In A3040, it was pleaded in the existing counterclaim that if Delco is found to have any claim against Fang, then to the extent there is a balance due to Fang from Delco after setting off HK$55,501,079.97, Delco is liable to pay to Fang the said balance and Fang made a counterclaim for the balance.  With the proposed amendment pleading the Chern Debt, the balance due to Fang would be $17,250,786.40 instead of $464,889.22.  The 2010 Agreement was pleaded in the existing defence but not the Convention.

26.  In A2939, the existing pleading is to the effect that mutual debts were incurred and the 2010 Agreement was pleaded but not the Convention. The proposed amendments plead the Chern Debt as part of the mutual debts. There is no counterclaim.

27.  The summonses seeking leave to amend the defence in each action were issued on 11 October 2019.  It was accepted by the defendants that limitation period had expired when the summonses were issued.  The judge noted but placed no particular reliance on the fact that there seems to have been significant delay in formulating the proposed amendments[5]. The focus of the judge’s analysis is on whether Delco has a reasonably arguable case on limitation, and whether the “new claim”, if it is a claim, arises out of the same or substantially the same facts as a cause of action in respect of which relief has already been claimed in the existing action[6].

The applicable principles

28.  The judge has correctly stated the applicable principles where issues of limitation are involved in an application to amend a pleading. Where an amendment to plead an arguably time-barred claim would bring the “relation back rule” in section 35(1)(b) into operation, the amendment could deprive a party of an arguable limitation defence and so prejudice it. The correct approach is to refuse leave to amend, unless the plaintiff can show that the defendant does not have a reasonably arguable case on limitation, or that the new claim arises out of the same or substantially the same facts as a cause of action in respect of which relief has already been claimed in the existing action (Global Bridge Assets Ltd v Sun Hung Kai Financial Ltd [2012] 4 HKLRD 474 at §21).

29.  Section 35(2) defines a new claim as meaning “any claim by way of set-off or counterclaim, and any claim involving either – (a) the addition or substitution of a new cause of action; or (b) the addition or substitution of a new party”.

30.  There is no dispute that “set-off” in this context means legal set-off, as opposed to equitable set-off[7], as a matter of construction of the wording of the statutory provision and as a matter of principle (Henriksens Rederi A/S v THZ Rolimpex [1974] 1 QB 233 at 246C; Westdeutsche Landesbank v Islington BC [1994] 4 All ER 890 at 945b to f).

31.  As explained by Hobhouse J in Westdeutsche Landesbank at 943f to 946a, “any claim” as a matter of language contemplates something which is, or can be expressed as, a “claim”, not something which has a mere status as a defence.  If a plaintiff, in equity, is not entitled to assert his cause of action without at the same time giving credit to the defendant for the relevant matters, no question of any claim being made by a defendant against the plaintiff arises, and the sole question is what is the proper claim that the plaintiff should make against the defendant.

32.  The rationale for this was as stated by Lord Denning MR in Henriksens at 245G to H:

“In point of principle, when applying the law of limitation, a distinction must be drawn between a matter which is in the nature of a defence and one which is in the nature of a cross-claim. When a defendant is sued, he can raise any matter which is properly in the nature of a defence, without fear of being met by a period of limitation. No defence, properly so called, is subject to a time-bar. But the defendant cannot raise a matter which is properly the subject of a cross-claim, except within the period of limitation allowed for such a claim. A cross-claim may be made in a separate action, or it may be made by way of set off or counterclaim. But on principle it is always subject to a time-bar.”

33.  A legal set-off, as denoted by the word “set-off” in section 35(2), is not properly in the nature of a defence. It is a purely procedural defence which does not operate to reduce or extinguish the creditor’s claim except at the point where judgment is given for the balance. It does not affect the substantive rights of the parties against each other, until both causes of action have been merged in a judgment of the court.  It addresses questions of procedure and cash flow.  As a matter of procedure, it enables a defendant to require his cross-claim be tried together with the plaintiff’s claim instead of having to be the subject of a separate action and in this way ensures that judgment will be given simultaneously on the claim and cross-claim.  Although both the claim and cross-claim must be liquidated, it is not necessary that the claim and cross-claim should be connected to each other (Goode & Gullifer on Legal Problems of Credit and Security (6^th ed) at §7-04; Stein v Blake [1996] AC 243 at 251; Fearns v Anglo-Dutch Paint & Chemical Co Ltd [2011] 1 WLR 366 at §§13 to 15).

34.  In contrast, an equitable or transaction set-off, which does not fall within section 35(2), is properly in the nature of a defence.  It arises where the claim and cross-claim, even if not arising from the same transaction, are so closely connected that it would be inequitable for one claim to be enforced without credit being given for the other.  It is capable of operating as a substantive defence where this is not precluded by the nature or terms of a contract between the parties.  It can be relied on outside the context of proceedings as an immediate answer to a liability to pay money otherwise due.  The exercise of a right of equitable set-off does not have the effect of extinguishing or reducing the cross-liabilities, it is essentially a provisional act and operates as a temporary retention of an economic asset by the party exercising the right, and the temporary deprivation of the other party of that asset, and so does not affect the final resolution of the dispute because the exercise of the right does not prevent either party from subsequently proving his claim or cross-claim (Goode & Gullifer on Legal Problems of Credit and Security at §7-05; Federal Commerce & Navigation Co Ltd v Molena Alpha Inc [1978] QB 927 at 975; SL Sethia Liners Ltd v Naviagro Maritime Corpn [1981] 1 Lloyd’s Rep 18 at 26; Fearns at §§19 to 35).

35.  Where a new claim is made in the course of an action outside the limitation period, sections 35(5) and (6) together permit rules of court to be enacted to provide for allowing a new claim to which section 35(3) applies, but materially only in the case of a claim involving a new cause of action if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment.  RHC Order 20 rule 5 is the rule of court which has been made accordingly.

36.  The judge has summarised the relevant principles as to how the rule should be approached:

“33. The words in that rule are not to be narrowly construed; they should be given a broad and liberal interpretation in order to attain the objective of the rules. The court should not be over technical or restrictive. This is because the policy behind the section and the rule is that, if factual issues are in any event going to be litigated between the parties, the parties should be able to rely upon any cause of action which substantially arises from the same facts. Thus, the exception to the application of section 35 identified and put into effect by Order 20 rule 5 is based on the assumption that the party against whom the proposed amendment is directed will not be prejudiced because that party will, for the purposes of the matters already in issue, already have had to investigate those matters or substantially the same facts.

34. Of course, whether one factual basis is “substantially the same” as another factual basis involves a value judgment. Nevertheless, the concept must involve something going no further than minor differences likely to be the subject of enquiry, but not involving any major investigation, and/or differences merely collateral to the main substance of the new claim, proof of which would not necessarily be essential to its success. Each case will require consideration of its own particular facts, and there will be no hard and fast rule. A common sense approach should be adopted.”

Whether section 35 is engaged

37.  The judge held that the proposed pleading of the Chern Debt is the making of a “claim” and hence section 35 is engaged, and Delco does have a reasonably arguable case on limitation, of which it would be deprived if the opposed amendments are permitted[8]. Mr William Wong, SC submitted on behalf of the defendants[9] that the judge has erred and he ought to have held that the proposed pleading of the Chern Debt is in the nature of a defence rather than a claim.

38.  Mr Wong made the point that the existing defence, which covered only the Fang Debt and the HKM Debt, pleaded a substantive defence which would satisfy the requirements of an equitable set-off and an estoppel by convention.  On the defendants’ case, the 2010 Agreement was an acknowledgment of the debts owed by Delco, pursuant to which Delco agreed to use the uncapitalised portion of shareholders’ loans (payable by CT to Delco) to partly repay.  However, Delco later objected to an immediate setting off of the uncapitalised portion against the debts in the books of Delco Asia, which led to the adoption of the Convention, pursuant to which the mutual debts were recorded in the accounts separately as receivables and payables and would not be immediately set off against each other.  Following the Convention, the parties mutually assented that the HK$41.9 million consideration payable to Delco under the Transfer Agreement would be left outstanding until there came a time when all their mutual debts would be set off against each other.  And the same practice was followed in respect of the other amounts payable to Delco.  By reason of the 2010 Agreement and the Convention, it would be manifestly unjust to allow Delco to enforce payment of its debts without taking into account the debts it owed, comprising the Fang Debt and the HKM Debt as currently pleaded.

39.  Properly analysed, Mr Wong submitted that the proposed pleading of the Chern Debt is to correct the true extent of the debts owed by Delco’s group to Fang’s group, for the purpose of the existing defence of equitable set-off and estoppel by convention.  He further argued that the substance of the plea is that it was to be a mutual accounting exercise, and although the balance of what would be due to Fang’s group as a result of this exercise is the subject of the counterclaim in two of the actions, there is no self-standing claim for the Debts so as to constitute a cross-claim and this should not detract from the true nature of the pleading which is in substance a defence.

40.  Mr Wong submitted that leave to amend should be granted to enable the real question in controversy – the genuineness of the Debts booked into the accounts of Delco Asia, including the Chern Debt – to be determined.  He contended that the merits of his submission are even stronger in the two actions, A3040 and A2939, where the Convention was not pleaded and hence no claim can be said to be made in respect of the Chern Debt, which is pleaded merely as facts relevant to the matters in dispute.  He pointed out that the Chern Debt was already mentioned in the reply of Delco, which alleged that the Debts including the Chern Debt were the subject of the Scheme and that none of which are genuine debts.  The defendants must be allowed to join issue with Delco on these allegations and should have leave to plead the Chern Debt.  This may affect the defining of the issues at trial and the scope of discovery and could thereby prevent the defendants from adducing evidence to prove that the Chern Debt is genuine.  Mr Wong pointed out that hitherto, Delco has not made discovery of how it had contributed to various capital injections of the joint venture operations in China, which, according to the proposed amendments, gave rise to the Chern Debt.

41.  Mr Victor Dawes, SC submitted on behalf of Delco[10], as he did before the judge[11], that the set-off as pleaded is only capable of operating as a legal set-off and is therefore within a “new claim” in section 35(2). It is not entirely clear from the Judgment whether the judge has accepted Mr Dawes’ submission in that regard.  If he has, I do not agree with him.  In my judgment, it is quite clear that the plea is not in the nature of a legal set-off but is capable of operating as an equitable set-off.

42.  The judge also agreed with Mr Dawes that estoppel by convention concerns the assumption of a factual or legal state of affairs and does not apply to promises, representation of intention or representation of future conduct.  He took the view that the Convention as pleaded is in essence a promise or representation of future conduct, and so the plea of estoppel by convention is not open to the defendants[12].  But there is authority for the proposition to the contrary that an estoppel by convention is not wholly distinct from other forms of reliance-based estoppels (such as promissory estoppel) and there can be an estoppel by convention as to the rights of the parties in relation to their future conduct that is promissory in nature (Spencer Bower: Reliance-Based Estoppel (5^th ed) at §§1.28, 2.27, 8.48 to 8.55).  I do not agree with Mr Dawes that Ribeiro PJ had decided to the contrary in Unruh v Seeberger (2007) 10 HKCFAR 31 at §§140 to 141 and the extract quoted therein in Waltons Stores v Maher (1987-1988) 164 CLR 387 at 415 to 416 is concerned with a different proposition, namely, whether the common assumption in an estoppel by convention relates to a factual and not a legal state of affairs. 

43.  The judge further took the view that the mutual debts as pleaded do not provide the necessary “close connection” which would make it manifestly unjust to allow Delco to enforce its own claim without taking into account the cross-claims so as to give rise to an equitable set-off. He pointed to the fact that the claims and cross-claims differ significantly in parties, nature and timing.  The Chern Debt is said to have been incurred by Delco Asia to Fang prior to 2005, in the course of the capital injections in relation to CT Metals and Hefast. But Delco’s claim in A2943 arose in 2012 between Delco (not Delco Asia) and HWH (not Fang) on the sale of CT shares (not CT Metals or Hefast).  In A3040, the claim arose in 2010 and originated from the shareholders’ loans Delco Asia had against the joint venture (not Fang).  And in A2939, Delco’s claim accrued in 2012 because Delco (not Delco Asia) subscribed to the CB issued by CT (not CT Metals or Hefast)[13].  He also expressed the view that Chern is not part of Delco’s group or Fang’s group, so it is difficult to see why he could take advantage of the Convention[14].

44.  Mr Dawes emphasised the same matters in his submissions to this court. He contended that neither equitable set-off nor estoppel by convention is open to the defendants.

45.  In respect of estoppel by convention, Mr Dawes submitted that any estoppel based on promises or representation as to future conduct (even if permissible at law) must fail as the defendants have failed to show “irrevocable detriment”.  And as Chern is not within Fang’s group (defined in the pleadings as including Fang and the companies beneficially owned by him), whatever alleged conventional practice was adopted by the parties simply did not concern the Chern Debt.

46.  For equitable set-off, he contended that for the reasons given by the judge, the Chern Debt is not closely connected to Delco’s claims in these actions such that it would be manifestly unjust to allow Delco to enforce payment of its claims without taking into account the Chern Debt. He stressed that the 2010 Agreement is not a set-off agreement as rightly held by the judge[15]. That agreement does not provide that a party can use the sums owed to it by the other to set off against any sums it owes to the other, but merely provides for repayment as and when demanded or when Delco Asia has funds.

47.  In my judgment, unless the existing plea of equitable set-off and estoppel by convention is wholly without merit (and there has been no application to strike out the defence in any of the actions on that basis, whilst there was an unsuccessful application for summary judgment alternatively interim payment in A3040 and A2939)[16], the merits of that plea should be a matter for trial.  I am inclined to agree with Mr Wong that the judge was led into “unnecessarily overstepping” into determining the merits of the defence.  Whether in all the circumstances (acknowledged by the judge to be a complex case)[17] – notwithstanding the differences in the nature of the debts incurred, the time, the identity of the parties – it would or would not be manifestly unjust to allow Delco to enforce payment of its claims without taking into account the Debts is not so clear and obvious that a proper determination could be made at this stage. At the very least, the merits of the existing plea of equitable set-off and estoppel by convention is a triable issue and the perceived lack of merits should not have been relied on as a ground for disallowing the amendments. As for Chern not being within Fang’s group, it is pertinent to have regard to the pleading that he is a nominee of Fang.

48.  Mr Dawes further submitted that even if the proposed amendments to add the Chern Debt were allowed for the purpose of raising a defence of equitable set-off and estoppel by convention, the defendants should not be allowed to raise a counterclaim on the basis of the Chern Debt that would be over and above the claims of Delco.  I do not accept his submission.  This would be to diminish or emasculate the effect of an equitable set-off that is properly raised.

49.  I accept the submissions of Mr Wong. The judge is in error in holding that section 35 is engaged in this instance.  The proposed amendments do not raise a “new claim” in the course of an action outside the limitation period. For this reason, the appeals must be allowed.  It is not necessary to consider the other ruling of the judge that the new claim does not arise “out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment”.

50.  I would only make this observation.  I am in agreement with the judge[18] that for the purpose of considering whether the new claim comes within sections 35(5) and (6) and Order 20 rule 5(5), the relevant facts for comparison should be the facts pleaded by the defendants to substantiate the Fang Debt and the HKM Debt and it is irrelevant to have regard to the Scheme pleaded by Delco in the reply with mention of the Chern Debt.  In contrast with the English statutory provision[19], the wording in our statutory provisions is more restrictive, so I do not think Goode v Martin [2002] 1 WLR 1828 cited by Mr Wong could be relied on for his proposition that our Order 20 rule 5(5) should be interpreted as permitting an amendment whose effect would be to add or substitute a new claim where it arises out of the same facts or substantially the same facts as “as are already in issue” on an existing claim.

51.  I would allow these three appeals and set aside the judge’s order disallowing the amendments in each action.  I would replace his costs order with an order that the plaintiff should have the costs of and occasioned by the summonses and that the defendants’ costs of the contested hearing should be borne by the plaintiff.  As there is no dispute that costs of the appeal should follow the event, I would order the plaintiff to pay the defendants’ costs of these appeals, with a certificate for three counsel. 

Hon Cheung JA:

52.  I agree with the judgment of Kwan VP.