CHINACAST EDUCATION CORPORATION AND OTHERS v. CHAN TZE NGON AND OTHERS

HCA 1062/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1062 OF 2012

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D E C I S I O N

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The application

1.  This is an application by the 2^nd defendant, Mr Sena, to strike out the statement of claim under Order 18, rule 19(1).  Although the summons, dated 2 January 2015, was formulated as an application brought under Order 18, rule 19(1)(a), (b) and (c), the argument was confined to the usual ground in subparagraph (a), namely that the statement of claim disclosed no reasonable cause of action.

The unless order

2.  Before that application can be considered however, Mr Smith SC for the plaintiffs says that there is a more significant hurdle for Mr Sena to cross.  On 4 June 2014, following what was plainly a careful and comprehensive examination of the state of play in the proceedings Mr Registrar K W Lung made a number of orders at a Case Management Conference (CMC) which had been fixed for that date by an order made by him on 6 December 2013.  The principal question being considered at the CMC was whether or not the case was ready to set down for trial.

3.  Mr Sena’s solicitors, in preparation for that CMC, had prepared the usual Listing Questionnaire.  They were unable to confirm that there were no outstanding interlocutory applications to be dealt with, or that Mr Sena did not intend to take out any other interlocutory applications.  In respect of those two questions the following answers were provided:

“A4 The following interlocutory application and appeal are outstanding:-

1. The Plaintiffs’ application for specific discovery against the 1^st to 5^th defendants by way of Summons on 15^th April 2014.

2. The 2^nd defendant’s appeal against the decision of Master Chow made on 23^rd April 2014 on the 2^nd defendant’s application for security for costs by way of Notice of Appeal filed on 29^th April 2014.

A5-A6 Subject Counsel’s advice, the 2^nd defendant may have a joinder application for contribution/indemnity, an application for specific discovery against the Plaintiffs or other applications.” (sic)

4.  Having heard the solicitors for the plaintiffs, counsel for Mr Sena and the solicitors or counsel for a number of other defendants, the Registrar made the following order:

“1. Matter to be adjourned to be heard immediately after the hearing of the Plaintiffs’ application for specific discovery by summons filed on 15 April 2014 for the 2^nd Case Management Conference, with the following directions:

a. Unless the parties take up the interlocutory applications by 4:00 pm on 25 June 2014, the matter shall proceed as if no applications will be taken out.

b. If the interlocutory applications are taken out and contested, the applications shall be listed before the Registrar for argument.

2. The parties be exempted from filing and serving their Listing Questionnaires for the subsequent Case Management Conference(s) unless the Court otherwise directs or there is a drastic change of the legal proceedings that renders the previous direction is not applicable;” (My emphasis)

5.  On 24 June 2014, Mr Sena took out a number of interlocutory applications, including specific discovery, an application to join third parties, and an application for security for costs. On 25 June 2014, with the consent of the plaintiffs, Mr Sena filed a further application for discovery of particular documents.

6.  The law is clear that where a party fails to comply with an unless order, any sanction for failure to comply imposed by the order takes effect: Order 2, rule 4; see also Daimler AG v Leiduck [2012] HKLRD 119 (CA) at §44, and Marcan Shipping (London) Ltd v Kefalas & Anor [2007] 1 WLR 1864 CA.  Thus, said Mr Smith, after 4:00 pm on 25 June 2014, Mr Sena could not take out any further interlocutory applications without relief against the sanction of the unless order.

7.  An unless order is an important order in the arsenal of devices that might be used to properly bring proceedings to a speedy trial.  It is a Draconian order, and Mr Smith did not challenge my suggestion to him that an unless order should be strictly interpreted and the benefit of any doubt in interpretation given to the party subject to the order.

8.  The unless order in this case is not happily worded and cannot be said be in the usual form of an unless order.  Mr Carolan argued that the proper meaning of the order, when read as a whole, was that if no interlocutory applications were taken out within the time limit the matter would proceed to the next CMC with a view to setting down, as though no applications had been taken out.  It was not, he said, an absolute bar to further interlocutory applications, a situation that could only arise on a clear and plain unless order to that effect.

9.  It would have been possible to have formulated the unless order so that if no interlocutory applications were taken out by a fixed date, the defendants would be barred from any further interlocutory applications prior to setting down.  It may even be that that was what was intended.  But that is not what the order says. 

10.  I accept Mr Carolan’s submission and hold that in the particular circumstances, the unless order is not a bar to further interlocutory applications.  The effect of the order is that the matter should have proceeded to setting down.

The application to strike out the statement of claim:

11.  The indorsement to the writ, issued on 19 June 2012, prepared by solicitors, initially against the 1^st to 4^th defendants, included claims against them for damages for the tort of conversion; damages for breach of fiduciary duty; damages for conspiring to convert the Plaintiff’s property to their use and for conspiring to commit breaches of contract and/or fiduciary duty; and damages for breach of the various defendants respective service agreements.

12.  The original statement of claim, dated 5 October 2012, and served on 5 September 2012, signed by senior counsel, ran to 101 paragraphs and 54 pages.  By that time, the 5^th to 13^th defendants had been added to the proceedings. 

13.  On 21 November 2012, Mr Sena, by his solicitors and counsel filed a defence and counterclaim, comprising 102 paragraphs over 35 pages.

14.  On 15 July 2012, Mr Sena filed a request for further and better particulars.  Questions were asked in respect of a total of 53 paragraphs of the statement of claim.  On 15 October 2013, the answer, over a total of 90 pages, was filed by the plaintiffs.  Other than the deletion of four paragraphs from the counterclaim, and the deletion of two prayers for relief from the counterclaim, which were made on 18 September 2014, no further amendment has been made to the defence by Mr Sena, following the filing of the further and better particulars.

The grounds for striking out

15.  At the heart of Mr Carolan’s is the well‑known rule is that an allegation of fraud must be pleaded “distinctly and with the utmost particularity”: see Bokhary JA in Aktieselskabet Dansk Skibsfinansierring v Wheelock Marden & Co Ltd [1994] 2 HKC 264 at 270B‑C.  It is not allowable to leave fraud to be inferred from the facts; see the cases collected at 18/12/16 Hong Kong Civil Procedure 2015.

16.  It will be seen from the indorsement to the writ that a claim in fraud is not specified with that particular expression.  In fact, the word “fraud” is not used at all in the statement of claim.  Instead, the pleader has elected to describe the steps taken by the defendants of which complaint is made by reference to their fiduciary duties.

17.  Mr Carolan did not seek to contend that the statement of claim must be struck out because the expression fraud was not used.  Instead, his argument was that as no specific actions were alleged against Mr Sena, but instead the absence of steps or actions were alleged, it was only by way of inference that the plaintiffs could say that Mr Sena was involved in any fraud.

The content of the statement of claim:

18.  I do not propose to set out in this judgment the factual background to the proceedings.  Those factual allegations have been comprehensively set out in §§12‑22 of the judgment of Anthony Chan J, dated 11 November 2013, in earlier Mareva proceedings, which I gratefully adopt.  It is plain that there is not the slightest doubt from that description that the case for the plaintiffs is that they have been the victims of an egregious fraud which has had appalling consequences for them. 

19.  As part of claim alleged, the plaintiffs say that the defendants actively obstructed investigations into the removal of funds from bank accounts and destroyed records.  They did so, the claim says, to conceal their wrongful activities.  As an example, those activities are described in §41 of the statement of claim as “wrongful activities”.  Particulars are given.  They might equally have been described as a “fraudulent activities” but no one is left in any doubt as to what is pleaded.

20.  There are further numerous expression in the statement of claim that make it abundantly clear that what is pleaded against the defendants is fraudulent activity.  For example:

(i) §36 says, in relation to Mr Sena and other defendants:

“the taking over control of the Shanghai Office, where both the 3^rd and 4^th share the same facilities and staff, was more difficult as a result of the collaborative obstruction efforts of the 1^st to 5^th Defendants and their accomplices. At the same time, activities were undertaken by or on the instructions of the 1^st and 4^th Defendants to destroy and/or remove records of the in order to conceal or destroy evidence of their wrongdoing.”

(ii) Particulars include an act of obstruction by Mr Sena, described in §36(m).

(iii) Other acts are pleaded in §37 as being an “act of obstruction and destruction” and “impeding the investigation of the various acts of misappropriation and other wrongful activities committed against the Group” by Mr Sena and other defendants.

(iv) under part VI of the statement of claim headed “Wrongful acts against the Group” there are a number of allegations as to activities in which Mr Sena and the other principal defendants had been engaged in over an extended period.  These activities are described as including the diversion of corporate opportunities and resources the personal benefit defendants, misappropriation of over RMB760 million from bank accounts of the plaintiffs; misappropriation of the proceeds of allotment of shares.

(v) §78 describes the depletion of bank balances as being with “the knowledge or connivance of each of the 1^st to 4^th defendants”.

(vi) In §80 the plea is that:

“In the premises the sum of at least RMB762 million has been misappropriated by the 1^st to 4^th defendants who should account for the said Plaintiffs are the same. Further or alternatively the Defendants have converted the said monies to their own use thereby causing loss and damage for which they are liable.”

(vii) §81 is preceded by the title: “(v) Other misappropriation of funds” and contains four paragraphs which set out the nature of the misappropriation alleged.

(viii) §85 pleads that the funds that have disappeared or are unaccounted for had been “misappropriated” by the 1^st to 4^th defendants and alternatively they had “converted the said monies to their own use”.

(ix) §90 constitutes a further allegation of misappropriation by all defendants.

(x) §92 pleads that “the 1^st to 4^th defendants wrongfully caused or procured the transfer (of) these colleges out of the Group and into the hands of the number of persons”.

Discussion:

21.  It may well have been prudent for the pleader to have expressly used the words “fraud” or “fraudulently” in relation to the various activities alleged on the part of the four defendants.  But nobody reading the statement of claim could be left in any doubt by the use of words such as “misappropriated”, “converted”, or “wrongfully,” that what is being alleged against the four defendants are acts of fraud.

22.  What is alleged in respect of Mr Sena is essentially that having been in the position he was, the Chief Financial Officer (“CFO”) of the group of companies, it would simply not have been possible for the fraud that is alleged to have taken place, to have taken place, without his involvement.  Steps that he should have taken, but did not, are clearly pleaded.  It is open to inference that he did not take those steps because he was part of the fraudulent conspiracy has resulted in a very substantial loss to the plaintiffs.

23.  I do not understand it to be argued that it is not possible to find a case of fraud against a man whose role in a fraudulent conspiracy is to shut his eyes to what is taking place.  In this case the plaintiffs point to the duties upon Mr Sena by virtue of this service agreement and his role as CFO, and say that had he performed his duties the plaintiffs would have been warned about what was taking place.  That Mr Sena did not perform his duty and did not warn the plaintiffs, leads, the plaintiffs say, to an inference to be drawn on the balance of probabilities that Mr Sena was part of the conspiracy.

24.  It may well be that the allegations against Mr Sena are skimpy to say the least.  But that is an issue for trial, just as whether there was a good arguable case was an issue in the Mareva injunction stage of the proceedings.  I am not required in this application to judge whether there is a good arguable case against Mr Sena, but merely whether the statement of claim discloses a good cause of action against him.

25.  It may well be that where a pleader pleads fraud, and relies upon inference from facts pleaded to assert the fraud, the case may not be a good arguable case such as to support a Mareva injunction.  But that is a much higher standard required to be established than it is to show that no reasonable cause of action is disclosed by the pleadings.  It may be that the cause of action disclosed by the pleadings is doomed to failure because the inference sought is not ultimately established.  But it cannot be said that an action in fraud or conspiracy cannot be mounted upon facts from which a pleader seeks to draw the inference of fraudulent conduct.  So long as the defendant knows he is facing an allegation of fraud, it is likely that the plea will stand.

26.  Although Order 18, rule (1) itself states that the application to strike out may be made at any stage of the proceedings the law is clear that the application should always be made promptly, and as a rule before the pleadings are closed. 

27.  I have set out in §§12-14 above the course of the pleadings.  It is remarkable that following such extensive pleadings, completed, on the plaintiffs’ part by 15 October 2013, the only step taken by Mr Sena was to reduce the scope of his counterclaim.  If there was any prospect that the statement of claim might be struck out for failing to disclose a cause of action, one would have thought that by that time the absence of a cause of action would be plain. 

28.  Instead, Mr Sena waited nearly a year before reducing his counterclaim, and another 15 months before filing the summons now under consideration.  This snail like progress bears all the hallmarks of a defendant trying to slow the proceedings down.

29.  There may, in some special cases, be a good reason to file a motion to strike out a statement of claim on the ground that no good cause of action is disclosed many months or even years after the statement of claim has been originally served.  But the rule that such an application should be made at the earliest date is sensible and recognises that it is only in plain cases, where a defendant is quite unable to discern what the cause of action against him is, that a statement of claim would be struck out.  Where a defendant is able to plead to the claim, seek further and better particulars, and find no reason to thereafter amend his defence, it will be very difficult for him to establish that no cause of action is disclosed.

30.  Mr Carolan specifically disavowed a submission based upon the absence of the word “fraud” from the statement of claim.  That was sensible. If that word was required this is plainly a case where the plaintiffs should be given an opportunity to make appropriate amendments.

31.  For the foregoing reasons the application to strike out statement of claim is dismissed, with an order nisi for the costs of the application to be paid on a party‑and‑party basis by Mr Sena.