NG YEE WAH v. LAM CHUN WAH AND ANOTHER

HCA2457/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2457 OF 2007

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D E C I S I O N

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Applications

1. The 1^st defendant and the plaintiff are ex-husband and wife.  They are the registered equal shareholders of the 2^nd defendant.  In November 2007, the plaintiff commenced the present derivative action.

2. By summons dated 11 March 2008 (“the Order 14A Summons”), the plaintiff brought this application under Order 14A, Rules of the High Court, against the 1^st defendant for determination of two questions of law in her favour :

(1)  whether the 1^st defendant is estopped from re-litigating the issue (“the 1^st Issue”) as to whether the 1^st defendant is the beneficial owner of the plaintiff’s 50% shareholding in the 2^nd defendant by reason of the doctrine of res judicata; and

(2)  whether the 1^st defendant is estopped from re-litigating the issue (“the 2^nd Issue”) as to whether the 1^st defendant is the beneficial owner of the 2^nd defendant’s 35% shareholding in June Just Company Limited (“June Just”) by reason of the doctrine of res judicata.

She asked that if the questions are answered in the affirmative, paragraphs 3 and 4 of the defence, which purported to raise the two Issues, be struck out.

3. By a further summons dated 28 August 2008 (“the Amendment Summons”), the plaintiff applied to amend the Order 14A Summons to add an additional relief, namely, judgment be entered against the 1^st defendant as per the statement of claim.

4. The doctrine of res judicata is said to have arisen from an earlier derivative action the plaintiff commenced in 2003, namely, HCA3349/2003.

HCA3349/2003

5. In HCA3349/2003, the plaintiff claimed on behalf of the 2^nd defendant against the 1^st defendant for damages for his breach of fiduciary duties and trust in the total sum of HK$6,836,182.41.  The plaintiff pleaded, among other things, that the 2^nd defendant acquired a 35% interest in June Just from the 1^st defendant in 1991 and that in 2000, the 1^st defendant wrongfully diverted to his own account the balance of the dividend declared by June Just in the sum of HK$107,788 to which the 2^nd defendant was entitled.

6. The 1^st defendant denied liability.  Among other things, he pleaded that he alone was the beneficial owner of :

(a) all the shareholdings of the 2^nd defendant; and

(b) the 2^nd defendant’s 35% interest in June Just.

7. Thus the 1^st and 2^nd Issues were distinctly joined in HCA3349/2003.

8. Eventually, the parties settled HCA3349/2003 by a consent order dated 28 December 2005 (“the Consent Order”), which provided :

“1.   judgment be entered for the Plaintiff against the 1^st Defendant for the sum of HK$3,418,091.20 as agreed damages together with interest thereon at judgment rate from the date of Writ to the date of actual full payment;

…

3.    upon receipt of the full amount of the said sum of HK$3,418,091.20 together with interest as aforesaid, the Plaintiff do transfer to the 1^st Defendant her shares of and in the 2^nd Defendant Company (“the Shares”) at the price to be determined in the manner specified in sub-clause i) below but subject however to the other conditions stipulated as follows :-

i)     the 1^st Defendant shall at his own costs provide to the Plaintiff within 30 days from the date of order made herein a written valuation report on the Shares prepared by an independent certified public accountant who must not have served the parties hereto;

…

5.    the plaintiff and the 1^st Defendant sign in their own personal capacity and as capacity of the director and shareholder of the 2^nd Defendant Company;

…”

9. A consent judgment also dated 28 December 2005 was entered for the plaintiff against the 1^st defendant for HK$3,418,091.20 as agreed damages together with interest. 

Subsequent conduct of the 1^st defendant

10. It is the plaintiff’s case, well supported by evidence before me, that the 1^st defendant had since the Consent Order conducted himself in such a way which is consistent with the plaintiff’s case that she is the beneficial owner of the 50% shares in the 2^nd defendant held under her name and that the 2^nd defendant is the beneficial owner of its 35% shares in June Just.

Disposal of the shares in June Just

11. It is the plaintiff’s case that after the consent order, she discovered that the 1^st defendant had in fact disposed of the 2^nd defendant’s shares in June Just on or about 12 September 2005 without her knowledge or consent thus.

12. On 2 September 2005, Mr Chen Jun, the 1^st defendant’s cousin, became the sole shareholder and director of one Pacific Bright Limited (“Pacific Bright”).  On the same day, a company called Huge Loyal Investment Limited (“Huge Loyal”) was incorporated with a Mr Chan and two of the directors of June Just as shareholders and directors.  On 12 September 2005, the 1^st defendant executed an instrument of transfer and a sale and bought note on behalf of the 2^nd defendant, transferring its 35% shareholding in June Just (28,000 shares) to Pacific Bright for HK$7 million.  Mr Chen executed the documents on behalf of Pacific Bright.  Then on 29 September 2005, Pacific Bright transferred the 12,800 and 15,200 shares in June Just to Huge Loyal and a Mr Li, another director of June Just, respectively.

The present action

13. In November 2007, the plaintiff commenced the present action on behalf of the 2^nd defendant against the 1^st defendant for his breach of fiduciary duties in disposing the 2^nd defendant’s shares in June Just as aforesaid.  She claimed for, among other things, the sum of HK$7 million.

14. In his defence, the 1^st defendant repeated his plea in HCA3349/2003 that he was the beneficial owner of the plaintiff’s 50% shareholding in the 2^nd defendant and the 2^nd defendant’s 35% shareholding in June Just.  The transfer of the 2^nd defendant’s shares in June Just to Pacific Bright for HK$7 million is admitted.  But he denied that the transfer was made without authority as alleged.

15. The plaintiff took the view that the doctrine of res judicata arose out of the Consent Order, debarring the 1^st defendant from re-litigating the 1^st and 2^nd Issues in these proceedings.

The general approach

16. Order 14A, rule 1 provides :

“(1)   The Court may upon the application of a party or of its own motion determine any question of law or construction of any document arising in any cause or matter at any stage of the proceedings where it appears to the Court that ―

(a)   such question is suitable for determination without a full trial of the action; and

(b)   such determination will finally determine (subject only to any possible appeal) the entire cause or matter or any claim or issue therein.

…”

17. When approaching an Order 14A application, the court first needs to be satisfied that both conditions (a) and (b) are satisfied.  It is not necessary for the making of an application under Order 14A that the determination of the relevant question will finally determine the whole action.  The Order 14A procedure may be invoked for the purpose of determining any claim or issue in the cause or matter : see Shell Hong Kong Ltd v. Yeung Wai Man Kiu Yip Co. Ltd & Another (2003) 6 HKCFAR 222, per Chan PJ at para. 23 at p. 230C-H.

18. Next, even if the conditions (a) and (b) are satisfied, the court still has a residual discretion whether or not to embark on a determination of a question under Order 14A.  How that residual discretion is to be exercised depends on the circumstances of the case.  If, for example, the question is of a dominant feature of the case and the determination of which might or would enable the parties to avoid the expense of trial and assist them in the efficient disposal of the action, the court may be more inclined to invoke Order 14A.  If, however, after taking an overall view of the matter to see the context in which the question arose, the court comes to view that there would not be a great saving of time or costs in determining the question, this would be a factor against adopting the Order 14A procedure.  While the factors that are relevant to the exercise of the residual discretion are not exhaustive, it must be emphasised that the court must have all the necessary facts and matters before it in order to determine the question of law or construction.  Where the court is not seized of all relevant facts, it would be extremely rare case (if ever) in which the procedure under Order 14A would be adopted.  See the discussion by Mr Recorder Ma, SC (as he then was) in Rockwin Enterprises Ltd v. Shui Yee Ltd [2003] 3 HKC 174, paras. 18-27 at pp. 183D-185H.

19. Finally, if the court exercises the discretion to determine the relevant question and having made the determination, it will make the consequential orders flowing from its determination. 

Conditions (a) and (b) fulfilled

20. With these principles in mind, I first consider if conditions (a) and (b) are fulfilled.

21. Plainly, the two questions raised in the Order 14A Summons are suitable for consideration without a trial.  Further, if determined in the plaintiff’s favour, they will finally dispose of the 1^st defendant’s defence that he was the beneficial owner of the plaintiff’s share in the 2^nd defendant and the 2^nd defendant’s share in June Just.  Thus both conditions (a) and (b) are fulfilled.

Exercise of the residual discretion

22. Counsel’s debate really concerned whether the court should exercise the residual discretion to determine the two questions.

23. Mr Ng, counsel for the plaintiff, cited a number of authorities on res judicata.  For present purposes, it is sufficient to state the following well-established propositions derived from the cases.

24. A party will not be permitted to re-litigate in subsequent proceedings issues which have already been adjudicated upon in previous proceedings by a court of competent jurisdiction.  The requirements of issue estoppel are :

(1) that the same question has been decided;

(2) that the judicial decision which is said to create the estoppel was final; and

(3) that the parties to the judicial decision or their privy were the same persons as the parties to the proceedings in which the estoppel is raised or their privies : see Carl Zeiss Stiftung v. Rayner & Keeler Ltd [1967] AC 853, per Lord Guest at p. 935.

25. A judgment by consent raised an estoppel just in the same way as a judgment after the court has exercised a residual discretion in the matter : Re South American and Mexican Company ex parte Bank of England [1895] 1 Ch 37, per Vaughan Williams J at p. 45; Kinch v. Walcott [1929] AC 482, per Lord Balnesburgh at pp. 493-394.

26. Accordingly, Mr Ng contended that by virtue of the Consent Order, issue estoppel arose which would debar the 1^st defendant from re-litigating the 1^st and 2^nd Issues in the present action.  If so debarred, the 1^st defendant does not have any real defence to the plaintiff’s claim herein.  The court should exercise the residual discretion to strike out paragraphs 3 and 4 of the defence, which raised the Issues, and enter judgment against him.

27. As I understand his submissions, Mr Chain, for the 1^st defendant, took essentially the following points.

28. First, he argued that the Consent Order might have been made without jurisdiction because in a derivative action, any judgment should be entered in favour of the claimant for and on behalf the company.  But the judgment entered by virtue of the Consent Order was in favour of the plaintiff.  I do not think this point assist the 1^st defendant for the simple reason that the Consent Order, until set aside, is still valid.

29. Second, the 1^st defendant’s case is that the Consent Order formed part of the global settlement the parties reached at the time, including the divorce proceedings in the family court.  Mr Chain thus submitted that arguably the court might not have all the necessary facts and matters before it in order to determine the two questions.  I disagree.  In my view, all the necessary facts relating to the two questions are before the court.  The court does not need to concern itself with the alleged global settlement in its determination if the 1^st and 2^nd Issues are caught by the issue estoppel arising from the Consent Order.

30. I pause here to note that Mr Chain has not advanced any substantive argument that the issue estoppel relied on by the plaintiff did not arise from the Consent Order.

31. This brings me to the third and principal submission advanced by Mr Chain.  In July 2008, the 1^st defendant started HCA1324/2008 to set aside the Consent Order.  Mr Chain submitted that because of HCA1324/2008, the court should refuse to determine the two questions under Order 14A.  For it would be a futile exercise if in the end the 1^st defendant is successful in setting aside the Consent Order.  Contending that HCA1324/2008 cannot be ignored, Mr Chain asked rhetorically : if that action were to be tried soon, would the court still entertain the Order 14A application? 

32. However, it is trite that unless set aside by agreement or on appeal, an order remains valid and binding on the parties.  For present purposes, the Consent Order is a valid order.  HCA1324/2008 does not have any effect of diminishing the operation of the issue estoppel arising from the Consent Order.

33. Mr Chain’s submission that the Order 14A application would be a futile exercise rests on the assumption that the 1^st defendant succeeds in setting aside the Consent Order in HCA1324/2008.  Whether the 1^st defendant would be so successful remains to be seen.  On the materials before me, I cannot agree that the Order 14A application would be a futile exercise.  It will help expedite the present action by disposing of the 1^st defendant’s defence on beneficial ownership at this very early stage of the proceedings.

34. The rhetorical question posed by Mr Chain is simply hypothetical.  HCA1324/2008 is still in its very initial stage.  In fact, the plaintiff has already taken out an application to strike out the 1^st defendant’s claim.  Whether HCA1324/2008 will proceed to trial is too early to say.  Even if HCA1324/2008 were to be tried soon, the court may or may not view the matter differently.  It really depends on the circumstances then before the court.

35. For the above reasons, I reject all the submissions of Mr Chain.  It is plainly a case where the court should exercise the residual discretion to determine the two questions raised in the Order 14A Summons.

36. In my view, both the 1^st and 2^nd Issues are clearly caught by the issue estoppel arising from the Consent Order.  I will therefore answer the two questions raised in the Order 14 Summons in the affirmative.

Orders

37. The remaining question is what consequential orders should the court make.

38. Mr Ng asked that paragraphs 3 and 4 of the defence be struck out.  I agree.

39. Relying on the Amendment Summons, Mr Ng asked me to enter judgment in favour of the plaintiff.  At the hearing, I had indicated that I might not be prepared to accede to this request.  One particular point bothered me but no longer.

40. The point is this.  The 1^st defendant denied in his defence that the disposal of the 2^nd defendant’s shares in June Just was made without authority.  So even if paragraphs 3 and 4 of the defence are struck out, unless the court is satisfied that the denial cannot be sustained at all, no judgment can be entered against him at this stage.  I was then concerned if all the necessary evidence was before me before I could be so satisfied.

41. I have since the hearing read the pleadings and evidence more closely.  I now agree with Mr Ng’s submission that although the 1^st defendant did, by way of pleading, put in issue if the transfer of the June Just shares was made with authority, he had not come up with any evidence in support at all.  The Amendment Summons was taken out more than 10 days before the hearing.  So the 1^st defendant was well aware of the application for judgment.  Still, he had not adduced any evidence to support his case that the disposal was made with authority.

42. In the circumstances, I am now satisfied that judgment should be entered against the 1^st defendant.

43. For the above reasons, I will allow the Amendment Summons.  On the Order 14A Summons as amended, I will answer the two questions posed in the affirmative; strike out paragraphs 3 and 4 of the 1^st defendant’s defence; and enter judgment for the plaintiff for an on behalf of the 2^nd defendant as per paragraphs (1) to (8) of the prayer in the statement of claim.

44. I further make an order nisi that the 1^st defendant do pay the plaintiff the costs of the Order 14A Summons and the Amendment Summons, to be taxed if not agreed.