EVER-LONG CAPITAL LTD v. RICH DELTA DEVELOPMENT LTD AND ANOTHER

HCA 509/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 509 OF 2006

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D E C I S I O N

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1.  This is an appeal by the 2nd defendant against the dismissal by a Master of his application for leave to issue third party proceedings.  The application was opposed by the plaintiff, which also opposes this appeal.

Background

2.  The original claim by the plaintiff was only against the 2nd defendant.  It arose out of an alleged loan of HK$2.3 million pursuant to an arrangement described as “Loan Agreement C”.  Paragraphs 20 and 23 of the original statement of claim plead:

“20.  On about 9th November 2004, a supplemental loan restructuring agreement was made between the plaintiff and the defendant (now the 2nd defendant) (“the Supplemental Restructuring Agreement”) whereby the defendant shall enter into another loan agreement with the plaintiff for the amount of HK$2,300,000”

The whole arrangement for lending the HK$2.3 million is referred to as Loan Agreement C. 

“23.   Pursuant to the Loan Agreement C and under the notice of Drawdown issued by the defendant to the plaintiff on 9th November 2004, the principal sum of HK$2,300,000.00 was drawn by the plaintiff to the defendant by way of cheque payable to Rich Goal Limited for the sum of HK$1,800,000.00 and HK$500,000.00 by way of cash cheque to the defendant at the instruction of the defendant.”

The 2nd defendant’s case on the HK$500,000 cash cheque

3.  The defendant dealt with paragraph 23 of the statement of claim in paragraph 5 of the original defence.  It reads:

“5.  Paragraph 23 is denied save and except that the defendant received only one cheque from the plaintiff of HK$1,800,000 made payable to Rich Goal Limited and Miss Miranda Chan (“Miranda”) director of the plaintiff, asked the defendant to acknowledge receipt the other cash cheque of HK$50,000 as stated and then it was taken away by Miranda on the ground the money is to be paid to Mr Kenneth Cheung (“Kenneth”).  Kenneth is the control person of Styland Holding Limited (“Styland”), the holding company of the defendant (sic).  Styland is a public company listed on the Hong Kong Stock Exchange.  This happened in the presence of Mr Johnny Tam, the managing director of Styland then, and Miss Winky Leung, an associate of the defendant.  The actual loan amount under the supplemental loan restructuring agreement per paragraph 20 paid by the plaintiff to the defendant was only HK$1,800,000”.

4.  The amount of the cash cheque was erroneously stated as HK$50,000.  The plaintiff should have known that the defendant was referring to a cash cheque of HK$500,000.  Styland was also wrongly pleaded as the holding company of the defendant when it was the holding company of the plaintiff.  The plaintiff dealt with this paragraph by a bare denial in the reply.

5.  The plaintiff then made a substantial amendment to the claim on 7 June 2007 by adding the 1st defendant, changing the then existing defendant to the 2nd defendant and enlarging the then claim of about HK$4.1 million to about HK$24.3 million by adding a further claim or claims of about HK$20.2 million.  The allegations in paragraphs 20 and 23 of the statement of claim remained unamended.

6.  The 2nd defendant then put in an amended defence on 17 September 2007.  He dealt with paragraph 23 of the amended statement of claim in paragraphs 23 to 28 of the amended defence:

“23.  The 2nd defendant executed a notice of drawdown dated 9th November 2004 and received only 1 cheque from the plaintiff in the amount of HK$1,800,000 dated 10th November 2004, drawn on Standard Chartered Bank and made payable to Rich Goal Limited.  Save as aforesaid, paragraph 23 is denied.  The said notice of drawdown had been prepared by the plaintiff’s representative and the 2nd defendant was asked to sign it. 

24.  At the time when the 2nd defendant was given the said cheque of HK$1,800,000, one Miss Miranda Chan (“Miranda”), a director of the plaintiff, asked the 2nd defendant to acknowledge receipt of a cash cheque in the amount of HK$500,000 and then took the cash cheque away from the 2nd defendant on the ground that the HK$500,000 was to be paid to Mr Kenneth Cheung (“Kenneth”). 

25.  Kenneth was at the material time the person, or one of the persons, in control of Styland Holding Limited (“Styland”). 

26.  At the material time, Styland was a public company listed on the Hong Kong Stock Exchange and was the holding company of the [plaintiff]. 

27.  In the premises, only HK1.800,000 was in fact advanced by the plaintiff to, or on account of, the 2nd defendant pursuant to Loan Agreement C.  It is specifically denied that the plaintiff had advanced to the 2nd defendant the full amount of HK$2,300,000 as alleged.

28.  Save as aforesaid, paragraph 23 is denied.” (emphasis supplied)

7.  The plaintiff then amended its reply on 16 October 2007 and pleaded in paragraph 4 as follows:

“4.  Save that the 2nd defendant executed a notice of drawdown dated 9 November 2004 which was prepared by the plaintiff, paragraphs 23 and 24 are denied and the plaintiff avers that all cheques drawn under the said Loan Agreement were made on the 2nd defendant.”  (emphasis supplied)

I do not quite understand the meaning of the words “made on” at the end of this paragraph.

8.  The parties exchanged their witness statements on 7 January 2008.  The 2nd defendant put in two witness statements with one made by himself and the other made by one Miss Leung Tak-kin.  Regarding the cheques for HK$1.8 million and HK$500,000, Miss Leung said in paragraph 10 of her witness statement:

“10.  Then Miss Miranda Chan presented two cheques to the 2nd defendant of which one is for the sum of HK$1,800,000 made payable to Rich Goal Limited as requested and instructed by the 2nd defendant and the other one is cash cheque for the sum of HK$500,000.  At the same time, Miranda asked 2nd defendant to sign on a receipt prepared by her to acknowledge receipt of the $500,000 cheque.  After 2nd defendant signed the receipt for HK$500,000 cheque, Miranda took the cheque away and said this cheque was for Kenneth.  2nd defendant asked Miranda why she grabbed the cheque and gave it to Kenneth.  Miranda asked 2nd defendant to deal with Kenneth directly.”

9.  The 2nd defendant also dealt with these two cheques in his witness statement.  He said in paragraphs 50 to 53:

“50.  On 9 November 2007 I executed a notice of drawdown and received only one cheque from the plaintiff in the amount of HK$1,800,000.00 dated 10th November 2004, drawn on Standard Chartered Bank and make (sic) payable to Rich Goal Limited.  The said notice of drawdown had been prepared by the plaintiff’s representative and I were (sic) requested to sign on it.  The cheque is annexed hereto and marked “MakCY-28”.

51.  On 9 November 2007, at the plaintiff’s office, Miranda, asked me to acknowledge the receipt of a cash cheque in the amount of HK$500,000.00 as part of drawdown of the Supplemental Loan Agreement B.  I acknowledged the cash cheque.  Without my consent, Miranda then took away the cash cheque from me on the ground that the cash cheque was to be paid to a Mr Kenneth Cheung (“KC”) to settle part of my personal financial dispute with KC.  At the time I had no chance to take a photocopy of it. 

52.  On 12 November 2004, I issued a notice of requesting stop payment for the said cash cheque to the plaintiff and I failed to contact KC to clarify what was the matter and I presume the cash cheque was lost.  The notice is annexed hereto and marked “MakCY-29”. 

53.  Therefore I had only drawn down HK$1,800,000.00 from the plaintiff for the Supplemental Loan Agreement B.  I denied that the plaintiff had advanced HK$2,300,000.”

10.  The notice dated 12 November 2004 was signed by the 2nd defendant himself and was in the following terms:

“Dear Sirs,

Please be informed that there was a cash cheque issued by Ever-Long to me from the drawdown of a personal loan dated 10th Nov. 2004 had been lost.  Please stop payment of the same immediately before further action to be taken.

Formal written notice bearing signature to be sent to you shortly.  Please take this as our formal notice by email and fax in lieu of written notice to be followed.”

11.  The 2nd defendant’s way of dealing with the alleged taking away of the HK$500,000 cheque may not appear to be entirely satisfactory.  However, he indeed appeared to have asked the plaintiff to stop paying this cheque.

12.  The plaintiff’s witness statement was made by Miss Miranda Chan.  She referred to Loan Agreement C in paragraph 15 of her statement, but she did not say a word about the two cheques for HK$1.8 million and HK$500,000.

Application for leave to issue third party notice against Kenneth Cheung

13.  On the next day (8 January 2008) the 2nd defendant, who was then acting in person, took out an application for specific discovery by the plaintiff of the cash cheque for $500,000 for identification of the drawer and for leave to join Kenneth Cheung as the third party.  He wanted to make a counterclaim against Cheung. 

14.  In relation to specific discovery for the cheque, I think the 2nd defendant wanted to know who had presented the cheque for payment rather than the identification of the drawer.  It is a bit strange that the plaintiff should have failed to discover a copy of this cheque as the 2nd defendant has, since the filing of his defence on 7 June 2006, been saying that this cash cheque had been taken back by Miss Miranda Chan and passed to Mr Kenneth Cheung.  In any case a copy of this cheque was later produced by Miss Chan and I will refer to it below.

15.  The other relief sought by the 2nd defendant, namely to join Kenneth Cheung as the third defendant for a counterclaim, was wrongly stated.  The 2nd defendant in fact wanted leave to join Kenneth Cheung as a third party so that he could seek recovery of the $500,000 from Cheung.  This error was later corrected and the plaintiff does not appear to have been prejudiced by it.  I understand that the 2nd defendant wanted to pursue Kenneth Cheung for the HK$500,000 as an alternative to his defence that he had only received the loan of $1.8 million and not $2.3 million from the plaintiff.  The third party proceedings are to cater for the eventuality that the court may find that the plaintiff had indeed advanced $2.3 million to the 2nd defendant but half a million of it was taken from him by Kenneth Cheung personally and not by the plaintiff.

16.  The application was opposed by the plaintiff.  The 2nd defendant then filed an affirmation by Miss Leung Tak Kin on 30 January 2008.  She repeated what she said in paragraph 10 of her witness statement, which has been quoted above.  The 2nd defendant himself also made and filed an affirmation on 13 February 2008 to support his application.  This affirmation has also been treated as an ex parte application by him for leave to join Kenneth Cheung as a third party.  The 2nd defendant annexed a draft third party notice to this affirmation.  He said in paragraph 3 of the affirmation:

“3.  The 2nd defendant claims against Kenneth Cheung the sum of HK$500,000.00 and received from the 2nd defendant without authority damages and interest and costs to be indemnified against the plaintiff’s claim and the costs of this action or contribution to the full extent of the plaintiff’s claim or the following relief or remedy including damages, interest and costs on the following grounds of the claim:

a.  At a material times (sic), Kenneth Cheung was the controlling shareholder of Styland International Holdings Limited, which is (sic) major shareholder of the plaintiff.

b.  At all material times, Ms Miranda Chan is the director of the plaintiff.

c.  On 9 November 2004, the second defendant entered into a supplemental loan agreement with the plaintiff for a loan of HK$2,300,000.00.

d.  On 9 November 2004 the plaintiff issued and provided the second defendant two cheques of HK$1,800,000.00 and HK$500,000.00 respectively upon the notice of draw down of loan.

e.  On 9 November 2005 (sic), Miss Miranda Chan explicitly told the second defendant that she acted on Kenneth Cheung’s behalf and took away the cheque of HK$500,000.00 referred to in clause d. above from the second defendant without consent or proper authority from the second defendant at the time of draw down of the said loan by the second defendant from the plaintiff.

f.  Kenneth Cheung had obtained money from the second defendant by fraud or exercise of undue influence, or threat on the second defendant with the help of the plaintiff.

g.  Despite repeated requests Kenneth Cheung failed to return the money he took from the second defendant.

h.  The second defendant seeks to recover for money had and received by Kenneth Cheung, damages and interest and costs to be indemnified against the plaintiff’s claim and the costs of this action or contribution to the full extent of the plaintiff’s claim or the relief or remedy, including damages, interests and costs.”

17.  Miss Miranda Chan also made an affirmation on behalf of the plaintiff to oppose this application.  She said in paragraphs 8 to 10:

“The present application by the 2nd defendant:

8.  The 2nd defendant is claiming the Intended Third Party, Mr Kenneth Cheung, for an amount of $500,000.00, allegedly that in respect of a loan agreement for the 2nd defendant for HK$2.3 million, it was alleged that I on behalf of the plaintiff drew down two cheques of HK$1.8 million and HK$0.5 million to him but took away on behalf of the Intended Third Party the cheque of HK$0.5 m without his consent/proper authority.”

Opposition to the 2nd defendant’s present application:

9.  I refer to paragraph 3(e) of the 2nd defendant’s affirmation dated 13 February 2008 and strongly denies (sic) that I had explicitly told him that I was acting on Kenneth Cheung’s behalf and had taken away the subject cheque of HK$0.5 m from him without consent or proper authority as alleged. 

10.  Same strong denial is also made to paragraph 24 of the amended defence of the 2nd defendant dated 17 September 2007.”

18.  Miss Chan did not simply say that she had not taken the HK$500,000 cash cheque from the 2nd defendant.  It seems that she was asserting that she had not said to the 2nd defendant that she was acting for Kenneth Cheung and/or she had not taken the cheque without the consent or proper authority of the 2nd defendant.

19.  She also produced a copy of the cheque, which was probably in response to the 2nd defendant’s application for specific discovery.  The back of the copy cheque shows that one So Chi Keung presented the cheque through his own bank on Monday, 15 November 2004 for payment.  In the light of this information, I cannot tell if Miss Miranda Chan’s case is that she was acting for So Chi Keung rather than Kenneth Cheung and she had, with the permission of the 2nd defendant, taken the cheque to So.

Question to be resolved

20.  In the light of the above, there is clearly a question of how this HK$500,000 was disposed of and this question has to be resolved at the trial of this action.  How this question is disposed of may give rise to different issues.  In order to dispose of all such issues, it is necessary to have Kenneth Cheung to be joined as a third party in this action.

21.  I have already mentioned that the third party proceedings is meant to be an alternative to the 2nd defendant’s defence that the plaintiff had not advanced a loan of $2.3 million but only a loan of $1.8 million.  Now that it is revealed that So Chi Keung was the person who appeared to have obtained payment under the cash cheque, the 2nd defendant should also consider whether he should inquire with So on this cheque and, if need be, join So as the 2nd third party.

Delay

22.  The plaintiff also complained that this application was made too late as the action was launched on 8 March 2006 and witness statements have been exchanged.  However, as I have already observed, the action underwent a substantial amendment on 7 June 2007 with a new defendant added and the claim expanded by nearly five times.  Taking 7 June 2007 as the fresh starting point, the 2nd defendant’s application made initially in January this year, was not really too late.  To disallow this application would also leave the alternative claim of the 2nd defendant against Kenneth Cheung outside the action.  But that alternative claim should be resolved as part of the issues in this action.  On the whole, I think the substantive merit of the application has just outweighed the problem of delay.

23.  Finally, the plaintiff offered to reduce its claim by half a million dollars if leave for third party proceedings should be refused.  The 2nd defendant does not find this acceptable and I will say no more about it. 

Decision

24.  I therefore allow the appeal and grant leave for the 2nd defendant to issue third party notice on Kenneth Cheung in terms of the draft third party notice annexed to his affirmation filed on 13 February 2008.  The 2nd defendant shall issue and serve the third party notice on Kenneth Cheung within seven days from today. 

25.  If the 2nd defendant would like to join So Chi Keung as the 2nd third party, he should make an ex parte application supported by affidavit within 14 days from today.

26.  Finally, I grant the plaintiff liberty to apply for directions in the event that the 2nd defendant should fail to proceed with the third party proceedings expeditiously.

Costs

27.  I make an order nisi that the plaintiff shall pay the costs of the appeal to the 2nd defendant.  Regarding the costs of the application before the Master, the 2nd defendant has not made the application correctly at the start and he has also delayed the making of the application.  I therefore allow him only half of the costs of the application.