TASTY CATERING GROUP LTD AND ANOTHER v. CHENG HUNG KIT AND OTHERS

CACV 573/2020

[2021] HKCA 1211

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 573 OF 2020

(ON APPEAL FROM CONSOLITDATED ACTIONS

HCA 1130/2011 AND HCA 1137/2011)

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HCA 1130/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1130 OF 2011

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(by Original Action)

AND BETWEEN

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(by Counterclaim)

HCA 1137/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1137 OF 2011

________________________

________________________

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.  This appeal is brought by the 1^st plaintiff (by counterclaim) (“P1” or “CHK”) against the decision of Linda Chan J on 23 September 2020 (“Decision”). For ease of reference, all references herein to plaintiffs or defendants are to those by counterclaim, unless otherwise stated.

2.  By the Decision, it was ordered that:

(1)  the counterclaim of the 1^st to 4^th plaintiffs (“P1 to P4”) as against the 13^th defendant (“D13” or “JJ”) made in the “Defence of the 1^st and 2^nd Defendants and Counterclaim” (“D&CC”) filed on 27 March 2015 be struck out;

(2)  the action of P1 to P4 as against D13 be dismissed with costs to D13;

(3)  the summons of P1 to P4 for leave to amend the D&CC (“Amendment Summons”) be dismissed;

(4)  there be a costs order nisi that the costs of the summons for striking out issued by D13 (“Strike Out Summons”) and the costs of the Amendment Summons insofar as it relates to D13 be paid by P1 to P4 to D13, to be taxed if not agreed with certificate for two counsel and be paid forthwith; and

(5)  there be a costs order nisi that the costs of the Amendment Summons be paid by P1 to P4 to the 1^st and 2^nd defendants (“D1 and D2”), to be taxed if not agreed and be paid forthwith.

3.  In this appeal, P1 sought to set aside the orders in the Decision, and in lieu thereof the Strike Out Summons be dismissed and the Amendment Summons be allowed, with costs to be paid by D1, D2 and D13 on appeal and below.  Although the D&CC were drafted by counsel, P1 acted in person before the judge and on appeal.  All other documents filed by P1 in these proceedings are in English and he provided written submissions in English. P2 to P4 did not appeal against the Decision.

Background

4.  The relevant background matters are set out in the Decision at §§6 to 16:

“6. The consolidated action concerns a dispute over the shares in 2 companies, Hang Heung Cake Shop Company Limited, the 3^rd defendant by original action (“HHCS”), and Hang Heung Hop Kee Investment Co Ltd, the 9^th defendant by counterclaim (“HHHK”), which had been offered as security for a loan and have since been foreclosed by the lender and sold to D1-D2.

7. Until the enforcement of the security over the Shares in December 2009:

(1) the majority shareholders of HHCS and HHHK were P1, Cheng Hung Sang (“P2”), KT Holdings Ltd (“P3”) and Honlex Investment Limited (“P4”); and

(2) P1-P2 were 2 of the directors of HHCS and HHHK.

8. In 2001, P1-P3 entered into a series of loan agreements (“Minehead Agreements”) with Minehead Finance Limited, 10^th defendant by counterclaim (“Minehead”), whereby P1 obtained loans in the aggregate amount of HK$3 million and provided security in the form of a charge over the shares in HHHK and HHCS held by P1, P3 and P4 (collectively “Shares”). JJ was the legal adviser of P1 in relation to the Minehead Agreements.

9. On 22 December 2009, Minehead assigned all their rights under the Minehead Agreements to Pitt Tak Group Limited, the 6^th defendant by counterclaim (“Pitt Tak”). Two days later, Pitt Tak exercised its right as chargee and sold the Shares to the 3^rd to 5^th defendants by counterclaim (collectively “BVI Companies”).

10. On 26 January 2011, P1 and P3 signed a letter of intent (“LOI”) stating that they intended to “purchase back” the shares in HHCS from the BVI Companies.

11. On 24 February 2011, the BVI Companies sold the shares in HHCS to D1-D2, and they were subsequently appointed as directors of HHCS.

12. At the Extraordinary General Meeting of HHCS held on 30 April 2011, various resolutions were passed by the shareholders (including D1-D2) to allot 60,000 shares to existing shareholders in proportion to their shareholding (“April EGM”). The shares were all taken up by D1 in May 2011 and it became the majority shareholder holding 64.55% of its issued shares.

13. P1 has since April 2011 been challenging D1-D2’s status as shareholders of HHCS on the ground that he had never approved the sale of the Shares to Pitt Tak.

14. On 28 June 2011, P1 and P3 signed a written acknowledgement to the effect, inter alia, that P1 would retrieve 29% shareholding in HHCS if he could pay Sir Chan [Chi Keung] (12^th defendant by counterclaim) HK$12 million in 3 years (“Acknowledgement”).

15. In July 2011, the 2 actions [HCA 1130/2011 and HCA 1137/2011] were commenced (“Consolidated Action”) in which:

(1) D1-D2 seek declaration to confirm the validity of the sale and transfer of the shares in HHCS to them and their status as shareholders of HHCS.

(2) Ps seek declarations to impugn the series of transactions which cumulated into the transfer of HHCS’s shares to D1-D2 and their status as shareholders and directors of HHCS (including the April EGM), essentially on the grounds that when they signed the relevant Agreements, they did not know that they could lose their rights to the Shares and that the Agreements were invalid by reason of undue influence by JJ and/or unconscionable dealings by the other defendants to the counterclaim.

(3) Further, P1 alleges that JJ acted in breach of his duty of care and skill and fiduciary duties in that he failed to properly explain the terms of the Minehead Agreements. As JJ also acted for Minehead in respect of the relevant Agreements, his knowledge could be attributed to Minehead. The Minehead Agreements were made under the undue influence of JJ and Minehead or that they constituted unconscionable bargains.

(4) Neither the LOI nor the Acknowledgement signed by P1 could constitute affirmation of the acts carried out by JJ, as the LOI was signed by P1 in reliance on JJ’s and others’ misrepresentation that P1 no longer had any rights in the Shares, while the Acknowledgement was signed by P1 under duress of JJ and others.

16.     On 30 November 2011, P1 commenced HCA 2037/2011 against JJ for damages for breaches of duty of care and skill and fiduciary duties owed to P1 with respect to the Minehead Agreements. Of the 13 breaches alleged against JJ, 12 of them had already been raised by P1 in their D&CC.  The other breach relate to JJ’s failure to pass on a cheque of HK$150,000 to Minehead.”

The Decision

5.  The judge ordered Ps’ claim against D13 to be struck out on the ground that despite the extensive allegations against D13 in the D&CC (that D13 had committed various wrongs which induced Ps to enter into transactions that culminated in the sale of the HHCS shares to D1 and D2, so that Ps were entitled to rescission and reverse the security enforcement) and the long list of relief in the D&CC which ran to six pages with 25 declarations, Ps had not pleaded any relief against D13[1].  As no relief is sought against JJ, it is unnecessary to join him as D13 to the counterclaim (Tam Wing Yuen v Siberian Mining Group Co Ltd, HCCW 392/2015, 1 February 2017, §46; Mitchell v Royal Bank of Scotland Plc [2017] EWHC 1025 (Ch) §51; Chan King Sheen v K C Tsang & Co Solicitors (a firm), HCA 994/2001, 22 November 2001, §§49 to 50, citing Brooking v Maudslay (1886) 55 LT 343)[2].

6.  In response to the Strike Out Summons, Ps issued the Amendment Summons to amend the D&CC. The proposed amendments relating to D13 are:

(1)  in §140 by adding a plea to the effect that D13 was a party who participated in the duress on 28 June 2011 when P1 signed the Acknowledgment, as pleaded in §133, so that §140 would read as follows (the amendments are underlined):

“By reason of the matters pleaded in Paragraph 133 of the Amended Defence above, it is averred that [P1] and [P3] have suffered loss and damage, to be assessed, caused by the duress of [D12], [D11], Pitt Tak, [D7], each of the BVI Companies, JJ (being prime mover and engineer to victimize and/or to injure [P1], [P2], [P3] and [P4] mainly via [P1]), [D1], and [D2].”

(2)  in §142(6) by adding a plea that JJ was one of the parties against whom P1 and P3 seek damages or equitable compensation for duress, on the same basis as pleaded in §140 so that §142(6) would read as follows (the amendments are underlined):

“On behalf of [P1] and [P3], damages or equitable compensation, to be assessed, for duress against [D12], [D11], Pitt Tak, [D7], each of the BVI Companies, JJ (being prime mover and engineer to victimize and/or to injure [P1], [P2], [P3] and [P4] mainly via [P1]), [D1], and [D2].”

7.  The judge refused leave for the proposed amendments, holding that they are demurrable with no reasonable prospect of success and cannot salvage the mis-joinder of JJ as D13[3].

8.  In the other proposed amendments in the D&CC (§§138A, 139, 141(15), 142(2)(h) and 142(5)(f)), Ps pleaded that the resolutions passed at the Extraordinary General Meeting of HHCS held on 3 August 2011 (“August EGM”) approving the allotment of an additional 60,000 new ordinary shares to all existing current shareholders should be declared invalid and the purported allotment was null and void because the August EGM was held in breach of the articles of association of HHCS in that D1 and D2, not being the rightful owner of the shares in HHCS, had no right to call the August EGM or vote at that meeting.

9.  The judge refused to grant leave for the proposed amendments because they sought to introduce a new cause of action which accrued after the commencement date of the counterclaim, which was 6 July 2011[4]; the six-year limitation period for this new claim had expired on 2 August 2017 before the Amendment Summons was issued on 8 August 2019; and the new claim does not comply with the requirements of Order 20 rule 5(5) of the Rules of the High Court and section 35(6) of the Limitation Ordinance, Cap 347 in 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”[5].

The Strike Out Summons and Amendment Summons vis-à-vis D13

10.  In P1’s grounds of appeal, he did not challenge the holding that in the existing D&CC no relief was pleaded against D13.  His complaint was that the judge was wrong to refuse the proposed amendments which would cure the omission to plead relief against D13. As pointed out by Mr Dawes SC for D13[6], this is acceptance that absent the proposed amendments, the D&CC is liable to be struck out as against D13.

11.  The proposed amendments did not make a claim for damages for the alleged breaches of D13 in respect of the Minehead Agreements. Such claim for damages has already been made by P1 against him in HCA 2037/2011.  It would be an abuse of process if P1 were to maintain two actions (the Consolidated Action and HCA 2037/2011) on the same subject matter and making the same claim against an identical party (Taihan Electric Wire Co Ltd v Lee Chi Yuen Arctic, HCA 454/2013, 17 December 2013, §22).  P1’s proposed new claim for damages against D13 relates only to the alleged participation of D13 in the duress which caused P1 to sign the Acknowledgment on 28 June 2011, which was not an allegation made in HCA 2037/2011.

12.  The judge held that the proposed amendment is not reasonably arguable because duress is not an actionable tort which gives rise to a claim in damages.  This is fully supported by the authorities.  As explained by Cooke J in The Cenk Kaptanoglu [2012] 2 All ER (Comm) 855 at §25:

“In 1983, the House of Lords had cause to consider the question of economic duress where a ship was blacked by the ITF and the question arose as to whether or not a tort had been committed and/or whether the Trade Union and Labour Relations Act 1974 exempted the union from liability for any such tort. In Universe Tankships v ITF [1983] 1 AC 366[7], at 383-387, Lord Diplock, with whom the majority agreed, considered the ambit of economic duress in its then state, referring to the need for a coercion of the will, as opposed to a deflection of it, which is the terminology usually used today. At page 385B, however, he stated that the form that the duress takes may or may not be tortious. The use of economic duress is not a tort in itself, though the particular form that some economic duress takes may amount to a tort. The remedy to which economic duress gives rise is not an action for damages but an action for restitution of property or money extracted under such duress and the avoidance of any contract that is induced by it. In some cases the economic duress may amount to a tort, in which case the restitutionary remedy for money had and received is merely an alternative remedy to an action for damages in tort. The two are however distinct.”

13.  See also Investec Bank (Channel Islands) Ltd v Retail Group plc [2009] EWHC 476 (Ch) at §122 and Al Nehayan v Kent [2018] 1 CLC 216 at §224.  In summary, the primary object of a plea of economic duress in relation to a contract is to avoid the contract, which is a legal consequence significantly different from establishing a cause of action in damages.  The circumstances in which a contract may be rescinded and the defendant required to restore a benefit received from the plaintiff may not coincide with those in which the plaintiff is entitled to recover damages for loss caused by a wrongful act of the defendant.  If the conduct amounting to duress does not also give rise to liability in tort, such as the tort of intimidation, there is no proper basis for a claim for damages for duress.

14.  As there is no plea in this instance that D13 had committed any tort, the claim for damages for duress against D13 in the proposed amendments is impermissible as a matter of law.  On this basis alone, the judge is clearly right in refusing leave to amend[8].

15.  Mr Dawes has a second argument which was also accepted by the judge.  Even if duress is an actionable tort, P1 and P3 have no reasonably arguable case on loss.  There is just no scenario where P1 and P3 would be entitled to claim for the loss of their right to rescind (§140 of the proposed amendments merely alleged that P1 and P3 have suffered loss and damage to be assessed, without pleading any particulars), as analysed in §24 of the Decision:

“(1) If P1 and P3 fail to establish their right to rescind the Minehead Agreements by 28 June 2011 (on the basis that they cannot establish any of the vitiating factors pleaded or that they have lost their right to rescind by reason of bars to rescission before that date), they will not have any basis to claim that the alleged duress has caused any loss to them.

(2) If, on the other hand, P1 and P3 are able to establish their right to rescind the Minehead Agreements and prove duress, they will be able to obtain the return of the Shares and set aside the Acknowledgement. They will not be able to show that they have suffered any loss as a result of duress.

(3) If P1 and P3 are able to establish their right to rescind the Minehead Agreements but fail to prove duress, the Acknowledgement (which constitutes affirmation) will bar rescission.  In this scenario, they have no right to any damages, both because they have no cause of action (for duress) and have lost nothing (right to rescind).”

16.  We agree with the above analysis. Proof of loss is an essential element for torts in general (Clerk & Lindsell on Torts (23^rd ed) §1-52).  As P1 and P3 have no reasonably arguable case on loss, there cannot be a reasonably arguable claim in duress even if duress is an actionable tort.

17.  In these circumstances, there is no purpose to allow the proposed amendments in §§140 and 142(6) of the D&CC and keeping the Consolidated Action on foot against D13.

18.  P1’s skeleton argument did not address the above reasons of the judge in refusing the proposed amendments.  As for the contentions made in respect of D13 in the grounds of appeal and his skeleton argument, none of them are of merit.

19.  P1 contended that the issues in the Consolidated Action and HCA 2037/2011 are different. The proposed claim in damages for duress has not been made in HCA 2037/2011.  Hence, there is no question of multiplicity of proceedings by reason of HCA 2037/2011, and so the D&CC in the Consolidated Action should not be struck out as against D13. The Consolidated Action and HCA 2037/2011 should be tried together in the interest of justice and for saving costs.  It is artificial for D13 to assert that he ought only to contest the claims in HCA 2037/2011 and not the Consolidated Action when he was the key player in the events pleaded leading to the Consolidated Action.  The wrongful acts alleged against D13 in the Consolidated Action were not limited to his involvement in procuring the Acknowledgment or the Minehead Agreements but his acting in concert with all other defendants against the interest of Ps, in particular the subsequent transactions resulting in the sale and transfer of the shares of HHCS to D1 and D2.

20.  The above contentions are simply no answer to the material objections that as Ps do not seek any relief against D13 for any of the claims in the Consolidated Action and the proposed claim in damages for duress is not reasonably arguable, there is no justification in keeping D13 as a party in the Consolidated Action.

21.  The judge is clearly right in refusing leave for the proposed amendments in §§140 and 142(6) of the D&CC.

The Amendment Summons vis-à-vis D1 and D2

22.  P1 raised two broad contentions concerning the refusal to allow the proposed amendments relating to the resolutions passed at the August EGM and the allotment of shares as a result.  First, he submitted that the judge erred in law in that the rule in Eshelby v Federated European Bank Ltd [1932] 1 KB 254 at 260 (which provides that a statement of claim cannot be amended to introduce a cause of action which was not in existence or had not yet accrued at the time of the issue of the writ) is no longer the law in Hong Kong.  Second, he argued that the August EGM was not an independent isolated transaction but an act which sprang from the unlawful exercise of power of the board of directors of HHCS which had already been challenged in the Consolidated Action and hence the proposed amendments would satisfy the requirement of arising out of the same or substantially the same facts as already relied upon.

23.  These contentions are likewise without merit.

24.  Notwithstanding that the courts in recent times have been disposed to adopt an approach more flexible than the Eshelby rule, this rule remains an aspect that the court may properly take into consideration in the exercise of its discretion under Order 18 rule 19 or Order 20 rule 5 whether to allow an amendment to plead post-writ matters (Wing Siu Co Ltd v Goldquest International Ltd [2003] 2 HKC 64 at §§17 to 18; Chan Mei Lin & Ors v Lee Hong, CACV 44/2015, 3 December 2015, at §28; Qianhai Xinhuakang Financial Holdings (Shenzhen) Ltd v Chen Jiarong [2020] 2 HKLRD 1320 at §§46 to 61).

25.  As pointed out by Ms Joyce Leung for D1 and D2, it is apparent from the Decision that the judge’s approach in refusing to exercise her discretion to allow the amendments was not confined to the application of the Eshelby rule.  Quite clearly, the judge did not stop short at her conclusion that the claim in the proposed amendments accrued after the commencement date of the counterclaim.  She went on to consider the prejudice of D1 and D2 being deprived of the limitation defence before holding that the additional claim should not be introduced by way of amendment.

26.  The judge is right in holding that the proposed amendments relating to the August EGM introduced a new cause of action.  There is no mention of the August EGM or any fact relating to this meeting in the D&CC.  This new claim cannot be said to 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.  The requirements of Order 20 rule 5(5) and section 35(6) of Cap 347 are plainly not met. There is no need to go into other matters raised by P1, D1 and D2.

27.  There is no basis to interfere with the exercise of the judge’s discretion.

28.  In P1’s submissions, he sought to rely on the remarks of DHCJ Le Pichon in §54 of the decision in HCMP 812/2017 on 12 September 2017 (brought by other shareholders of HHCS against D1, D2 and HHCS for the appointment of interim receivers).  His reliance on those remarks is misplaced.  Firstly, they are not relevant.  Secondly, the remarks (that serious issues are raised concerning the real state of HHCS’s share capital and the possibility of dilution of the shareholdings of those who applied for receivers to be appointed) were made with regard to the evidence placed before the court in September 2017.  They may need to be revised in light of the evidence adduced in the present proceedings in September 2020 on the state of affairs of HHCS after the discharge of the receivers in November 2017[9].

Conclusion and costs

29.  For the above reasons, P1’s appeal is dismissed.

30.  There is no dispute that costs of the appeal should follow the event.  We order P1 to pay the costs of D1, D2 and D13 in this appeal, to be taxed if not agreed, with a certificate for two counsel for D13.