KILIK KILIK SDN. BHD AND OTHERS v. LAU YU MAN AND OTHERS

IN THE COURT OF APPEAL

1993, No. 168 & 214
(Civil)

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J U D G M E N T

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Litton, J.A.:

1. We have before us two interlocutory appeals. They concern further and better particulars of the plaintiffs' Points of Claim. The writ was issued in December 1991, in relation to claims arising from a casualty at sea which occurred as long ago as 5 November 1988. And yet, in February 1994, this court is only dealing with a pleading point: whether orders made by Mayo J. for further and better particulars of averments in the Points of Claim were right or not.

Background

2. The plaintiffs claim as owners or insurers of cargo, Malaysian logs, which were carried on a vessel called the "Golden Park" from Sandakan, Malaysia to Inchon, South Korea. The vessel sank on 5 November 1988 and the cargo was totally lost.

3. The plaintiffs obtained a consent judgment against the owner of the vessel in the sum of ￥79.46m. The owner Hasumsoon Shipping Co. Ltd. S.A. is a Panamanian company. The judgment remained wholly unsatisfied. The plaintiffs then commenced the present action against the directors of Hasumsoon personally, relying on two provisions of the Panamanian General Code which, they say, entitle them to recover the sum owed by Hasumsoon from the directors personally.

Points of Claim

4. In the Points of Claim, the plaintiffs alleged that at the time the Golden-Park sank, there was valid hull insurance to the amount of US$2.9M alternatively $2.4m and that the underwriters had paid the insurance money to the company.

5. Paragraph 14 of the Points of Claim reads as follows:

"Wrongfully and in breach of the provisions of Panamanian law set out in paragraphs 9 and 10 above, the Defendants have failed properly to apply the said insurance proceeds as assets of Hasumsoon, have failed to reserve corporate funds from the hull insurance proceeds to the prejudice of the Plaintiffs and have otherwise failed properly and without misconduct to manage the affairs of Hasumsoon, in that the said sum of US$2.9m alternatively, US$2.4 million has been paid away other than to the Plaintiffs and has been distributed and dispersed from Hasumsoon's assets so as to render Hasumsoon assetless and the judgment referred to in paragraph 7 above useless. For the avoidance of doubt, if and insofar as the Defendants establish that any part of the said hull proceeds was paid by way of the redemption of a ship mortgage dated 23rd June 1988 between Hasumsoon and Bangkok Bank Limited, the Plaintiffs will not contend that such a payment was improper or otherwise gives rise to personal liability on the part of the Defendants to the Plaintiffs".

6. On the 30 September 1993 Points of Defence were served, which amounted in effect to a general denial of the plaintiffs' claim and it is note- worthy that the averments in paragraph 12 of the Points of Claim are "not admitted". In paragraph 12 of the Points of Claim the plaintiffs aver that at the time of the casualty there was a valid hull insurance upon the vessel in the sum of US$2.9m alternatively $2.4m.

7. On 14 October 1993, which in fact was the day when the pleadings between the parties were deemed to be closed, the plaintiffs sought an order for interrogatories and among the matters put was the following:

"3. What amounts after 5th November 1988 have been paid away by Hasumsoon specifying each and every payment, the amount paid, the date of payment, the recipient and full details of the obligation in respect of which each payment was made".

Orders for particulars

8. The defendants made their requests for particulars on 23 September 1993 before the Points of Defence were served. They related to averments wider than those in paragraph 14 but what remain in issue now are those confined to paragraph 14.

9. On 18 October 1993 Mayo J. ordered that particulars of para. 14 of the Points of Claim be given. I will not in this judgment set out the whole of the order; a sample will suffice: for instance para. 2 which orders as follows:

"(2) Insofar as the plaintiffs' claim against the defendants is based on an alleged liability under Article 64 of the Panamanian Generam Corporation Law as pleaded in paragraph 10 of the Points of Claim:

(i) give full particulars of each and every dividend (if any) alleged to have been declared by Hasumsoon having the effect of reducing the value of its assets to less than the amount of its liabilities, stating the amount and date of each alleged dividend, the nature of alleged value of Hasumsoon's assets immediately before that date and the nature and alleged value of Hasumsoon's liabilities immediately before the date;

(ii) give the like particulars in relation to each and every distribution (if any) alleged to have been paid by Hasumsoon and having the effect of reducing the value of its assets to less than the amount of its liabilities;

(iii) give full particulars of each and every reduction of the corporate capital of Hasumsoon (if any) that is alleged to have been effected......"

10. I pause here to make this observation: the plaintiffs are total strangers to Hasumsoon and its director, and have never had any direct dealings with them; they came to be in litigation only because their logs carried on the Golden Park were lost when the vessel sank, and Hasumsoon happened to be the owner of the vessel.

11. On 1 October 1993 the plaintiffs lodged an appeal against Mayo J's order of 18 October 1993 and this became Civil Appeal No. 168 of 1993.

12. On 23 November 1993 the defendants made another request for particulars of para 14 as follows:

"Under paragraph 14:

Of:

"Wrongfully and in breach of the provisions of Panamanian law set out in paragraphs [ ] 10 above, the defendants.... have failed to reserve corporate funds from the hull insurance proceeds... in that the said sum ... has been ... dispersed from Hasumsoon's assets ...."

13. Please state in relation to :

(1) each and every dividend or distribution declared or paid from the assets of Hasumsoon that reduced the value of the assets of Hasumsoon to less than the amount of its liabilities or the corporate capital of Hasumsoon; and

(2) each and every reduction in the capital of Hasumsoon; whether it is alleged that the defendants or any of them consented to such acts with knowledge that with such acts the corporate capital of Hasumsoon was affected and, if so, stating in relation to each such defendant:-

(a) the date when and the means by which such consent was given;

(b) all facts and matters relied upon in support of the allegation that such consent was given with knowledge that by such act the corporate capital of Hasumsoon was affected."

14. This was followed by a Summons dated 26 November 1993 seeking an order that the particulars be given. On 9 December 1993 Mayo J. ordered that particulars be given as requested in the letter of 23 November 1993 and on 22 December 1993 the plaintiffs lodged an appeal against this order. This became Civil Appeal No. 214 of 1993.

The appeals

15. The matter has been well argued by counsel on both sides. Mr. Faulkner for the plaintiffs does not say that para. 14 of the Points of Claim does not need particularisation: he says that the material is peculiarly within the knowledge of the defendants; only they would know how the assets of Hasumsoon were managed; all that the plaintiffs can say at this stage is that there was hull insurance to the tune of US$2.9m or $2.4m, that Hasumsoon is a one ship company, that even allowing for the discharge of the ship mortgage there appears to be surplus in the region of US$ 1/2 to $1m available for the creditors; that the directors caused a consent judgment to be entered against the company but that judgment remained wholly unsatisfied; that the directors in their Points of Claim have even denied that the ship was insured and if it transpires that there were indeed substantial surplus assets available for creditors, then the inference that the directors consented to a distribution contrary to Article 64 of the Panamanian law and had knowledge that the corporate capital would be thus reduced would be readily drawn by a court. In these circumstances, as Mr. Faulkner submits, there is a clear case for discovery and interrogatories before an order for particulars of the Points of Claim should be made. He relies on Ross v. Blakes Motors Ltd. (1951)2 AER 689 for this purpose.

16. The judge gave very brief reasons for making the order. He was heavily influenced by the decision of this court in ADS v. Wheelock Marden & Co. Ltd. CA No. 88/92 15 March 1993 (unreported). It is common ground that this decision in no way binds the judge in the present case and reading the judgment in ADS v. Wheelock Marden Co. Ltd. this seems to me to be plainly right. The causes of action in that case were very different from the present one and indeed without looking at the statement of claim to see the averments to which the particulars there related it is difficult to see how the decision in ADS v. Wheelock Marden could be thought to be binding.

17. The judge having erred in principle, in the exercise of his discretion, the matter then is at large before us.

18. Mr. Clifford Smith was inclined at one stage to argue that the Points of Claim are defective in at least 2 respects: (1) as far as Article 444 of the Panamanian law is concerned this, he says, is plainly intended only for the protection of shareholders, because the concluding sentence in Article 444 rthe general eads "Liability may only be demanded based on a resolution of meeting of stockholders"; and (2) insofar as the plaintiffs rely upon Article 64 of the Panamanian law there must be an averment of knowledge and consent before personal liability on the part of the directors can be founded; there is no specific pleading of either consent or knowledge.

19. For my part I am inclined to think that Mr. Smith is right on the first point. Reading Article 444 as a whole it does seem to me to be aimed at the protection of shareholders and it is difficult to see how the plaintiffs can come within its scope. But as to point (2) I am not satisfied that Mr. Smith is correct. There is a general averment of wrongful breach of the provisions of the Panamanian law as previously set out in the Points of Claim. This is, in my judgment, just enough to establish a case based upon the acts averred in Article 64.

20. But, whether Mr. Smith be right or wrong in these submissions, the fact of the matter is that there has been no application to strike out the claim and dismiss the action, and it is now far too late to raise that point.

21. We are concerned in this court solely with the orders for particulars. We are now dealing with the matter at a stage when the pleadings have long since closed and under Order 24 r2 of the Rules of the Supreme Court the parties ought to have made mutual discovery of relevant documents long ago.

22. If the judge's orders for particulars be upheld before any discovery can take place this would mean in effect the end of the present action. Plainly, on the material before us, the plaintiffs will be unable to comply with the order for particulars before discovery.

23. As all the facts are peculiarly within the knowledge of the defendants I am firmly of the view that this is a case where particulars of the Points of Claim should not have been ordered before the plaintiffs have had a chance to seek discovery, either under Order 24 in relation to relevant documents in the possession of the defendants, or under Order 26 in relation to facts by administering interrogatories, or both. It must follow therefore that the appeal must be allowed and the orders made by the judge be discharged.

Bokhary, J.A.:

24. If the defendants had applied to have the Points of Claim struck out for lack of material averments, that attempt may or may not have succeeded. For, on the one hand, the plaintiffs have certainly pleaded in very general terms. At the same time, however, the facts are certainly very unusual.

25. Be all of that as it may, the fact of the matter is that the defendants have not sought the striking out of the Points of Claim. Instead, they have pleaded to it. Moreover, far from zeroing in on any lack of material averment, they have sought particulars of the very matters which they say are crucial. Rather than proceeding on the basis that there is no peg, they have demanded things to be hung on it.

26. Once the case emerged from the starting gate - and the defendants' own approach has ensured that - I have no doubt, in the circumstances, that the situation which arose was one for particulars after rather than before discovery of documents and, by way of interrogatories, of facts.

27. I agree that this appeal must be allowed as my Lord proposes.

Godfrey, J.A. :

28. This is an interlocutory appeal in an action for payment of a judgment debt, brought by judgment creditors of a limited company whose judgment remains unsatisfied, against the directors of the company.

29. This is startling. It is axiomatic, in English (and Hong Kong) company law that directors owe no fiduciary or contractual duty, nor any duty of care, to persons who deal with their company. Even if they mismanage the company's affairs deliberately or negligently, so that the company becomes unable to pay its debts to creditors of the company, they cannot be held personally liable to those creditors for the company's debts, although of course in the winding up of the company they may be ordered to contribute towards the payment of the company's debts if they have been guilty of fraudulent or wrongful trading. These principles are well-known to company lawyers and, I may add, are more or less universal in one form or another in corporate laws throughout the world.

30. This case is different, or is said to be different, because of the particular provisions of Panamanian law which apply to this company, which is a Panamanian company. Article 444 of the Panamanian Commercial Code modified by Law No.9, 3rd July 1946, amended by Cabinet Decree No.247 of 16th July 1970, set out in paragraph 9 of the plaintiffs' Points of Claim, provides as follows:

"The directors shall not be personally liable for the obligations of the company, but they shall be individually or severally liable, as the case may be, to the company and to third parties for the reality of the payments appearing as made by the partners, for the reality of the dividends declared, for the good management of the bookkeeping and in general for the execution or impropriety in the performance of their duties or for the violation of the laws, the Certificate of Incorporation, the By laws or by resolutions of the General Meeting. Such directors as may have protested within the legal time-limit against the resolution of the majority, or those who failed to attend for justified cause, shall be exempted from liability. Liability may only be demanded based on a resolution of the General Meeting of Stockholders."

31. Article 64 of the Panamanian General Corporation Law, Law No.32 of 26th February 1927, set out in paragraph 10 of the plaintiffs' Points of Claim, provides as follows:

"If any dividend or distribution is declared or paid from the assets that reduces the value of the assets of the corporation to less than the amount of its liabilities, including in the latter the corporate capital; or if the amount of the capital is reduced; or if some statement is giving or a false report is given in any material representations, the directors that shall have given their consent to such acts, with the knowledge that with such act the corporate capital is affected, or that the statement or representation is false, shall be jointly and severally liable to the creditors of the corporation for any damage resulting therefrom."

32. I entertain considerable doubt whether these special provisions of Panamanian law make a significant difference to the rules which generally preclude the liability of the directors of a company for the payment of its debts. But, be that as it may, we have at this stage of the case to proceed on the footing that the plaintiffs' claim for relief, based on these special provisions of Panamanian law, is a claim which deserves to be properly considered at the trial f the action. It is of course essential, if a claim of this unusual character is to be advanced, that the plaintiffs should state in the body of the pleading which advances it all necessary averments to establish the cause of action on which they rely. It is not the function of particulars to take the place of necessary averments in the pleading, nor "to state the material facts omitted in order by filling the gaps to make good an inherently bad pleading": see Pinson v. Lloyds Bank [1941]2 KB 72 per Scott L.J. at p.75.

33. In the present case, the relevant paragraph of the pleading is paragraph 14 of the plaintiffs' Points of Claim, which reads as follows:

"14. Wrongfully and in breach of the provisions of Panamanian law set out in paragraphs 9 and 10 above the Defendants have failed properly to apply the said insurance proceeds as assets of Hasumsoon, have failed to reserve corporate funds from the hull insurance proceeds to the prejudice of the Plaintiffs and have otherwise failed properly and without misconduct to manage the affairs of Hasumsoon, in that the said sum of US$2.9 alternatively, US$2.4 million has been paid away other than to the Plaintiffs and has been distributed and dispersed from Hasumsoon's assets so as to render Hasumsoon assetless and the judgment referred to in paragraph 7 above useless."

I must say that, for my part, and having regard to the contents of the relevant Panamanian legislation, I regard this pleading as one which might have been open to challenge on the ground that it fails to contain all the material averments necessary to support the plaintiffs' cause of action. But that challenge has not been mounted. Far from it; the defendants have pleaded over any such irregularity. My provisional view (we do not have any such application before us) is that the defendants have left it too late to attempt to strike out the plaintiffs' claim for want of material averments in the Points of Claim.

34. I am therefore of the opinion that all we have to consider now is whether the particulars for which the defendants have asked ought to be ordered before discovery of documents and facts or (as the judge thought) afterwards. Given that the plaintiffs have here a case which is fit to be entertained by the Court, it is plainly impossible for them to particularize it at this stage. The relevant documents and facts are all within the power and knowledge respectively of the defendants. The effect of the judge's order would be to stymie the plaintiffs' action altogether, and he was wrong to make it.

35. For the reasons I have attempted to state, I too would allow this appeal.