SHUN KAI FINANCE CO LTD (In Compulsory Liquidation) AND OTHERS v. JAPAN LEASING (HONG KONG) LIMITED (In Creditors' Voluntary Liquidation)

HCA 13826/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13826 OF 1998

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D E C I S I O N

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1.  This is an application by the defendant to strike out the 3rd plaintiff’s claim in the Amended Statement of Claim and the Particulars of Damage and to dismiss the 3rd plaintiff’s action against the defendant.

Background

2.  This action was started 10 years ago.  The parties however have not been idling as there are other actions between them and they have been working hard on these other actions. 

3.  There have also been a number of important developments in this action.  The 1st plaintiff was wound up on 5 November 2003.  Its liquidator settled its claim with the defendant.  Its action against the defendant was dismissed by consent on 20 April 2006.  Regarding the 2nd plaintiff, he was adjudged a bankrupt on 6 October 2006.  The defendant applied on 2 June 2008 to strike out the Amended Statement of Claim and the Particulars of Damage vis-à-vis the 2nd and 3rd plaintiffs and to dismiss their actions.  Registrar Au Yeung acceded to the application in relation to the 2nd plaintiff on 11 June 2008, but referred the application as against the 3rd plaintiff to be dealt with by a judge of this court.

4.  The grounds of the defendant’s application are that the Amended Statement of Claim and the Particulars of Damage disclose no reasonable cause of action against the defendant, they are scandalous, frivolous and vexatious, they may prejudice, embarrass and delay the fair trial of the action and they are an abuse of the process of court.  It turned out that the arguments were only under the first ground, namely whether there is a reasonable cause of action.

The 3rd Plaintiff’s Case

5.  The Amended Statement of Claim pleads that the 1st plaintiff was a licensed money lender carrying on business in Hong Kong.  The 2nd and 3rd plaintiffs are husband and wife.  They were the legal and beneficial owners of no less than 90% of the 1st plaintiff’s shares.  The 2nd plaintiff used to have full control of the 1st plaintiff.  They earned a living from the 1st plaintiff’s business. 

6.  There was an agreement between the 1st plaintiff and the defendant (“the Governing Agreement”) dated 19 May 1993 under which the defendant agreed to lend money to the 1st plaintiff.  The 1st plaintiff used the funds advanced by the defendant as well as its own funds for lending to its customers.  The Governing Agreement required the 1st plaintiff to obtain mortgage security from its customer upon lending to the customer and further required the 1st plaintiff to execute legal sub-mortgage in relation to the lending in favour of the defendant.  The Governing Agreement also authorized the 1st plaintiff to demand and receive repayment from its customers the moneys that had been lent by the defendant to it and lent on by it to its customers.

7.  The Governing Agreement further provided that if the 1st plaintiff should default in repayment to the defendant or in complying with the terms of a sub-mortgage and facility letter of a loan, then the authorization to the 1st plaintiff to collect repayment maybe revoked upon seven working days prior notice by the defendant.

8.  Prior to the execution of the Governing Agreement, the 2nd plaintiff on behalf of the 1st plaintiff had orally agreed with the defendant’s executive one Mr Leung that the defendant would not revoke the 1st plaintiff’s authorization except when the 1st plaintiff had been given seven days prior notice of revocation and that the 1st plaintiff failed to make good the default within that seven days period.  This oral agreement is pleaded as the Collateral Agreement.  The 1st plaintiff executed the Governing Agreement in reliance upon the Collateral Agreement.  The defendant is thus estopped from denying that the Governing Agreement has the effect as contended by the plaintiffs or the effect of the Collateral Agreement. 

9.  The defendant however breached the Governing Agreement or the Collateral Agreement by directing a substantial number of the 1st plaintiff’s customers to make repayment directly to the defendant but without giving the 1st plaintiff the seven days prior notice.  The 1st plaintiff has identified a number of such customers who complied with the defendant’s direction and ceased making payment to the 1st plaintiff. 

10.  Such conduct of the defendant also constituted tortious procurement by the defendant of breaches by the 1st plaintiff’s customers of their contracts with the 1st plaintiff by failing to make repayments to the 1st plaintiff. 

11.  As a result, the 1st plaintiff suffered loss and damage, in particular the loss of the moneys received by the defendant and the loss of business opportunity and future income.  Furthermore, the defendant has negligently diminished and/or destroyed the value of the 1st plaintiff to its owners namely the 2nd and 3rd plaintiffs and has caused loss and injury to them. 

12.  The particulars of negligence are the defendant’s failure to have regard to the Governing Agreement or the Collateral Agreement and/or the irrevocable authorization given to the 1st plaintiff to receive payment from its customers, or to take care not to injure the business of the 1st plaintiff thereby injuring the 2nd and 3rd plaintiffs or to distinguish between the moneys lent by the defendant to the 1st plaintiff or the 1st plaintiff’s own moneys.

13.  The particulars of loss and injury pleaded in the Amended Statement of claim are the deprivation of the livelihoods of the 2nd and 3rd plaintiffs and their emotional distress, anguish and inconvenience.

14.  The particulars of damage pleaded separately in the Particulars of Damage say that if the defendant should have given the 1st plaintiff the seven days prior notice, the 1st plaintiff would have remedied the alleged breaches.  As a result of the defendant’s breach, the 1st plaintiff’s business including goodwill was completely or substantially destroyed.  The 1^st plaintiff thus lost its then business, its goodwill and the opportunity to undertake new business.  It’s then existing business was generating gross annual profits in excess of HK$10 million.  The 1st plaintiff also expected to earn HK$9 million annually in a new business product involving the Home Ownership Scheme.

15.  Prior to the defendant’s wrongful conduct, the 2nd and 3rd plaintiffs directly or through companies under their control enjoyed substantial benefits like fees of HK$3 to HK$5 million, rental subsides of more than HK$1 million and traveling subsidies of more than HK$150,000 every year.  The shareholdings of the 2nd and 3rd plaintiffs in the 1st plaintiff were also of a substantial value and would have a worth of HK$90 million but for the defendant’s breach.  The plaintiffs also contend that in ascertaining their damages, the Court should capitalize the lost earnings and benefits for at least 10 years.

The 3rd Plaintiff’s Application to Re-amend the Amended Statement of Claim

16.  On 8 September 2008, the 3rd plaintiff issued a summons to re-amend the Amended Statement of Claim.  The 3rd plaintiff intended to plead a further ground of negligence against the defendant in that the defendant had failed to take care not to injure the interest of the 3rd plaintiff including her interest as the wife and a dependent of the 2nd plaintiff and thereby caused loss and injury to her.  Under the particulars of loss and injury, she intended to add a few more items of claim.  The first item is her loss of financial support from the 2nd plaintiff as he had been financially ruined by the defendant’s negligence and was declared bankrupt on 6 October 2006.  The next item is her loss of substantial family and personal assets including a portfolio of investment properties which she was forced to liquidate prematurely to meet her liabilities, which liabilities, but for the defendant’s negligence, she would have been able to satisfy without suffering such loss.  She also wanted to add her development of a uterine tumor and her ongoing mental suffering involving a tendency to commit suicide.  She also intended to plead that all these losses were reasonably foreseeable by the defendant as her situation and family affairs were known to the defendant through its executive Mr Leung.

17.  Counsel for the 3rd plaintiff also added in oral submissions that the 3rd plaintiff’s liabilities which she sought to add by re-amendment included her liabilities as a guarantor to the debts of the 1st plaintiff and of other members of the 1st plaintiff’s group of companies.

18.    The 1st plaintiff’s application to re-amend is opposed by the defendant.  Mr Ng, counsel for the defendant, submitted that the proposed amendments cannot make good the Amended Statement of Claim and they also do not disclose any reasonable cause of action.  Leave should therefore not be given for the amendments to be made.  Both the defendant’s application to strike out and the 3rd plaintiff’s application to re-amend the Amended Statement of Claim are heard together.

Grounds for Striking Out

19.  The defendant has two grounds for the striking out.  The first ground is that the 3rd plaintiff’s claims of loss are of two kinds, namely pure economic loss and non-financial loss such as emotional distress.  Mr Ng submitted that the defendant has no liability to the 3rd plaintiff for either type of loss.  The second ground is that the 3rd plaintiff cannot recover reflective loss from the defendant.

Reflective Loss

20.  The reflective loss of a shareholder is a reflection of the loss suffered by his company.  The rule against reflective loss has been discussed in Johnson v Gore Wood & Co. a firm [2002] 2 AC 1 and Gardner v Parker [2004] 2 BCLC 554.  It has also been discussed by the Court of Appeal in Landune International Ltd v Cheung Chung Leung [2006] 1 HKLRD 39 at 43F-G and by Reyes J in Hotung v Hillhead Ltd [2008] 3 HKLRD 200.

21.  The claims by the 3rd plaintiff for loss of the benefits she used to derive from the 1st plaintiff and the loss of value of her shares in the 1st plaintiff are reflective losses.  Mr Swaine, counsel for the 3rd plaintiff, made it clear at the hearing that the 3rd plaintiff is not seeking any reflective loss.  The items of claim that are reflective losses are therefore abandoned by the 3rd plaintiff.  Counsel said the 3rd plaintiff is claiming the defendant for breach of a duty owed by the defendant to her directly.  Counsel further said that if the 3rd plaintiff can establish such duty, then damages may be recoverable by her.

Pure Economic Loss

22.  Mr Ng for the defendant submitted that the 3rd plaintiff is also not permitted to mount a claim of negligence against the defendant for pure economic loss.  Her alleged loss of substantial benefits from the 1st plaintiff was pure economic loss and should be barred.  The defendant relies on Murphy v Brentwood District Council [1991] 1 AC 398, Bank of East Asia Ltd v Tsien Wui Marble Factory Ltd (1999) 2 HKCFAR 349, Linfield Ltd v Taoho Design Architects, HCCT 68/2001 and Re Fully Well Investment Ltd, HCCW 1056/2002 at paras. 33 to 36.

23.  Counsel submitted that in the light of Murphy, economic loss is only recoverable on the basis of the principle of Hedley Byrne in which there is a special relationship between the parties.  The relationship may be found where a party has assumed responsibility to another for making a statement or for performance of services and the other party relied on such statement or service.

24.  Mr Swaine however submitted that the law on economic loss has developed and is still developing.  He suggested three approaches that can be taken to determine the recoverability of economic loss.  He referred to paras 8-86 and 8-89 of Clerk & Lindsell on Torts, 19^th edition.  The three approaches are the assumption of responsibility test, the three stage test of forseeability, proximity and fairness, justice and reasonableness (introduced by the House of Lords in Caparo Industries v Dickman [1990] AC 605) and the incremental approach.

25.  I agree with the defendant that the 3rd plaintiff’s claim for pure economic loss must fail.  The reason being that there is no pleading of any special relationship between the 3rd plaintiff and the defendant, or that the defendant had assumed any responsibility to the 3rd plaintiff for making of any statement or for provision of any service whether to the 1st plaintiff or otherwise or any reliance by the 3rd plaintiff on such statement or service.  The principle of law pronounced in Murphy is good and I must abide by it.

26.  However, even if I should go through the three approaches suggested by Mr Swaine, the result is the same.  I have already said that there was no assumption of responsibility by the defendant.  For the three-stage test, the relationship between the defendant and the 3rd plaintiff as a shareholder of the 1st plaintiff is not proximate enough for a duty on the part of the defendant to arise.  It is also not fair to the defendant to impose such a duty on it.  To do so would mean that the defendant would also have a duty to the 1st plaintiff’s other shareholders, directors, employees, creditors, its holding company and subsidiaries as well.  It is unfair and unreasonable to do so.  To impose such a duty also amounts to a radical approach rather than an incremental approach in the development of this branch of the law.

Loss for Emotional Distress

27.  The defendant submitted that losses for emotional distress, anguish and inconvenience and the 2nd plaintiff’s loss of reputation in the business world are irrecoverable as a matter of law.  I am referred to a line of cases starting from Addis v Gramaphone Co. Ltd [1909] AC 488, Watts v Morrow [1991] 1 WLR 1421, Ruxley Electronics v Forsyth [1996] AC 344 and Johnson v Gore Wood & Co.  The exceptions are cases of contract to provide leisure and relaxation.  They do not apply to this case.  I do not think the 3rd plaintiff has any answer to this argument.

The Proposed Re-amendments

28.  Regarding the proposed re-amendments, the defendant submitted that they also disclose no reasonable cause of action.  The 3rd plaintiff’s intended claim for loss of financial support from the 2nd plaintiff, who was a shareholder and director of the 1st plaintiff, is a claim for pure economic loss.  It has no basis as the defendant owed no duty to the 3rd plaintiff in relation to such financial support.  There is also no claim of any special relationship.  The same applies to her intended claim for loss in her family and personal assets due to premature disposal to meet her liabilities which included liabilities under guarantees given by her for the 1st plaintiff and other companies in the 1st plaintiff’s group.

29.  Finally, her intended claim based on the development of a uterine tumour and mental sufferingare not physical injuries inflicted by the defendant.  These, if proved, are only illness and suffering brought about by emotional distress and anguish.

30.  All these proposed amendments disclose no reasonable cause of action.  I will not give leave for them to be included in the Amended Statement of Claim.

Decision

31.  In the light of my discussions above, I strike out the Amended Statement of Claim and the Particulars of Damage and dismiss the 3rd plaintiff’s action against the defendant.  I also dismiss the 3rd plaintiff’s summons to re-amend the Amended Statement of Claim. 

32.  I make an order nisi that the 3rd plaintiff do pay the defendant the costs of the defendant’s summons to strike out and the 3rd plaintiff’s own summons to re-amend.