CCMD OVERSEAS LTD v. SINOM INVESTMENTS LTD AND ANOTHER

HCA 903/2021

[2023] HKCFI 2912

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 903 OF 2021

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BETWEEN

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DECISION

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1.  On 7 August 2023, Master Alan Kwong ordered, inter alia, that summary judgment be entered against the defendants. By their notice of appeal dated 14 August 2023, the defendants sought to, inter alia, set aside the Master’s order granting summary judgment. The hearing on 6 November 2023 was intended to be the substantive hearing for the determination of the defendants’ appeal.

2.  The defendants now seek to put forward a new (and the only) defence to oppose the plaintiff’s summary judgment application, which was not raised before the Master. They acknowledge that the new defence has not been pleaded by them. Further, they consider that their Amended Defence and Counterclaim would need to be amended to plead the new defence before they can rely on it to resist the summary judgment application (see further paragraph 39 below).

3.  On 31 October 2023, the defendants took out a summons to ask for leave to (1) re-amend their Amended Defence and Counterclaim dated 27 October 2022 (“the Amendment Application”) and (2) adduce further evidence in support of their appeal against the Master’s order for summary judgment (“the New Evidence Application”).

4.  The defendants are no longer pursuing any of the defences that were previously advanced before the Master. Mr Anson Wong SC (leading Mr Lai Chun Ho), counsel for the defendants, accepted that the defendants’ appeal would fall to be dismissed if the defendants are unsuccessful in the Amendment Application and are barred from pursuing the new defence.

5.  It was common ground that the outcome of the Amendment Application and the New Evidence Application would have a direct impact on the defendants’ appeal and that this Court should therefore first hear submissions on the two applications at the hearing on 6 November 2023 with a view to determining their outcome.

A. THE RELEVANT BACKGROUND

6.  The plaintiff is wholly owned by Chongqing Chonggang Minerals Development Investment Limited (“CCMD Investment”), a state-owned enterprise incorporated in Mainland China.

7.  The first defendant was the sole owner of a company called Asia Iron Holdings Limited (“AIHL”) until September 2010.

8.  In September 2010, (1) the plaintiff lent a substantial sum of money to the first defendant under a written loan agreement; (2) the second defendant became a guarantor of the first defendant’s indebtedness under the loan agreement; and (3) the first defendant charged its 40% shareholding in AIHL (“the Charged Shares”) in favour of the plaintiff to secure the first defendant’s payment obligations under the loan agreement.

9.  In June 2011, the plaintiff acquired 60% of the shareholding in AIHL from CCMD Investment.

10.  In June 2015, the first defendant defaulted on the loan agreement. In July 2015, the plaintiff issued demand letters to the defendants to demand repayment under the loan agreement and the personal guarantee.

11.  In November 2016, the plaintiff exercised its rights under the share charge and registered itself as the registered shareholder of the Charged Shares.

12.  In June 2017, the plaintiff appointed receivers (“Receivers”) under the share charge, who took possession of the Charged Shares.

13.  In June 2021, the plaintiff commenced the action herein against the defendants. Between September 2021 and March 2022, pleadings were filed by the parties. The defendants filed their Amended Defence and Counterclaim in October 2022 and the plaintiff filed its Amended Reply in November 2022.

14.  On 6 April 2023, the plaintiff issued its application for summary judgment against the defendants. The substantive hearing of the summary judgment application took place on 7 August 2023 and the defendants were represented by their former solicitors. At the conclusion of the hearing, Master Alan Kwong, inter alia, gave summary judgment in favour of the plaintiff.

15.  Following the hearing on 7 August 2023, the defendants changed their solicitors.

B. THE AMENDMENT APPLICATION

16.  The new defence that the defendants now wish to advance to oppose the summary judgment application is founded upon the allegations that (1) the plaintiff had exercised its powers under the share charge for improper purpose of assuming full ownership of the Charged Shares and/or the sole, unchallenged and unsupervised control over AIHL (“the Improper Purpose”) and (2) the plaintiff had acted in concert with the Receivers to further the Improper Purpose, or had stood by while knowing that the Receivers were acting to further such Improper Purpose.

17.  The defendants’ new allegations are set out in the draft Re-Amended Defence and Counterclaim which is exhibited to their summons for the Amendment Application. The material pleas are at paragraphs 16A, 16B, 16C, 16D and 16E of the draft pleading.

18.  The plaintiff submitted that the Amendment Application should be dismissed on the grounds of lateness and lack of merits. However, in the event that the Amendment Application is allowed, the plaintiff submitted that directions ought to be given for it to file evidence in reply to the defendant’s newly pleaded case and that the hearing of the appeal should be adjourned to a date to be fixed. The plaintiff’s fallback position was not opposed by the defendants.

19.  In considering the Amendment Application, I have borne in mind RHC O.20 rr.8(1) and 8(1A) and the following guiding principles on the exercise of discretion to allow or refuse an amendment of pleadings laid down in Ketteman v Hansel Properties Ltd [1987] AC 189 at 212F-H (which remain good law after the Civil Justice Reform).

(1) All such amendments should be made as are necessary to enable the real questions in controversy between the parties to be decided.

(2) Amendments should not be refused solely because they have been made necessary by the honest fault or mistake of the party applying for leave to make them: it is not the function of the court to punish parties for mistakes which they have made in the conduct of their cases by deciding otherwise than in accordance with their rights.

(3) However blameworthy (short of bad faith) may have been a party’s failure to plead the subject matter of a proposed amendment earlier, and however late the application for leave to make such amendment may have been, the application should, in general, be allowed, providing that allowing it will not prejudice the other party.

(4) There is no injustice to the other party if he can be compensated by appropriate orders as to costs.

20.  Nonetheless, the court must now also take into account the underlying objectives in RHC O.1A to decide how its discretion should be exercised: Topwell Corp Ltd v Kwan Kam Kee [2014] 5 HKLRD 1 at §39 (Kwan JA).

21.  However, leave to amend is refused where “it can be demonstrated that the new claim based on the proposed amendment is bound to fail”: Natamon Protpakorn v Citibank NA [2009] 1 HKLRD 455 at §25 (Cheung JA).

22.  Both parties accept, and I agree, that for the purpose of determining whether leave should be granted to amend a pleading, the proposed pleas should be taken as proven.

23.  The plaintiff submitted that (1) it was expressly entitled to take possession of the Charged Shares, to exercise certain rights as chargee and to appoint receivers over the Charged Shares, (2) there is no proper basis for the defendants to contend that the plaintiff’s exercise of power was improper or in bad faith, and (3) the defendants’ proposed pleas are consistent with the plaintiff’s purpose to recover the debt under the loan agreement as secured by the share charge.

24.  Having considered the written and oral submissions of the plaintiff, and having made the assumption that the proposed pleas are taken as proven, I am not satisfied that the proposed amendments are bound to fail. Given that the parties will have to proceed to the substantive hearing for the summary judgment appeal, it would not be appropriate for me to say anything further on the merits of the various issues canvassed in the parties’ submissions.

25.  As far as lateness is concerned, it is common ground that the Amendment Application was made late. Further, I accept the plaintiff’s submission that the only explanation for the lateness given by the defendants was the lack of advice by their former legal representatives, which is not a satisfactory explanation.

26.  Nonetheless, one of the underlying objectives of the RHC is to “promote a sense of reasonable proportion … in the conduct of proceedings” (O.1A r.1(c)). I do not believe it is proportional to shut out the defendants from running their only defence on the ground of lateness in circumstances where the defence is not bound to fail and where they have no further opportunity to contest the summary judgment which has been obtained against them. I also bear in mind that in giving effect to the underlying objectives of the RHC, “the Court shall always recognise that the primary aim in exercising the powers of the Court is to secure the just resolution of disputes in accordance with the substantive rights of the parties” (O.1A r.2(2)). These points are also consistent with the principles summarised in paragraphs 19(1) to 19(3) above.

27.  For the above reasons, I exercise my discretion to allow the Amendment Application.

C. THE NEW EVIDENCE APPLICATION

28.  By the New Evidence Application, the defendants seek leave to file the 2^nd Affirmation of Ng Yau Tong and the Affirmation of Ching Yue Cin Stephanie both dated 31 October 2023, the latter of which exhibits two affirmations from expert witnesses. According to the defendants, the new evidence relates to the loss of the value of the Charged Shares as a result of the plaintiff’s alleged wrongful acts.

29.  The defendants accepted that a party seeking to admit new evidence in support of an appeal from a Master’s decision needs to satisfy the conditions laid down in Ladd v Marshall. They submitted that all three conditions in Ladd v Marshall are satisfied.

30.  The plaintiff submitted that the defendants cannot satisfy the first condition of Ladd v Marshall and that the New Evidence Application should be dismissed.

31.  As to the first condition of Ladd v Marshall, the defendants submitted that the new evidence could not have been obtained with reasonable diligence for use at the hearing before the Master. They submitted that until the plaintiff filed its affirmation in reply dated 20 July 2023, (1) there was no sufficient basis for the defendants to allege that the plaintiff and the Receivers had acted in concert in furtherance of the Improper Purpose, and (2) this was particularly so when it was the plaintiff’s pleaded position in §9(6)(b) of the Amended Reply and Defence and Counterclaim that the Receivers had made proper attempts to sell the Charged Shares in 2017 and 2020. The defendants further submitted that it was only upon receiving the plaintiff’s reply affirmation on 20 July 2023 that the Receivers’ perfunctory attempts to sell the Charged Shares came to light, which provided the defendants with the evidential basis to mount a case that the plaintiff and the Receivers were acting in concert in furtherance of the Improper Purpose, and to hold the plaintiff for losses arising therefrom.

32.  At the hearing, it was further submitted on behalf of the defendants that the materiality of the new evidence was not appreciated before the Master’s hearing and that the defendants could not be criticised for failing to present the new evidence with reasonable diligence if they did not appreciate its materiality earlier.

33.  I am unable to accept these submissions.

(1) As the defendants acknowledged, the new evidence relates to the loss of the value of the Charged Shares as a result of the plaintiff’s alleged wrongful acts.

(2) As pointed out by Mr Johnny Ma SC (leading Ms Rosa Lee) for the plaintiff, the allegation that the plaintiff and the Receivers were acting in concert in furtherance of the Improper Purpose is only one of the two alleged wrongful acts. The other alleged wrongful act is that the plaintiff had exercised its powers under the share charge for Improper Purpose. The latter alleged wrongful act does not depend on the Receivers’ attempts to sell the Charged Shares. In paragraph 8 of the 2^nd Affirmation of Ng Yau Tung, it was said on behalf of the defendants that “it has always been the Defendants’ contention that the Plaintiff has treated itself as the owner of the [Charged Shares]. In my 1^st Affirmation, I have specifically questioned whether the Plaintiff had ever carried out any step to sell the [Charged Shares]”. The defendants cannot therefore seek to rely on the date when the plaintiff’s reply affirmation was filed (on 20 July 2023) as the earliest time when they realised the significance of the new evidence. If the defendants had wished to adduce any evidence relating to the loss of value of the Charged Shares, such evidence could have been obtained by reasonable diligence earlier.

(3) It seems to me that the only plausible reason why such evidence was not obtained earlier by the defendants was that its materiality was not appreciated until the defendants had changed its legal team after the Master’s hearing. This is consistent with the oral submissions advanced on behalf of the defendants at the hearing (see paragraph 32 above) and what was said in paragraph 23 of the 2^nd Affirmation of Ng Yau Tung that the defendants did not “appreciate the relevance” of some of the new evidence due to apparently deficient legal advice from their former legal representatives.

(4) However, the failure of a party to adduce evidence on the basis of advice of the party’s former legal advisers cannot constitute a special ground for such evidence to be adduced under RHC O.58 r.1(5). As Kwan JA said in Chan Koon Nam v Ng Man Sum (unreported, CACV 281/2011, 5 March 2013) at §48 in the context of holding that the first condition of Ladd v Marshall was not met, “[there] would be no end to litigation if litigants who had not adduced evidence at trial were allowed to do so on appeal on the ground that their legal advisors had not given them correct legal advice at the time”. Similarly, her Ladyship in Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd et al (unreported, CACV 90-91, 93-96/2012, 17 September 2013) at §22 said “[where] further evidence sought to be adduced on appeal could have been adduced at trial with reasonable diligence, the failure to do so owing to any act or omission of the lawyer could not constitute a special ground for such evidence to be admitted on appeal, in the absence of wholly exceptional circumstances”.

34.  For these reasons, I dismiss the New Evidence Application.

D. DISPOSITION

35.  I adjourn the hearing for the defendants’ appeal to a date to be fixed. The parties should agree any directions relating to the adjournment, failing which I give the parties liberty to apply for further directions.

36.  On the defendants’ summons dated 31 October 2023, I dismiss the application in paragraph 1 of the summons and make an order in terms of paragraphs 2, 3, 4 and 5 of the summons.

37.  As far as the costs of the summons dated 31 October 2023 are concerned, the defendants acknowledged in paragraph 6 thereof that the plaintiff would be entitled to the costs of and occasioned by the summons. I therefore make an order nisi that (1) the costs of and occasioned by the summons and (2) the costs occasioned by the adjournment, be to the plaintiff, with a certificate for two counsel, to be summarily assessed on paper.

38.  I further direct (1) the plaintiff should lodge and serve a statement of costs within 7 days from the date of this decision, (2) the defendants should lodge and serve written submissions of not more than 3 pages to set out any disagreement on the plaintiff’s costs within 7 days thereafter, and (3) the plaintiff should lodge and serve written submissions in reply of not more than 3 pages within 7 days thereafter. The time referred to in the above directions should include Saturday and Sunday.

39.  This case has highlighted a practical issue relating to how a defendant may show cause to oppose a summary judgment application.

(1) There are recent decisions[1] to interpret the Court of Appeal’s decision in Kaefer AG v Winfield Marine Services Co Ltd [2022] HKCA 807 as laying down a rule that a defendant cannot rely upon an unpleaded defence to resist an application for summary judgment when he has already filed a defence. Indeed, the defendants’ legal team in the present case considered it prudent and necessary to take out the Amendment Application to plead the new defence so that it can be relied upon to resist the summary judgment application. This was an understandable approach to take in view of the recent authorities.

(2) However, it appears that all that the Court of Appeal held in §§30-32 of Kaefer was to agree with the judge below that (a) bona fide purchase for value without notice was a different defence to change of position, (b) the defendant could not rely on the facts pleaded for change of position to support a different defence and (c) the defendant could not rely on the defence of bona fide purchase when it was only raised shortly before the start of the hearing and without satisfactory explanation for the lateness. What was decided in Kaefer was specific to what happened in that case. It is not apparent that the Court of Appeal in Kaefer laid down any general rule. Furthermore, I note that RHC O.14 r.4(1) provides that a defendant may show cause against a summary judgment application by affidavit or otherwise to the satisfaction of the court.

(3) In this case, both parties agreed that I should determine the Amendment Application. My determination was not made on the basis of any rule that a defendant cannot rely on a defence to resist a summary judgment application unless that defence is pleaded.

(4) The present case highlights the fact that it is not necessarily cost effective, expeditious or procedurally economical to invariably require a defendant to amend his pleading before he can be allowed to rely on a defence to resist a summary judgment application.