TES ASIA PACIFIC LTD v. NGAI, SAU MING AND OTHERS

HCA 50/2016

[2019] HKCFI 2502

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 50 OF 2016

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DECISION

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1.  This is the appeal of Tes Asia Pacific Limited (“the plaintiff”) from the order dated 28 November 2018 of Master Lui granting leave to Ngai Sau Ming (“the 1^st defendant”), Tang Leanne Lai Anh (“the 2^nd defendant”) and Fin Leaf Wines Limited (“the 3^rd defendant”) (collectively “the defendants”) to amend their defence originally filed on 13 April 2016 (“the defence”). At the conclusion of the hearing, the decision was reserved which I now give.

BACKGROUND

2.  The plaintiff was incorporated on 14 June 2012.  Its issued capital was beneficially owned by four parties: each of David Evans (“Evans”), Roy Frederick Stevens (“Roy”) and the 2^nd defendant beneficially owned 3000 shares (or 30% each) with the remaining 1000 shares (10%) beneficially owned by the 1^st defendant who is the husband of the 2^nd defendant, the shares being registered in the names of their respective nominees.

3.  The 1^st defendant became a director of the plaintiff on the plaintiff’s incorporation and Evans became a director on 30 April 2015.

4.  Prior to the incorporation of the plaintiff, Evans and Assemakis Scott Andrew Wilson (“Scott”) were the only shareholders of European Fine Wines (HK) Ltd (“EFW HK”), a company incorporated in Hong Kong engaged in the wine trading business.  The 2^nd defendant was hired as a consultant for management of EFW HK.

5.  According to the defendants, the 1^st and 2^nd defendants have been in the wine trading and distribution business in Asia Pacific since the early 2000’s.  Evans and Scott carried on a similar business in the United Kingdom under the name of European Fine Wines Ltd (“EFW UK”).

6.  The 2^nd defendant assisted Evans in setting up EFW HK in August 2010 and was engaged as its consultant.  EFW HK would source its wines from EFW UK.  However, EFW HK’s business ran into difficulties since about 2011 as, allegedly, EFW UK was unable to supply designated wines to EFW HK.

7.  In 2012, Evans found an investor, namely, Roy, willing to invest in a business venture trading in whiskey, spirits, and milk powder in addition to wines through a new company in which Roy would be issued shares to reflect his investment.  It is the defendants’ defence that Evans reassured the 2^nd defendant that Roy would provide sufficient investment not only to get the new business up and running but also to cover the debts of EFW HK.

8.  On the basis of such understanding, Roy transferred £225,000 to the defendant on various dates under Evans’ instructions for the purpose of setting up the plaintiff.

THE PLAINTIFF’S STATEMENT OF CLAIM

9.  The nub of the plaintiff’s complaint is to be found in §6 of the statement of claim.  The allegation is that the defendants operated a fraudulent scheme by causing the plaintiff to purchase stock from the 3^rd defendant (which is owned by the 1^st and 2^nd defendants) and, in the meantime, causing the 3^rd defendant’s running expenses to be paid by the plaintiff.

10.  §7 provided particulars of fraud/knowledge of fraud.  It alleged that:

(i)  the 1^st and/or 2^nd defendants used the plaintiff’s monies to purchase stock in the plaintiff’s name from the 3^rd defendant which was then on-sold to EFW HK at cost (ie without the plaintiff making any profit);

(ii)  the 1^st and/or 2^nd defendants caused the plaintiff to pay for various running expenses of the 3^rd defendant from June 2013 to December 2014 without disclosing such arrangement or obtaining prior consent;

(iii)  the 1^st and/or 2^nd defendants disposed of the plaintiff’s stock without any or adequate consideration. 

11.  §9 contained an allegation that the 1^st and 2^nd defendants breached their fiduciary duties.

12.  §§12 – 13 alleged that the defendants dishonestly received assets/money of the plaintiff in breach of their fiduciary duty, relying on the matters particularised in §7 of the statement of claim.

13.  In summary, the principal allegations are that the defendants have as a result made secret profits at the plaintiff’s expense,misappropriated the plaintiff’s assets and falsified accounts.

14.  The defence of the defendants, in outline, was that the 2^nd defendant was told by Evans that the money from Roy (allegedly with Roy’s knowledge and consent) would be used to revive EFW HK and to get the new business up and running.

15.  At §7(f) – (h) of the defence, the defendants stated that upon receipt of the funds from Roy, the 2^nd defendant repeatedly enquired with Evans about the setting up of a company’s bank account for the plaintiff but Evans insisted that the funds should be used to revive the business of EFW HK first and to hold off the setting up of such an account; that as a result, the 2^nd defendant was unable to commence business and trading for the plaintiff which has “remained dormant since its incorporation”;and that most of Roy’s investment was used to cover the running costs of EFW HK under the instructions of Evans.

16.  The defendants’ proposed amendments set up a different defence that entail the deletion of parts of the earlier defence.

THE PLAINTIFF’S OBJECTIONS TO THE PROPOSED AMENDMENTS

17.  Mr Lam, counsel for the plaintiff, submitted that the plaintiff objects to the amendments to §§7(f) – (h), 9, 10(a) – (d), 13 and 14 of the defence because:

(a)  they amount to withdrawal of admissions;

(b)  they are bound to fail; and

(c)  the plaintiff would suffer substantial prejudice.

(a)  Withdrawal of admissions

18.  The plaintiff contends that those paragraphs contain the following admissions: (i) misapplication of funds admission; (ii) dormant admission; (iii) breach of duty of care admission; (iv) competition admission; and (v) debit note unrelated to the plaintiff admission.  To allow those proposed amendments was said to have the effect of permitting the defendants to withdraw those admissions.

19.  It should be noted that the plaintiff’s objections are limited to the proposed amendments enumerated in §17 above.  No objection was raised concerning the other proposed amendments.

20.  In the defendants’ proposed new defence (the “ADCC”), the defendants admit (at §7A) that at all material times the plaintiff was trading. In other words, the plaintiff had commenced business which is an admission of the plaintiff’s allegation at §12(6) of the statement of claim.

21.  Given that plaintiff has no objection to the proposed §7A of the ADCC, it is nothing short of illogical for the plaintiff to now object to the amendments (deletions) proposed to be made to §§7(g), 9, 10(a) and (d) of the defence to the effect that the plaintiff remained dormant. While the plaintiff sought to contend that they amount to a withdrawal of “the dormant admission” and “the breach of duty of care admission” (see §18(ii) and (iii) above), in substance they amount to an admission of the plaintiff’s allegation in §12(6) of the statement of claim and so cannot be objectionable.

22.  The same may be said of the proposed amendment to §10(d) of the ADCC which admits that the 3^rd defendant did issue the debit notes as alleged in §7(4) of the statement of claim.  The proposed amendment is thus an admission rather that a withdrawal of the “debit note unrelated to the plaintiff” admission (see §18(v) above).

23.  I turn to consider the remaining two admissions mentioned in §18 above, namely, the “misapplication of funds admission” and the “competition admission”.

24.  The “misapplication of funds admission” relates, inter alia, to the proposed deletion of the defence relating to the usage of the funds to revive the business of EFW HK in §7(f), and to cover the costs of EFW HK in §§10(b) – (d) and 14.

25.  An allegation of fact made by a party is deemed admitted by the opposite party unless it is traversed by that party: see Order 18, rule 13 of the Rules of the High Court.  However, it is to be noted that nowhere in the statement of claim is there an allegation of fact in relation to the revival of the business of EFW HK or in relation to the investor’s funds being used for EFW HK.

26.  I agree with Ms Tang, counsel for the defendants, that in the absence of such allegations of fact in the statement claim, the deletion of the averments by the defendants could not have amounted to any withdrawal of admission.  What the defendants have done is to change their case.

27.  I am not aware of any rule that prohibits it and none has been cited.  While a change of case may affect a witness’s credibility and would provide fertile ground for cross-examination, in my view, it is neither here nor there in the context of whether the amendments should be allowed.

28.  While the plaintiff relied on §§7(f) and (h), 10(d), 13 and 14 for what is termed “the misapplication of funds admission”, it is no more than a legal submission based on the version of the facts advanced in the defence.  But it is only at trial that the true facts can be established.

29.  The “competition admission” is said to arise from §10(b) of the defence which denied the plaintiff’s case that the 1^st and 2^nd defendants caused the plaintiff to purchase stocks from the 3^rd defendant and then on-selling the stock at the same price to EFW HK.  In §40 of the plaintiff’s submissions it was said that by that denial, “[the defendants’] case effectively means that EFW HK purchased wines from [the 3^rd defendant].  [The 1^st] and/or [2^nd defendant] have interests in both EFW HK and/or [the 3^rd defendant].  [The 1^st defendant] and/or [the 2^nd defendant], by operating such a scheme, was in direct competition with [the plaintiff]”.

30.  But as the plaintiff has not made any allegation of fact that EFW HK purchased from the 3^rd defendant instead of the plaintiff, it is unclear and not at all apparent why the deletion of §10(b) of the original defence would lead to the conclusion asserted. 

31.  For those reasons, I do not accept that the proposed amendments to which the plaintiff objects constitute withdrawals of admissions as alleged.

(b)  Bound to fail

32.  The plaintiff submitted that the newly pleaded case has no prospect of succeeding trial given the stark inconsistencies between the defendants’ previous evidence in support of the defence and the draft of the 2^nd supplemental witness statement of the 2^nd defendant (“the 2^nd supplemental witness statement”) in support of the ADCC.

33.  Essentially, the plaintiff’s criticism is nothing more than that the defendants have put forward two versions of fact which are at odds with one another and therefore simply have no prospects succeeding at trial “in terms of credibility”: see §§26 – 27 of the affirmation of Ho Veng Ian, the plaintiff’s solicitor in support of the plaintiff’s opposition to the amendment summons.  The crucial inconsistencies the plaintiff identified are listed in §29 of the affirmation of Ms Ho.

34.  The defendants submitted that “bound to fail” in terms of credibility have no role to play in the court’s consideration since what the court has to consider is whether the averments in the ADCC taken to their highest are bound to fail: the evaluation of the defendants’ credibility is a matter for trial.  

35.  The defendants submitted that the so-called crucial inconsistencies in the 2^nd supplemental witness statement are in fact the 2^nd defendant’s clarification of the matters alleged to be “inconsistencies”.  Whether the 2^nd defendant would be believed is a matter for trial and not a matter for determination on the pleadings.

36.  At §§68 – 69 of the plaintiff’s skeleton submissions, the plaintiff addressed §7A(a) of the ADCC, suggesting that as therein pleaded, the 1^st and 2^nd defendants “would have” put themselves in conflict with the interest of the plaintiff in three respects.  Then it was said that the 3^rd defendant would be a resulting trustee for the plaintiff with regards to the profits generated by the resale.

37.  The first matter to note is that the plaintiff’s present appeal does not concern §7A(a): see §19 above.  Further, it is unclear how a conflict of interest would arise if an arrangement which would benefit all parties had been agreed by them in the first place.  Finally, if the court were to accept that the arrangement was a commercial arrangement agreed to by all parties concerned, it is again unclear how or why a resulting trust would arise.

(c)  Substantial prejudice

38.  §50 of the plaintiff’s skeleton itemised the following as causing substantial prejudice to the plaintiff: (a) the plaintiff’s stocks were being sold by the 3^rd defendant at the Food Expo 2018 at a reduced price; (b) poor storage provided by the 3^rd defendant and the lapse of time would cause the plaintiff’s stocks of wine to turn bad and become undrinkable; and (c) given Roy’s deteriorating health, any delay would be detrimental to him.

39.  It was said that but for the various applications made by the defendants for security for costs, applications to adduce supplemental witness statements and third-party notices as well as the application to amend the defence, the case could have been set down for trial at the 1^st Case Management Conference in July 2017. 

40.  At the last Case Management Conference held on 26 July 2018, in considering the defendants’ application to amend the defence,the master was fully aware of the procedural history as well as the matters raised above.  The master nevertheless considered it appropriate to grant the defendants time to apply to amend the defence.  It is not suggested that the ADCC was not filed in time.

41.  Mr Lam submitted that the plaintiff’s major concern is the delay that would be caused if the proposed amendments were allowed in terms of possibly having further discovery, new witness statements as well as amendments to the statement of claim.  It was also submitted that the absence of any affidavit/affirmation to explain the need to make the amendments suggests that it was not made in good faith.

42.  On the question of delay, it is relevant to note that this appeal by the plaintiff has taken in excess of 10 months and to that extent has contributed in no small measure to such delay as has occurred.  In the present case, I do not consider that delay alone is sufficient reason to refuse the proposed amendments.

43.  As for the prejudice that would be caused to the plaintiff (see §38 above), it is to be noted that while there are allegations of the plaintiff’s goods turning bad,the relief that is sought is an account of the sum due rather than the return of the goods.

44.  At the hearing, Mr Lam referred to item (9) of the relief sought in the statement of claim which is for an injunction to restrain the defendants from disposing stock.  It was submitted that the injunction was necessary because of the potential damage to the plaintiff’s reputation through selling undrinkable wines/spirits.  However, the injunction is hardly the focus of this litigation.  I am not persuaded that any reputational damage cannot be compensated in monetary terms.

45.  Having considered the various submissions advanced, I am of the view that the proposed amendments should be allowed so that the real issues could be resolved and determined at trial.

ORDER

46.  Accordingly, this appeal is dismissed.  There is to be an order nisi that the costs occasioned by this appeal be to the defendants in any event, with certificate for counsel.