HCA 2693/2006
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 2693 OF 2006
______________________
BETWEEN
PAI CHIN MING (白金明) SUING ON
BEHALF OF HIMSELF AS SHAREHOLDER
AND ALL OTHER SHAREHOLDERS IN
THE DEFENDANT COMPANY, HONG KONG
(999) TRANSPORT COMPANY LIMITED
Plaintiff
(三九 (999) 香港汽車有限公司)
and
LUO XIAO (駱霄)
1st Defendant
GREATCOMELIMITED
2nd Defendant
(浩臨有限公司)
HONG KONG (999) TRANSPORT COMPANY LIMITED
3rd Defendant
(三九(999)香港汽車有限公司)
______________________
Before : Mr Recorder P Fung SC in Chambers
Dates of Hearing : 13-14 June and 30-31 August 2007
Date of Handing Down Judgment : 25 September 2007
______________________
J U D G M E N T
______________________
1. This is an appeal by the Plaintiff against two Orders by Master S. Kwang both dated 17th May 2007 whereby the learned Master : -
(i)
dismissed the Plaintiff’s Summons filed on 15th May 2007 for amendment of the Statement of Claim with costs to the 1st and 2nd Defendants;
(ii)
ordered that the Amended Writ and the Statement of Claim be struck out on the ground that they were frivolous or vexatious or an abuse of the process of the Court or that they disclosed no reasonable cause of action and further ordered that the Plaintiff’s action against the 1st and 2nd Defendants be dismissed with costs.
History of the Proceedings
2. The Writ of Summons with a general Indorsement of Claim was first issued on 4th December 2006 by the Plaintiff against only two defendants, namely, the present 1st Defendant and 3rd Defendant.
3. Pursuant to an Order of Registrar C. Chan dated 5th January 2007, the Writ of Summons was amended so as to join another defendant, namely, the present 2nd Defendant. The original 2nd Defendant then became the present 3rd Defendant. The original general Indorsement of Claim was also amended to become the Amended Indorsement of Claim with claims by the Plaintiff against the 1st Defendant and the new 2nd Defendant.
4. The Statement of Claim was filed on 10th January 2007.
5. On 12th February 2007, the 1st and 2nd Defendants issued a Summons to apply for the striking out of the Amended Writ of Summons and the Statement of Claim and for “all further proceedings with regard to the claim against the 1st Defendant herein be dismissed or struck out”. Somewhat strangely, there was no similar application regarding the 2nd Defendant. I take it that that was a slip on the part of the 1st and 2nd Defendants as a result of the addition of the new 2nd Defendant not long before the issue of the Summons.
6. The application referred to in paragraph 5 above was supported by the affirmation of the 1st Defendant filed on 13th February 2007 (“D1 ’s 1st Affirmation”).
7. In response to D1 ’s 1st Affirmation, the Plaintiff filed his affirmation on 8th March 2007 (“P’s 1st Affirmation”).
8. The 1st Defendant then filed his affirmation on 4th April 2007 (“D1 ’s 2nd Affirmation”).
9. On 15th May 2007, just two days before the hearing scheduled to take place before the Master, the Plaintiff issued a Summons to apply for leave to amend the Statement of Claim as per the draft annexed thereto (“the 1st Draft S/C”).
10. On 17th May 2007, after hearing arguments by Counsel, the learned Master made the Orders referred to in paragraph 1 above.
11. On 30th May 2007, the Plaintiff filed the Notice of Appeal against the said two Orders of the Master.
12. On 12th June 2007, the Plaintiff filed his 2nd affirmation (“P’s 2nd Affirmation”).
13. On the following day, 13th June 2007, the Plaintiff’s appeal came before me. I dealt first with the application by Counsel on behalf of the Plaintiff, Mr. Alfred Liang together with Mr. Harry Liu, for leave to admit P’s 2nd Affirmation. The application was opposed by Ms. Eva Sit, Counsel acting for the 1st and 2nd Defendants. I ruled that P’s 2nd Affirmation should be admitted in evidence. Ms. Sit was content at that stage that the appeal should still proceed.
14. In the course of argument on the same day, as a result of the fact that the case of the Plaintiff seemed to be shifting at times, I directed that Mr. Liang should produce a finalised draft of the proposed Amended Statement of Claim the following morning.
15. On the morning of 14th June 2007, Mr. Liang did produce a finalised draft of the proposed Amended Statement of Claim (“the Final Draft S/C”). Ms. Sit then applied for an adjournment of the appeal and for leave to file further evidence.
16. I made a ruling to the effect that the appeal should be adjourned and that the 1st and 2nd Defendants be given leave to file further evidence. (See my Judgment dated 14th June 2007.)
17. On 24th July 2007, the 3rd Affirmation of the 1st Defendant (“D1 ’s 3rd Affirmation”) was filed. This was after the expiry of the period within which the 1st and 2nd Defendants were allowed to file evidence under my Order dated 14th June 2007. Nevertheless, I admitted it at the adjourned hearing of the appeal which began on 30th August 2007.
18. On 28th August 2007, just two days before the adjourned hearing of the appeal was to take place, the Plaintiff filed his 3rd affirmation (“P’s 3rd Affirmation”).
19. At the hearing on 30th August 2007, Ms. Sit objected to the application by Mr. Liang for P’s 3rd Affirmation to be admitted on the basis that it was filed too late and without leave of the Court. I said that I had read it on a de bene esse basis and that I would rule on the matter when I came to give my decision on the appeal.
My Ruling
20. I take the view that P’s 3rd Affirmation was really filed for the purpose of clarifying certain matters arising out of D1 ’s 3rd Affirmation (which was filed late) and for the purpose of supplementing P’s 1st Affirmation and P’s 2nd Affirmation. I do not think that there was anything in P’s 3rd Affirmation which the 1st and 2nd Defendants could have answered to further by adducing further evidence, nor did Ms. Sit make any such suggestion. In the circumstances, I have come to the conclusion that the Court should look at and consider all the available evidence at one go. I therefore rule that P’s 3rd Affirmation should be admitted in evidence.
The Applicable Principles
21. There is no dispute between Counsel on both sides as to the applicable principles in a case such as the present. They are conveniently set out in the Notes in the 2007 Hong Kong White Book Vol. 1 as follows :-
(i)
On page 333, at Note 18/19/4 :
“
Exercise of powers under this rule
(1)
Striking out only in plain and obvious cases – it is only in plain and obvious cases that the court should exercise its summary powers to strike out the indorsement on any writ or any pleading under this rule. There should be no trial upon affidavit. Disputed facts were to be taken in favour of the party sought to be struck out. Nor should the court decide difficult points of law in striking out proceedings. The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out…
Where the legal viability of a cause of action is sensitive to the facts, an order to strike out should not be made…
The jurisdiction should not be exercised if it requires a minute and protracted examination of the documents and facts of the case in order to see whether the plaintiff really has a cause of action…
Questions of law can be determined in strike out applications provided that they are crucial and the Court has all the relevant facts before it and these facts are certain…
It is for the party seeking to strike out an indorsement on a writ or pleading to demonstrate that the case is a plain and obvious one in which the other party’s claim is bound to fail.”
(ii)
On page 852, at Notes 58/1/2 and 58//1/3 :
“
An appeal from the master to the judge in chambers is dealt with by way of an actual rehearing of the application which led to the order under appeal…
It is common practice for the judge in chambers, subject of course to the question of costs, to admit further or additional evidence by affidavit to that which was before the master…
Because the judge treats the matter as though it came before him for the first time, the court more readily allows fresh evidence to be adduced.”
22. The parties are agreed that I should look at the Final Draft S/C and regard that as the definitive statement of the Plaintiff’s case and should consider all the evidence filed (subject to the question of admissibility of P’s 3rd Affirmation which I have just now resolved in paragraph 20 above) in the context of the strike-out application. I shall do so below.
The Plaintiff’s Case
23. The Plaintiff’s claim is formulated as a derivative action wherein the Plaintiff as a shareholder of the 3rd Defendant is suing the 1st Defendant and the 2nd Defendant for the benefit of himself and the 3rd Defendant.
24. In the Final Draft S/C and P’s 1st Affirmation, P’s 2nd Affirmation and P’s 3rd Affirmation, the Plaintiff has cumulatively and in gist made the following factual allegations : -
(i)
The Plaintiff at all material times was and is the holder of 1 out of 1,000,000 issued shares of and in the 3rd Defendant.
(ii)
The only other shareholder of the 3rd Defendant was and is a person by the name of Chen Da Cheng (“Chen”), the registered holder of the remaining 999,999 shares of and in the 3rd Defendant.
(iii)
The 3rd Defendant is a wholly-owned subsidiary of a company incorporated in the Mainland by the name of “深圳市三九汽車發展有限公司” (“the PRC Parent”) which in turn is a subsidiary in a PRC conglomerate called “三九集團”.
(iv)
At all material times, the Plaintiff and Chen have held their respective shares of and in the 3rd Defendant in trust for the PRC Parent.
(v)
The 3rd Defendant is at all material times closely associated with a Hong Kong company by the name of China Main Investment (H.K.) Co. Ltd. (“China Main”) which was incorporated in about mid-2000 in that :
(a)
the investment funds of both the 3rd Defendant and China Main were provided and/or guaranteed directly or indirectly by the PRC Parent;
(b)
Chen owns the majority shares of China Main;
(c)
The daily operation of China Main was controlled by Chen through a Madam Ma Xiao Ling (“Ma”) and the 1st Defendant who is Chen’s personal assistant, both of whom “were” director’s of China Main. The 1st Defendant has remained a director of China Main.
(vi)
The operation of the 3rd Defendant was at all material times controlled by Chen and/or through Ma and the 1st Defendant of China Main.
(vii)
The Plaintiff became an employee of China Main and was directed and supervised by Ma and the 1st Defendant.
(viii)
The operation of the 3rd Defendant since early 2001 has mainly been the holding of an investment property known as Workshop No. 7 on 10th Floor, Block B, New Trade Plaza, No. 6, On Ping Street, Shatin, New Territories (“the On Ping Property”).
(ix)
The Plaintiff was until his resignation on 3rd February 2006 a director of the 3rd Defendant. The other director of the 3rd Defendant has been Chen.
(x)
As an employee of China Main and director of the 3rd Defendant, the Plaintiff was to follow instructions from Chen to sign Annual Returns and audited accounts of the 3rd Defendant and responsible for leasing of the On Ping Property. He was also responsible for business negotiations for China Main. Whenever Chen was not available, Ma and the 1st Defendant would give instructions to the Plaintiff on behalf of Chen in relation to the daily operation of the 3rd Defendant.
(xi)
In or about September 2005, Ma and the 1st Defendant informed the Plaintiff that Chen intended to cease the operation of the 3rd Defendant and instructed the Plaintiff to transfer the On Ping Property to the 2nd Defendant at a consideration of $1,980,000.00.
(xii)
It was also the representation of Ma and the 1st Defendant that the purchase price would be settled directly between Chen and the 2nd Defendant. Ma and the 1st Defendant also represented that they would procure Chen to sign and acknowledge receipt of the purchase price for the On Ping Property in order to induce the Plaintiff to sign the receipt for the purchase price.
(xiii)
The Plaintiff then tried to contact Chen for confirmation about the transaction but was unsuccessful. Since then, the Plaintiff has been unable to contact Chen any more.
(xiv)
At all material times, the 1st Defendant is the single shareholder and director of the 2nd Defendant, a shell company incorporated by the 1st Defendant for the acquisition of the On Ping Property.
(xv)
The registered office of the 2nd Defendant was also shared with China Main and the 3rd Defendant.
(xvi)
On 26th September 2005, the conveyancing transaction was completed at the office of Messrs. Michael Cheuk, Wong & Kee (“MCWK”), the solicitors instructed by the 1st Defendant to represent the 2nd Defendant.
(xvii)
Prior to signing the Memorandum for Sale and Purchase and the Assignment, both the 1st Defendant and MCWK represented to the Plaintiff that the deposit and the balance of the purchase price in the total sum of $1,980,000.00 would be settled by the 2nd Defendant to the 3rd Defendant directly.
(xviii)
Relying on the aforesaid representation by Ma and the 1st Defendant and representation by the 1st Defendant and MCWK at MCWK’s office, the Plaintiff signed the receipt for the purchase price for the On Ping Property although it was not actually paid.
(xix)
At or about the end of 2005, Ma and the 1st Defendant informed the Plaintiff that, as from November 2005 onwards, Chen had been detained in China and had been absent from Hong Kong.
(xx)
On 10 November 2005, Ma resigned as the managing director of China Main.
(xxi)
The Plaintiff also decided to resign as a director of the 3rd Defendant on 3rd February 2006 owing to the cessation of operation of the 3rd Defendant, outstanding salary payment, old age and deteriorating health condition.
(xxii)
In early February 2006 the Plaintiff informed the company’s auditor and company secretary, A-Pro Accounting & Secretarial Services Ltd. (“A-Pro”), regarding his resignation at the same time when he signed the Application for Deregistration of the 3rd Defendant prepared by A-Pro.
(xxiii)
The Plaintiff signed the Notification of Resignation of Director on 3rd February 2006 after the Form D4 was prepared by A-Pro.
(xxiv)
After the Plaintiff’s resignation on 3rd February 2006, the 1st Defendant effectively took over the control and management of all the affairs of the 3rd Defendant as a de facto director of the 3rd Defendant.
(xxv)
On 18 August 2006, the 1st Defendant filed a Form D2A and reported to the Company Registry as the appointed director of the 3rd Defendant as from 30 June 2006.
(xxvi)
In the course of applying for deregistration of the 3rd Defendant, in or about February 2006, after the Plaintiff was informed by the Company Registry that the deregistration of the 3rd Defendant was withheld, it was discovered that the 2nd Defendant had never made any payment of the said purchase price of $1,980,000.00 or any part thereof to the 3rd Defendant. Upon enquiry made by the Plaintiff, the 1st Defendant misrepresented that payment had in fact been made by the 2nd Defendant to the 3rd Defendant which was false.
(xxvii)
Despite the fact that the Plaintiff had urged the 1st Defendant to take action to procure the said outstanding purchase price from the 2nd Defendant, as a director of the 3rd Defendant, the 1st Defendant still failed to take any action against the 2nd Defendant for repayment of the outstanding purchase price and the said sum of $1,980,000.00 remains unpaid but ownership of the On Ping Property had been transferred to the 2nd Defendant.
(xxviii)
The 2nd Defendant had rented out the On Ping Property and derived rental income thereform.
(xxix)
In or about late November 2006, A-Pro had also informed the Plaintiffs that the 3rd Defendant had outstanding liabilities and that Messrs. Tony Kan & Co acting for Wealth Track Asia Limited and Chung Siu Wah, the plaintiffs in a High Court action, HCA 654 of 2006 (“HCA 654”), had objected to the 3rd Defendant’s application for deregistration.
(xxx)
The Plaintiff had no knowledge of such outstanding liabilities as mentioned in the writ in HCA 654. The Plaintiff therefore tried to contact the 1st Defendant in an attempt to find out about the nature of such liabilities. However, the 1st Defendant hung up his phone and stayed in China and since then could not be located. The Plaintiff also found out that the 1st Defendant did not reside at the address as recorded in the Companies Registry.
(xxxi)
The writ in HCA 654 was issued on 27 March 2006 and served on the 3rd Defendant. The 3rd Defendant was named as the 1st defendant and China Main as the 2nd defendant. However, while the 1st Defendant was acting as the de facto director of the 3rd Defendant, he had not taken any action and the 3rd Defendant did not file any acknowledgment of service upon receipt of the said writ.
(xxxii)
Default judgment was entered against the 3rd Defendant in HCA 654 on 21 April 2006. Judgment in default of defence was also entered against China Main on 20 May 2006.
(xxxiii)
It was not until early 2007, only after a complaint to the Law Society of Hong Kong and through the Law Society’s investigation of the handling solicitor of the agreement alleged in the writ that the Plaintiff found out that the claim in HCA 654 was for outstanding purchase price in the sum of $35,000,000 under a share purchase agreement signed by Chen purportedly on behalf of the 3rd Defendant in November 2000 (the “Purported 2000 Agreement”) to purchase 10,000 shares (“the MZL Shares”) in a company called Master Zen Limited (“MZL)”) and a debt in the amount of $100,000,000 (“the Debt”) from the 1st and 2nd plaintiffs in HCA 654 (the “Alleged Vendors”). On or about 13 December 2001, 9,998 of the 10,000 MZL Shares were eventually transferred to China Main, and the other 2 MZL Shares were transferred to Ma to be held in trust for China Main, without any consideration given to the 3rd Defendant. On or about 13 December 2001, the Debt was also assigned by the Alleged Vendors to China Main without any consideration to the 3rd Defendant. As at present, China Main is still the registered holder of 9,998 of 10,000 MZL Shares.
(xxxiv)
The Purported 2000 Agreement was not affixed with the Company seal of the 3rd Defendant.
(xxxv)
At the time of the alleged sale and purchase under the Purported 2000 Agreement, MZL had already entered into a Sale and Purchase Agreement dated 18th August 2000 by which it agreed to purchase a property known as Asia Pacific Centre, No 8 Wyndham Street, Hong Kong (“the Wyndham Property”) at a consideration of $500,000,000 (“Sale Price”).
(xxxvi)
On 18 January 2005, the Wyndham Property was re-sold by MZL at a consideration of $660,000,000 (“the Re-sale Price”).
(xxxvii)
Chen, Ma or the 1st Defendant had never informed the Plaintiff of the said dealings in relation to the transfers of MZL shares or reported the same to the 3rd Defendant and the transactions were never reflected in the accounting books of the 3rd Defendant.
(xxxviii)
Out of the transactions arising out of the Purported 2000 Agreement, China Main, of which the 1st Defendant is a Director, was therefore benefited at the expense of the 3rd Defendant to the extent of : -
(1)
the MZL Shares and the Debt which were valued together at $115,000,000.
(2)
via its ownership of 99.98% of the MZL Shares (9,998/10,000), 99.98% of the difference between the Sale Price and Re-sale Price of the Wyndham Property in the sum of $159,968,000 (($660,000,000 – $500,000,000) x 99.98%).
The Claims in relation to the On Ping Property
25. On the basis of the factual allegations set out in paragraph 24 above, the Plaintiff on behalf of himself (as a shareholder of the 3rd Defendant) and on behalf of the 3rd Defendant itself makes the following claims against 1st Defendant and/or the 2nd Defendant in the prayer in the Final Draft S/C in relation to the On Ping Property : -
“
1.
An account of such secret or authorised profits which the 1st and 2nd Defendants may have made or received as a result of his breach of duties and/or fiduciary duties;
2.
An order for payment to the 3rd Defendant of all sums found due on taking of such accounts;
3.
Further or in the alternative to 1 and 2,
(a)
a declaration that the 3rd Defendant is the sole beneficial owner of the Property;
(b)
a declaration that the 2nd Defendant, from 26 September 2005, the date of Assignment of the Property, until the reassignment of the Property by the 2nd Defendant to the Plaintiff, held the Property on resulting and/or constructive trust in favour of the 3rd Defendant;
(c)
an order that the 3rd Defendant’s name be entered as the registered legal and beneficial owner of the Property in the Land Registry in replace of the 2nd Defendant as at the date upon which the 2nd Defendant were formerly registered as legal and beneficial owners of the Property;
(d)
in alternative to paragraph (a) hereof, an order that the 2nd Defendant do execute and deliver a conveyance of the Property to the 3rd Defendant within 14 days after delivery of this judgment;
(e)
in alternative paragraph (c) and/or (d) hereof, a fit and proper person be appointed pursuant to Section 25A of the High Court Ordinance (Cap. 4) of the Laws of Hong Kong for the purpose of executing such conveyance as described in (d).
4.
Further or in the alternative to 1, 2 and 3, payment to the 3rd Defendant of the sum of HK$1,980,000.00 being the purchase price of the Property;
5.
Equitable damages and/or compensation for breach of duties and/or fiduciary duties on part of the 1st Defendant to be assessed;
5A.
Damages;
6.
Interest on the sum found due in paragraphs (2) and (5A) above at such rate and for such period on this Honourable Court sees fit;
7.
All such further or other accounts, inquiries directions and relief as this Honourable Court set fit; and
8.
Costs of this action.”
The Case of the 1st and 2nd Defendant in relation to the On Ping Property
26. The argument of the 1st and 2nd Defendants can be summarised as follows : -
(i)
The Plaintiff has been constantly changing his case. In relation to this aspect of the case, the Plaintiff at first pleaded that he first knew about the non-payment of the purchase price in November 2006 and later he changed to saying that it was in February 2006.
(ii)
In order to launch a derivative action, a plaintiff has to allege fraud on the minority and wrongdoer control of the company in question. In the present case, there is no allegation of wrongdoer control.
(iii)
The 3rd Defendant itself on whose behalf the derivative action has been brought has no cause of action against the 2nd Defendant because it has signed an acknowledgement of the purchase price. Moreover, it was the Plaintiff who actually signed the receipt.
27. The 1st and 2nd Defendants rely on three receipts all of which bear the signature of the Plaintiff. First, there is the Memorandum of Sale and Purchase dated 21st September 2005 wherein the Plaintiff signed on behalf of the 3rd Defendant and acknowledged receipt of the deposit in the sum of $198,000-. Secondly, there is a receipt dated 26th September 2005 addressed to the 2nd Defendant and signed by the Plaintiff for and on behalf of the 3rd Defendant which refers to the On Ping Property in the caption and says as follows : -
“
We hereby confirm that we have received from you the sum of HK$1,780,000.00 being the balance of the purchase price of the above-mentioned property.”
The 1st and 2nd Defendants further rely on the receipt clause in the Assignment also dated 26th September 2005 and executed by the Plaintiff on behalf of the 3rd Defendant which is in the following terms : -
“
1.
In consideration of the sum of DOLLARS ONE MILLION NINE HUNDRED AND EIGHTY THOUSAND ONLY (HK$1,980,000.00) Hong Kong Currency paid by the Purchaser to the Vendor (receipt whereof is hereby acknowledged) ...”
28. The 1st and 2nd Defendants rely on the doctrine of estoppel by deed.
My Ruling
29. In my judgment, the case as pleaded by the Plaintiff regarding the non-payment of the purchase price for the On Ping Property is at least arguable. It will depend on the evidence to be adduced or the lack of it, including documentary evidence, and on the Court’s view of the same.
30. To begin with, the 1st Defendant is in full control of the 2nd Defendant. It should not be difficult for the 1st Defendant and the 2nd Defendant to simply produce copies of cheques or bank statements showing that the purchase price for the On Ping Property was indeed paid out either in a lump sum or in a number of instalments. The 1st and 2nd Defendants have failed or refused to adduce such evidence but have chosen just to rely on an estoppel.
31. On the doctrine of estoppel by deed, Ms. Sit has referred me to a passage in Chitty on Contracts (29th ed.) Vol. 1 at page 416 paragraph 5 – 086 : -
“
5-086 Definition . This category of mistake is derived from a small group of cases most of them of modern times, although the doctrine existed at least as early as 1584. The general rule is that a person is estopped by his or her deed, and although there is no such estoppel in the case of ordinary signed documents, a party of full age and understanding is normally bound by his signature to a document, whether he reads or understands it or not. If, however, a party has been misled into executing a deed or signing a document essentially different from that which he intended to execute or sign, he can plead non est factum in an action against him. The deed or writing is completely void in whosesoever hands it may come. In most of the cases in which non est factum has been successfully pleaded, the mistake has been induced by fraud. But the presence of fraud is probably not a necessary factor. As Byles J. said in Foster v Mackinnon , “it is invalid not merely on the ground of fraud, where fraud exists, but on the ground that the mind of the signor did not accompany the signature; in other words, that he never intended to sign, and therefore in contemplation of law never did sign, the contract to which his name is appended.””
32. It is to be noted that that passage is in a chapter on “Mistake” and deals with a situation where a person has entered into an agreement and assumed a burden to perform some contractual obligation. It does not deal with the situation where a person has signed a receipt. In any event, when it refers to the “general rule” and uses the expression “normally bound”, the inference can certainly be drawn that there are exceptions and the passage does go on to deal with the exceptions.
33. The case of United Dominions Trust Ltd. V. Western [1976] 1 Q.B. 513 which Ms. Sit also relies on, in particular, the dictum of Megaw L. J. at p. 521 B – E, is also a case on non est factum rather than a case on a receipt clause. The passage in the judgment of Megaw L. J. which is particularly relied on by Ms. Sit reads as follows : -
“
In Gallie v. Lee their Lordships laid down, if I may respectfully say so, definitively the principles applicable where somebody has signed an agreement which is in fact of a different legal effect from that which the person signing it had thought that it was at the time when he signed it.”
It shows the context in which the dictum was given, namely, in the consideration of a plea of non est factum.
34. There are other authorities which tend to support that the doctrine of estoppel by deed, at least in relation a receipt clause has a limited scope of operation.
35. In the case ofGreer V. Kettle [1938] A. C. 156, which is relied on by Mr. Liang and which concerns the question of an estoppel by recital in a deed of guarantee but which does not concern a receipt clause, Lord Maugham made the following observation at page 171 : -
“
The well known rule of the Chancery Courts in regard to a receipt clause in a deed not effecting an estoppel if the money has not in fact been paid is a good illustration of the equity view …”
36. In Cross and Tapper on Evidence (8th Ed.) (which is not the latest edition of that work), there is a section dealing with estoppel by deed at pages 99 – 100. At page 99, the section begins with the following statement : -
“
B. ESTOPPEL BY DEED
‘
A party who executes a deed is estopped in a court of law from saying that the facts stated in the deed are not truly stated.’ Accordingly, if a deed contained a receipt for the purchase of property, the vendor was estopped in a common law action on the deed, from alleging that part of the money had not been paid, provided the estoppel was duly pleaded.”
On page 100, however, the following passage appears : -
“
Whatever may be the true modern basis of the doctrine of estoppel by deed, its scope is extremely limited under the present law. In the first place, it applies only between parties to the deed and those claiming through them. Second, it applies only in actions on the deed. In Carpenter v Buller , for instance, the defence to an action of trespass was that the defendant was seised of the land in question and he produced a deed, made between himself, the plaintiff and a third party, in which this was stated to be the case; but it was held that the plaintiff was not estopped from denying the defendant’s seisin because the action was not brought on the deed which did not directly concern the land. Thirdly, the doctrine applies only to clear and unambiguous statements, and finally it does not prevent a party from setting up a plea of illegality or fraud or from availing himself of any fact which would have given rise to a right to rescind the deed in equity. This last limitation is of great importance, for it means that matters, such as the receipt for the purchase price of property in the body of the deed, which would formerly have supported a plea of estoppel at common law will now, generally speaking, be of little avail.”
37. It is to be noted that in a later edition of the same work, the 9th edition, the chapter on estoppel has been revised and there is no section or discussion on estoppel by deed or estoppel by conduct as in the 8th edition.
38. Other statements of the law which are relevant to the question in issue can be found in Halsbury’s Laws of Hong Kong (2005 – Reissue) Vol. 11 (2). At page 322, the following appears : -
“
[170.071] No estoppel in favour of person knowing the circumstances A person who knows the truth of the circumstances under which a deed has been executed, whether he has acquired that knowledge personally or through his agent, cannot set up an estoppel in his own favour if the circumstances were such as to make the deed invalid between the original parties.”
At pages 326 -327, the following appear : -
“
[170.078] Receipt for consideration money A receipt for consideration money in the body of a deed or indorsed on it is not conclusive as between the parties that the money has in fact been paid, although it may, in the case of a conveyance, raise an estoppel in favour of a subsequent purchaser.
[170.081] No estoppel where action not founded on deed There can be no estoppel arising out of a deed where the action is not founded on the deed, but is wholly collateral to it¹. In such cases the recitals in the deed, although certainly evidence of the facts to which they relate, are not of so high and conclusive a nature as to admit of no contradictory proof, and evidence of the circumstances in which the admissions contained in the deed were made is receivable to show that the admission was inconsiderately made and not entitled to weight as proof of the fact it is used to establish.
1.
Carpenter v Buller (1841) 8 M & W 209; Carter v Carter (1857) 3 K & J 617 at 645; Fraser v Pendlebury (1861) 31 LJCP 1; Re Simpson, ex p Morgan (1876) 2 ChD 72, CA (Eng); cf Trinided Asphalt Co v Coryat [1896] AC 587 at 592, PC, per Lord Hobhouse. Where pecuniary legatees who had not received legacies in full executed a release to the trustees acknowledging receipt of legacies, it was held that they were not estopped from claiming the balance on the subsequent failing in of other funds : Re Ghost’s Trusts (1883) 49 LT 588.”
39. Mr. Liang has also referred me to a recent decision of the English Court of Appeal in Close Asset Finance Ltd. V. Taylor [2006] EWCA CIV 788 in which the Court reiterated the well known rule of the Chancery Courts as enunciated by Lord Maugham in Greer V. Kettle referred to above and held that a receipt clause in a mortgage deed was not final and conclusive.
40. Thus, there is, to say the least, some authority to support the proposition that if the 2nd Defendant knew that it had not paid the purchase price for the On Ping Property, there could be no estoppel by deed against the 3rd Defendant.
41. The purpose of the Plaintiff pleading the representation or misrepresentation by Ma and the 1st Defendant and the 1st Defendant and MCWK was to explain why he did sign the receipts in question. There is no claim by the Plaintiff for damages for misrepresentation.
42. Furthermore, so far as the claim against the 1st Defendant as a director in control of the 3rd Defendant and as the sole beneficiary in control of the 2nd Defendant is concerned, it is at least arguable that such claim is not founded on the Deed of Assignment dated 26th September 2005 whereby the On Ping Property was assigned to the 2nd Defendant.
43. I am of the view that, if the Plaintiff’s allegations are true, the 1st Defendant would certainly be a ‘wrongdoer’ in control of the 3rd Defendant and therefore the test under the rule in Foss V. Harbottle is satisfied.
44. I do not think that the fact that the Plaintiff has shifted his case as to when he discovered the non-payment of the purchase price is fatal.
45. In all the circumstances, the claims regarding the On Ping Property are dependent on a number of factual issues to be decided on the evidence, including documentary evidence. They are further dependent on a careful analysis of the law on estoppel by deed.
46. In my judgment, it is certainly not plain and obvious that the Plaintiff’s claims regarding the On Ping Property against both the 1st Defendant and the 2nd Defendant are bound to fail and should be struck out. The 1st and 2nd Defendants fail on this score.
The Claims in relation to the Purported 2000 Agreement
47. On the basis of the factual allegations set out in paragraph 24 above, the Plaintiff on behalf of himself (as a shareholder of the 3rd Defendant) and on behalf of the 3rd Defendant itself makes the same claims against the 1st Defendant as contained in the prayer in the Final Draft S/C (except for paragraphs 3 and 4 thereof) in relation to the Purported 2000 Agreement.
The Case of the 1st Defendant in relation to the Purported 2000 Agreement
48. The 1st Defendant’s argument in relation to the Plaintiff’s claims concerning the Purported 2000 Agreement can be summarised as follows : -
(i)
The Plaintiff has been constantly changing his case.
(ii)
Although the Plaintiff alleges that he resigned as a director of the 3rd Defendant in February 2006, his notice of resignation was only filed in the Companies Registry in April 2006.
(iii)
On the other hand, the 1st Defendant only became a director of the 3rd Defendant in June 2006.
(iv)
The Plaintiff has failed to allege or prove that the 1st Defendant has been the ‘wrongdoer’ in control.
(v)
Even if the Plaintiff can prove that the 1st Defendant was responsible for allowing default judgment to be entered against the 3rd Defendant, that at most amounts to negligence and is not sufficient to ground a derivative action.
My Ruling
49. In the context of the Plaintiff’s claims against the 1st Defendant in relation to the Purported 2000 Agreement and HCA 654, the questions of whether the Plaintiff remained a director and in control of the 3rd Defendant after early February 2006 and whether the 1st Defendant became a de facto director in control of the 3rd Defendant as from February 2006 are crucial because HCA 654 was commenced on 27th March 2006 and default judgement therein was obtained against the 3rd Defendant on 21st April 2006.
50. The Plaintiff explained that he did resign in early February 2006 and signed the notification of resignation at the same time but for some reason the 3rd Defendant’s auditor and company secretary did not file it with the Companies Registry until April 2006.
51. On the other hand, although the 1st Defendant filed a Form D 2A on 18th August 2006 notifying the Companies Registry that he had become a director of the 3rd Defendant as from 30th June 2006, there is no evidence to show how he could have validly become such director when there could not have been any valid shareholders’ or directors’ meeting of the 3rd Defendant appointing him to be such director. With the absence of Chen and the Plaintiff, there could not have been a quorum for any meeting.
52. As I read the Final Draft S/C, the claims by the Plaintiff against the 1st Defendant do not relate solely to the default judgment entered against the 3rd Defendant in HCA 654. They relate also to the alleged fact that the MZL Shares have not been transferred and the Debt has not been assigned to the 3rd Defendant but to China Main, of which the 1st Defendant is a director. In such circumstances, the 3rd Defendant may possibly have a claim against China Main for those two items. The 1st Defendant being a director of both the 3rd Defendant and China Main is, to say the least, possibly in a ‘wrongdoer in control’ situation. If he has breached his duty owed to the 3rd Defendant by not taking action against China Main and/or the Alleged Vendors, he can possibly be liable to the 3rd Defendant.
53. The long and short of the above is that the allegations on both sides are evidence-sensitive and the law on the subject regarding derivative actions is complicated.
54. I am by no means convinced that it is plain and obvious that the Plaintiff’s claims against the 1st Defendant regarding the Purported 2000 Agreement is bound to fail. The matter can only be resolved at trial after due discovery has been made by the parties.
55. The 1st Defendant also fails on this score.
Conclusion
56. I therefore make the following orders : -
(i)
The Plaintiff’s appeal against the two Orders of Master S. Kwang dated 17th May 2007 is allowed and the said two Orders are set aside.
(ii)
The application by the 1st and 2nd Defendants to strike out the Amended Writ of Summons, the Statement of Claim and the action is dismissed.
(iii)
The Plaintiff’s application for leave to file and serve an Amended Statement of Claim as per the Final Draft S/C is granted.
57. In view of the fact that the Final Draft S/C produced before me is very different from the draft Amended Statement of Claim put before Master S. Kwang and in view of the fact that the Plaintiff had to put in late affirmations to supplement or vary its case, I think it is only fair that the usual order as to costs should not be made.
58. I make an order nisi in relation to costs as follows : -
(i)
The costs of and incidental to the Plaintiff’s application for amendment of the Statement of Claim be to the 1st and 2nd Defendants in any event.
(ii)
Subject to (i) above, the costs of and incidental to the strike-out application before Master S. Kwang and this appeal be the 1st and 2nd Defendants’ cost in the cause.
59. Finally, I would like to thank Counsel on both sides for their detailed legal research and submissions. They have referred me to a large number of cases and addressed me on various other points in great detail. In view of the decision I have come to and the fact that the action will proceed, I have concluded that the less I say about the merits of the case both on the facts and the law the better it is for the future conduct of the proceedings.
(Patrick Fung, SC)
Mr Alfred Liang and Mr Harry Liu, instructed by Messrs Yen & Co, for the Plaintiff
Ms Eva Sit, instructed by Messrs Anthony Chiang & Partners, for the 1st and 2nd Defendants