LAVERY CO LTD v. WONG LEE YUK PING AGNES AND ANOTHER

CACV 16/2017

[2018] HKCA 131

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 16 OF 2017

(ON APPEAL FROM HCA NO. 393 OF 2016)

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J U D G M E N T

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Hon Lam VP:

1.  I agree with the judgment of Yuen JA.

Hon Cheung JA:

2.  I agree with the judgment of Yuen JA.

Hon Yuen JA:

3.  This is an appeal by the plaintiff from the Judgment of DHCJ Hunsworth given on 13 January 2017 (“the Judgment”) in which the learned deputy judge allowed only part of the plaintiff’s application to re-amend its statement of claim.  The appeal was due to be heard on 14 March 2017 but counsel for one party was suddenly taken ill and could not attend court.  Directions were then given for written submissions to be provided in place of an adjourned oral hearing.

Procedural history

4.  The plaintiff first filed a Statement of Claim on 29 March 2016.

5.  On 5 July 2016, the defendants filed a summons to strike out parts of that Statement of Claim.

6.  On 2 September 2016, the plaintiff filed an Amended Statement of Claim (for which leave is not required).

7.  However on 16 December 2016, the plaintiff filed a summons for leave to further amend its claim as per a proposed Re‑Amended Statement of Claim (“the Proposed RASOC”).

8.  Consequently when both the defendants’ strike-out summons and the plaintiff’s amendment summons came before the learned deputy judge, the issue was whether the Proposed RASOC was viable, or (as the defendants contend) it still contained passages which failed to disclose a reasonable cause of action, alternatively contained inconsistent allegations which should be struck out on any or all of the grounds in Order 18 rule 19 RHC, or were otherwise an abuse of the process of the court.

9.  The deputy judge allowed only parts of the plaintiff’s Proposed RASOC, excluding §§16, 31, 34B and 35 thereof, and ordered the plaintiff to pay the defendants’ costs of both summonses.

10.  The plaintiff appealed.  There is no respondent’s notice.  In other words, the only issue before this court is whether the deputy judge should have allowed the struck-out paragraphs to be pleaded.

Background

11.  The factual background[1] as set out in the Proposed RASOC before the judge is summarized below.

12.  The plaintiff (“the Company”) is a company incorporated in Hong Kong which carried on the business of trading in plastic materials.

13.1   The 1^st defendant was an accountant who became a shareholder of the Company in 2005[2], and was a director from May 2007 to December 2015.

13.2   Her son, the 2^nd defendant, who had worked in an accountancy firm, became a shareholder of the Company in 2012[3], and was its manager from September 2010 to January 2015.

13.3   The defendants co-managed the business of the Company and were in charge of its business operations, finance and accounts.

Sale of goods to KK

14.  The Company began dealing with Mr Leung Kin Kwan trading as Kwan Kee Plastic Material Co (“KK”) in 2010.

15.1   In September 2011, the Company sold certain goods to KK at a price of $5,927,900 on terms of 14 days credit.  KK provided post‑dated cheques[4], but the defendants instructed the Company’s staff not to present them for payment.

15.2   On 18 December 2011, KK ceased business.  The next day Mr Leung himself filed a bankruptcy petition, and a bankruptcy order was made against him in January 2012.

15.3   On 19 December 2011, Mr Leung filed a statement of affairs in which he said on affirmation that he had no stock in trade.

Re-sale of Alleged Returned Goods to DK

16.1   On 30 December 2011, the defendants caused the Company to produce “Sold Goods Return Orders” indicating that KK had returned part of the goods (“Alleged Returned Goods”), worth $4,270,572.

16.2   These Alleged Returned Goods were purportedly re-sold by the Company on the same day to a PRC company called Dongguan Kaiying (“DK”) at the same price ($4,270,572) on terms of 30 days credit.

16.3   The balance owed by KK of $1,657,328 ($5,927,900 less $4,270,572) was written off by the Company as a bad debt.

17.   However DK also defaulted in payment and was subsequently de-registered in February 2013.

Company’s primary case – re-sale was fictitious

18.1   In the RASOC, the Company alleged that:

-   as Mr Leung had said on 19 December 2011 that he had no stock, it must follow that the Alleged Returned Goods could not have been returned by KK for the Company to re-sell to DK on 30 December 2011, and

-   there was no record of movement of the Alleged Returned Goods.

18.2   Accordingly, the Company alleged that the return of part of the goods sold to KK, and their re-sale to DK, were fictitious and created by the defendants, for which the defendants were liable for breach of fiduciary duty etc[5].

Company’s alternative case – re-sale was genuine but imprudent

19.  However the Company also pleaded an alternative case. In §16 (which the deputy judge excluded), it was pleaded that even if the re‑sale to DK was genuine, that re-sale was nevertheless imprudent.  DK was a new customer of the Company and yet the defendants had allowed it to purchase the Company’s goods on excessive credit terms without performing a credit check or obtaining security[6]. The Company alleged that the defendants had breached their duties to the Company to exercise reasonable care, skill and diligence.

Partial Payment for DK

20.1   The matter does not end there.  The Company alleged that even though DK failed to pay for the Alleged Returned Goods in the sum of $4,270,572, only part of that sum ($1,825,344) was written off as a bad debt on 30 November 2012.

20.2   The balance was $2,445,228, which was paid to the Company about a year later, on 16 December 2013 (“the Partial Payment for DK”), by a person called Huang Jinye (“Huang”) with whom the Company had no relationship.

With Company’s own funds?

21.1   The Company alleged that the Partial Payment for DK “coincided” with the following “artificial and fraudulent transactions”[7], and in effect, the Partial Payment for DK was made with the Company’s own funds.

21.2   The Company alleged that the Partial Payment for DK involved two $1 companies, Kam Lung (HK) Trading Ltd (“Kam Lung”) and Shunda Plastic Ltd (“Shunda”), both incorporated in Hong Kong and both controlled by Mr Liang Zhaoque (“Liang”), who was the sole shareholder and director of both companies.

21.3   Liang was known to at least the 1^st defendant, as he had previously done business with the Company’s related company Wah Sang Hong Ltd and its PRC subsidiary, of whom the 1^st defendant was a director.

21.4   The Company alleged that on 12 December 2013, the defendants caused the Company to pay $2,445,112.80 to Kam Lung for goods which were then on-sold by the Company to Shunda only 4 days later for $2,451,807 (ie at a profit to the Company of $6,694.20).  However the on-sale by the Company to Shunda was on terms of 60 days credit, and Shunda eventually failed to pay the Company any part of the purchase price.

21.5   In other words, the Company paid about $2.44 million to a company controlled by Liang for goods which it on-sold to another company controlled by Liang, for which the Company did not receive payment.  The Company was therefore left with neither funds nor goods.  The Company’s case is that these transactions (“the Liang transactions”) were close, both in time and amount, to the Partial Payment for DK.

21.6   It is alleged that the Liang transactions were artificial, that the defendants were involved in implementing them and that the defendants were in breach of fiduciary duty, etc.

21.7   In the alternative, it is alleged that if the Liang transactions were not artificial, nevertheless there was no commercial or other justification for the Company to enter into them as they exposed the Company to the risk of a default of payment by Shunda (which was not creditworthy) for a potential profit in a very small amount.  Consequently the defendants were in breach of their duties of care to the Company.

Application to strike-out

22.  The defendant applied to strike out part of the Proposed RASOC on the ground that the plaintiff was advancing inconsistent alternative cases.

The deputy judge’s Judgment

23.1   The deputy judge’s Judgment may be summarized as follows.  Although he acknowledged that the rules of court allow the pleading of inconsistent facts, this should not be allowed if the plaintiff plainly knew one set of facts[8]. He held that the relevant time to ascertain the state of the plaintiff’s knowledge was when the Statement of Claim was filed in March 2016[9].

23.2   The deputy judge held[10] that by that time, if not earlier, the Company:

“must plainly have had within its knowledge the facts which have allowed it to plead the serious allegations against [the defendants] of what may colloquially be described as ‘cooking the books’”.

He noted that there was no suggestion by the Company that its documents were incomplete.  Therefore after early 2015 when the defendants left the Company, the new management would have had “full opportunity to review the books and records” permitting it to plead its primary case, ie that in fact KK had not returned any goods.  The deputy judge noted[11] that the Company has pleaded in §15(4)(A) of the Proposed RASOC that the Company had no records of KK’s return of the goods or of the Company’s delivery of goods to DK.  Accordingly if no goods had been returned by KK, then the KK goods could not have been the subject of the sale to DK.

Appeal

24.  The plaintiff appealed.  Mr William Wong SC[12] for the Company emphasized that the Company was run entirely by the defendants at the relevant time, as they were in charge of business operations, transactions, finance and accounts.  The present management of the Company could therefore only rely on circumstantial matters which could admit of alternative interpretations.  The deputy judge was therefore in error when he said that the Company must plainly have known the facts were as asserted in their primary case.

Discussion

25.1   With respect to the deputy judge, he was in error in holding that the plaintiff in these proceedings must be confined to its primary case, as he had failed to take certain relevant matters into account.  Order 18 rule 12A RHC stipulates:

“A party may in any pleading make an allegation of fact which is inconsistent with another allegation of fact in the same pleading if –

(a) the party has reasonable grounds for so doing; and

(b) the allegations are made in the alternative”.

25.2   It is common ground in this case that the disputed allegations are made in the alternative.  So essentially the question is whether the Company had reasonable grounds for pleading inconsistent allegations.

26.  It is undisputed that:

“one of the objectives of this rule is to prevent a party from pleading inconsistent cases in relation to a matter which is plainly within his knowledge, so that there could be no justification for him to put forward inconsistent factual alternatives”[13]. (Emphasis added).

27.  With respect, when the deputy judge held that the Company must plainly have known the facts which they asserted as their primary case, he appears to have failed to take into account the following matters.

28.  First, the fact that on 19 December 2011, the proprietor of KK, Mr Leung filed a statement of affairs in which he said on affirmation[14] that he had no stock in trade does not mean conclusively that to the Company’s knowledge, no goods were ever returned.  Mr Leung could have returned them before that date, leaving no goods in stock at the date of his statement of affairs.  Mr Leung’s evidence is equivocal and the Company is not at present in a position to require clarification.

29.  Then there are “Sold Goods Return Orders” which the defendants caused the Company to create.  Whether the goods were in fact returned, and if so when, is within the defendants’ peculiar knowledge.  As far as the Company is concerned, there is evidence pointing both ways.  On the one hand, there are the above orders.  On the other hand, there is the absence of relevant records in support.  The fact that there was no suggestion that any Company records were missing does not mean that they were accurately kept.  And of course the persons responsible for account-keeping were the defendants themselves.  It cannot therefore be said that the return (or non-return) of the goods was a matter plainly within the Company’s knowledge.

30.  The same reasoning applies to the Liang transactions.  Of course as both Kam Lung and Shunda were apparently controlled by the same person Liang, the question arises why it was necessary for the Company to be interposed for an on-sale.  But I do not think it can be said (at least at this stage) that that evidence can admit of only one conclusion of fact, ie that the transactions were a sham[15]. If the evidence is reasonably capable of any other conclusion of fact, the Company would have reasonable grounds to plead the alternative case.  Whether there were other reasons for the Liang transactions is a matter within the defendants’ knowledge as they were the persons in control of the Company at the time.  It cannot therefore be said that the true nature of the Liang transactions is plainly within the Company’s knowledge.

31.  Finally, I do not agree with Mr Hingorani’s submissions that it would be difficult to plead to the Proposed RASOC.  On the contrary, the defendants, having been in charge of all aspects of the Company at the material time, would be in the best position to recount and explain the various transactions.

32.  The Civil Justice Reform makes it clear that the pleading exercise is not a pedant’s game, in which the draftsman of a pleading intentionally confines himself to a strict literal construction of the particular words used by his opposing number sentence by sentence, and gives away as little as he can about his own case.  The objective is for both sides to articulate their cases in the clearest way possible, so that the real issues in dispute between them would be apparent to both sides, and to the court, well in advance of trial.

Order

33.  For the reasons set out above, I would allow the appeal, set aside the order below, dismiss the defendants’ summons to strike-out and give leave to the plaintiff to re-amend its Statement of Claim.  I would make an order nisi that the costs of the appeal be paid by the defendants to the plaintiff.  As for the costs below, as the real issue was the strike-out, I would make an order nisi that the defendants pay the plaintiff’s costs, save for the costs of the summons to re-amend.