LI SHIU TO v. CHEUNG PIK NG AND OTHERS

CACV 66/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 66 OF 2014

(ON APPEAL FROM HCA 416/2003)

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REASONS FOR JUDGMENT

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Hon Cheung CJHC:

1.  At the conclusion of the hearing, we allowed the 1^st defendants’ appeal from the order of Au Yeung J dated 4 March 2014 striking out the third party notice and dismissing the 1^st defendants’ claim for contribution against the third party with costs. We now give our reasons.

The facts

2.  The facts pertinent to this appeal can be very briefly stated.  The plaintiff, the original 1^st defendant (Li Shiu Tsang, now deceased) and the original 2^nd defendant (Li Shiu Kwan, now the third party) are brothers.  (In this judgment, Li Shiu Tsang and Li Shiu Kwan will be referred to as the 1^st defendant and “LSK” respectively).  Their father, Li Po Chun, died intestate in 1963, and the three sons were beneficiaries of the father’s estate.  The 1^st defendant was also an administrator of the father’s estate.  The 3^rd defendant, a limited company, was beneficially owned by the father and its shares were held by the father, the three brothers and three individuals who, the plaintiff says, were fictitious persons.  In fact, it is alleged, the 801 ordinary shares registered in their names belonged to their father, and therefore his estate.  It is the plaintiff’s case that as beneficiary, he is entitled to further distribution from the father’s estate in respect of the 801 shares.

3.  Originally, the plaintiff claimed against the 1^st defendant and LSK that they wrongfully procured the company to pass resolutions to amend its articles of association and allot preference shares to companies associated with them.  This had the effect of depleting the value of the company’s ordinary shares including the 801 shares, to the detriment of the plaintiff as beneficiary of the estate of the father.

4.  By amendments made in 2012, the plaintiff now also claims against the 1^st defendant (the action against LSK having been discontinued) that he has wrongfully caused the company to dispose of certain properties to other companies associated with him and LSK.  This has again resulted in dilution in value of the ordinary shares of the company to the detriment of the plaintiff.

5.  In relation to these new claims, there is no dispute that the 1^st defendant and LSK were the only directors of the company at the material times.  LSK’s participation in the resolutions effecting the transactions under complaint was either admitted or evidenced by minutes and written resolutions.

6.  The 1^st defendant passed away in December 2012, and his executors became the 1^st defendants in the action.

7.  On 9 July 2013, the judge granted the executors’ application to issue a third party notice against LSK claiming for contribution in respect of the new claims, on the basis of dishonest assistance of a breach of trust or fiduciary duty.  She rejected the plaintiff’s objection that the main action would be delayed by the third party proceedings, and that the 1^st defendant’s estate could institute separate contribution proceedings against LSK after conclusion of the main action.  The judge considered that the convenience and justice of having all issues resolved at the same time among the three brothers and the need to avoid inconsistent findings outweighed the effects of delay.

The decision below

8.  However, after the third party proceedings were commenced, the judge acceded to LSK’s application to strike out the third party notice, and dismissed the third party proceedings on the ground of abuse of the process of the court in terms of prejudice to LSK.

9.  In her decision dated 4 March 2014, the judge explained that the 1^st defendant’s death deprived LSK of an opportunity to cross‑examine the very person who is alleged to have been dishonestly assisted by LSK in breach of his duty as administrator of the estate.

10.  The judge pointed out that even the 1^st defendant himself had asserted in an earlier application to strike out the plaintiff’s action for want of prosecution (which was dismissed by Master Andy Ho), that due to the plaintiff’s unreasonable delay in prosecuting the action, and thus the long lapse of time, aging of the remaining witnesses and fading memory, it was “no longer possible or feasible for there to be a fair trial of the issues” in the main action.  The judge observed that the third party proceedings would involve the same factual matrix, and LSK agreed with the 1^st defendant’s view that it would no longer be possible for there to be a fair trial.

11.  The judge also noted that in relation to the new claims, the 1^st defendant’s death would cause real prejudice to LSK.  This was because if he had not died, he could have provided evidence to support or attack LSK in relation to the new claims or, as the case may be, the dishonest assistance claim.  He might have revealed whether he himself had known or at least suspected that the 3 shareholders were fictitious.

12.  The judge further observed :

“33. Mr Chow SC [then acting for the 1^st defendants] submits that the prejudice stated in para 30 was no more than a bald assertion and is in any event refuted by the fact that LSK (being formerly D2) already filed a defence, a list of documents and a detailed 15-page witness statement on 17 November 2003. He would be able to refresh his memory against his witness statement and the documents disclosed. I will add that LSK has been conducting the case on behalf of the Company and might have continued knowledge about progress of this case.

34. However, LSK’s witness statement was made 10 years ago.  Since then, the statement of claim has been re-re-amended. The material amendments included the purported dispositions to related companies of LSK of D1, which the plaintiff impugns, but the plaintiff has not alleged dishonesty against LSK.  D1 has to prove dishonesty against LSK.  It is not even clear if D1 has filed a supplemental witness statement to prove those re-re-amendments before he died.  These reinforce my view that the absence of D1 will be prejudicial to LSK.”

13.  The judge concluded that whilst striking out is only employed in clear and obvious cases and notwithstanding that LSK was joined properly as a matter of law as a third party,

“the fact that D1 himself considered it impossible to have a fair trial of the plaintiff’s stale claim against him, and the fact that D1 (a key witness) has died, make it an abuse of process for the third party proceedings to continue” (para 35).

14.  The judge therefore struck out the third party notice and dismissed the claim for contribution.

The arguments on appeal

15.  In the appeal, counsel for the executors submitted that the judge struck out the third party notice on the ground of prejudice on a misapplication of the legal principles concerning dishonest assistance, that is, she erroneously thought that to establish the constituents of whether the 1^st defendant had committed a breach of trust or fiduciary duty as administrator and whether LSK had assisted in such breach would depend on the 1^st defendant’s oral testimony.  The judge also erred in taking the 1^st defendant’s own statement made in the context of an application to strike out the plaintiff’s action for want of prosecution into account, notwithstanding that the assertion had already been rejected by Master Ho who found that a fair trial of the action was still possible.  Counsel therefore submitted that in the exercise of her discretion, the judge erred in disregarding principle, failed to take into account relevant matters, and took into account irrelevant matters.  Counsel submitted that the conclusion reached by the judge was one outside the generous ambit within which a reasonable disagreement is possible.

16.  Mr Hunsworth, for LSK, essentially submitted that the judge’s exercise of discretion should not be disturbed on appeal.

My views

17.  It is essential to bear in mind the basis of the striking out order.  The application to strike out was made under Order 18 rule 19(1)(b) (frivolous or vexatious) and/or the inherent jurisdiction of the court.  The judge, in deciding to strike out the third party notice and dismiss the third party proceedings, put her decision firmly on the basis of abuse.  The only matters identified by the judge to support her conclusion of an abuse were that, first, the 1^st defendant had said that a fair trial of the main action was no longer possible after the long lapse of time etc, and secondly, the fact that the 1^st defendant, a key witness, is now dead, to the prejudice of LSK in his defence of the contribution claim.

18.  In my view, the first matter cannot constitute an abuse.  It was a belief held by the 1^st defendant for reasons which he gave.  It was said in the context of an application to strike out the main action for want of prosecution.  It was not accepted by Master Ho who refused the application.  At most, one could say that the 1^st defendant had mistakenly thought at one stage that a fair trial of the then claims made against him in the main action was no longer possible.  It had little to do with the new claims made against him introduced by the amendments made subsequent to the failed strike out application.  Still less did it have any direct bearing on the contribution claim made against LSK in relation to those new claims.  No estoppel is involved here and none is alleged.  What the 1^st defendant had said previously cannot constitute an abuse as regards the third party contribution claim against LSK.

19.  As regards the 1^st defendant’s death, thereby, so it is said, depriving LSK of the opportunity to cross examine him in defence of the contribution claim, this court has not been referred to any authority to suggest that the mere death of a key witness can amount to an abuse.  Certainly, on the facts of the present case, no blame can be laid at the door of the 1^st defendant for the delay experienced.  The 1^st defendant was not responsible for the long time taken for the plaintiff to prosecute his original claims or to amend his pleadings to include the new claims (which led to the third party contribution claim).  No time was lost by the 1^st defendant’s executors to issue the third party proceedings against LSK in relation to those new claims.  It is unfortunate that the 1^st defendant died soon after the new claims were belatedly made against him.  But he was not to blame. Mere absence of a key witness in those circumstances cannot be an abuse.  The parties will simply have to do the best they can.

20.  In those circumstances, there simply was no basis for the judge to strike out the third party notice or dismiss the third party proceedings based on abuse.

21.  The parties have made submissions as to whether, and if so, how, the death of the 1^st defendant would prejudice the defence of the 1^st defendant’s estate regarding the new claims, or the defence of LSK of the contribution claim, particularly in terms of what is or is not required to prove dishonest assistance on the facts of the present case.  Since the matter will now proceed further, I would refrain from dealing with these submissions.  It is unnecessary to do so.

Disposition

22.  For these reasons, the appeal was allowed.  We also gave the costs, here and below, to the 1^st defendants, together with a certificate for two counsel.

23.  As we pointed out at the hearing, there are powers under Order 16 rules 4(3)(c) and 6 to bring to an end the third party proceedings on case management grounds, without prejudicing any future contribution action that may be brought separately from the main action.  Our decision to allow the appeal and to set aside the judge’s order does not prevent the court below from exercising such powers on application, if it considers it fair and convenient to do so, on which matter no view is expressed.

Hon Chu JA:

24.  I agree.

Hon Barma JA:

25.  I agree with the judgment of the Chief Judge.