FORTIS BANK ASIA HK v. SINO GLOBAL INTERNATIONAL LTD AND OTHERS

CACV 41/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 41 OF 2004

(ON APPEAL FROM HCMP NO. 4950 OF 2001 AND
HCA NO. 298 OF 2002)

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HCMP 4950/2001

(By Counterclaim)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2. This was an appeal from the order of Reyes J dated 26 January 2004 allowing the appeal of Fortis Bank Asia HK ("the bank") from the order of Master Au-Yeung who had allowed the joinder of Messrs Li, Wong & Lam ("LWL") as the 5th defendant in HCA 298/2002 ("the High Court action"). The master's order for joinder was set aside by the judge. At the conclusion of the hearing, this court allowed the appeal, restored paragraphs 1, 2 and 6 of the order made by Master Au-Yeung on 17 December 2003, and gave directions that the High Court action be restored before a judge of the Court of First Instance for directions before the end of June. Great Honour Investments Limited ("Great Honour") and Wall International Investments Limited ("Wall International") (collectively "the companies") were awarded the costs of the appeal and of the hearing below. Written reasons were to be handed down later which we now do.

Background

3. In March 1999, Wang Yan ("Dr Wang") a Mainland resident met Ko Yin ("Ms Ko") in Hong Kong and soon became intimate friends. In August 1999, Dr Wang acquired Great Honour, a shell company, to purchase a property ("the 2nd property"). Dr Wang funded the purchase. In December 1999, Dr Wang acquired Wall International as the vehicle for acquiring another property ("the 1st property"). Again, the funds for the purchase came from Dr Wang. At all material times, Dr Wang and Ms Ko were the only shareholders and directors of the companies, with Dr Wang holding 90% of the shares in each of them and Ms Ko the remaining 10%.

4. In May 2000, Ms Ko executed mortgages on behalf of Wall International and Great Honour respectively of the 1st and 2nd properties to the bank in return for loans to Sino Global International Limited ("Sino Global") in which Ms Ko was a 40% shareholder but in which Dr Wang was neither a shareholder nor director and had no legal or beneficial interest. It would appear that there were board resolutions of Great Honour and Wall International dated 28 September 1999 and 25 January 2000 respectively authorising the execution of the 1st and 2nd mortgages by Ms Ko. It is the case of the companies that Ms Ko had no authority to execute or enter into any mortgage of the properties, that her interests in the mortgages had never been properly disclosed to them and that such non-disclosure constituted a breach of fiduciary duty and/or a breach of trust.

5. According to Dr Wang, he first discovered the unauthorised mortgages in March 2001. In September of that year, the bank commenced HCMP 4950/2001 ("the mortgage action") against Sino Global and the companies. About two months later, in November 2001, Dr Wang made a report to the Commercial Crimes Bureau relating to suspected forged documents, namely, board resolutions of the companies purportedly authorising Ms Ko to execute mortgages on behalf of the companies. In December 2001, Dr Wang filed an affirmation in response to the mortgage action alleging fraud and forgery. He explained that whilst the board resolutions bore his signature, he had never signed them. He recalled that he had signed on blank papers for Ms Ko and suspected that she had fabricated the two resolutions in question in support of her application for the mortgages. Dr Wang stated that he had never authorised Ms Ko to execute or enter into any mortgage loan.

6. In January 2002, Master Cannon ordered that the mortgage action be continued as if began by writ. Three weeks later, Dr Wang commenced the High Court action which started as a derivative action by Dr Wang against Ko Yin and the companies. Those proceedings (HCA 298/2002) were amended in September 2002. The companies became the plaintiffs in lieu of Dr Wang, the defendants being Ms Ko and Sino Global. In December 2002, Master Levy ordered simultaneous trials of the mortgage action and the High Court action.

7. On 9 September 2003, the plaintiffs in the High Court action issued a summons for joinder of LWL as the 5th defendant. As noted above, Master Au-Yeung granted leave for joinder but that order was reversed by Reyes J whose order the companies sought to overturn in this appeal.

8. I now turn to consider the circumstances which led to the application for joinder.

Jimmie Wong's statement

9. LWL acted for the companies in relation to the purchase of the 1st and 2nd properties. Mr Jimmie Wong was the handling solicitor. He was instructed by Ms Ko in relation to those purchases. At the time the 1st property was acquired in December 1999, Mr Wong asked to be provided with resolutions of the companies relating to the acquisition of the properties including that of the 2nd property which had already been acquired by Great Honour. Instead, Ms Ko asked Mr Wong to provide a draft of a resolution for each of the companies (1) to record the purchase of the relevant property; (2) that Ms Ko was authorised to sign all relevant documents relating thereto and (3) that she was authorised to affix the common seal of the company to the assignment for and on behalf of the company. Ms Ko apparently asked for a further paragraph to be inserted in each of the resolutions to the effect that she, Ms Ko, as director be authorised to deal with the property on behalf of the company including but not limited to the leasing and mortgage of the property. Mr Wong then prepared a resolution for each of the companies but these were unsigned when they were handed to Ms Ko.

10. The matters referred to in the preceding paragraph are dealt with in a statement made to the police by Mr Wong in December 2001. The companies obtained a copy of that statement in June 2003.

11. In the light of Mr Wong's statement, the companies amended their pleadings to allege a case against LWL in negligence in that it had knowledge of Ms Ko's self-interest, breach of duty and/or breach of trust. Further, since LWL were the bank's agents for the purposes of the mortgages, the companies' position was that LWL's knowledge could be imputed to the bank and so render the mortgages unenforceable. The pleadings in both the mortgage action and the High Court action have been re-amended to deal with the involvement of Mr Wong in the purchase of the properties, the drafting of the board resolutions and the mortgages. It is also alleged that LWL was in breach of duty to the companies in relation to the mortgage transactions. The bank's case is that Ms Ko had apparent authority to execute the mortgages on behalf of the companies and that it had no knowledge of what LWL knew.

12. The present solicitors for the companies, Li & Partners, received instructions to act on 6 June 2003. Upon perusing the documents, they noticed a supplemental list of documents dated 12 April 2003 containing the statement Mr Wong had made to the police. They immediately requested a copy and were supplied with one on 20 June 2003. They tried to obtain the original exhibits to Mr Wong's police statement as well as the solicitors' files in respect of the two properties. Eventually, on 10 July 2003, they obtained the original files relating to the purchases of the properties but were only allowed to inspect the files in respect of the mortgages which they did on 14 July, after which they administered interrogatories on 31 July receiving answers on 3 September. The summons for joinder of LWL and for the amendment of the pleadings was taken out on 9 September 2003.

This appeal

13. The judge considered that the matter he had to decide was one of case management. Broadly speaking, there were three reasons which caused him to reverse the master's order which are dealt with below. This appeal was brought on the basis that those reasons were wrong in principle and/or arrived at with a misapprehension of the facts and/or an exercise of discretion outside the ambit of possible reasonable decisions.

14. First, at paragraph 8 of his judgment, the judge said this:

"8. I am conscious of the danger of limping judgments. In my view, the appropriate course is for Great Honour and Wall International to proceed separately against the solicitors for the time being. The onus would then be on Great Honour and Wall International to advance those separate proceedings with dispatch such that, if they are able to catch up with the main proceedings in 4950 and 298, they can apply at that stage for consolidation."

15. I confess that I am not familiar with the term "limping judgments". It would appear to have been a reference to the risk of inconsistent findings of fact when factual witnesses have to be examined twice on the same factual issues. That, of course, would be highly undesirable, not to mention the unnecessary duplication of costs and waste of judicial time involved. Where, as here, the judge has himself acknowledged that the proceedings are fit for consolidation, it can only have been on the basis that the disputes involve the same factual issues. That being so, the court should strive towards achieving that objective by ensuring the efficient resolution of common factual issues in a single trial rather than to see if one set of proceedings would catch up with the other. In my view, that can be done with minimal delay by proper case management: the judge seized of the case is in a position to give appropriate directions and retain a firm control over the progress of the proceedings. The advantages flowing from such a course are clear: it would avoid inconsistent factual findings, (a risk which multiple actions involving the same factual issues necessarily run), and save costs and judicial time.

16. Second, the judge was concerned about the delay that a joinder would cause. He observed that that delay would come on top of time already lost in respect of the allegations of fraud made by the companies that have subsequently been abandoned without explanation. The judge was also not satisfied with the explanation for the time interval taken before the joinder application was made.

17. As a matter of case management, I have already made the point that the judge in charge is in a position to ensure that delay is reduced to a minimum were joinder to be allowed. In relation to time lost in respect of abandoned claims in fraud, I cannot see the relevance of that in the context of the joinder application. In any event, it seems plain that once Mr Wong's statement came to light, the companies were in a position to reformulate their case and abandon the allegations of fraud and forgery which are difficult to make good. Finally, as to the period of delay which would appear to be between April and September 2003, no criticism can be made of the conduct of the companies' present solicitors since their involvement in the conduct of these proceedings which was not till early June 2003. In respect of the delay between April and June, the companies ought not to be penalised for steps which their previous legal advisors might have failed to take.

18. At the hearing, Mr Ling, who appeared for the bank, sought to argue that the delay began not in April 2003 but March 2001 when Mr Yan first discovered the unauthorised mortgages. But until Mr Wong's statement became available, it is simply not arguable that Dr Wang ought to have known of the matters dealt with in that statement. Although Mr Wong made his statement to the police in December 2001, Ms Ko herself was not aware of such a statement until March 2003 and only obtained a copy in April 2003. As appears from her second witness statement, she came to know about the statement in purely fortuitous circumstances: although she had dealt with Mr Wong in the purchases and the mortgages, it had not occurred to her to contact Mr Wong until March 2003. Could Dr Wang have realistically been expected to have tracked down Mr Wong when Dr Wang never had any dealings himself with LWL or Mr Wong? It should be borne in mind that up until November 2001, Dr Wang was still negotiating with Ms Ko for a settlement. Further, as Mr Leong SC submitted, the bank has not adduced any evidence of prejudice as a result of delay. The judge did not appear to have paid regard to the absence of prejudice. In my view, the advantages from a joinder unquestionably outweigh any delay the joinder might cause.

19. Third, the judge considered that "[t]he ambits of the proceedings with and without the proposed joinder are not the same.".

20. Whilst it is true that the legal issues are not the same in that in the case against the bank, the legal question which arises is whether the solicitor's knowledge can be attributed to the bank, and in the case against LWL, it is a question of whether they had acted negligently, the factual issues are the same. LWL's knowledge was not something abstract: rather, it turns entirely on findings of fact to be made at trial. As Mr Leong SC has rightly pointed out, until those factual issues have been resolved, the legal inquiry as to whether it is unconscionable for the bank to enforce the mortgages cannot commence.

21. I should add that as a general rule, this court will not interfere with the exercise of a judicial discretion in a matter of case management. But this is a wholly exceptional case: the judge has been shown to have gone plainly wrong such as to warrant this court's intervention.