EAA SECURITIES LTD v. FATTYDAD ALICE PUI YAN, THE ADMINISTRATRIX OF THE ESTATE OF FATTYDAD HENRY, DECEASED

CACV 205/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 205 OF 2013

(ON APPEAL FROM HCA 2507/2003 & HCA 2520/2009 (Consolidated))

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HCA 2507/2003

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REASONS FOR JUDGMENT

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Hon Cheung CJHC:

1.  After hearing on 14 October 2014, we dismissed the appeal of Alice Fattydad, the administratrix of the estate of Henry Fattydad, deceased (“the deceased”) from the ruling of Poon J on 12 September 2013 disallowing certain proposed amendments to the administratrix’s consolidated defence and counterclaim and striking out prayers (A) and (C) in the pleading; however, we allowed, to a limited extent, her appeal against the judge’s order on costs which he made on the following day after allowing the remainder of the proposed amendments. We now give our reasons.

The facts

2.  Very briefly, the deceased used to maintain a cash (subsequently margin) securities trading account with the plaintiff, EAA Securities Limited (formerly known as BDNI Securities Limited), through his wife, So Tai Fai (“Anita So”).  Anita So was a dealing director of the plaintiff until May 2002.  She was subsequently convicted of 18 counts of false accounting and 3 counts of using a false instrument in relation to various clients’ accounts whilst in the employment of the plaintiff.  It is the case of the deceased and his estate that as at 6 September 2000, the last time he had transactions through his account with the plaintiff, he had 101,160 shares of PCCW Limited, 1.5 million shares of CCT Technology Holdings Limited, 0.5 million shares of Sen Hong Resources Holdings Limited, 50,000 shares of China Unicom and 50,000 shares of Hong Kong Exchange and Clearing in his account with the plaintiff.  Unbeknown to him, his wife made use of his account to carry out unauthorised transactions. 

3.  These unauthorised transactions resulted in a net debit balance (after disposal of the securities) of over $700,000 in the securities trading account by April 2003.  In July 2003, the plaintiff commenced HCA 2507/2003 against the deceased to recover the outstanding balance.  The deceased filed a defence and counterclaim in October 2003. He claimed ignorance of the (allegedly) unauthorised transactions carried out in his account.  He counterclaimed for the delivery of the shares described above as well as “all the proprietary rights deriving from and/or arising out of those said shares between 6 September 2000 and present, including but not limited to all the dividends (whether in cash or by way of shares), bonus shares and warrants, etc”.  Alternatively, he counterclaimed for damages to be assessed in relation to the shares and the proprietary rights deriving from the shares.

4.  The deceased passed away in September 2004.

5.  In December 2009, the plaintiff commenced another action, HCA 2520/2009, against Anita So and the deceased’s estate (represented by the administratrix), in relation to certain cheque proceeds of over $4 million paid by the plaintiff at Anita So’s instructions (as its dealing director) into a joint names account of the deceased and his wife, purportedly relating to transactions in the securities trading account.

6.  In 2011, the two actions were consolidated and consolidated pleadings were filed.  In the administratrix’s consolidated defence and counterclaim dated 1 September 2011, the deceased’s claim of ignorance of the allegedly unauthorised transactions carried out by his wife in his securities trading account was repeated, and the same counterclaim for the delivery of the shares (prayer (A)) and for all the proprietary rights deriving from and/or arising out of those shares (prayer (C)) was repeated.

7.  The consolidated action came on for trial before Poon J on 10 September 2013.

8.  The judge had difficulty in understanding the estate’s counterclaim for the delivery of the shares and the proprietary rights (dividends, bonus shares and warrants, etc) arising from those shares.  There was practically nothing in the body of the counterclaim to shed light on the basis on which the two items of relief were sought.  That prompted counsel, Mr Brian Wong, to make an application for leave to amend the counterclaim on the second day of trial, that is 11 September 2013.  The proposed amendments pleaded various contractual provisions regulating the securities trading account (paragraphs 46 to 48).  The amendments then sought to introduce an implied term:

“49. Further and/in the alternative, it is averred that it is an implied term in the CCA, GTA and MCA which is implied by reason of business efficacy that otherwise provided by express terms and conditions of the aforesaid documents, the Plaintiff shall delivery (sic) shares purchased or held custody on behalf of the Deceased or shares being identical with such shares purchased or held under custody on behalf of the Deceased or his nominee in terms of numbers, class, denomination, nominal amount and rights attached thereto at the request of the Deceased or his nominee.”

9.  Paragraph 51 of the proposed amendments alleged that the plaintiff, in breach of the relevant agreement(s) governing the securities trading account, had allowed the deceased’s shares “to be lost or diminished”. Paragraph 52 then said that by reason of the plaintiff’s claim for the debit balance in the securities trading account, the plaintiff had evinced an intention not to return any of the shares or to deliver any of the identical shares to the deceased.  Paragraph 53 therefore pleaded an entitlement to claim for the delivery of the shares or identical shares.  Paragraph 54 claimed damages in the alternative.  The proposed amendments sought to expand on prayer (A) to ask for “the delivery by the Plaintiff of the said shares or such identical shares in terms of numbers, class, denomination, nominal amount and rights attached thereto as set out in [the pleading]”.

The decision below

10.  The judge was not impressed by these proposed amendments to justify prayers (A) and (C).  By a short ruling, he refused the amendments in relation to the implied term and struck out prayers (A) and (C).

11.  In his ruling, the judge observed that he was faced with a very late application.  He noted that by the proposed amendments the estate sought to frame its counterclaim purely on contract.  He pointed out that both prayers (A) and (C) were based on the implied term pleaded in paragraph 49.  He took the view that a request by the deceased or his nominee was a prerequisite for invoking the suggested implied term for the plaintiff to deliver the shares in question.  He noted Mr Wong’s concession that the demand was only made by way of the proposed amendments placed before him.  In other words, at the time of the counterclaim, no proper cause of action based on implied term was constituted.  The judge further noted that the shares were sold by the plaintiff in 2000.  He said that if he were to allow the amendments, he would be allowing a claim which was clearly time barred.  He refused to exercise his discretion to allow the amendments relating to or in support of prayers (A) and (C).  Instead, he struck out those two prayers.

12.  Under those circumstances, Mr Wong’s side came up with a revised draft amended defence and counterclaim on the following day, which no longer contained the alleged implied term or prayers (A) and (C).  After further arguments, the judge allowed the bulk of the amendments, but awarded all costs incurred from November 2003 including the costs of and occasioned by the amendments, save and except the costs of the hearing on 10 September 2013, against the administratrix.

13.  Given the late amendments, the parties agreed that the trial could not continue, and by consent obtained an adjournment from the judge, who also gave directions for the further conduct of the case.

The appeal

14.  Aggrieved by the judge’s decision, the administratrix appealed to this court, seeking to reinstate prayers (A) and (C) on the basis of the alleged implied term, which she said the judge ought to have given her leave to plead.  She also complained about the costs order made by the judge.

Prayer (A)

15.  I first turn to prayer (A).  Mr Wong accepted at the hearing that the counterclaim for the delivery of the original shares purchased in the account is quite out of the question.  It is common ground that the shares have long been sold by the plaintiff, rightly or wrongly.  Indeed, by 2003, the plaintiff was suing the deceased for a debit balance in the shares trading account.  Importantly, Mr Wong also accepted that the only claim made under prayer (A) in its unamended form was the delivery of the original shares.

16.  In other words, the amendments presented before the judge on the second day of trial sought to introduce, under prayer (A), a new claim based on contract, that is, the implied term, for shares identical to the original shares.  However, on the administratrix’s own case, the contractual right to claim the identical shares would have arisen following the disposal of the original shares by the plaintiff in 2000 which the administratrix says was wrongful.

17.  In those circumstances, the judge was correct to say that the new claim sought to be introduced by the amendments was time barred.  It is of course true that this fact alone need not be conclusive against allowing a late amendment.  See Order 20 rule 5 of the Rules of the High Court (Cap 4A).  But whether to allow such an amendment was a matter of discretion for the judge.  He no doubt took into account the fact that the claim was time barred, and it was a very late amendment.  Moreover, one could easily see the injustice to the plaintiff if such a late claim for the delivery of identical shares were allowed to be run.  If the claim had been included in the original counterclaim in the 2003 action, the plaintiff could have gone to the market to buy the (identical) shares so that, in the event of its losing the counterclaim, it could use those shares to satisfy the court’s judgment for delivery of identical shares.  Given the long lapse of time and the inevitable changes in market prices, to allow such a late claim for the identical shares to be made now would be quite unfair to the plaintiff.

18.  All this was a matter of discretion for the judge to consider.  He gave the application his consideration and exercised his discretion against allowing the addition of such a late claim.  He was entitled to do so, and under well established principles, this court simply had no ground to interfere with his exercise of discretion.

19.  Once the proposed amendments to substantiate prayer (A) were disallowed, the judge was of course right to strike out prayer (A) in its original form.

Prayer (C)

20.  As regards prayer (C), the counterclaim for bonus shares, dividends, warrants etc was parasitic on prayer (A).  The striking out of prayer (C) must follow the striking out of prayer (A).  Moreover, as mentioned, the original shares had long been sold and the right to the warrants etc arising from those original shares must have belonged to third parties to whom the shares had been sold (or resold).  Unlike prayer (A), there was not even an attempt to ask for identical bonus shares, warrants etc.  Prayer (C) must be a bad claim on the facts.

21.  Even if one were to limit the claim for the bonus shares etc to those issued before the (allegedly) wrongful disposal of the original shares from the deceased’s account, on the facts, it is clear that everything in the account had long been liquidated by 2003, leaving the net debit balance which the plaintiff sued on in the 2003 action. There is simply no question of counterclaiming for those bonus shares etc.

22.  The alternative claim for damages under prayer (C) must also be bad because the administratrix is already counterclaiming for damages in relation to the lost shares.

23.  In those circumstances, the judge was right to strike out prayer (C).

Costs

24.  As for costs, the judge ordered the administratrix to pay all costs incurred right from the beginning (2003) up to and including the aborted trial (except the first day) on the basis that the administratrix had obtained leave from him to make substantial amendments to the counterclaim, without which the counterclaim would not be sustainable.

25.  Mr Wong, at the hearing, did not dispute that without the amendments eventually allowed, his counterclaim would be in great difficulty.  But he criticised the judge for awarding the costs of the main action in the 2003 action as well as the costs of the 2009 action against his client.  He argued that they had nothing to do with the counterclaim in the 2003 action.

26.  Mr Dennis Kwok, for the plaintiff, conceded that the costs of the 2009 action should not have been awarded against the administratrix.  However, as for the costs of the main action in the 2003 action, he maintained that the defence and the counterclaim there were simply two sides of the same coin, and on that basis, the judge’s order could be justified.

27.  I agree with Mr Wong.  The administratrix has a free standing defence to the plaintiff’s claim in the 2003 action, unaffected by the success or failure of her counterclaim.  There was no basis to award costs against her in relation to her defence of the main action in the 2003 action.

Disposition

28.  For these reasons, the administratrix’s appeal relating to the amendments and prayers (A) and (C) was dismissed, whereas his appeal in relation to costs was allowed to a limited extent, that is, the judge’s order for costs should be limited to the costs of the counterclaim in the 2003 action, the costs of the aborted trial (except the first day) as well as the costs relating to the amendments.

29.  As for the costs of the appeal, the plaintiff was substantially successful in resisting the appeal, although the administratrix had to come to court to reverse (in part) the judge’s costs order.  The administratrix was therefore ordered to pay 80% of the costs of the appeal to the plaintiff, to be taxed if not agreed.  Legal aid taxation of the plaintiff’s own costs was also ordered.  No order was made regarding the costs of Anita So.

Hon Yuen JA:

30.  I agree with the reasons of the Chief Judge.

Hon Chu JA:

31.  I agree.