HCCL 8/2013
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
COMMERCIAL ACTION NO 8 OF 2013
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BETWEEN
HSU MING CHI (許明棋)
Plaintiff
and
LAM SHU CHIT (林樹哲)
1st Defendant
SOUTH ASIA TEXTILES (HOLDING) LIMITED
2nd Defendant
SOUTH NATIONAL REAL ESTATE LIMITED
3rd Defendant
YEUNG LIN KAR (楊連嘉)
4th Defendant
CHUI WAI FOOK (徐偉福)
5th Defendant
HOWAN BUSINESS MANAGEMENT COMPANY LIMITED
6th Defendant
GENIUS SKY LIMITED
7th Defendant
____________
Before: Hon Ng J in Chambers
Date of Hearing: 27 June 2014
Date of Judgment: 22 October 2014
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J U D G M E N T
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INTRODUCTION
1. This is the Plaintiff’s application for leave to amend the Statement of Claim as per the draft in red attached to its summons dated 25 February 2014 (“Draft ”).
2. In their affirmations in opposition to the application ie the Affirmation of Hui Heon Ming Herman for the 1st , 2nd , 4th and 5th Defendants and the Affirmation of Ma Shiu Ngok for the 3rd Defendant, the five Defendants (“Defendants ”) indicated their objection was confined to paragraphs 3, 5, 13, 13B, 28, 29B and 30 (first sentence) of the Draft.
3. In their joint skeleton submissions and as clarified by Mr Liao SC at the hearing, the Defendants further cut down their “substantive” objection to paragraphs 13, 13B and 29B of the Draft and amendments “in connection therewith”. As explained by Mr Liao SC, the objection to the amendment to paragraph 13 is because it amounts to a disguised withdrawal of a fundamental admission by the Plaintiff (“1st Objection ”). The objection to the amendments to paragraphs 13B and 29B is because the Plaintiff is seeking to introduce a new oral collateral term (“2nd Objection ”).
BACKGROUND
4. I take the following background facts and competing contentions from the parties’ pleadings.
5. In 1993, the Plaintiff’s younger brother (representing the Plaintiff and himself) and the 1st Defendant (“Lam ”) orally agreed to enter into a joint venture investment to acquire and develop a piece of land in Quanzhou, Fujian Province, PRC (“Land ”) using the 3rd Defendant, a company incorporated in Hong Kong, as the vehicle. Each of the Plaintiff and the 4th Defendant (as nominee of Lam) was to hold one share in the 3rd Defendant and be appointed its director. Lam then formed a company in the PRC viz Quanzhou Nan Ming to hold the Land and registered this PRC company as solely owned by the 3rd Defendant. The Plaintiff said he and his younger brother were induced by Lam to leave the control of the 3rd Defendant and Quanzhou Nan Ming as well as the management of the joint venture investment to Lam.
6. In 2000, the Plaintiff and his younger brother experienced severe financial difficulties. The Plaintiff approached Lam for financial assistance. Lam agreed and procured the 2nd Defendant to grant a HK$2 million loan to the Plaintiff (“Loan ”). As evidence of the Loan and the security for it, the Plaintiff signed a memorandum in Chinese dated 12 September 2000 (“Loan Note ”). The Loan Note stated inter alia the Plaintiff agreed to pledge his share in the 3rd Defendant (“Share ”) to the 2nd Defendant as security and if the Loan and interest were not repaid within 2 years, the Share would belong to the 2nd Defendant.
7. The Defendants allege that when the Plaintiff signed the Loan Note and sent it back to the 2nd Defendant, he also signed and delivered to the 2nd Defendant:
(1) an Instrument of Transfer and a Bought and Sold Note for the Share with the date and the name of the transferee left blank;
(2) other incidental documents including a letter of resignation dated 9 September 2000 whereby the Plaintiff resigned as director of the 3rd Defendant, an undated Form D4 signifying his resignation as director of the 3rd Defendant as at 9 September 2000, board minutes of the 3rd Defendant approving the transfer of the Share to the 5th Defendant (“Chui ”) and his resignation as director of the 3rd Defendant.
(collectively “Additional Documents ”)
8. The Plaintiff denies having signed any of the Additional Documents - the only document he admits to have signed was the Loan Note. In other words, on the Plaintiff’s case, his signature on the Additional Documents had been forged.
9. It is the Plaintiff’s case that on at least 2 occasions, in May 2002 and before September 2002, he had approached Lam with a view to making repayment of the Loan. On those occasions, Lam told him there was no hurry to repay the Loan. Subsequently, unknown to the Plaintiff, the Land was developed (“Development ”) and the units in the Development were sold. Further, the Share was transferred to Chui who had also replaced the Plaintiff as a director of the 3rd Defendant.
10. It is the Plaintiff’s case that the 2nd Defendant has wrongfully and fraudulently caused the transfer of the Share to Chui in order to deprive him of his interest in the Land and the Development. In this action, the Plaintiff claims inter alia a declaration that the Additional Documents are null and void and of no legal effect, that he remains a shareholder and director of the 3rd Defendant, that the 1st to 3rd Defendants hold his investment in the Land upon trust for him, account of profits from the investment, and for a discharge of the security over the Share.
11. The Defendants, on the other hand, claim that the Plaintiff failed to repay the Loan or interest within 2 years pursuant to the Loan Note. In consequence, the Share became vested in the 2nd Defendant and was subsequently transferred to Chui in November 2006. The Defendants rely on the Additional Documents which appear to bear the signature of the Plaintiff. As the Writ of Summons in this action was only issued in February 2013, the Defendants aver that the Plaintiff’s claim is barred by reason of limitation or on the ground of laches and the Plaintiff has lost his equity of redemption. The Defendants further contend that the Plaintiff has elected to withdraw from the joint venture investment and is estopped from pursuing any claims against the Defendants.
DELIBERATION
The Applicable Principles
12. I shall first remind myself of some of the well‑established principles concerning amendments to pleadings.
13. It is a guiding principle of cardinal importance on the question of amendment that generally speaking, all such amendments ought to be made “for the purpose of determining the real question in controversy between the parties to any proceedings or of correcting any defect or error in any proceedings”: Re Playmates Investments Ltd [1996] 4 HKC 577 at 582E-H (per Le Pichon J as she then was); Natamon Protpakorn v Citibank NA [2009] 1 HKLRD 455 at para. 25 (per Cheung JA); Hong Kong Civil Procedure 2014 Vol. 1 para. 20/8/6.
14. Leave is readily granted to amend before trial unless it can be shown that the new claim based on the proposed amendment is bound to fail. While the court is entitled to have regard to the merits of the case, it should only do so when the merits are readily apparent, and are so apparent as not to require prolonged investigation: Natamon Protpakorn v Citibank NA supra at para. 25 (per Cheung JA).
15. If the proposed amendments are bound to fail, no leave to amend should be granted. In this regard, the court will take the applicant’s proposed pleaded case to the highest: Bank of China v Leigh Hardwick unrep., HCA 1110 of 2006, 28 August 2013, per Anthony Chan J at para. 2.
16. Absent any real prejudice, an application for amendment, albeit late, must be decided upon the general principle that a court of law seeks to adjudicate on the real issues and disputes between the parties and, if possible, technical and procedural rules should not stand in the way of allowing the parties to raise their real claims or defences before the court for adjudication: VSC Building Products Co Ltd v Kono Insurance Ltd., unrep. HCA 947/2005, 9 September 2009, per A Cheung J (as he then was) at [22].
17. Where prejudice is claimed, the burden is on the party opposing the amendment to show prejudice. There is no injustice to the opposing party if he can be compensated by appropriate orders as to costs: Re Playmates Investments Ltd supra at 582H, 584C (Le Pichon J as she then was).
18. Lastly, in giving effect to the underlying objectives of the Rules of the High Court, including those concerning amendments, the court shall always recognize that the primary aim in exercising the powers of the court is to “secure the just resolution of disputes in accordance with the substantive rights of the parties”: RHC O 1A r 2(2).
The 1st Objection
19. The original paragraph 13 of the Statement of Claim is in these terms:
“Hsu Elder thereupon approached Lam for assistance. Lam suggested that a loan of HK$2 million be made by his company, South Sea Textiles to Hsu Elder repayable in two years time with interest at a rate described as “P” (which in the context could only be understood as Prime Rate of major banks in Hong Kong), with Hsu Elder’s share in the South National as security. Hsu Elder signed a note dated 12 September 2000, evidencing the loan and the said security. Apart from signing the aforesaid note, Hsu Elder signed no other document in relation to the loan.”
20. The amended paragraph 13 is in these terms:
“Hsu Elder thereupon approached Lam for financial assistance. Lam suggested that a loan of HK$2 million be made by his company, South Asia Sea Textiles to Hsu Elder repayable in two years time and Hsu Elder agreed. with interest at a rate described as “P” (which in the context could only be understood as Prime Rate of major banks in Hong Kong), with Hsu Elder’s share in the South National as security. Hsu Elder signed a note dated 12 September 2000, evidencing the loan and the said security. Apart from signing the aforesaid note, Hsu Elder signed no other document in relation to the loan .”
21. As I understand it, the Defendants’ objection appears to be this.
22. In the original paragraph 13, the Plaintiff’s case was that he signed the Loan Note evidencing the Loan and “the saidsecurity” ie the Share. With the proposed amendment, the Plaintiff is seeking to withdraw an admission and fundamentally change his case by deleting the plea of the Share as “security”. But that is not all. The Plaintiff has further come up with a new story in paragraph 13B of the Draft that, not only was there no agreement on his part to provide “security”, in fact there was an Oral Collateral Term, in the form of a representation by Lam, not to enforce the words in the Loan Note providing for the Share as “security”. This change of the Plaintiff’s case is critical to his allegation of forgery of the Additional Documents - this is because, on the basis of the original paragraph 13, there was no reason why the Plaintiff would be unwilling to sign the Additional Documents as part of the “security” which he had agreed to provide. In other words, there would simply be no need for any of the Defendants to forge the Plaintiff’s signature on the Additional Documents.
23. With respect to Mr Liao SC, I do not think there is a withdrawal of admission by the Plaintiff.
24. As submitted by Mr Neoh SC at the hearing, looking at the amendments as a whole, all that the Plaintiff has done is to replace the original paragraph 13 which contains a summary of the Loan Note with the new paragraph 13A which pleads the terms of the Loan Note in its entirety. No doubt, the Plaintiff has added a new plea of Oral Collateral Term at paragraph 13B, and repeated his denial of signing any other documents relating to the Loan apart from the Loan Note at paragraph 13C. Nevertheless, in so far as the Plaintiff has previously admitted signing the Loan Note, the same admission remains in the Draft. In so far as the Plaintiff has admitted that the Loan Note constitutes evidence of the security, this is self-evident from the term of the Loan Note itself which is pleaded in its entirety in paragraph 13A.
25. It seems to this court that there is nothing unjust in allowing the amendment or that it would cause any real prejudice to the Defendants. If the Defendants see fit to contend that the Plaintiff has “changed his story” by now denying his agreement to provide the Share as security, they can still make the point at trial. Similarly, if the Defendants see fit to contend that this “change of story” adversely affects the credibility of the Plaintiff, again the point will not be lost by reason of the amendment and they can still make it at trial.
The 2nd Objection
26. In paragraphs 13B and 29B of the Draft, the Plaintiff has added a plea of Oral Collateral Term in the form of a representation by Lam, on behalf of the 2nd Defendant, that the security for the Loan ie the Share would not be enforced and words to such effect in the Loan Note were merely for the eyes of Mr Lu Xin (呂振萬), founding shareholder and Chairman of the 2nd Defendant. It was in reliance of this representation that the Plaintiff agreed to the Loan and signed the Loan Note. Accordingly, the 2nd Defendant is not entitled to enforce the security.
27. The Defendants contend that by the Oral Collateral Term, the Plaintiff is alleging a conspiracy to defraud Mr Lu and hence the 2nd Defendant. In effect, the Plaintiff is seeking to introduce a new allegation of “fraud” for the first time after a lapse of nearly 14 years since the Loan Note was signed and the court should carefully scrutinize the Plaintiff’s conduct and the explanation for omitting to plead the Oral Collateral Term in the original Statement of Claim: Associated Leisure Limited v Associated Newspapers Ltd . [1970] 2 QB 450 (late plea of justification). In this regard, the Defendants contend that the Plaintiff’s “purported explanation was shadowy and incapable of belief”.
28. Further, the Defendants contend that the Oral Collateral Term is illegal because it involves the making of a false representation to Mr Lu and therefore will not be enforced by the court: Halsbury’s Laws of Hong Kong 2nd Ed. (2012) Vol. 18 paras. 115.207-115.208; Chung Mui Teck v Hang Tak Buddhist Hall Association [2001] 2 HKLRD 471, 477I‑478A. In other words, the plea of Oral Collateral Term is bound to fail and the court should not give leave to amend.
29. I have considered the Plaintiff’s explanation for the omission in his first affirmation and do not find anything in it which is inherently incapable of belief. Further, unlike what was in issue in Chung Mui Teck v Hang Tak Buddhist Hall Association supra, I do not agree that the plea of Oral Collateral Term amounts to a plea of conspiracy to defraud or necessarily involves the commission of an illegal act. Further, with respect, I do not agree with Mr Liao SC’s submission that the consideration for the Oral Collateral Term is illegal.
30. On a fair reading of the plea, it is no more than a representation by Lam that the security mentioned in the Loan Note would not be enforced by the 2nd Defendant, that this representation was relied upon by the Plaintiff in agreeing to the Loan and signing the Loan Note and, for that reason, the 2nd Defendant is not entitled to enforce the security mentioned in it. As far as consideration is concerned, it was provided by the Plaintiff in agreeing to the Loan and signing the Loan Note. It is a classic example of a collateral warranty/ contract which, if accepted by the court, varies the terms of a written contract between the parties: Chitty on Contracts 31st Ed. Vol. 1 paras. 12‑004 – 12-006.
31. In Bank of China (Hong Kong) Limited v Fung Chin Kan (2002) 5 HKCFAR 515, Litton NPJ (with whom the other members of the Court agreed) observed at [55] that although the courts had leaned against finding the existence of collateral warranties or collateral contracts, the modern tendency is to take a far less restrictive view. At [57], his Lordship stated the test for ascertaining a collateral agreement in the following term:
“A collateral agreement, like any other contract, must be objectively viewed, so the test must be this: On the totality of the evidence, must the parties be taken to have intended that the representation made by one of them should form part of the basis of the legal relationship between them?”
32. As the authorities show, if the objection is put on the basis that the plea is bound to fail, the court will take the applicant’s proposed pleaded case to the highest. As submitted by Mr Neoh SC, in the present case, it means the Defendants would have to show that the plea is incapable of belief by any trial judge. But the viability of this plea of Oral Collateral Term can only be assessed on “the totality of the evidence”, particularly, in the light of the credibility of the Plaintiff and Lam. This is clearly a matter which calls for viva voce evidence at trial when the testimony of the witnesses can be tested. It is difficult to see how, at the interlocutory stage, the court can resolve the matter in favour of the Defendants and rule that the plea of Oral Collateral Term is bound to fail.
33. This action is still in an early stage. It seems to me that justice requires the plea of Oral Collateral Term to be investigated by the court, and, in the absence of any appreciable prejudice to the Defendants (other than having to deal with the plea), leave to amend should be given: Associated Leisure Limited v Associated Newspapers Ltd . supra at 457E‑G; VSC Building Products Co Ltd v Kono Insurance Ltd supra at [22].
CONCLUSION
34. For the above reasons, and in the exercise of my discretion, I would allow the amendments as per the Draft.
DISPOSITION AND COSTS ORDER NISI
35. There would be an order in terms of paragraph 1 of the Plaintiff’s summons dated 25 February 2014.
36. As far as costs are concerned, adopting the approach of Yam J in Lessy SARL v Pacific Star Development Ltd & Anor [1996] 2 HKLR 1, there shall be an order nisi that:
(1) the Plaintiff shall bear the Defendants’ costs of and occasioned by the summons, excluding the costs of the hearing on 27 June 2014, to be taxed if not agreed, with certificate for two counsel;
(2) the Defendants shall bear the Plaintiff’s costs of the hearing on 27 June 2014, to be taxed if not agreed, with certificate for two counsel.
37. Lastly, I thank counsel for their detailed and helpful submissions.
(Peter Ng)
Mr Anthony Neoh SC and Mr Jonathan Chang, instructed by Simon Si & Co, for the plaintiff
Mr Andrew Liao SC, Mr Kenneth C K Chow and Mr Lawrence Hui, instructed by Herman H M Hui & Co, for the 1st , 2nd , 4th and 5th defendants
Mr Kenneth K H Lee, instructed by Waller Ma Huang & Yeung, for the 3rd defendant