HIGHFIT DEVELOPMENT CO. LTD (IN LIQUIDATION) v. KOO SIU YING AND OTHERS

HCA 494/2015
[2018] HKCFI 105

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 494 OF 2015

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D E C I S I O N

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1.  This is the application of Koo and Ling[1] for leave to appeal against the Decision of this court dated 9 August 2017 (Decision). The Decision arose from an appeal against a Master’s decision which concerned Development’s joinder of Holdings in these proceedings as the 3^rd defendant and the amendments of the SOC.

2.  There are 2 grounds advanced in the draft Notice of Appeal, namely: (a) whether the joinder of Holdings and the amendments in respect of the new claims against it should be allowed in view of the limitation defence (Ground 1); and (b) whether the amendments that Holdings was the alter ego of Koo and Ling and/or that the corporate veil of Holdings should be pierced such that it should be treated as equal to Koo and Ling were properly particularised (Ground 2). 

3.  With respect, I am unable to agree that either of these Grounds has a reasonable prospect of success: see s.14AA(4)(a)[2] of the High Court Ordinance, Cap 4 and SMSE v KL [2009] 4 HKLRD 125, §17.

4.  In respect of Ground 1, it was held that the argument based on the relation-back principle (see s.35(1)(b) of the Limitation Ordinance, Cap 347 (Ordinance)) was misconceived because this action was instituted more than 14 years after the Transaction and it is, prima facie, time-barred: see Decision, paras 16 and 17.  Another way of putting it is that the relation-back principle was not engaged. 

5.  This is the effect of the Court of Appeal (CA) judgment in Siberian Mining Group Co Ltd v Cheung Keng Ching & Ors, HCMP 726/2017, 14 June 2017, §§4 and 6.  This authority is consonant with the English CA judgment in Leicester Wholesale Fruit Market Ltd v Grundy [1990] 1 WLR 107, at 111E and 113G-H.  Ground 1 has therefore no reasonable prospect of success. 

6.  In the course of his submissions, Mr Khaw SC, who appeared with Ms Seto for Koo and Ling, argued that s.35(3) of the Ordinance created a free-standing obligation on a party seeking to add a new claim (as defined by s.35(2)) to an existing action at a time when the limitation period has expired, regardless of the relation-back principle.  For instance, to satisfy the condition under s.35(6)(b) and (7) that the new party is necessary for the determination of the original action.

7.  This is a new argument which was not previously advanced.  I am unable to agree with it.  It is reasonably clear from the wording of s.35(3) that it applies where the relation-back principle is engaged: “… the court shall not allow a new claim within subsection (1)(b), …”. 

8.  Further, I am unable to find a good reason to justify the construction advocated because a party joined in an action which is prima facie time-barred can apply to have it struck out.  There is therefore no need for additional safeguard or hurdle before the amendment is allowed.    

9.  In respect of Ground 2, the averments in the ASOC which went to support Development’s case of alter ego or for piercing the corporate veil as an alternative were as follows :

(a) Koo and Ling were, at the material time, the only shareholders and directors of Holdings.  They were (and are) in control of that company: §§9 and 20D(1) of ASOC;

(b) Koo and Ling used Holdings solely for the purpose of entering into the Share Sale Agreement: §20D(2) of ASOC;

(c) Holdings had (and has) no other business operations and/or assets except holding the Huifa Shares: §20D(3) of ASOC;

(d) The use of Holdings was to conceal the fact that the Huifa Shares were in substance transferred to Koo and Ling: §20D(2) of ASOC;

(e) The use of Holdings was for the purpose of shielding Koo and Ling from potential claims from Development and Lim: §24C(2)(iii)(a) of ASOC; and

(f) The use of Holdings rendered it more difficult for Development and Lim to discover the Transaction: §24C(2)(iii)(b) of ASOC.

10.  These averments should be read in conjunction with Development’s pleaded case against Koo and Ling that they had caused it to sell the Huifa Shares to Holdings at an undervalue (which was not paid) and without disclosing that Holdings was their company.

11.  It is not disputed that, for the present purpose, the court is not concerned with the merits of the pleaded case unless it is of the view that it is bound to fail: see Decision, para 25.

12.  Bearing in mind this important point of principle, I am unable to see why the plea of alter ego/piercing the corporate veil was not adequately particularised. 

13.  It was submitted on behalf of Koo and Ling that the court had given no reason for holding that the plea of alter ego/piercing the corporate veil was sufficiently particularised.  The authority of English v Emery Reimbold & Strick Ltd [2002] 1 WLR 2409, §§18-19, 22-25 was referred to. 

14.  I believe the adequacy of the plea is self-evident.  Certainly in respect of the plea of alter ego, it is difficult to see what other particulars would be required.   

15.  In the course of Mr Khaw’s submissions, it was clarified that the complaint under Ground 2 is confined to the alternative case for piercing the corporate veil. 

16.  In Prest v Petrodel [2013] 2 AC 415, at 484, §28 (Lord Sumption), the distinction between the principles of concealment and evasion which underpin respectively the concepts of alter ego and piercing the corporate veil was explained :

“… The concealment principle is legally banal and does not involve piercing the corporate veil at all.  It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant.  In these cases the court is not disregarding the “facade”, but only looking behind it to discover the facts which the corporate structure is concealing.  The evasion principle is different.  It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. …”

[emphasis added]

17.  It was submitted, relying on Prest v Petrodel, §§27-28 and 35 of the judgment of Lord Sumption, that piercing the corporate veil only occurs in exceptional circumstances.  There is no disagreement to this proposition.       

18.  However, it must be borne in mind, firstly, that the dividing line between the two principles may not be readily apparent.  Secondly, the two may overlap. 

19.  In this case, Development had pleaded a case of breach of fiduciary duties and breach of trust against Koo and Ling (see paras 17, 18 and Section E of the ASOC), as well as an allegation of evasion (see paras 9(e) and (f) above).  Therefore, the 2 elements (see para 16 above) of existing legal right against the controller of the company and interposing a company to defeat the right or frustrate its enforcement were met. 

20.  Finally, there are a number of criticisms made in respect of various averments made in paras 20D and 24C(2) of the ASOC as “plainly insufficient”, “bare assertion”, “carries no meaning at all”, “neither here nor there”, “self-serving”, “empty allegation”, “at best neutral” and “does not assist Development’s case at all”.  In my view, these criticisms conflate the adequacy of the plea with its merits.    

21.  For these reasons, this application is declined with costs to Development, to be taxed if not agreed.

22.  I am grateful to counsel for their assistance.