NG PIT HAK AND OTHERS v. HO CHIU

   HCA 2359/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2359 OF 2008

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BETWEEN

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D E C I S I O N

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Introduction

1.  This is the 1^st Plaintiff’s application to appeal out of time against Master Kwang’s order made on 12 May 2009 striking out the Plaintiffs’ Statement of Claim pursuant to Order 18, rule 19 of the Rules of the High Court and the inherent jurisdiction of the Court on the ground that it failed to disclose any reasonable cause of action, is frivolous or vexatious or is otherwise an abuse of process of the Court.

2.  The Plaintiffs and the Defendant were shareholders of Sino Link Group Limited (the “Company”). According to their Statement of Claim, the Plaintiffs’ pleaded case is as follows. The Company formed a joint venture with Guangdong Investment Ltd to operate an electro-power station in the Peoples’ Republic of China (the “PRC”) in 1997. In or about 2000, Guangdong Investment Ltd agreed to pay the Company RMB125 million for the Company to withdraw from the joint venture (the “Withdrawal Money”). The Withdrawal Money was paid to the Company by stages between 2001 and January 2003. It was not until the beginning of 2004 that the Plaintiffs first became aware that the Defendant had pocketed all the Withdrawal Money. In addition, between 2004 and 2005 the Company made a profit of HK$40 million from the sale of 80 million shares in Securities No. 1176 (the “Securities Profit”). The Defendant failed to pay the Plaintiffs their share of 80% in the Securities Profit. On 19 November 2008, the Plaintiffs issued the Amended Writ of Summons and Statement of Claim against the Defendant.

3.  On 12 December 2008, the Defendant applied to strike out the Plaintiffs’ Statement of Claim. The application was supported by an affirmation of the Defendant. The basis of his application was that the Company was dissolved, having been struck off from the register of the Companies Registry on 3 June 2005 pursuant to section 291(6) of the Companies Ordinance. The Defendant had also ceased to be a director of the Company since 17 August 1999. The application was set down for hearing before Master Kwang on 12 May 2009.

4.  On 19 December 2008 Master Lung gave directions for the Plaintiffs to file affirmation in opposition within 28 days, for the Defendant to file affirmation in reply within 28 days thereafter and that no further affidavit may be filed without leave of the Court, which must be applied for at least 14 days before the date of hearing.

5.  No affirmation in opposition was filed by the Plaintiffs until three days before the hearing on 9 May 2009. In the meantime, on 9 March 2009, the Plaintiffs took out proceedings under Miscellaneous Proceedings No. 428 of 2009 against the Registrar of Companies and the Defendant to restore the Company on the register pursuant to section 291(7) of the Companies Ordinance (the “Restoration Application”). The Restoration Application was set down for hearing before Bharwaney J on 11 March 2010. Decision was reserved. Thus, as at the date of hearing of the striking out summons before Master Kwang and the date of hearing of the appeal against Master Kwang’s decision now before me, the outcome of the Restoration Application remained unknown.

6.  At the hearing before Master Kwang, the learned Master brought to the parties’ attention that the Plaintiffs’ affirmation was filed without leave of the Court. The Plaintiffs’ counsel then applied for an adjournment to enable the Plaintiffs to take out proper application for leave to file affirmation in opposition and for the Defendant to file affirmation in reply. The Defendant’s counsel objected. Master Kwang adopted a proactive case management approach. He refused the Plaintiffs’ application for adjournment and ordered the Plaintiffs’ affirmation filed without leave of the Court to be expunged from the record of the Court. Then he dealt with the merit of the striking out application and allowed the application.

Discussion

7.  The Plaintiffs’ affirmation having been expunged is not available in the Court’s record. No copy has been produced at the hearing of the appeal. No reliance on that affirmation has been sought by the 1^st Plaintiff. I have no knowledge of what was contained in the expunged affirmation. However, the thrust of the 1^st Plaintiff’s appeal according to his affirmation in support of the appeal and his submission is that Master Kwang should have adjourned the hearing of the striking out application until after the disposal of the Restoration Application, the decision of which will be delivered shortly. He has no dispute that the Company had been struck out and dissolved pursuant to section 291(6) of the Companies Ordinance on 3 June 2005. As Master Kwang considered the Plaintiffs’ case absolutely hopeless on the basis of the pleading and proceeded on the basis of striking out on the ground that the Statement of Claim disclosed no reasonable course of action, there was no need to consider any evidence by affirmation from either side. No prejudice or injustice could have been caused to the 1^st Plaintiff by expunging the affirmation. Accordingly, I concur with Master Kwang’s proactive approach in expunging the Plaintiffs’ affirmation and to dispose of the striking out application on the basis of the pleading and undisputed facts without an adjournment.

8.  On the question whether the Plaintiffs could have a viable cause of action against the Defendant, Master Kwang queried how the Plaintiffs, being shareholders of the Company, could maintain a personal claim against another shareholder in respect of a wrong or wrongs allegedly done to the Company, namely, in pocketing or appropriating the Withdrawal Money and Securities Profit. He held that the Plaintiffs had no viable cause of action against the Defendant. In summary, his reasons are as follows. The basic principle is that if a wrong is done to a company, the company is the only proper plaintiff to take action against the wrongdoer: Foss v Harbottle (1843) 2 Hare 461. There are exceptions under that rule. However, Master Kwang held that such exceptions were inapplicable to a dissolved company. That must be right. If a company is dissolved, all property and rights whatsoever vested in or held on trust for the company immediately before its dissolution, shall be deemed to be bona vacantia and shall belong to the Government, by virtue of section 292(1) of Companies Ordinance. The exception under the rule is Foss v Harbottle could not have the effect of overriding a statutory provision. Thus, all along, the right to sue the Defendant for misappropriation of the Company’s funds was in the Company, which as a result of its dissolution was vested in the Government. The learned Master’s conclusion was based on well established principles and could not have been faulted. Accordingly, the Plaintiffs even as majority shareholders had no cause of action against the Defendant. The learned Master’s decision could not have been different even if the Company had been restored to the register as at the date of hearing before him.

9.  The 1^st Plaintiff argued that the Plaintiffs or the Company, had it not been struck out, had a very substantial claim of $2 billion against the Defendant. The Defendant should not be allowed to go unpunished and the Plaintiffs be left without a remedy merely because the Company was struck out. He argued that justice would require the learned Master to have adjourned the hearing pending the outcome of the Restoration Application. Once the Company is restored, it could substitute the Plaintiffs in the action. If the action was struck out, the Company would have to start a fresh action and would face difficulties caused by limitation.

10.  That may well be the case. But a court faced with an application to strike out a statement of claim shall decide on the merit of the application as at the date of filing of the statement of claim. The considerations now urged upon me are irrelevant. The learned Master would have been wrong to have taken those matters into account. It would have been wrong to allow someone who had no right to sue to start an action just for the sake of keeping the action alive for another party to substitute its place to avoid problems caused by limitation. That would have been a clear case of abuse of process of the court as well. Whether the Plaintiffs had a viable cause of action and whether the Company’s claim would be time-barred for action are different issues. One should not be allowed to cloud the other.

11.  On the facts of the present case, according to their pleaded case, the Plaintiffs were aware of the misappropriation in early 2004. They were directors of the Company. For a year or more until the Company was struck out, they took no action against the Defendant. Not only that, they allowed the Company to be struck out from the register. Thereafter, they waited for another four years before filing the Statement of Claim in 2008. They were represented by solicitors. They should have been advised that only the Company could be the appropriate plaintiff and that they should take steps to restore the Company to the register. It took them more than three months before they took out the Restoration Application. The 1^st Plaintiff argued, without any supporting evidence, that it was the Defendant who delayed the progress of that application. Be that as it may, the Plaintiffs were to blame for allowing their claim to idle for four years before starting the proceedings. There are good public policy reasons for the limitation provisions. If the Plaintiffs decided to sleep on their claim, they have to meet the consequence of their own delay in taking action if they cannot rely on the provisions under the Limitation Ordinance extending the period of limitation.

12.  Lastly, I have two observations to make. These observations are not relevant for my decision. Firstly, the Defendant resigned as director of the Company in August 1999. The Withdrawal Money and Securities Profit were paid in 2001 through to 2003 at a time when the Plaintiffs were presumably in control of the Company while the Defendant was apparently not in control of the Company. The Plaintiffs came to know about the misappropriation in early 2004. The payments were very substantial. Under such circumstances, it is bewildering that the Plaintiffs could have no knowledge about those payments and their misappropriation for three years and that they could have simply stood by for another four years without action. Another observation is that according to the joint venture agreement pleaded in the Statement of Claim and produced by the Plaintiffs in their answer to the Defendant’s request for further and better particulars, the parties to the joint venture were neither the Company nor Guandong Investment Ltd. For the Company to be able to sue in this action, the Statement of Claim would have to be completely overhauled. Substituting the Plaintiffs by the Company alone will not suffice.

Conclusion

13.  The decision of Master Kwang was passed on 12 May 2009. The 1^st Plaintiff waited until 7 August 2009 to file his notice of appeal. The appeal was out of time. He offered no explanation for the delay in his affirmation in support of his appeal. In answer to the question of the Court, he said that the delay was due to the processing of his application for legal aid. However, as the Court’s records show, he only applied for legal aid on 11 August 2009 after he filed his notice of appeal. His legal aid application was refused on 16 September 2009. His explanation was untrue.

14.  Accordingly, the 1^st Plaintiff has failed to give any reasonable explanation for appealing out of time and has shown no prospect of success in his appeal. His application for leave to appeal out of time is therefore refused and his appeal dismissed with costs.