HAIFA INTERNATIONAL FINANCE CO LTD v. CONCORD STRATEGIC INVESTMENTS LTD AND OTHERS

HCA2308/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2308 OF 2006

---------------------

---------------------

------------------------

J U D G M E N T

------------------------

1. This is an appeal by the 1^st defendant against the order of the master made on 14 February 2008 dismissing the application of the 1^st defendant to strike out the plaintiff’s claim herein and granting leave to the plaintiff to amend its Statement of Claim.

Background

2. The plaintiff is a company incorporated in Hong Kong with backing from Hainan Development Bank.

3. Upon its incorporation in Hong Kong, its two directors were Liu Yu and Gu Rong who were also the shareholders nominated by Hainan Development Bank to hold the shares in the plaintiff on its behalf.

4. Liu Yu was the managing director responsible for the day to day running of the plaintiff while Gu Rong was a non-executive director taking no active part in the management of the plaintiff.

5. The 1^st defendant was incorporated in Hong Kong on 20 January 1997 initially under the name of Fine Honest Development Ltd.  On 18 May 1997 it changed its name to Concord International Group Ltd.  On 19 September it further changed its name to Concord Strategic Investments Ltd.

6. The 3^rd defendant is a company incorporated in the British Virgin Island on 12 December 1996 initially under the name of Union System Ltd.  On 22 May 1997, it changed its name to Concord International Group Ltd and on 29 August 1997 it further changed its name to Concord Strategic Investments Ltd.

7. The 2^nd defendant was at all material times a director of the 1^st and 3^rd defendant.

8. Prior to 15 October 1997, the shareholders of the 1^st defendant were :

(a)      the 3^rd defendant (about 40%);

(b)     the plaintiff (about 30%);

(c)     China Great Wall Coins Investment Ltd (about 30%); and

(d)     Liu Yu (about 0.0024%).

9. On 15 October 1997, the shareholders of the 1^st defendant transferred all of their shares of the 1^st defendant to :

(a)      Concord Group (BVI) Ltd (999,999 shares); and

(b)     the 2^nd defendant (1 share).

10. As of 1 August 2000, the 3^rd defendant owned 70% interest in the 1^st defendant.

11. As of 31 August 2000, the 3^rd defendant still held a 70% interest in Concord Group (BVI) Ltd, the parent company of the 1^st defendant.

12. During the period between April 1997 to September 1997 a total of eight loans were advanced by the plaintiff pursuant to eight written loan agreements.  In February 1998 a 9^th loan agreement was entered into by the plaintiff which was a consolidation of all the outstanding amounts from the earlier eight loans advanced by the plaintiff and stated therein to be $30,281,806.33.

13. In the 1^st loan agreement, the borrower was named as Fine Honest Development Ltd.

14. In the 2^nd and 3^rd loan agreements, the borrower was stated to be Concord International Group Ltd.

15. In the remaining six loan agreements including the 9^th loan agreement, the borrower was stated to be Concord Strategic Investments Ltd.

16. The 9^th loan agreement was effectively an embodiment of the total outstanding sums (including interest) owed to the plaintiff from the earlier eight loan agreements which was stated therein to be $30,281,806.33.  In that sense, it embodied and superceded the earlier eight loan agreements.

17. All the nine loan agreements were executed by Liu Yu for and on behalf of the plaintiff on the one hand, and by the 2^nd defendant for and on behalf of the borrower on the other hand.

18. In May 1998, Liu Yu suddenly left Hong Kong and resigned all his executive posts with the plaintiff only remaining as a non-executive director.  Since then Liu Yu has not returned to Hong Kong.

19. On 26 April 1999, Cheng Xiaoling and Chen Bing Lian were appointed as additional directors of the plaintiff. Upon their appointment, one of their tasks was to recoup the outstanding loans owed to the plaintiff.

20. In this respect, a settlement agreement was entered into by the plaintiff dated 17 October 2000 with the 3^rd defendant.  In that settlement agreement, it was (inter alia) stated that the 3^rd defendant owed to the plaintiff (up to 31 August 2000) the principal amount of $45,280,000 and interest thereon of $12,000,000.  I am told that the principal amount of the loan stated in the settlement agreement includes the amount of $30,281,806.33 being the subject matter of the present claim.

21. When no payment of the outstanding loans and/or any sums under the settlement agreement was received by the plaintiff, the plaintiff commenced HCA4442/2003 against the present 1^st defendant for repayment of such loan.

22. By its defence in HCA4442/2003, the present 1^st defendant alleged that the loans, if any, were not lent to the present 1^st defendant but were lent and advanced to another company registered in the British Virgin Islands whose name was exactly the same as that of the present 1^st defendant.

23. Not surprisingly the plaintiff’s application for summary judgment in HCA4442/2000 was dismissed by the master.

24. Under such circumstances the plaintiff commenced the present action herein against all three defendants alleging against them fraud principally, and also relying on breach of contract as an alternative or further cause of action.

25. The plaintiff has already obtained judgment against the 2^nd defendant on 8 November 2007,

26. A search report dated 10 September 2006 relating to the 3^rd defendant shows that it has already been struck off from the Register of Companies in BVIbut it is not apparent from that search report as to the date when it was struck off. 

27. Therefore in effect it is only the 1^st defendant left for the plaintiff to pursue in this litigation.

The plaintiff’s pleaded case

28. The case of the plaintiff as pleaded in its Amended Statement of Claim (in respect of which leave was granted by the master below to amend) is one of fraud as pleaded in paragraph 5 thereof which reads :

“In an attempt to deceive and/or defraud the Plaintiff, the 1^st and 2^nd Defendants caused and/or procured the 3^rd Defendant to impersonate the 1^st Defendant, both under the same name at all material times, to conclude with the Plaintiff 9 loan agreements evidenced and/or contained in writing over the period of 29 April 1997 to 27 February 1998, pursuant to which 9 loans were advanced by the Plaintiff to the 3^rd Defendant (which the Plaintiff does not admit) in the belief that it were the 1^st Defendant.”

29. Particulars of fraud were then pleaded (which I will deal with in more detail later in this judgment) as well as particulars of the nine loan agreements.

30. It was then pleaded that the 1^st defendant denies liability for repayment of the outstanding amount of the loans being $30,281,806.33 (despite demands of the plaintiff) on the grounds that the loans were made to the 3^rd defendant, but which was not known to the plaintiff until the 1^st defendant’s Defence was filed in HCA4442/2003 on 22 September 2004.

31. It was also pleaded that the 3^rd defendant has failed or refused to repay the plaintiff the sum of $30,281,806.33 or any part of it.

32. Paragraph 7 of the Amended Statement of Claim then pleads that the 1^st to 3^rd defendants are parties to a fraud in causing or procuring the plaintiff to have concluded the 9^th loan agreements and to have advanced the loans to the 3^rd defendant in the manner as pleaded.

33. The plaintiff further pleads section 26 of the Limitation Ordinance to the effect that the period of limitation shall not begin to run until the plaintiff has discovered the fraud.

34. The further or alternative case pleaded by the plaintiff is that the 3^rd defendant is liable to the plaintiff for repayment of the sum of $30,281,806.33 pursuant to the 9^th loan agreement.

Grounds for striking out

35. The application by the 1^st defendant to strike out the plaintiff’s claim was expressly stated to be on the following grounds as per its summons dated 8 November 2007 :

(a)      no reasonable cause of action against the 1^st defendant;

(b)     scandalous, frivolous or vexatious;

(c)     prejudice, embarrass or delay the fair trial of the action; and

(d)     otherwise an abuse of the process of the court.

I shall deal with each of the grounds put forward individually.

No reasonable cause of action

36. In so far as the application relies on there being no reasonable cause of action against the 1^st defendant, it was submitted that the particulars of fraud pleaded by the plaintiff was ambiguous, vague and does not comply with the rule of practice that fraud must be pleaded strictly and with the utmost particularity.

37. A total of nine particulars of fraud was pleaded by the plaintiff in the Amended Statement of Claim as follows :

“Particulars of Fraud

(1)   The 2^nd Defendant represented to the Plaintiff that the 1^st Defendant was the borrowing party of the loans and loan agreements.  By the time the 1^st and 2^nd loans were extended to the 1^st Defendant by the Plaintiff pursuant to the 1^st and 2^nd loan agreements, the 3^rd Defendant was not yet incorporated.

(2)   By reason of the matters pleaded in (1) above, the Plaintiff deposited the 1^st loan under the 1^st loan agreement to the account of the 1^st Defendant, then known as ‘Fine Honest Development Ltd’.

(3)   Neither the 1^st nor the 2^nd Defendant mentioned to the Plaintiff about the 3^rd Defendant insofar as the loans and loan agreements were concerned.

(4)   The 1^st and 3^rd Defendants deliberately adopted the same name as each other and held themselves out at large; they first changed their name to ‘Concord International Group Limited’ (協和國際控股有限公司) on 14 May 1997 and 22 May 1997 respectively, and then to ‘Concord Strategic Investment Limited’ (協和策略投資有限公司) on 10^th September 1997 and 29^th August 1997 respectively.

(5)   The 2^nd Defendant was a director of both the 1^st and 3^rd Defendants for the period 19 April 1997 to 27 February 1998.  All the loan and loan agreements were concluded with the Plaintiff by the 2^nd Defendant who purported to act for and on behalf of the 1^st Defendant, referring to ‘Concord Strategic Investments Limited’ (協和策略投資有限公司) in the 1^st, 4^th, 5^th, 6^th,7^th, 8^th and 9^th loan agreements and ‘Concord International Group Limited’ (協和國際控股有限公司) in the 2^nd and 3^rd loan agreements.

(6)   The 3^rd Defendant was an unregistered company in Hong Kong.

(7)   The 2^nd Defendant did not dispute about the 1^st Defendant being the borrowing party of the loans and loan agreements in the course of the Plaintiff’s subsequent investigation of the matter.  On this basis, the 2^nd Defendant signed the acknowledgement of liability of the loans and loan agreements for and on behalf of the 1^st Defendant with the Plaintiff on or about 15^th April 1999.

(8)   The Plaintiff was misled by the 2^nd Defendant into signing the agreement dated 17 October 2000 for production of financial statements and other relevant records by the 1^st Defendant.

(9)   The Plaintiff only became aware of the defence of the 1^st Defendant, namely, that it disputed about being the borrowing party of the loans and loan agreements, when it filed the defence in HCA4442/2003 on 22September 2004”

38. Given the above particulars pleaded, it was submitted by the 1^st defendant that those particulars do not even identify the individual either making or to whom the alleged representation was made, being the basis of the fraud.

Scandalousfrivolous and vexatious

39. In so far as this ground goes, it was submitted by the 1^st defendant that the present claim is scandalous, frivolous and vexatious in light of the fact that the plaintiff had issued a writ against the present 1^st defendant in HCA4442/2003 claiming for the same remedy but based on conflicting facts namely, that in HCA4442/2003, the plaintiff’s claim was based on the fact that all the loans and the loan agreements were made with the present 1^st defendant while in the basis of the present action for fraud it was pleaded that loans and loan agreements were made with the 3^rd defendant.

Limitation

40. The 1^st defendant accepts that the limitation period for contract or tort is one of six years from that date on which the action accrued and that section 26(1)(a) of the Limitation Ordinance provides that for an action based on fraud, “the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it”.

41. It was submitted by the 1^st defendant that the plaintiff could, with reasonable diligence, have discovered the fraud alleged by it from the Directors’ Report and Audited Financial Statement of the 1^st defendant for the period ending 31 March 1998 since the same made no mention at all about the alleged loans to the 1^st defendant, bearing in mind that the plaintiff was at that time a majority shareholder of the 1^st defendant.

42. In the circumstances the course of action based on fraud is now time-barred, even on the date when the writ herein was issued.

Decision

43. Having heard submissions from both parties, I am not persuaded that the present claim should be struck out as being scandalous, frivolous and vexatious for the reasons put forward by the defendant.

44. The fact that there has been an earlier action by the plaintiff in HCA4442/2003 does not make this claim scandalous for in HCA4442/2003 that claim was put on the footing that the loans had been made to the 1^st defendant and seeking repayment of same from the 1^st defendant.

45. The present case is brought on a wholly different cause of action, namely fraud by the 1^st defendant together with the 2^nd and 3^rd defendant.

46. Moreover, in bringing the present action on fraud, the plaintiff puts his case on the basis that if it should be found as a fact that the loans were made to the 3^rd defendant and not the 1^st defendant (which is not admitted by the plaintiff), then that was the fraud upon the plaintiff since it had always been the belief of the plaintiff that the loans were all made to the 1^st defendant.

47. In this sense there is no conflict between the factual basis put forward by the plaintiff in the two actions.

48. In so far as the limitation point goes, the dispute between the parties on that issue is really fact sensitive, namely, when it was factually that the plaintiff discovered the fraud alleged.  As such, limitation cannot be the basis of a striking out since it would depend on factual findings which cannot be made at this stage.  The limitation point should be pleaded by way of defence only and to be determined when findings of fact can be made at trial.

49. I turn now to deal with the real issue between the parties in this application, whether the plaintiff has a reasonable cause of action against the 1^st defendant in fraud.

50. In this respect, the first criticism by the 1^st defendant is that the particulars given by the plaintiff relating to the allegation of fraud is wholly insufficient.

51. One has only to look at the particulars pleaded by the plaintiff in the Amended Statement of Claim to see that those particulars pleaded cries out for further and better particulars in that the particulars already given does not state to which person of the plaintiff was the alleged misrepresentation made and which person of the plaintiff was misled by such representation.

52. If that was the only defect with the case of the plaintiff, it would not be difficult to cure same by a simple order for further and better particulars.

53. However, seemingly, that defect goes much deeper than the particulars given and is intrinsically connected with the very foundation of the plaintiff’s case in fraud which is as follows.

54. Firstly, it is already pleaded by the plaintiff that at the material times of the nine loans and loan agreements, Liu Yu was the managing director of the plaintiff responsible for running the affairs of the plaintiff.

55. The evidence not in dispute show that Liu Yu was the person who executed all the nine loan agreements on behalf of the plaintiff.

56. It is also not in dispute that the plaintiff and also Liu Yu were shareholders of the 1^st defendant at least up to 15 October 1997 and thereafter transferring their shares in the 1^st defendant to a holding company, Concord Group (BVI) Ltd.

57. The changes of name by the 1^st defendant took place in Mayand September of 1997.  Therefore it is inconceivable that up to the time when the shares of the plaintiff and Liu Yu were transferred to Concord Group (BVI) Ltd on 15 October 1997, Liu Yiu would not have known of the change of name of the 1^st defendant.

58. There is also documentary evidence before me in the form of written resolutions by the shareholders of the 3^rd defendant to change its name (when the 3^rd defendant changed its name to Concord Strategic Investment Ltd) and to adopt a Chinese name, both dated 29 August 1997.  On both those resolutions Liu Yu signed as a shareholder of the 3^rd defendant in his personal capacity.  Those resolutions were also signed by the 2^nd defendant, not in his personal capacity, but as representing Great Excellence Ltd, another BVI company.

59. In all those circumstances, it is inescapable that Liu Yu must have known of the 1^st and 3^rd defendants changing their respective names to the same name, not once but twice in 1997.

60. At the hearing before me, counsel for the plaintiff was quite adamant that the plaintiff’s case was put on the footing that Liu Yu was not a party with the other defendants to defrauding the plaintiff in the manner alleged, but rather was himself as much a victim of that deception as was the plaintiff.

61. That being the footing on which the plaintiff’s case is formulated, then it becomes so much more important that the plaintiff properly particularize its allegation of fraud, specifically as to who of the plaintiff was deceived by the representation alleged since the evidence quite clearly shows that Liu Yu could not have been the person deceived in the manner alleged by the plaintiff.

62. It is wholly insufficient for the particulars to say that the plaintiff, itself a legal entity, was the person deceived.

63. Not only must an allegation of fraud be sufficiently and fully particularized such that the other side can properly know what case it has to meet, an allegation of fraud must also be properly supported by evidence.

64. In the present case, I do not find the allegation of fraud to be properly supported by evidence.

65. Although the change of names by both the 1^st and 3^rd defendants on two different occasions but all within 1997 such that both of them took on similar names albeit that the 3^rd defendant was a BVI company must give rise to strong suspicion that some sort of scheme was afoot, however, suspicion alone does not allow for a half-baked plea of fraud as has happened here.

66. It is not without hesitation that given all the circumstances of this case, I must come to the only possible conclusion open to me and which is to strike out the plaintiff’s claim based on fraud against the 1^st defendant on the grounds that the plaintiff has no reasonable cause of action against the 1^st defendant.

67. Accordingly, the appeal by the 1^st defendant will be allowed and the order of the master below set aside.

68. There will be an order that in so far as the plaintiff’s claim against the 1^st defendant is concerned, the Amended Statement of Claim be struck out and the plaintiff’s claim against the 1^st defendant be dismissed.

69. There will be a costs order nisi that the plaintiff pays to the 1^st defendant the costs of this appeal as well as the costs of the hearing before the master and any costs occasioned by the order of the master.