IVY ZHU XU v. HONG KONG PETROCHEMICAL CO LTD

HCA 1248/2017

[2023] HKCFI 2071

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1248 OF 2017

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D E C I S I O N

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A.  Introduction

1.  By summons of 13 December 2022 (the “Striking Out Summons”), the plaintiff (“P”) seeks an order striking out §§10(e) and 19(e) (the “Impugned Paragraphs”) of the defendant’s Re-Re-Re-Amended Defence (“D” and “RRRAD”), on the basis that the Impugned Paragraphs are inconsistent with §§4(b)(ii), 10(c)(i), 10(c)(ii), 12(b)(ii), 19(c)(i) and 19(c)(ii) of the RRRAD (the “Specified Paragraphs”).

2.  On 6 April 2023[1], Master Elizabeth Cheung (the “Master”) dismissed the Striking Out Summons (the “Decision”).

3.  This is P’s appeal against the Decision.

4.  The main issues are whether D has via the Impugned Paragraphs put forward factually inconsistent pleas, and if so, whether it has any reasonable grounds for doing so.

5.  Mr David Fong appeared for P. Mr Jeremy Cheung with Ms Angel HY Wong appeared for D.

B.  Parties’ respective cases

6.  By the present action, P seeks against D repayment of 2 alleged loans (the “1^st Loan” and “2^nd Loan”, and collectively the “2 Loans”). The 2 Loans were made pursuant to 2 loan agreements both dated 14 January 2011 (the “1^st Loan Agreement” and “2^nd Loan Agreement”).

7.  The 2 Loans, according to P, are “roll-over” loans. P is not the original lender, but an assignee of the same. P’s case in gist is as follows:

(a)  In respect of the 1^st Loan, its genesis (or the root loan) was a loan advanced by Lau Siu Wing (“LSW”) to D (the “LSW Loan”). It was a director’s loan. It was in the sum of HK$12,480,000, and made in around 2009. LSW and D had since entered into at least 17 agreements extending repayment of the same. On 7 January 2011, LSW assigned the LSW Loan to C&S Chem Limited (“C&S”). When the LSW Loan was about to mature, C&S entered into the 1^st Loan Agreement with D “for the purpose of refinancing the [LSW] Loan with the 1^st Loan”[2]. On 28 March 2012, C&S assigned the 1^st Loan to Xu Guangkun (“Mr Xu”), who on 27 December 2016 in turn assigned the same to P;

(b)  The 2^nd Loan has followed a similar path. Its genesis (or the root loan) was a loan advanced by Korchina Logistics (H.K.) Limited (“KLHKL”) to D (the “KLHKL Loan”, and together with the LSW Loan collectively the “Root Loans”). It was in the sum of HK$15,184,260, and made also in around 2009. On 31 December 2009, KLHKL assigned the KLHKL Loan to Ms Lau Vivian Sio Kuan (“LVSK”). LVSK and D had since entered into at least 12 agreements extending repayment of the same. On 7 January 2011, LVSK assigned the KLHKL Loan to C&S. When the KLHKL Loan was about to mature, C&S entered into the 2^nd Loan Agreement with D “for the purpose of refinancing the [KLHKL] Loan with the 2^nd Loan”[3]. On 28 March 2012, C&S assigned the 2^nd Loan to Mr Xu, who on 27 December 2016 assigned the same to P.

8.  D first filed its defence 7 May 2018. 4 sets of amendments have subsequently been made (on 9 March 2020, 9 July 2021, 28 July 2021, and 28 December 2021, the last set for ease of reference being referred to as the “4^th Amendment”), resulting in the current Re-Re-Re-Amended Defence (RRRAD).

9.  D has pleaded a number of defences. They include breach of fiduciary duties owed to it by LSW and LVSK as directors, failure on their part to disclose interest, lack of records recording the requests, approvals and advancements of the Root Loans, the ineffectiveness of the various assignments, invalidity of the 1^st and 2^nd Loan Agreements for want of authority, and limitation defences under the Limitation Ordinance Cap 347.

10.  Amongst the defences pleaded, of most relevance to the present application are the following arising from the Impugned Paragraphs and the Specified Paragraphs:

(a)  In respect of the 1^st Loan:

(i)  D avers, on a further or alternative basis, “that there had never been any actual advancement and/or transfer of the said sum of HK$12,480,000 by LSW to [D]” – §4(b)(ii) of the RRRAD;

(ii)  Particulars on D’s bank accounts (the “Bank Accounts”) are then provided, leading to the averment that there “is no record of the actual advancement and/or transfer of any exact sum of HK$12,480,000 by LSW to [D] in any of the bank statements of the Bank Accounts in or around 2009” – Particulars (2) under §4(b)(ii);

(iii)  “At no time or at all did C&S ever lent to [D] the 1^st Loan (viz HK$12,480,000) or at all” – §10(c)(i);

(iv)  “Further or alternatively, at no time or at all did C&S ever refinanced the LSW Loan, the existence of which is denied by [D], with the 1^st Loan or at all …”
– §10(c)(ii);

(v)  §4(b)(ii) is added by the 4^th Amendment, whereas §§10(c)(i) and 10(c)(ii) (save some minor amendments) appear in the original Defence;

(vi)  The 4^th Amendment adds further §10(e) (1 of the 2 Impugned Paragraphs), that:

“Further or alternatively, [D] avers the 1^st Loan and/or any advancement and/or transfer of any sum by C&S to [D] pursuant the 1^st Loan Agreement, which is denied, is in the nature of quasi capital/equity instead of a debt:

(i) No maturity date of the 1^st Loan was scheduled in the 1^st Loan Agreement;

(ii) The 1^st Loan has not been rolled-over since its execution;

(iii) C&S was given the option to convert the 1^st Loan into equity/shares in the event of default on the part of [D] pursuant to Clause 7.1.”;

(b) The 2^nd Loan follows a similar pleading pattern:

(i)  D avers, also on a further or alternative basis, “that there had never been any actual advancement and/or transfer of the said sum of HK$15,184,260 by KLHKL (or LVSK) to [D]” – §12(b)(ii) of the RRRAD, with similar particulars in relation to absence of record in the Bank Accounts statements;

(ii)  “At no time or at all did C&S ever lent to [D] the 2^nd Loan (viz HK$15,184,260) or at all” – §19(c)(i);

(iii)  “Further or alternatively, at no time or at all did C&S ever refinanced the KLHKL Loan, the existence of which is denied by [D], with the 2^nd Loan or at all …” – §19(c)(ii);

(iv)  §12(b)(ii) is added by the 4^th Amendment, whereas §§19(c)(i) and 19(c)(ii) (save some minor amendments) appear in the original Defence;

(v)  Similar to the case of the 1^st Loan, the 4^th Amendment adds further §19(e) (the other of the 2 Impugned Paragraphs), that

“Further or alternatively, [D] avers the 2^nd Loan and/or any advancement and/or transfer of any sum by C&S to [D] pursuant the 2^nd Loan Agreement, which is denied, is in the nature of quasi capital/equity instead of a debt:

(i) No maturity date of the 2^nd Loan was scheduled in the 2^nd Loan Agreement;

(ii) The 2^nd Loan has not been rolled-over since its execution;

(iii) C&S was given the option to convert the 2^nd Loan into equity/shares in the event of default on the part of [D] pursuant to Clause 7.1.”

11.  Procedurally, it is also relevant to note that:

(a)  the 4^th Amendment was effected by way of a consent summons of 14 December 2021 (the “4^th Amendment Consent Summons”);

(b)  on 18 August 2022, D’s application to adduce expert evidence (“D’s Expert Evidence Summons”) on the nature of the 2 Loans was heard by Master Dick Ho; and

(c)  by summons of 23 November 2022, and in respect of the paragraphs of the RRRAD mentioned above, P sought further and better particulars on “the material facts in support of the reasonable grounds for making of the above inconsistent alternative(s) by [D]” (“P’s F&BP Summons”).

C.  Parties’ stances

12.  Mr Fong points to the Specified Paragraphs. He also refers to the supplemental witness statement of 周潔儀 (“Chau”) of 6 January 2023 filed on D’s behalf, wherein Chau says at §§32 and 34, inter alia, that:

“32. 承如上文所述，公司大部分於2009至 2011年的文件經已散失，唯本人亦一直在被告人代表律師的協助下，不斷翻查被告人的辦公室，才終於在2021年下旬找到被告人的再再再經修訂的答辯書中第4(b)(ii)段所提及的公司於匯豐銀行以及星展銀行賬戶的銀行賬單。

…

34. 本人經翻閱上述銀行帳戶由2009年至2011年月結單後，發現在該些關鍵時間，公司從未獲存入與第一筆借款或第二筆借款數目同等的款項 …」

13.  Mr Fong submits[4], in summary and conclusion, that:

“… this is a case where a defendant pleads on the one hand that the loans have never been advanced whilst pleading on the other hand that if the loans were advanced, they were in the nature of “quasi-capital/equity” despite its actual knowledge that even the bank statements of all of its bank accounts at the material time suggest otherwise.”

14.  Mr Cheung submits that by consenting to the filing of the RRRAD, P is estopped from applying to strike out the Impugned Paragraphs. The alternative case put forward by the Impugned Paragraphs (the “Alternative Case”) is founded on the same set of facts P has pleaded. D is not seeking to raise any inconsistent alternative plea grounded on different sets of facts. It is merely a fallback position, in the sense that:

“… [D] is merely advancing the plea that, if, contrary to what [D] avers, the Court finds in favour of [P] and rules that there is the ‘1^st Loan and/or any advancement and/or transfer of any sum by C&S to [D] pursuant to the 1^st Loan Agreement’, the said 1^st Loan and/or any sum so advanced or transferred are by nature quasi capital/equity but not debt. The same can be said in respect of the 2^nd Loan and the 2^nd Loan Agreement.”[5]

Mr Cheung submits further that even if the Court is to rule that D is indeed raising factually inconsistent alternatives, there are reasonable grounds for D to do so[6].

D.  Whether a factually inconsistent case pleaded

15.  For the following reasons, my view is that D has not by way of the Impugned Paragraphs pleaded any factually inconsistent alternative.

16.  Order 18 rule 10 provides as follows:

“Departure (O. 18, r. 10)

(1) A party shall not in any pleading make any allegation of fact, or raise any new ground of claim, inconsistent with a previous pleading of his.

(2) Paragraph (1) shall not be taken as prejudicing the right of a party to amend, or apply for leave to amend, his previous pleading so as to plead the allegations or claims in the alternative.”

(a)  Order 18 rule 10 however has to be read together with and is subject to Order 18 rule 12A. The latter was introduced by the Civil Justice Reform, which provides as follows:

“Pleading with inconsistent alternatives (O. 18, r. 12A)

A party may in any pleading make an allegation of fact which is inconsistent with another allegation of fact in the same pleading if—

(a) the party has reasonable grounds for so doing; and

(b) the allegations are made in the alternative.”

17.  Order 18 rule 12A only concerns allegations of facts. The raising of a point of law does not fall within its ambit – see Hong Kong Civil Procedure 2023 Volume 1 §18/12A/3.

18.  The Alternative Case raises two main constituent points:

(a)  whether the funds representing the Root Loans had been physically advanced (“Constituent#1”); and

(b)  if so, the nature of the advancements, and in particular whether each of them was “in the nature of quasi capital/equity instead of a debt” (“Constituent#2”).

19.  In so far as Constituent#2 is concerned, Mr Cheung submitted that during the hearing of D’s Expert Evidence Summons and in resisting the same, P’s own stance was that the nature of the 2 Loans was a question of law. There is some dispute as to what was exactly submitted and their implications. But irrespective of those disagreements, Mr Fong has now confirmed that “P accepts that whether the two loans are quasi-capital/equity is a question of law”[7](“P’s Acceptance re Constituent#2”).

20.  In respect of Constituent#1:

(a)  The wording of the Impugned Paragraphs and Specified Paragraphs should be noted. The newly added §§4(b)(ii) and 12(b)(ii) (together with the Particulars thereunder) make it quite plain that D’s primary case in those regards concerns the flow of the funds, in the sense that the relevant Bank Accounts statements contain “no record of the actual advancement and/or transfer of any exact sum” (emphasis added), but that if there had in fact been such actual advancements and/or transfers, then they were in the nature of quasi capital/equity instead of a debt;

(b)  Hence, according to D’s pleaded case, if there had been no actual advancement/or transfer of the exact sum as the records show, P’s claim fails. But if, contrary to the records, there had in fact been such actual advancements and/or transfers, the Alternative Case in relation to the nature of the advancement and/or transfer becomes engaged;

(c)  Viewed as such, there is clear force in Mr Cheung’s submissions, understood in the context of P’s Acceptance re Constituent#2, that the Alternative Case is grounded on P’s own plea, and is a fallback position in law[8];

(d)  In contending otherwise:

(i)  Mr Fong submitted in the course of the hearing that all 3 cases D relies on (Sun Tian Gang (孫天罡) v Changchun High & New Technology Industries Development Parent Co (長春高新技術產業發展總公司) [2018] 5 HKLRD 485, Binks v Securicor Omega Express Ltd [2003] 1 WLR 2557, and Poon Hau Kei v Hsin Chong Construction Co Ltd, Taylor Woodrow International Ltd Joint Venture (2004) 7 HKCFAR 148) concerned the plaintiff “feeding off” the pleaded defence or riding on the defendant’s defence;

(ii)  Whilst Mr Fong’s submissions are factually correct in respect of those 3 cases, I see no basis in principle to suggest that a defendant cannot in the reverse be permitted to “feed off” the plaintiff’s case. As Deputy Judge Le Pichon observed in Sun Tian Gang in §20 adopting Maurice Kay J’s observations in Binks at [8], that (with emphasis added):

“20. The Court of Appeal [in Binks] disagreed with the Judge and noted that CPR (Civil Procedure Rules 1998) Pt.22 r.1(2) enables the court to dispense with verification by a statement of truth when a statement of case is amended. Maurice Kay J (at [8]) took the view that amendment to plead in the alternative a case derived from an opponent’s documents, pleadings or evidence is capable of being such a case and he did not accept that ‘the purpose or effect of Pt.22 is to exclude the possibility of pleading inconsistent factual alternatives.’ ”

(e)  For the above reasons, I accept Mr Cheung’s submissions on Consituent#1 in the above regards;

(f)  I hence also accept Mr Cheung’s submission that Order 18 rule 12A is not engaged.

E.  Whether reasonable grounds

21.  For the following reasons, it is my view that even if what D has put forward amounts to pleading alternatives on inconsistent facts, so that Order 18 rule 12A is engaged, D has reasonable grounds in doing so.

22.  In Herostar Properties Ltd & Ors v Cheung Yu Ping (張宇平) & Anor [2018] 6 HKC 165, Deputy Judge Le Pichon observed at §38 that:

“… the purpose or objective of O 18 r 12A of the Rules of the High Court is to exclude dishonest or opportunistic and speculative claims. It is not intended to exclude honest claims reasonably advanced on the basis of incomplete information which points to alternative sets of fact, each of which would be legally viable as part of the party’s case.”

23.  In Hui Yin Sang（許彥生）& Anor v Tsoi Ping Kwan（蔡炳坤）& Anor [2010] 1 HKC 585, Au J (as he then was) observed at §25(10), with emphasis added, that:

“One of the objectives of [O 18 r 12A] is to prevent a party from pleading inconsistent cases in relation to a matter which is plainly within his knowledge, so that there could be no justification for him to put forward inconsistent factual alternatives. The party also simply could not properly verify the pleading as he is now required to do.”

24.  In that same context, the word “plainly” also appears in the observations of Zervos J in Yiu Ka Fung Vincent t/a Confidence Services Centre v Info-Vantage Ltd and Another (CACV 96/2014, 3 July 2015) at §63, also with emphasis added, that:

“Cases may arise where the party has no personal knowledge of the facts, but has evidence pointing to alternative possibilities. The pleading and verification of such alternative pleas is permissible as long as there is a reasonable basis for doing so on the evidence available. In such circumstances, where a party puts forward a pleading with alternative and mutually inconsistent versions of the facts, because the facts as known to him admit of alternative interpretations, the pleading is permissible and verifiable on the basis that the party believes on the evidence available that the facts will ultimately correspond to one or other of the possibilities pleaded. However, if the matters pleaded are matters which are plainly within that party’s knowledge, so that he must know which of the inconsistent alternatives is the correct one, then the pleading of inconsistent alternative cases is not permissible.”

25.  In the present case:

(a)  Even on P’s case, the background facts leading to the 2 Loans are not straightforward: the Root Loans took place quite some years ago, that there had been multiple extensions for their repayment, that the 2 Loans were given for the purpose of “refinancing” the Root Loans, and that there had been repeated assignments of the Root Loans and the 2 Loans;

(b)  P does not have any personal involvement in the material transactions. She was only an assignee several tiers removed from the Root Loans;

(c)  In so far as D is concerned, it is alleging impropriety against LSW and LVSK. It has also raised issues arising from the absence of records relating to the Root Loans and the 2 Loans, which is not unusual in cases when director improprieties are alleged;

(d)  Ms Chau is D’s finance and human resources manager. But she only joined D in 2011, after the time when the Root Loans were allegedly made;

(e)  Ms Chau bases her evidence on her interpretation of the records. She notes the absence of any records from the Bank Accounts statements which tally exactly the amount of the 2 Root Loans;

(f)  D is seeking to prove the negative here (that there had been no actual advancement/or transfer of the exact sums which correspond with the Root Loans). Proving the negative is not always easy. The absence of records relating to the Root Loans may not be conclusive as to the absence of any advancement or transfer. Objectively, and as a matter of common sense, there could have been setoffs not apparent from those bank statements. On the other hand, there were apparent references to the Root Loans in D’s 2009 Audit Report;

(g)  The relevant pleaded matters, and in particular the facts relating to Constituent#1, are hence not matters which are plainly within D’s current knowledge;

(h)  On such facts as outlined above, I conclude that there exist reasonable grounds for D to plead the Alternative Case to cover the scenario of there having actually been advancements or transfer of sums representing the Root Loans despite the Bank Accounts statements;

(i)  In the context of the present appeal, there is further the added consideration that striking out is only for plain and obvious cases, of which this case in respect of the Impugned Paragraphs is in my view not.

F.  Conclusion

26.  For the reasons set out above, I dismiss the appeal.

G.  Estoppel

27.  Having reached the above conclusion based on the substantial merits (or lack of merits) of P’s application and appeal, there is in fact no need for this court to consider the question of estoppel. But if necessary, and for the following reasons, I would also have held P to have estopped from seeking to have the Impugned Paragraphs struck out:

(a)  On 9 December 2021, D took out a summons for leave to amended as per the draft RRRAD attached;

(b)  On 14 December 2021, the 4^th Amendment Consent Summons was filed, whereby inter alia leave for D to file the RRRAD was consented to and granted;

(c)  In the Hong Kong Civil Procedure 2023 at §18/12A/4:

“It is as yet unclear as to whether these “reasonable grounds” [required to Order 18 rule 12A] must also be pleaded, contained or stated in the pleadings themselves”;

Mr Fong submits that it is in fact D’s case that it is not required to state any “reasonable ground” for pleading the Impugned Paragraphs in its pleadings[9];

(d)  But the above hardly assists P:

(i)  If P herself was of view that D was required to plead the “reasonable grounds” but had not done so, P could have objected to the same as opposed to consenting to the RRRAD being filed; and

(ii)  If P herself was of view that D was not required to plead the “reasonable grounds” and for that reason had not done so, P could have asked D to state its “reasonable grounds” before deciding whether to consent or to object;

(e)  As things turned out, the consent for D to file the RRRAD was not subject to any request, condition or reservation;

(f)  On 28 December 2021, D filed its RRRAD;

(g)  At that stage, P still took no step to seek to clarify the “reasonable grounds”, but proceeded on 8 February 2022 to file its Re-Re-Amended Reply (“RRAR”);

(h)  In the RRAR, and in reply to §10(e) of the RRRAD, all P has pleaded are as follows:

“34B. Save that there was no maturity date stipulated in the 1^st Loan Agreement, paragraph l0(e) is not admitted. It is further averred that the 1^st Loan was repayable upon demand.”

(i)  P’s reply to §19(e) of the RRRAD is to the same effects[10];

(j)  P only took out P’s F&BP Summons in November 2022, months afterwards;

(k)  In Compania Sud Americana De Vapores SA v Hin-Pro International Logistics Ltd [2015] 2 HKLRD 458, the Court of Appeal observed at §§16-17 as follows:

“16. The principle derived from Chanel Ltd v FW Woolworth & Co Ltd is that if a point was open to a party on an earlier interlocutory application and was not pursued, then it is not open to him to take the point at a later application when there has been no material change of circumstances and no new facts ...

17. The Chanel Ltd v FW Woolworth & Co Ltd principle is founded on the basis that the party has a responsibility to take the point when it is first reasonably available to him before the court and that it would be an abuse of process to delay taking it until a subsequent application …”

(l)  P could have pursued the issue of inconsistent alternatives by seeking clarifications in relation to the “reasonable grounds” before endorsing the 4^th Amendment Consent Summons. P did not do so. Not only that, she proceeded to plead to the Impugned Paragraphs without raising the point;

(m)  Mr Fong relies on P’s F&PB Summons and what happened during the hearing of the same as change of circumstances justifying its belated issuing of the Striking Out Summons. I do not accept those submissions. Those are not changes of circumstances, but only clarifications which P could have obtained earlier had P pursued the issue of inconsistent alternatives when it was first reasonably available to her.

H.  Overall disposition

28.  For the above reasons, I dismiss the appeal. I express my agreement to the Master’s Decision dismissing the Striking Out Summons.

I.  Costs

29.  Both Mr Fong and Mr Cheung accepted that costs of the appeal should follow the event.

30.  I order that P should bear the costs of this appeal, with certificate for one counsel.

31.  I have considered D’s statement of costs placed before this Court towards the end of the hearing. It covers only the fees of Mr Cheung. The costs as set out are HK$109,030. I find that amount overall reasonable, and summarily assess D’s costs of this appeal as such.