THE LIQUIDATORS OF WING FAI CONSTRUCTION CO LTD (In Liquidation) v. YIP KWONG ROBERT AND OTHERS

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 735 OF 2002

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D E C I S I O N

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1. From the chronology of events and matters brought before the courts in these proceedings involving Wing Fai Construction Company Ltd ("Company"), the Liquidators and the three former directors who are named as respondents in these proceedings, it is hard to envisage that there can be further applications involving any new matters to be dealt with by the Court before the substantive determination of the real issues between the parties. Yet, there is before me an application by the Liquidators of the Company for leave to file an Amended Points of Claim, to pursue the misfeasance proceedings against the respondent directors under section 276 of the Companies Ordinance. The misfeasance proceedings had been initiated by a Summons issued as early as 30 August 2004 ("Misfeasance Summons"), supported by the 11th Affidavit of David John Kennedy ("Kennedy Affidavit").

2. The application for leave to amend was made by a summons for directions issued on 22 May 2008 ("Summons for Directions"). The Amended Points of Claim seek to make minor amendments, by inserting the amounts of the total payments made out of the Company's accounts by the respondents over the period from 8 March 2001 to 9 May 2002, which payments were claimed to have been made by the respondents in breach of their fiduciary duties as directors of the Company, in breach of duty, in breach of trust, dishonestly and constituting a misfeasance.  The respondents object to the amendments sought to be made to paragraph 21 of the Points of Claim, which refer to the respondents being "guilty of misfeasance, in breach of duty and/or negligence" in authorizing the allegedly wrongful payments to the two companies identified in the Points of Claim ("Famous Capital" and “King Capital”).  It is claimed that these amendments seek to introduce a new cause of action in negligence, which was time-barred by the time of the issue of the Summons for Directions in 2008.

Has a new cause of action being introduced?

3. In the Misfeasance Summons, the Liquidators seek a declaration that the respondents as former directors of the Company were guilty of misfeasance and/or breach of duty and/or breach of trust in relation to the Company in misapplying the money of the Company.  The Summons also seeks an order for accounts and inquiries to be taken for ascertaining the sums payable by the respondents by way of compensation for misfeasance and /or breach of duty and /or breach of trust.  

4. As Kwan J (as she then was) made it clear in one of the earlier decisions handed down in these proceedings on 23 September 2009, the amendments made to section 276 (1) of the Ordinance, and the substitution of "breach of duty" for "breach of trust", were for the purpose of bringing actionable negligence of directors within the scope of the section.  References made in the Summons to "breach of duty" on the part of the respondents accordingly extend to the claim of negligence.  

5. The Kennedy Affidavit filed in support of the Misfeasance Summons refers, in paragraph 56, to the respondents' common law duties owed to the Company, "to exercise appropriate care and skill in the exercise of their powers".  Paragraph 58 of the Kennedy Affidavit refers to the respondents’ breach of their common law and fiduciary duties, in dishonestly directing, authorizing and/or permitting transfer of funds through cheques and LC facilities to Famous Capital and King Capital.  Paragraph 121 of the Kennedy Affidavit also refers to the respondents' breach of duties of care and trust, causing a direct misappropriation of the Company's assets.  

6. Turning to the original Points of Claim in its un-amended form, it pleads in paragraph 4 the fact of the respondents being directors of the Company.  Paragraph 20 refers to a Schedule which sets out full particulars of the payments made from the Company's accounts to Famous Capital and King Capital, complained of by the Liquidators.  Paragraph 20(a) pleads "particulars of breach" of the respondents, in drawing cheques on the Company's bank accounts and procuring payments from the Company's credit funds to Famous Capital and King Capital, and further pleads that, given the relationship between the first and second respondents and the directors of Famous Capital and King Capital, the respondents "knew or ought to have known that no goods were delivered" to the Company.

7. Paragraph 20(b) pleads that the respondents authorized the payments to Famous Capital and King Capital in settlement of purported invoices, stated to be for the sale and delivery of goods, when they "knew or ought to have reasonably known" that no goods had been or were to be sold or delivered to the Company.

8. Paragraph 22 of the Points of Claim pleads that as a result of the matters referred to, the Company suffered loss and damage.  It is also pleaded in paragraph 23 that no resolution of the Company in general meeting had been cast to all the rise the payments to Famous Capital or King Capital, and that the payments were "made improperly and in validly and constitute a misfeasance and/or breach of duty and/or breach of trust in relation to the Company" on the part of the respondents as directors.  In the prayer of the Amended Points of Claim, the liquidators claim a declaration that the respondents as former directors were guilty of misfeasance and breach of duty and breach of trust in relation to the Company by making or causing the payments in question to be made.

9. Having considered the Summons, the Points of Claim, and the Kennedy Affidavit, I consider that the claim of negligence was included in the original claims made in the misfeasance proceedings brought against the respondents in 2004.  The amendments sought to be made to paragraph 21 do not add any new cause of action not already contained in the original Points of Claim.

10. Leading Counsel for the 2nd respondent relies on the judgment in Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400 to argue that intentional and unintentional wrongdoing give rise to distinct causes of action, and that there is a sharp dividing line which separates cases of fraud and dishonesty from cases of negligence and incompetence.  

11. It was held in Paragon that for the purposes of Order 20 rule 5(2)(5), an amendment which sought to make a new allegation of intentional wrongdoing where previously no intentional wrongdoing had been alleged constituted the introduction of the new cause of action.  The sentiments expressed in the judgment of Millett LJ can be understood in the context of the facts of that case, where the plaintiffs sought to amend their claim of negligence, breach of fiduciary duty and breach of contract to allege fraud, conspiracy to defraud, fraudulent breach of trust and intentional breach of fiduciary duty.  It is well established that fraud must be distinctly alleged and proved.  As His Lordship pointed out in Paragon, dishonesty is not a necessary averment in a claim for breach of contract, and an allegation that the defendant "knew or ought to have known" is not a clear and unequivocal allegation of actual knowledge, and will not support a finding of fraud even if the court is satisfied that there was actual knowledge. It can hardly be disputed that a pleading that a failure to act is negligent cannot constitute a claim of dishonesty and fraud.  

12. That is not to say, however, that the facts pleaded in support of a claim of fraud and actual knowledge can never support any claim of negligence. In each case, the facts pleaded should be examined to ascertain whether the necessary ingredients are present to support the plea of the cause of action asserted.  In the words of Millett LJ, "a cause of action is defined by its factual ingredients, not by the name ascribed to it".  

13. On the face of the Points of Claim, paragraphs 18 to 20 set out the facts of the respondents' issuance of cheques and their procuring and authorizing payments to be made by the Company's letters of credit, the fact that no goods were delivered to the Company, and that (as claimed) the respondents knew or ought to have known that no goods were delivered or sold to the Company.  These paragraphs set out the facts and acts of which the Liquidators complain, irrespective of the label of breach of fiduciary duty and breach of trust ascribed to paragraphs 18 and 19.  Paragraph 20 sets out the fact relied upon by the Liquidators as giving rise to the respondents' knowledge that no goods were delivered, namely the relationship between the 1st and 2nd respondents and the directors of Famous Capital and King Capital.  In my view, considering the Points of Claim and the Kennedy Affidavit as a whole, the factual ingredients to support a claim of negligence are sufficiently pleaded and contained in paragraphs 4, 18 to 21 and 22 of the Points of Claim.  As Miss Chan for the Liquidators rightly pointed out, whether or not the Liquidators' claim of negligence can succeed on the facts as pleaded is another matter, for determination at trial.

Whether any new cause of action arising out of the same facts

14. Even if the respondents are correct, that the proposed amendments introduce a new cause of action not hitherto pleaded in the original Points of Claim and which is time-barred, I consider that the cause of action in negligence arises out of the same or substantially the same facts as the cause of action already pleaded.  

15. As Kwan J put it in her decision of 23 September 2009, the pivotal issue in these proceedings was clear from day one, and that is whether the money which passed from the Company to Famous Capital and King Capital arose out of genuine, bona fide commercial transactions involving the actual sale and purchase of goods.  The proposed amendments do not add any new facts.  The only facts relied upon to support negligence are the same facts relied upon to support the cause of action of misfeasance, breach of fiduciary duties, and breach of trust, as set out in paragraphs 18 to 21 of the Points of Claim.  The facts to support the claim, or inference, of dishonesty are separately set out in paragraphs 21(i) to (viii) of the original Points of Claim.  

16. I am satisfied that the amendments come within Order 20 rule 5 RHC, and can be allowed notwithstanding any time limitation defence that can be raised by the respondent directors.

Whether the claims are sufficiently particularized

17. The respondents have repeated arguments made before the courts on their unsuccessful applications for striking out allegedly un-particularized claims and for delay, and I do not consider it worthwhile to deal with these arguments again in detail.  Suffice it to say that for the reasons set out in paragraphs 5 to 8 above, the claim of negligence is sufficiently particularized.

18. I agree with Kwan J (as she then was), that there can be no doubt what the pivotal and the real issue is in these proceedings and in the Misfeasance Summons.  This was echoed by Chu J (as she then was) in paragraph 50 of her decision of 28 March 2011.  The respondents cannot be in any doubt as to the case they have to meet.  

Whether there is prejudice to the 2nd respondent

19. I would also adopt the remarks made by Kwan J in paragraphs 64 and 65 of her decision of 23 September 2009, in relation to the lack of prejudice to the 2nd respondent in the context of any delay there may be in the application for amendment of the Points of Claim.  There is no reason why the 3rd respondent could not have his witness statement or affirmation made at an early stage of the proceedings when his memory was unimpaired.  The same goes for any other relevant witnesses.  

20. I also take into consideration the fact that the nature of the Liquidators' amended case had been made known to the respondents as early as July 2005.  Although I accept that the application for amendment was not made until the Summons for Directions was issued in May 2008, the nature of the Liquidators' amended case cannot be said to have taken the respondents by surprise, or to be something for which preparation of the witnesses' statements could not have been made before.  

Conclusion

21. The Liquidators have a substantial claim against the respondents in the misfeasance proceedings.  In all the circumstances, I am satisfied that the amendment is necessary to dispose fairly of the cause, and grant leave to the Liquidators to file their amended Points of Claim.  

22. Leave is granted to the respondents to file their Amended Points of Defence within 28 days from the date of the handing down of this Decision.  Directions for discovery and exchange of witnesses statements are also granted in terms of paragraphs 41.1 to 41.5 of the Skeleton Argument of Leading Counsel for the Liquidators.  

23. I will make a costs order nisi that the costs of and occasioned by the amendments to the Amended Points of Claim are to be paid by the Liquidators to the respondents in any event, but the costs of and occasioned by the Summons for Directions, including the costs of the hearing on 7 May 2013 and the costs reserved at the previous hearings of the Summons for Directions are to be paid by the respondents to the Liquidators forthwith.  The costs of the hearing on 7 May 2013 are summarily assessed at $170,000.