THE KWANGTUNG PROVINCIAL BANK v. CHUNG SUN KWAN

HCMP 7711/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 7711 OF 1999

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D E C I S I O N

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1.  The third party applied by summons filed on 8 February 2013 under the inherent jurisdiction of the court to strike out the third party proceedings for want of prosecution and further or alternatively under Order 18 rule 19(b) of the Rules of the High Court or the inherent jurisdiction of the court to strike out the third party notice and third party statement of claim. Order 18 rule 19(b) provides that the court may strike out any pleading if it is an abuse of the process of the court.

2.  The first ground for striking out is based on the second limb of Birkett v James [1978] AC 297, that the defendant is guilty of an inordinate and inexcusable delay in prosecuting the third party proceedings, which resulted in a substantial risk that it is not possible for the third party to have a fair trial of these proceedings or has caused serious prejudice to him.

3.  The second ground is based on an allegation that the defendant and/or the official receiver had “warehoused” the third party proceedings.

4.  Master Ho dismissed the application on 2 October 2013, but made no order as to costs.  The third party now appeals against Master Ho’s dismissal of the summons.  The defendant also cross-appeals against Master Ho’s decision not to order costs in his favour.

Background

5.  These proceedings were started by the plaintiff on 14 December 1999 for payment of monies due from the defendant under the covenants in a charge, further charge and facility letters dated 26 January 1996 and 24 April 1997. 

6.  The plaintiff also seeks delivery up of vacant possession of the ground floor and first floor of a building erected on the remaining portion of Lot 1203 in Demarcation District 19, which were charged by the defendant to the plaintiff to secure repayment of loans advanced by the plaintiff to the defendant. 

7.  The plaintiff obtained a judgment on 6 March 2000 against the defendant for payment of over HK$3.05 million and delivery up of the properties. 

8.  The defendant obtained leave on 14 March 2000 to institute third party proceedings.  Master Jones gave third party directions on 29 June 2000, directing the defendant to file his third party statement of claim within 28 days and the third party his defence within 14 days thereafter.  Discovery of documents was to follow 14 days thereafter and inspection within 7 days thereafter.   There should then be exchange of witness statements within 42 days from the close of pleadings.  The date for exchange of witness statements was subsequently moved to 10 April 2001. 

9.  The defendant failed to file the third party statement of claim on time and was only able to do so on 4 January 2001 after extensions of times were given.  The reason was that he needed Legal Aid to fund the third party proceedings and his application for Legal Aid, which was eventually granted, had occasioned the delay.

The defendant’s claim

10.  The defendant in the third party statement of claim claimed that he had a written joint venture agreement with the third party to develop three blocks of indigenous villagers’ small houses on sections A, B and C of Lot 1203 in DD 19, Lam Tsuen, the New Territories.  Further to the written joint venture dated 14 June 1993, they had two oral joint ventures made in September 1993 and mid-1996 respectively to build the same houses on Lots 1203 and 1152 in DD 19.

11.  Then, in about 1996, the defendant and the third party entered into a loan agreement under which the defendant agreed to borrow from the plaintiff HK$2 million to be secured with a charge on the said properties. 

12.  The terms of the loan agreement were that the defendant would retain HK$1 million of the advance from the plaintiff as security of the defendant’s share of profits under the three joint ventures. The remaining HK$1 million would be lent by the defendant to the third party. The third party would repay the loan from the plaintiff and interest thereon in monthly instalments according to the plaintiff’s repayment schedule.  In addition, the third party’s father would give a guarantee to the plaintiff to secure the defendant’s repayment of the plaintiff’s loan. 

13.  Pursuant to the loan agreement, the defendant duly obtained a HK$2 million loan from the plaintiff and lent HK$1 million of it to the plaintiff. 

14.  The parties then entered into a further loan agreement whereby the defendant would make a further charge on the said properties to obtain a further loan of HK$1.5 million from the plaintiff and then lend the same to the third party on the same terms and conditions as in the first loan agreement between them.

15.  Pursuant to this second loan agreement, the defendant duly gave the plaintiff a further charge on the properties, obtained a further loan of HK$1.5 million from the plaintiff and lent the same to the third party. 

16.  The third party duly repaid the monthly instalments from April 1996 to August 1998, but failed to do so since September 1998.  As a result, the defendant was sued by the plaintiff.  The defendant also discovered that the third party’s father was not a guarantor of the loans from the plaintiff to him. 

17.  Furthermore, the third party had also not paid the defendant any profit from their joint ventures. 

18.  The defendant thus claims in the third party proceedings an indemnity from the plaintiff to cover the judgment on the plaintiff’s claim and profits under the joint ventures.

The third party’s defence

19.  The third party filed a defence on 13 February 2001.  He admitted that there was the joint venture to build small houses on sections A, B and C of Lots 1203 and 1152 in DD 19.  He also pleaded that there was a joint venture to form a vehicle called Bright Wide Investment Limited for entering into joint ventures with indigenous villagers in Lam Tsuen to develop some 60 to 80 small houses.

20.  Regarding the joint venture in Bright Wide Investment, the defendant and third party had to contribute working capital in equal shares and share the profit and loss equally.  This project actually resulted in the building of 78 small houses. 

21.  From mid-1993 to early 1994, the defendant entered into a number of agreements with purchasers to sell them flats in the buildings erected on Lot 1203 and received deposits from them.  Of the deposits received, the defendant retained or appropriated some HK$1.1 million for his own use and was unable to return the same to the third party despite repeated requests.

22.  At the end of 1995 to 1996, the third party introduced the defendant to the plaintiff for obtaining finance as the defendant expressed the need for the same.  A loan of HK$2 million was obtained by the defendant from the plaintiff in early 1996, which was secured by a charge on the said properties.  The defendant then paid HK$1 million to the third party as partial repayment of the deposits that he had retained.

23.  For the purpose of carrying through the development of small houses on Lots 1203 and 1152 by Bright Wide Investment, the third party had injected substantial capital into these projects, both for himself and on behalf of the defendant as loans to the defendant at the defendant’s request.  I however note that the third party has provided no particulars in his defence of these loans. 

24.  The third party then pleaded that from 24 June 1996 to 19 May 1997 he and Bright Wide Investment also lent the defendant various sums totalling HK$972,400.  Particulars of the cheques and amounts have been pleaded for this total sum of HK$972,400.

25.  The defendant then paid HK$1.5 million to the third party and/or Bright Wide Investment on about 20 May 1997 to reduce the amount of outstanding loans advanced to the defendant for the projects.  Up to 31 July 1999, all small houses developed had been sold and Bright Wide Investment had spent HK$17.72 million for building the 78 small houses.

26.  The third party had also advanced to the defendant a total sum of HK$5,783,938.80, which included the retained deposit of about HK$1.1 million and the said advancements totalling HK$972,400. There is again no particulars on this sum of HK$5,783,938.80 save for the HK$972,400.

27.  After taking into account of the purchase price of the small houses, less the expenses for constructing them and the two payments by the defendant totalling HK$2.5 million, the third party pleaded in his defence that the defendant still owed him money, but there is no particulars whatsoever on the purchase price received, the expenses incurred or the amount of shortfall due from the defendant to the third party.  The third party also made no counterclaim for the alleged shortfall of an unknown magnitude.

Further conduct of the proceedings

28.  The defendant then filed his list of documents on 26 April 2001 and the third party also filed his on 23 June 2001. Inspection of documents was conducted by the parties in August 2001, but there was no exchange of witness statement on 10 April 2001 as ordered by Master Jones or on any other date as the parties could have agreed.

29.  There was then no further action until 4 March 2002 when the third party issued a notice of intention to defend.

30.  The defendant further issued a summons to amend the third party notice and third party statement of claim to include Bright Wide Investment as a second third party.  The summons was heard on 15 May 2002 and adjourned for the defendant to produce legal authority to support the application. 

31.  The defendant was adjudged a bankrupt on 18 December 2002.  The third party proceedings became vested in the official receiver. There was no further progress of these proceedings because the official receiver was not prepared to proceed with the proceedings with the use of public funds.  The official receiver was only prepared to proceed if: (1) there was a sufficient indemnity to pay for the legal costs and the third party’s costs in the event that the third party proceedings should be dismissed; and (2) there be a prospect of success in the third party proceedings.

32.  Since the defendant could not provide the official receiver with the indemnity, the official receiver did not proceed with the third party proceedings.  This was so despite repeated requests by the defendant to the official receiver to proceed.

33.  The defendant’s bankruptcy was discharged in December 2006, but the official receiver maintained that the third party proceedings were still vested in her.  She also tried to negotiate with the third party in May 2007 for a settlement of these proceedings but did not succeed. 

34.  The defendant applied for Legal Aid again on 27 March 2008.  On 26 August 2009, Legal Aid was granted to him for a claim to be launched against the official receiver as his trustee in bankruptcy for not proceeding with the third party proceedings.

35.  After a lot of correspondence between the defendant’s solicitors and the official receiver, the third party proceedings were eventually assigned to the defendant on 22 September 2012 at the consideration of HK$5,000.  The defendant had already been granted Legal Aid on 20 October 2010 to pursue the third party proceedings.

36.  The defendant’s solicitors then issued a notice of intention to proceed.  They also issued a case management summons on 12 December 2012.  They also wrote to the third party’s solicitors before and after the issuance of this summons, but nothing constructive was achieved.

The application to strike out

37.  Eventually, on 8 January 2013, the third party indicated that they would apply to strike out the third party proceedings for want of prosecution.  The summons to strike out was issued on 8 February 2013. It was eventually dismissed by Master Ho on 2 October 2013.

The principles governing striking out

38.  The applicable principles governing striking out applications are set out in the decision of the Court of Final Appeal in Wing Fai Construction Co Limited (in Liquidation) v Yip Kwong, Robert (2011) 14 HKCFAR 935 at paragraph 75.  I do not propose to set out all the principles herein, as not all of them are relevant to this appeal.  I would, however, reiterate that striking out is a remedy of the last resort and should only be ordered where it is plain and obvious to do so (paragraph 75(1)).  Abuse of process of a court is the foundation for the exercise of the jurisdiction to strike out for delay (paragraph 75(2)).  Merely for a party to start proceedings and then delay (which would often involve a failure to comply with the applicable rules of court) will not necessarily amount to an abuse justifying an order to strike out the action.  In order for “warehousing” of claims to justify striking out, it must be shown that the plaintiff is abusing the process of the court. Accordingly, where the “warehousing” of claims indicates that there is simply no intention to bring proceedings to a conclusion or there is a wholesale disregard of the rules or court orders, abuse can be found to exist (paragraph 75(4)).  The power to strike out for delay is discretionary and derives from the inherent jurisdiction of the court.  In exercising the discretion, the court must ask itself of the question whether or not in the circumstances it is just to strike out the proceedings (paragraph 80).

Analyses and decisions on delay and warehousing

39.  On this appeal, Mr Chan, leading counsel for the third party submitted that the official receiver has been sitting on the matter for 10 years and is guilty of inordinate and inexcusable delay.  Since the defendant is an assignee of the official receiver, he is in the same position as the official receiver; hence, the defendant is also guilty of inordinate and inexcusable delay.  Furthermore, the delay has created a substantial risk that a fair trial is not possible and that the third party has been prejudiced.

40.  Similar arguments had been advanced for the third party before Master Ho who found for the third party on inordinate and inexcusable delay, but Master Ho found that if there was any prejudice, it was the result of the fault of both sides, as the third party had also failed to make proper discovery and prepare his witness statement for exchange.  Hence, Master Ho dismissed the application, but made no order as to costs. 

41.  However, Mr Chain, counsel for the defendant, submitted that it is wrong to look at the conduct of the official receiver, but only the conduct of the defendant should be considered.

42.  It is beyond dispute that the defendant had all along been pushing for the progress of the third party proceedings, but the official receiver, for reason of not wanting to expose public funds, did not move the proceedings ahead.  The position of the defendant was thus in opposition to that of the official receiver on the progress of the proceedings.  To make the defendant liable for the delay of the official receiver would sound unreal. It is contrary to reality.  I therefore find that the defendant is not liable for any inexcusable delay. 

43.  I do not want to make any finding of whether the delay by the official receiver is inexcusable as the official receiver has not been given any opportunity to submit on her situation.

44.  On the second limb of attack of “warehousing”, I also find that the official receiver has not “warehoused” the third party proceedings.  Though the official receiver has not pushed these proceedings further, I do not think it can be said that she had no intention to bring the proceedings to a conclusion.  Her inaction was merely because of her desire not to expose public funds.  Once an indemnity was available, she would then assess the prospect and, if the assessment should be favourable, would proceed with the proceedings.  Her attempt in May 2007 to negotiate with the third party for a settlement was also for the purpose of bringing the proceedings to a conclusion.

45.  Furthermore, even if the official receiver should have “warehoused” the proceedings for the reasons given above, I would not put the defendant into the official receiver’s shoes merely because of his being the assignee of the official receiver.  To do so would be to ignore the history of the case and the reality.  I also find that the official receiver has not abused the process of the court and I make the same finding in relation to the defendant.

46.  In any case, I would exercise my discretion not to strike out the third party proceedings in the light of the persistent conduct of the defendant in wanting to push these proceedings ahead.  It is not fair or just to order striking out in these circumstances.

Decision on prejudice

47.  My decisions above are enough to dismiss the third party’s appeal.  However, I would also echo Master Ho’s findings that the third party’s prejudice was brought about by the failure of both sides to make full discovery back in April and June 2001 and their failure to prepare their witness statements for exchange then.  If the third party should have prepared his case properly, I do not think he would suffer from the alleged prejudice to his ability to properly defend these proceedings, if any.

Other minor issues

48.  Mr Chan has also submitted that the defendant’s failure to make timely discovery of his receipts of deposits from the purchasers has put the third party in difficulty.  However, the defendant never admitted the receipt of such money and one does not expect him to make discovery of such receipts.  It is and was back in 2001 for the third party to apply for specific discovery of the same by the defendant.

49.  Mr Chan further submitted that the defendant had not made discovery of the alleged payments of monthly instalments by the third party to the plaintiff.  However, the defendant had in discovery in April 2001 disclosed in item 5 of his list of documents the bank passbook showing that payments were made by deposits transferred into his bank account.  If the transfers were by persons other than the defendant, the defendant might not have the bank transfer document for discovery.  In any event, if the third party should consider that the defendant was in possession, custody or power of such documents, he should have applied for specific discovery of the same back in 2001.

50.  In any event, even if the defendant can be blamed for such failures, an order of striking out is still totally out of proportion to the degree of fault.

Dismissal of the appeal

51.  For the above reasons, I dismiss the third party’s appeal.

Consideration and dismissal of the cross-appeal

52.  Regarding the defendant’s cross-appeal, I also think that the Master should not be faulted.  In fact, the defendant’s bankruptcy was not known to the third party until the official receiver wrote to the third party in May 2007 suggesting a settlement.  The third party was not privy to all the exchanges between the defendant and the official receiver during the defendant’s bankruptcy and between the defendant’s solicitors and the official receiver after his discharge from bankruptcy.  The third party was ignorant of the facts that made the delay not inexcusable with regard to the defendant.  It was thus reasonable for the third party to have taken out the striking out application. 

53.  This is so despite the onset of CJR in April 2009 and the Wing Fai decision in December 2011.  The delay from 15 May 2002 to April 2009 was for nearly seven years. 

54.  Though the striking out application was rightly dismissed, I think by assessing the matter as a whole, it is correct to make no order as to costs on that application.  I therefore dismiss the defendant’s cross-appeal as well.

55.  I also make a cost order nisi that the third party do pay the defendant the costs of the third party’s appeal and the defendant pay the third party for the cross-appeal.  Such costs are to be assessed by me summarily.  The defendant and the third party should therefore prepare a bill of their respective costs and file and serve it on the other side within the next 14 days.  They should then file and serve their objections to the bill of the other, if any, within seven days thereafter.  I will then assess the costs on paper. 

56.  I also order that the defendant’s own costs be taxed in accordance with the Legal Aid Regulations.