THE LIQUIDATORS OF WING FAI CONSTRUCTION CO LTD (IN COMPULSORY 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) NO. 735 OF 2002

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D E C I S I O N

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The application

1.  This is an application by the respondents to strike out misfeasance proceedings brought against them by the liquidators of Wing Fai Construction Company Limited (“the Company”) under section 276 of the Companies Ordinance, Cap. 32 for want of prosecution or abuse of process.

2.  The court is asked to exercise its power and discretion to strike out these proceedings on the following bases:

(1)     the liquidators are in default and the default has been intentional and contumelious, in that their conduct of litigation amounted to an abuse of the process of the court (“the first limb”); and/or

(2)     there has been inordinate and inexcusable delay on the liquidators’ part and (a) such delay will give rise to a substantial risk that it is not possible to have a fair trial of the issues in these proceedings; or (b) the delay is such as is likely to cause or have caused serious prejudice to the respondents (“the second limb”).

3.  These principles were set out in the speech of Lord Diplock in Birkett v. James [1978] AC 297 at 318F to G.  The “abuse of process” ground developed by Lord Woolf in Grovit v. Doctor [1997] 1 WLR 640 is a specific application of the intentional and contumelious conduct in the first limb in Birkett v. James, as it was held it is an abuse of process to commence and continue litigation which the plaintiff or applicant has no intention to bring to a conclusion.

4.  I will consider first if the second limb is made out in this application before dealing with the first.  Before doing so, I will state the relevant background matters.

The background

5.  The winding-up petition was presented against the Company on 6 July 2002 and the provisional liquidators, being Mr David Kennedy and Mr Cosimo Borrelli, were appointed on the same day.  A winding-up order was made on 9 December 2002.  Mr Kennedy and Mr Borrelli were appointed liquidators by a court order on 28 February 2003.  On 8 December 2004, Mr Nicholas Hill was appointed an additional liquidator.  Mr Kennedy resigned in December 2004, Mr Borrelli did likewise in June 2009.  Orders were made for their removal.  Mr Hill is now the sole liquidator.  Where reference is made to liquidators below, this will include the situation where there is just one liquidator.

6.  The 1^st to 3^rd respondents are former directors of the Company.  The 1^st and 2^nd respondents resigned on 26 July 2001.  The 3^rd respondent resigned on 22 April 2002.

7.  The Company was sold to Sino Glister International Investments Limited (“Sino Glister”) on 22 April 2002, and the winding-up petition followed in less than 3 months’ time.  The liquidators alleged that notwithstanding the resignation of the respondents as directors, they remained de facto directors of the Company at all material times.

8.  Prior to the sale of the Company to Sino Glister, it was a wholly-owned subsidiary of Benefit Holdings International Limited (“Benefit Holdings”), which is in turn a wholly-owned subsidiary of China Rich Holdings Limited (“China Rich”).  China Rich is an investment holding company and its shares are listed on The Stock Exchange of Hong Kong Limited.  The Company was engaged in the business of engineering, construction, industrial consultancy services, engineering advisory services, contracting services.  Its business made up approximately 90% of the turnover for the China Rich group prior to its sale to Sino Glister.

9.  Since early 2003, the liquidators have been engaged in a number of civil proceedings against China Rich-related entities and persons, including various proceedings against the respondents.  There are eleven current proceedings in which the Company is involved.

10.  The financial records of the Company were virtually non-existent at the time the provisional liquidators were appointed.  Most of its books and records appeared to have been removed or destroyed.  The provisional liquidators had to use specialist information technology consultants to retrieve data from computer hard drives and they extracted limited financial information.  They also conducted private examination of the 1^st, 2^nd, and 3^rd respondents and others under section 221.  Shortly after their appointment, the provisional liquidators requested the respondents to submit and verify a statement of affairs under section 190(2)(a), on the basis they have been directors or officers of the Company.  This has not been done.

The misfeasance proceedings

11.  Misfeasance proceedings were brought by a summons issued in the winding-up proceedings on 30 August 2004, for a declaration that the respondents “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:

(i)      by authorising payments by cheque and the purchase of letters of credit in the sum of HK$18,525,681.32 from the Company’s funds for the benefit of Famous Capital Enterprises Limited (“Famous Capital”) without consideration whereby the same became wholly lost to the Company;

(ii)     by authorising payments by cheque and the purchase of letters of credit in the sum of HK$14,167,065.80 from the Company’s funds for the benefit of King Capital Engineering Limited (“King Capital”) without consideration whereby the same became wholly lost to the Company.”

12.  The summons also sought an order that all necessary accounts and inquiries be taken for ascertaining what sums the respondents are liable to contribute to the assets of the Company by way of compensation for “such misfeasance and/or breach of duty and/or breach of trust” and an order that the respondents do jointly and severally contribute to the assets of the Company and do pay the liquidators the said sums of HK$18,525,681.32 and HK$14,167,065.80 wrongfully paid by the Company.

13.  The summons was supported by the 11^th affidavit of Mr Kennedy of 63 pages with 57 exhibits in three lever arch files.

14.  An order was made on 12 October 2004 for the points of claim dated 10 September 2004 with the schedule attached to be re-served and re-filed and this was complied with.

15.  It was alleged by the liquidators in these proceedings that the respondents were involved in a conspiracy with related or associated persons and entities to defraud the Company and possibly the relevant banks of over HK$30 million, through a series of fake or sham letters of credit transactions, for goods that were never delivered and for which fake or sham invoices were issued by associated parties to the Company via the respondents.  The period in which these transactions took place was from 14 February 2001 to 9 May 2002.

16.  The transactions took the form of supposed deliveries of asphalt, concrete mix and steel bars to the Company by Famous Capital and King Capital.  The liquidators have obtained copies of numerous cheques and letters of credit documents signed by the respondents.  They alleged that Famous Capital and King Capital were set up either at the direction or with the knowledge of some or all of the respondents for the purpose of obtaining funds from the Company through letters of credit to channel monies to other entities in the China Rich group.  As a result, the Company had been drained of substantial funds in the three months leading up to its sale and the six months leading up to the appointment of provisional liquidators, that would have otherwise been available to meet at least partially the debts of creditors.

17.  In paragraphs 18 and 19 of the points of claim, it was pleaded that in “breach of fiduciary duty and/or in breach of trust”,

(1)     between 14 February 2001 and 9 May 2002, the 1^st respondent and/or the 2^nd respondent and/or the 3^rd respondent made or procured at least twenty-two payments by way of cheques and letters of credit, totalling at least HK$51,768,476.32 from available credit funds of the Company under their control to an account in the name of Famous Capital.  These payments were purportedly in consideration for goods and allegedly delivered to the Company by Famous Capital.  Despite various documents signed by the respondents as directors of the Company to the contrary, no such goods were delivered.  Between 9 July 2001 and 28 January 2002, twenty-four payments totalling HK$33,242,795 were paid to the Company by twenty-four cheques, leaving a shortfall of HK$18,525,681.32 owing to the Company; and

(2)     between 28 February 2002 and 9 May 2002, the 1^st respondent and/or the 2^nd respondent and/or the 3^rd respondent made or procured eleven payments totalling HK$26,217,065.80 from available credit funds of the Company under their control to an account in the name of King Capital.  These payments were purportedly in consideration for goods allegedly delivered to the Company by King Capital.  Despite various documents signed by the respondents as directors of the Company to the contrary, no such goods were delivered.  Between 18 February 2002 and 18 April 2002, four payments totalling HK$12,050,000 were paid to the Company by four cheques, leaving a shortfall of HK$14,167,065.80 owing to the Company.

18.  Particulars of all the payments and repayments were set out in the schedule to the points of claim.

19.  It was further pleaded that the 1^st respondent and/or the 2^nd respondent and/or the 3^rd respondent were dishonest in authorising the payments to Famous Capital and King Capital and their dishonesty “is apparent or, alternatively, can be inferred from” matters pleaded in paragraph 21 of the points of claim.

20.  In paragraph 23, it was alleged that no resolution of the Company in general meeting had been passed authorising the payments of the said sums to Famous Capital or King Capital or any sum and the said payments were made improperly and invalidly and “constitute a misfeasance and/or breach of duty and/or breach of trust” in relation to the Company on the respondents’ part as such directors.

21.  The liquidators claimed against the respondents the total sum of HK$32,692,747.12.

22.  It was held in Birkett v. James dismissal for want of prosecution under the second limb should not normally be exercised within the currency of the limitation period, since the plaintiff would be able to start fresh proceedings.

23.  Mr Barlow, SC for the respondents made these points about the points of claim.  Firstly, he contended that the points of claim pleaded a single cause of action being dishonest misfeasance and has not advanced a case of negligent misfeasance.  Secondly, he submitted that this cause of action pleaded in the points of claim has a limitation period of six years, which has expired on 9 May 2008, citing the judgment of Millett LJ (as he then was) in Paragon Finance plc v.D.B. Thakerar & Co. [1999] 1 All E.R. 400 at 407f to 410f.  Thirdly, in respect of the cause of action of dishonest misfeasance, the points of claim failed to plead allegations of fraud distinctly and was the utmost particularity, citing Davy v. Garrett (1878) 7 Ch D 473 at 489 and the judgment of the Court of Appeal in Aktieselskabet Dansk Skibsfinansiering v. Wheelock Marden & Co Ltd & Ors [1994] 2 HKC 264 at 269E to 270C.

24.  I will come back to Mr Barlow’s second and third points in the latter part of this decision.

25.  On Mr Barlow’s first point, Mr Bartlett for the respondents drew the attention of the court to the amendment of section 276(1) in 1984 by the substitution of the words “breach of duty” for “breach of trust” where these words first appeared in the section.  The purpose of the amendment was to give effect to the specific recommendation in the Companies Law Revision Committee’s Second Report, 1973, para. 8.59, to bring actionable negligence of directors and others within the scope of the provision.  With the change of wording from “breach of trust” to “breach of duty”, the amended provision would apply to mere negligence (Re D’Jan of London Ltd [1994] 1 BCLC 561; Cohen v. Selby [2001] 1 BCLC 176).

26.  Mr Bartlett submitted the cause of action premised on “breach of duty” was mentioned in the summons from the start, it was alluded to in the supporting affidavit being Mr Kennedy’s 11^th affidavit, and has been pleaded in the points of claim.  I am inclined to agree with him.  I reject Mr Barlow’s submission dishonest misfeasance is the only cause of action pleaded by the liquidators.

The points of defence

27.  Points of defence were filed by the respondents on 23 December 2004.

28.  It was denied that the respondents were de facto directors of the Company after their respective resignations as alleged.  It was further denied that the Company was insolvent at all material times.

29.  They made these averments:

(1)     The acts performed by the 1^st and 2^nd respondents in relation to the Company were incidental to their respective positions in China Rich (as chairman of China Rich for the 1^st respondent, as chief financial officer of China Rich for the 2^nd respondent) and the position of the Company as a wholly-owned subsidiary of China Rich up to 22 April 2002.

(2)     The 1^st to 3^rd respondents remained signatories of the Company’s bank accounts after 22 April 2002 subject to terms and conditions of the sale and purchase agreement between Benefit Holdings and Sino Glister, and that between 22 April 2002 and the presentation of the winding-up petition on 6 July 2002, a sum exceeding HK$10 million was transferred from accounts over which the respondents remained signatories into the Company’s bank account which was controlled by the director of the Company nominated by Sino Glister, Eric Chim, to the exclusion of the respondents.

30.  Paragraphs 18 and 19 of the points of claim, which contained the material allegations of the liquidators, were not admitted, save that payments of at least HK$33,242,795 were made to the Company by Famous Capital and payments of at least HK$12,050,000 were made to the Company by King Capital.  It was not admitted that the schedule to the points of claim constituted a complete listing of all payments and repayments between the Company, King Capital and Famous Capital.

31.  The respondents admitted they signed various cargo receipts in respect of goods delivered to the Company’s construction sites, but averred that the receipts did not stipulate the goods were physically delivered by King Capital or Famous Capital.

32.  The respondents denied that Famous Capital and King Capital were not independent third parties in relation to the Company.  They averred the Company had traded with Famous Capital and King Capital as evidenced by documents exhibited to Mr Kennedy’s 11^th affidavit. 

33.  I agree with Mr Bartlett no real positive case has been put forward by the respondents in the points of defence.  By and large, the respondents were putting the provisional liquidators to proof of their allegations.

The applicable principles

34.  Both sides have cited to me quite a number of cases, both in the United Kingdom and in Hong Kong.  As Mayo JA has commented in Ong Ee Chang v. Li Tung Lok & Anr, CACV No. 194 of 1999, 1 December 1999, at page 9:  “There are a plethora of cases on the subject of striking out claims for want of prosecution and the factual background of all of these cases will vary enormously.  A measure of caution is required in attempting to apply the relevant principles in any particular case.”

35.  The principles concerning the second limb in Birkett v. James were summarised by Neill LJ in Trill v. Sacher [1993] 1 WLR 1398A to 1400A.  I do not propose to set out all of them save to mention the salient ones that may be relevant to the present application:

(1)     The general burden of proof on an application to strike out rests on the applicant (at 1398B).

(2)     Delay which is inordinate is prima facie inexcusable.  It is for the plaintiff to make out a credible excuse (at 1398D).

(3)     Where a plaintiff delays issuing proceedings until towards the end of the period of limitation, he is under an obligation to proceed with the case with reasonable diligence.  The court is likely to look strictly at any subsequent delay which is in excess of the period allowed by the rules of court for taking the relevant step, and may regard such subsequent delay as inordinate even though a similar lapse of time might have been treated less strictly had the action been started earlier (at 1398E).

(4)     A defendant cannot rely on a period of delay for which he has himself been responsible (at 1398F).

(5)     Once the limitation period has expired the court is entitled to take account of all the earlier periods of inexcusable delay since the issue of the writ (at 1398H).

(6)     A defendant cannot rely on any prejudice caused to him by the late issue of a writ.  Some additional prejudice after the issue of the writ must be shown.  The additional prejudice need not be great compared with that which may have been already caused by the time elapsed before the writ was issued but it must be more than minimal (at 1399D).

(7)     Prejudice to the defendant may take different forms.  In many cases the lapse of time will impair the memory of witnesses (at 1399E).

(8)     The prejudicial effect of delay may depend in large measure on the nature of the issues in the case.  A defendant may also suffer some prejudice from prolonged delay in an action which involves imputations against his reputation, although this factor by itself is unlikely to provide a ground for striking out (at 1399F).

(9)     When considering the question of prejudice, and whether there is substantial risk it will not be possible to have a fair trial of the issues in the action, the court will look at all the circumstances.  A causal link must be proved between the delay and the inability to have a fair trial or other prejudice (at 1399G to H).

36.  I turn to consider the progress of the proceedings.  It is convenient to divide them into four stages – prior to the issue of the summons on 30 August 2004, from 30 August 2004 to 19 April 2006, from 19 April 2006 to 22 May 2008, and from 22 May 2008 to present.

Prior to 30 August 2004

37.  I agree with Mr Bartlett this is not a late start situation.  The payments and shortfall complained of occurred between February 2001 to May 2002.  The provisional liquidators were appointed on 6 July 2002.  According to Mr Kennedy’s 11^th affidavit, it was in March 2004 that the provisional liquidators learned from Eric Chim, the only registered director of the Company at the time of the provisional liquidators’ appointment, that Famous Capital and King Capital were companies that might be linked to the 2^nd respondent.  These proceedings were commenced on 30 August 2004.

38.  In any event, the provisional liquidators came into the Company with no accumulated knowledge and had to attempt to re-create corporate knowledge, which was a time-consuming process.  I have mentioned the lack of records, the lack of assistance of the former directors who did not submit a statement of affairs, and the private examination conducted by the provisional liquidators.

From 30 August 2004 to 19 April 2006.

39.  Mr Bartlett described this as a period in which these proceedings were progressed actively by the liquidators.  The process of obtaining evidence from various former employees of the Company required substantial work and time, as did seeking to obtain from various banks the letters of credit and related documentation.

40.  On 12 October 2004, the misfeasance summons came before me for directions for the first time.  Directions were made for points of claim to be re-filed, the respondents were to file and serve points of defence and affidavit evidence in opposition and the liquidators were to file and serve points of reply and evidence in reply, within stipulated times.  The summons was to be restored for hearing upon compliance with the directions given.

41.  The points of claim were re-filed on the same day.  What happened thereafter, in November and December 2004, were successive requests from the respondents for further and better particulars of the points of claim and further documents to be provided by the liquidators.  It was contended by the respondents they should not serve points of defence and evidence in opposition until these requirements were met.  On 16 November 2004, the respondents made a request for disclosure of documents under Order 24 rules 10 and 11A.  On 23 November 2004, they made a request for further and better particulars and issued a summons for production of documents and for particulars.  The liquidators issued a summons the following day for an unless order that the respondents be required to file and serve points of defence.  On 8 December 2004, the liquidators’ solicitors provided further and better particulars of the points of claim to the respondents’ solicitors by letter, essentially referring to various parts of Mr Kennedy’s 11^th affidavit and the documents he had exhibited.

42.  On 9 December 2004, by an order made by consent, the respondents’ summons for further and better particulars and discovery was withdrawn and the directions hearing on 9 December 2004 was vacated.  The respondents were to file and serve points of defence within 14 days and the earlier direction of 12 October 2004 was varied.  The liquidators were to provide to the respondents copies of the documents listed in the summons of the respondents once they have obtained the same from banks.  Leave was given to the respondents to file and serve amended points of defence if so advised and to file evidence in opposition within 14 days following the receipt of the documents provided by the liquidators and the earlier order of 12 October 2004 was varied.

43.  The respondents filed points of defence on 23 December 2004.

44.  The liquidators took affirmations from three witnesses in May and June 2005 and supplied them to the respondents with an affidavit of the liquidators’ staff producing additional documents obtained from the banks, under cover of their letter dated 11 July 2005.  The liquidators requested consent of the respondents to file amended points of claim as per the draft attached and to file the additional affirmations of the witnesses.

45.  In response, the respondents’ solicitors wrote a 37-page letter to the liquidators’ solicitors on 18 July 2005 seeking further and better particulars and further discovery, and enclosing an additional request for further and better particulars of nine pages.  The vast majority of the requests made in the letter was repetition of the requests made on 23 November 2004, with comments that the particulars provided previously and in the additional affirmations of the three witnesses were inadequate.

46.  The respondents did not amend the points of defence or file affidavit evidence in opposition following the receipt of documents provided by the liquidators within fourteen days of 11 July 2005 or subsequently.  Mr Barlow submitted the respondents were not ordered to file evidence in opposition by the order made on 9 December 2004, they were merely given leave to do so and the respondents did not fail to comply with any court order.  This is a bad argument.  The wording of the relevant paragraph in the order of 9 December 2004 is clear.  The respondents were given leave to file and serve amended points of defence “if so advised”, the filing of evidence in opposition was not qualified in this way. 

47.  The liquidators’ solicitors responded to the long letter of the respondents’ solicitors on 18 July 2005 by letter dated 19 April 2006, stating that all documents in their possession have been provided and supplied another formal set of answers to the request for further and better particulars.  They again requested the respondents’ agreement to filing amended points of claim and the affirmations of the three witnesses sent to these respondents on 11 July 2005.

48.  Much was made by Mr Barlow that the liquidators have made generalised allegations against the respondents in the points of claim and have failed to plead their allegations of fraud distinctly and with the utmost particularity.  This is the third point he made about the points of claim as mentioned earlier.  Complaint was also made that the discovery given was deficient. 

49.  The fact remains the respondents did not take up these complaints at the relevant time or thereafter by making an application to court.  The respondents did not make any response to the letter of the liquidators’ solicitors of 19 April 2006 that they would regard that letter as inadequate.  It was only in the affidavit of the 2^nd respondent filed in support of the present application on 19 August 2008 that they stated the liquidators’ answer in the letter of April 2006 was completely unsatisfactory.  Mr Bartlett reasoned if there were any substance to the respondents’ complaints, they would have been pursued by the respondents.

50.  I think these are valid arguments.  It should be fairly clear from the correspondence exchanged that the liquidators’ case was essentially contained in Mr Kennedy’s 11^th affidavit and would stand or fall on it.  The liquidators have contended all along that “on a reasoned and objective reading of the applicant’s points of claim together with Mr Kennedy’s affidavit and the exhibits thereto, it is patently clear as to the case [the respondents] are facing” and it was unnecessary for the liquidators to provide the particulars requested, see the letter of the liquidators’ solicitors to the respondents’ solicitors dated 8 December 2004.  The liquidators really have nothing further of material significance to give.  Further particulars and documents supplied by the liquidators after that substantial affidavit merely sought to clarify some of the details and information already provided.

51.  If the respondents are genuinely aggrieved because the points of claim are lacking in material particulars, and they are handicapped in not knowing what evidence they should be prepared with to meet the liquidators’ case, they should have applied long ago to strike out the points of claim.  Instead, the respondents made successive requests for further and better particulars and documents in 2004 and 2005 and made no move when they claimed to be dissatisfied with the answers given.  I do not accept the 2^nd respondent’s explanation that the respondents saw no benefit in pushing these points with an application to court as the Company was in liquidation and any costs order in their favour might not be paid.  A very substantial claim was made against the respondents in the misfeasance proceedings and the respondents have been engaged in quite a number of proceedings with the liquidators.  I am inclined to think these requests were tactical moves and aimed at bogging down the liquidators rather than moving the matter forward.

52.  For the purpose of the present application, I do not think it is strictly necessary to come to a view whether the respondents’ complaints regarding the pleadings and discovery are made out.  If they are of any merit, they could and should be examined in an appropriate application, and if these complaints are made good, it may be appropriate to dismiss the liquidators’ case on that basis.  These complaints should not be dealt with as coincidental matters in the present application which is grounded on delay in progressing with litigation.

From 19 April 2006 to 22 May 2008

53.  Nothing was heard from the respondents, nor did the liquidators take any further step to progress the proceedings until 22 May 2008, when the summons for directions was issued by the liquidators, seeking leave to file amended points of claim, leave to file further evidence in the claim and other directions.  So there was a period of inactivity of just over two years.

54.  Prior to the amendments introduced in the Civil Justice Reform, a plaintiff is required under Order 25 rule 1(1) to take out a summons for directions within one month after the pleadings in the action are deemed to be closed.  Here, the pleadings have closed in mid January 2005.

55.  The period of over two years’ delay must be regarded as inordinate.  The question is whether this is excusable.

56.  Mr Bartlett put forward a number of explanations for this inactivity.

57.  Firstly, it was pointed out that the liquidators were involved in other proceedings with the respondents or entities related to the respondents.  These included proceedings in which the 1^st and 2^nd respondents applied to commit Mr Kennedy for contempt of court and the matter is to be heard in the Court of Final Appeal in early October 2009.  I do not think this could excuse the long period of inactivity of two years.  If the liquidators’ resources and time were strained because of these proceedings or other related proceedings, they should have brought these proceedings back to the court for further directions.

58.  Secondly, the liquidators adduced evidence there were ongoing without prejudice negotiations with another firm of solicitors acting for the respondents on an intermittent basis since the commencement of the present proceedings, with the view to achieving a global settlement of proceedings in the winding-up proceedings and eleven related actions, and negotiations are continuing actively up to present.  I have little information from the liquidators on the dates when without prejudice negotiations were conducted, other than the fact that they were conducted intermittently in the 5-year period since these proceedings were brought.  The 2^nd respondent claimed there were only some without prejudice negotiations in October 2008 and a further brief attempt at negotiation in June 2009.  Given the paucity of information provided by the liquidators, I cannot be satisfied that the whole of the 2-year inactivity is excusable.

59.  I find there was inordinate and inexcusable delay during 19 April 2006 to 22 May 2008.

From 22 May 2008 to present

60.  This period is not strictly relevant.  I mention this because this showed that the delay in progressing with these proceedings was not all on one side.

61.  The liquidators issued the summons for directions on 22 May 2008.  As the liquidators were required to serve a notice of intention to proceed, the hearing date in June 2008 was vacated and re-fixed to 21 August 2008.  It was only on 19 August 2008 that the respondents issued the present summons to strike out for want of prosecution with the supporting affidavit of the 2^nd respondent.  Leave was given to the respondents to file further evidence in support on 21 August but the respondents did not do so until 23 October 2008.  The liquidators filed evidence in answer on 29 December 2008.  The respondents’ evidence in reply was not filed until 18 March 2009.  This has led to delay in fixing a hearing date for the present application and it is a year after the application was taken out that the matter was heard.

If there is prejudice to the respondents or substantial risk it is not possible to have a fair trial

62.  Mr Barlow submitted that the respondents have suffered prejudice and there is substantial risk it is not possible to have a fair trial of the issues in these proceedings by reason of these matters:

(1)     the liquidators have failed to provide adequate documents in support of their allegations of dishonesty;

(2)     the liquidators have failed to particularise their allegations of dishonesty;

(3)     the 3^rd respondent is now 78 years old and has been afflicted with degenerative disease causative of memory loss and suggestive of the onset of Alzheimer’s disease;

(4)     the respondents have not been able to focus their preparation for trial including preparation of their witness statements and they have lost the opportunity to make enquiries of the Company’s former site staff, because of the generalised nature of the liquidators’ allegations and the failure of the liquidators to give adequate discovery; and

(5)     for five years, the respondents have had to cope with the anxiety of defending themselves from very serious allegations of dishonesty which potentially jeopardise the chances of the 1^st respondent and/or the 2^nd respondent being directors of listed companies and had to incur expenses for their legal representation.

63.  The matters in (1), (2) and (4) may be considered together.  A causal link must be established between the delay and prejudice.  I am not satisfied that has been demonstrated.  It is pertinent to note in (4) the alleged prejudice was not due to the delay of two years between 2006 to 2008 but was said to be attributable to the lack of disclosure and lack of particularity of the liquidators’ allegations.  If that were the case, the respondents should have taken out the necessary application to the court as they had done in November 2004.  Instead, the applications in November 2004 were withdrawn by consent and notwithstanding the lengthy letter of the respondents’ solicitors in July 2005, and their apparent dissatisfaction with the liquidators’ reply in April 2006, the respondents have not brought the matter back to the court.

64.  The respondents’ solicitors asserted on affidavit they “were not able to prepare the defence for each of the respondents until [they] knew precisely what case each of them had to meet”.  This wording is ambiguous.  If the deponent meant he was unable to take proofs of evidence from the respondents or other relevant witnesses until the liquidators have provided further and better particulars and documents requested in the long letter of 18 July 2005, I do not accept this.  The present situation is very  different from Nanjing Iron & Steel Group International Trade Co. Ltd. & Ors. v. Stx Pan Ocean Co. Ltd., HCAJ No. 177 of 2006, Reyes J, 7 September 2009, cited to this court by the respondents’ solicitors after the hearing.  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 by letters of credit arose out of genuine, bona fide commercial transactions involving the actual sale and purchase of goods.

65.  As for the 3^rd respondent, whose deterioration in memory was noted in 2008, I see no cogent reason why his solicitors have not taken detailed proofs of evidence from him and other witnesses at the beginning, when memories would be freshest (Hymer v. Mass Transit Railway Corp & Ors. [2000] 2 HKLRD 589 at 610C to J; Lee Kin Yan v. Honeywell Ltd., CACV No. 35 of 2000, 19 May 2000, page 4).  The liquidators have served all their affidavit evidence to be relied on in these proceedings by July 2005.  I note also only two brief medical reports were obtained for the 3^rd respondent so far, one from a general practitioner and the other from a neurologist who was due to produce a detailed report in relation to his examination of the 3^rd respondent in September 2008 but has apparently not done so.  If the 3^rd respondent should testify at the trial, the court could have regard to his condition (if there is proper medical evidence placed before the court) in assessing his evidence.  The respondents’ defence, as disclosed in the points of defence, does not rest on the memory of the 3^rd respondent alone.

66.  The respondents have not established to the satisfaction of this court there is substantial risk it is not possible to have a fair trial of the issues in these proceedings due to the two-year delay.  As mentioned earlier, no real positive case was put forward by the respondents in the points of defence and they are in breach of the court order on 9 December 2008 in failing to file evidence in opposition within fourteen days from 11 July 2005.  As submitted by Mr Bartlett, the court would have difficulty in grappling with the issues which might be problematic due to the dimming of memories.  On the face of the pleadings, the issues raised such as the denial of insolvency, the denial of acting as de facto directors, the non-admission of payments made by the Company to Famous Capital and King Capital, the Company trading with Famous Capital and King Capital – are unlikely to rest solely on oral evidence.  I bear in mind all three respondents have been examined in private examination under section 221 and the transcript of examination would be adduced as evidence in the present proceedings.

67.  As for anxiety in (5), as mentioned earlier, prejudice from prolonged delay in an action which involves imputations against a defendant’s reputation is unlikely to provide a ground for striking out.  The same applies to anxiety.  Generally, it is only in an exceptional case that anxiety alone would found a sufficient ground for striking out in the absence of any particular prejudice (Eagil Trust Co Ltd. v. Pigott-Brown & Anr [1985] 3 All ER 119 at 124).  I am also inclined to agree with Mr Bartlett that the respondents, who have been involved in quite a number of legal proceedings brought against them as well as by them, should not be regarded as anxious litigants.

68.  I hold that the requirements to establish the basis for striking out in the second limb of Birkett v. James have not been made out.

Limitation period

69.  It is not strictly necessary to deal with Mr Barlow’s argument that the cause of action pleaded in the points of claim is time-barred, as this goes to the exercise of the discretion to strike out the proceedings in the event the requirements in the second limb of Birkett v. James are established.

70.  Mr Bartlett submitted that it is arguable there is no limitation period for dishonest misfeasance, citing a decision of the English Court of Appeal in Halls v. O’Dell [1992] 2 WLR 308. Millett J (as he then was) heard an appeal from a registrar’s decision refusing an application to dismiss a misfeasance application for want of prosecution.  In a rider to an extempore judgment, after counsel had pointed out he had not dealt with the limitation point, Millett J said he accepted the limitation period had not expired (at 314C).  His decision was reversed on appeal on grounds not directly relevant on the present point.  Balcombe LJ, who gave the judgment of the court, mentioned at 318C to D that Millett J was correct to hold that the misfeasance proceedings were not statute-barred, this being an action to which no statutory period of limitation applies and citing section 21 of the Limitation Act 1980.

71.  Section 21 of the Act is equivalent to our section 20(1) of the Limitation Ordinance, Cap. 347 which provides that “no period of limitation prescribed by this Ordinance shall apply to an action by a beneficiary under a trust, being an action – (a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or (b) to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use”.

72.  Mr Bartlett submitted for present purpose, it would suffice if it could be shown that the liquidators do have a reasonably arguable case this cause of action in dishonest misfeasance is not time-barred, relying on Halls v. O’Dell and section 20(1) of Cap. 347.  Alternatively, he relied on section 26(1) of Cap. 347 which provides for postponement of the limitation period in case of fraud, concealment or mistake in that the limitation period shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake or could with reasonable diligence have discovered it.  According to Mr Kennedy’s 11^th affidavit, it was in March 2004 that the liquidators first learned from Eric Chim of the possible connection of the 2^nd respondent with Famous Capital and King Capital.  As time should not run prior to March 2004, the misfeasance proceedings would still be within the limitation period even if section 20(1) does not assist the liquidators.

73.  Mr Barlow submitted Halls v. O’Dell, being an earlier decision, should not be followed and the law is governed by the later decision of Millett LJ in Paragon Finance.  He contended the misfeasance proceedings fall within the second class of case analysed in Paragon Finance at 409e to 410f, being a claim based on constructive trust where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff.  The expression of constructive trustee is used in the remedial sense and is not in reality a trust at all and does not come within section 20(1)(a) of Cap. 347.  Hence, the claim is subject to a limitation period of six years.

74.  As I see it, there is no conflict on the limitation point between Halls v. O’Dell and Paragon Finance, properly understood.  In Paragon Finance, Millett LJ drew a distinction between the second class of case (as mentioned earlier) and the first class of case in which the constructive trustee really is a trustee and he assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impugned by the plaintiff.  The rule that a claim against an express trustee was never barred by lapse of time in the absence of laches or acquiescence was applied to trustees de son tort and to directors and other fiduciaries, who though not strictly trustees, were in an analogous position (at 408f to j).

75.  I am inclined to the view there is a reasonably arguable case the cause of action in dishonest misfeasance is within the first class of case mentioned in Paragon Finance and is not time-barred.  I also agree with Mr Bartlett it is reasonably arguable the limitation period did not begin to run until March 2004.

If there is abuse of process

76.  That leaves the first limb in Birkett v. James being abuse of process of the kind developed in Grovit v. Doctor.

77.  The respondents contended that having brought these proceedings, the liquidators chose to put these proceedings on hold while pursuing other cases and have given up on the task of providing adequate particulars of their allegations of dishonesty and sufficient documentation.

78.  As mentioned earlier, no application has been brought by the respondents to seek further and better particulars and documents despite their avowed dissatisfaction with the reply given in the letter of liquidators’ solicitors in April 2006.

79.  I decline to infer on the evidence there was intention on the liquidators’ part to ‘warehouse’ these proceedings after the misfeasance summons was issued.

80.  As stated by the Court of Appeal in New China Hong Kong Group Ltd & Anr. v. AIG Asian Infrastructure Fund LP & Ors. [2005] 1 HKLRD 383, mere delay, without more, would not amount to an abuse of process.  There must be some evidence of objective conduct that the liquidators had no intention to bring the proceedings to a conclusion.  Caution must be exercised before acceding to strike out on the basis of abuse of process of the kind develop in Grovit v. Doctor, otherwise the second limb in Birkett v. James would be emasculated by the back door in that the requirement to prove likely prejudice would not be necessary.

81.  The amount claimed by the liquidators in these proceedings is in the region of HK$30 million.  Mere inactivity of two years does not in my view constitute cogent objective evidence evincing an intention of the liquidators not to bring the proceedings to a conclusion.  I think it right to look at these proceedings against the background of other litigation that has been going on all this time between the liquidators and the respondents or entities connected with the respondents.  Quite apart from the expenses incurred, I have no doubt that the extensive litigation would have stretched the resources of the liquidators.  The liquidators were not pursuing these proceedings for their own commercial interest.  I have no reason to think these proceedings were not pursued for the ultimate interest of the general body of creditors of the Company.

82.  I rule that the abuse of process limb is not satisfied.

Conclusion

83.  For the above reasons, I dismiss the respondents’ summons.  I make an order nisi the respondents do pay the liquidators’ costs of this application.