CHEUNG YING LUN AND ANOTHER v. KARRIE TRADING LTD AND OTHERS

HCA 550/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 550 OF 2010

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J U D G M E N T

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INTRODUCTION

1.  These two actions are closely related to each other.  They have common defendants being the 3rd Defendants in HCA 550/2010 who are the 2nd Defendants in HCA 551/2010.  These defendants, who are in practice as solicitors, are the liquidators (“the liquidators”) of the Incorporated Owners (“the IO”) of Kai Tak Mansion, a substantial block of flats built about 60 years ago on Kwun Tong Road close to the old Kai Tak airport.  The buildings are ripe for re-development which means that the individual flats are worth a great deal more when sold as part of a wholesale disposal of the buildings to a developer than if sold as a single unit to a private purchaser.  These are now old flats and, from what I have seen from the evidence, the buildings and their common parts are not well maintained and in some disrepair.

2.  Very serious allegations of fraud and conspiracy are made against the liquidators which if proved might result in professional misconduct charges and conceivably a criminal investigation.  Unsurprisingly, the statements of claim in both actions are lengthy and detailed.  The Defendants in each action are applying to strike out the statements of claim or, alternatively, specified paragraphs of these pleadings, on the basis that each discloses no reasonable cause of action or, alternatively, that it is frivolous, vexatious and amounts to an abuse of the process of the court.

3.  I propose to begin by relating the facts and matters relied on by the Plaintiffs, the allegations being common in each action, which are said to establish the wrongdoings upon which these two actions are brought.  After that I will briefly relate what needs to be shown by an applicant who seeks to strike out a pleading on the grounds that are relied on in the statements of claim and finally, I will apply those principles to the content of the pleadings and any evidence that I am permitted to have regard to on an application such as this.

The Factual Matrix Disclosed in the Statements of Claim

4.  The IO of Kai Tak Mansion has been put into liquidation due to non-payment of bills owed to a building contractor assigned by the IO to carry out various works of repair and renovation to the buildings.  Although the debt owed to the building contractor was relatively modest, the IO had no money to pay what it owed.  The reason for this was that for a number of years, the individual flat owners had not been paying the management fees nor their share of the renovation costs.  The IO had no income with which to perform its obligations or to discharge debts owed by it.  The liquidators were appointed and set about collecting what was owed to the IO by the flats owners. 

5.  The amount owed by the flats owners in each of these actions was not every much.  In respect of case HCA 550, the arrears of management charges and renovation costs was $21,552 which had risen to $30,000 when judgment was obtained from the Small Claims Tribunal (“SCT”) by the liquidators.  As to HCA 551, the same amount of $21,552 was outstanding and by the time that judgment was obtained for the arrears a partial payment of $9,000 had already been paid so that the judgment was for $22,000.

6.  I will need to provide, at all events, some of the detail which appears in the statements of claim, but for the purpose of explaining the basis of these actions, it is sufficient to set out here the bare essentials of what is said to have happened.

7.  The two pleadings allege a catalogue of sharp, and indeed fraudulent, practice by the liquidators in which the other defendants, as eventual purchasers of the flats, are said to have been complicit.

8.  HCA 550 relates to Flat 9, Block 3, Kai Tak Mansion.  The registered owners of this flat are the two Plaintiffs, and a Madam Yu Po Chun, who died in March 2000, as joint tenants.  Madam Yu’s death was registered with the Land Registry on 30 October 2008.  By operation of law, the Plaintiffs as Madam Yu’s surviving joint tenants, became the owners of the flat.  The Plaintiffs did not reside there.  They live in Fanling.  They let the property to a Miss Lai Po Fun, who lived there with her mother and her two children.

9.  In HCA 551, the Plaintiffs are the administrators of the deceased registered owner of Flat 7, also in Block 3. This property was unoccupied.

10.  In each of these two cases, it is alleged that the liquidators had obtained judgments from the SCT without proper service on the registered owners so that they had no opportunity to contest those proceedings.

11.  Thereafter, the liquidators proceeded to obtain charging orders nisi and subsequently charging orders absolute against the property concerned, again with no valid service on the registered owners.

12.  Having obtained the charging orders absolute the liquidators, again without good service, sought to enforce those orders by obtaining orders for sale.  This it is said, was also behind the back of the owners who had no opportunity to contest the applications.  In order to obtain the orders for sale, the liquidators produced valuations of $745,000 for the flats from valuers who share the same address as the company to whom the flats were eventually sold to.

13.  Having obtained the orders for sale, the liquidators then sold the flats to the 2nd Defendant in HCA 550, and to the same defendant being the 1st Defendant in HCA 551.  In HCA 550, the 2nd Defendant sold on to the 1st Defendant which is an associated company.

14.  All of these draconian methods used to secure enforcement of debts of $30,000 and $22,000 respectively behind the back of the registered owners and at a sale price of $745,000, being a gross undervalue on the true worth of these properties which is between $4 and $4.4 million when sold on bloc with all the other flats at Kai Tak Mansion to a developer for demolition and re-development of the site.

15.  The cases as pleaded and which will be advanced at trial, provided the Plaintiffs survive this application, carries the undoubted implication that these liquidators and the buyers of the flats have seen an opportunity for a dishonest “fast buck”, and I deliberately put this rather crudely because it is an accurate reflection of the conduct complained of by the Plaintiffs.  The owners of these now very run down properties were not resident in them at the time.  This was an opportunity to set in motion the process of the law to enforce very modest indebtedness, without in fact bringing to the attention of the owners what was going on until it was too late, by which time the sales had been completely.  As a result of this conduct, the owners have been deprived of their property, worth to them between $4 and $4.4 million.  All of this achieved “surreptitiously” (to use the language of the pleader of the statements of claim) conducted through legal processes designed to enforce repayment of very modest indebtedness and to achieve sales of these two flats at gross undervalues to complicit purchasers.

16.  This therefore is what the Plaintiffs say these two actions are all about.  By these claims, the Plaintiffs are seeking to have the sales overturned and the flats restored to their ownership, alternatively for damages to compensate them for their losses, to be proved at trial, no doubt based on the expected sale values of between $4 and $4.4 million when the flats would be sold as part of the whole of the building for

17.  I have at this stage stated the facts and the relief sought as a layman might express it.  The pleadings seek to set up pleas based on fiduciary duties owed by the liquidators to the Plaintiffs and knowing receipt by the ultimate purchasers of the two properties.  Because the applications to strike out the statements of claim are put forward on the basis that as a matter of law none of the pleas can succeed because none of the duties that are asserted by the Plaintiffs exist as a matter of law on the facts that are relied on, I will in due course have to examine the legal basis that the Plaintiffs rely on in their pleadings.

A MORE DETAILED SURVEY OF THE FACTS AS PLEADED

HCA 550/2010

18.  The basic facts are these:  The liquidators were appointed by the Official Receiver to act as the provisional liquidators of the IO on 27 August 2008.  They were appointed joint and several liquidators of the IO by order of this court on 4 December 2008.

19.  On 29 April 2009, they obtained judgment from the SCT in respect of arrears of renovation charges and management fees owed to the IO in the sum of $21,552, together with costs of $5,432 and interest.

20.  It is pleaded that this judgment was obtained without valid service of these proceedings on the Plaintiffs and therefore without notice having been given to them.  Before applying for judgment, the liquidators made no effort to contact the Plaintiffs with a view to securing payment of the arrears without resorting to litigation.  Further, the liquidators made no pre-action demand of the Plaintiffs for payment of what was owed by them.  Having decided to seek repayment by litigation through the SCT, valid service was not effected on the Plaintiffs as a result of which they had no notice of that proceeding.  It is useful to set out here the complaints of the Plaintiffs as to service of the SCT proceedings as they appear in the statement of claim:

“11.3 According to the land search records of the Property,

11.3.1 The Plaintiffs and a Yu Po Chun (‘Madam Yu, deceased’) became the owners of the Property, holding the same as joint tenants, on 9 December 1974.

11.3.2 By Memorial No.08103001910086, the Certified Copy of Death Certificate of Madam Yu, deceased has been registered in the Land Registry against the Property on 30 October 2008.

11.4 The said Certified Copy of Death Certificate of Madam Yu, deceased registered against the Property shows that Madam Yu, deceased had passed away on 28 March 2000 and that the residence of the 1st named Plaintiffs, being the son of Madam Yu, deceased was reported to be at Flat 708, Hung Shek House, Ping Shek Estate, Kowloon (‘the Ping Shek Estate Address’).

11.5 At all material times,

11.5.1 The Property has been rented out by the Plaintiffs to a Miss Lai Po Fun (;Ms Lai’), and Ms Lai, her mother and her 2 children (both of school age) have been occupying the Property;

11.5.2 The Plaintiffs and/or Madam Yu, deceased have not been residing at the Property;”

11.5.3 The Plaintiffs have been residing at Flat G, 25^th Floor, Block 10, Dawning Views, 23 Yat Ming Road, Fanling, New Territories (‘the Fanling address’); and

11.5.4 The parents of the 1st named Plaintiffs, including Madam Yu, deceased (while she was still alive), have been residing at the Ping Shek Estate Address, and the Plaintiffs could and can be contacted through the Ping Shek Estate Address.

11.6 In the premises, due enquiry made by the 3rd Defendants as to the address of the Plaintiffs:-

11.6.1 by conducting and making investigations on any land search on the Property conducted at any time after 30 October 2008 should have revealed the demise of Madam Yu, deceased, and further that the usual and/or last known address of the 1st named Plaintiffs would be the Ping Shek Estate Address and through which the Plaintiffs could be contacted by the 3rd Defendants; and

11.6.2 by visiting the Property would have revealed and confirmed that the Plaintiffs and Madam Yu, deceased were not residing at the Property, and further by making enquiry with Ms Lai and/or her family would have revealed that the Plaintiffs were residing at the Fanling Address and/or enabled the 3rd Defendants to get into contact with the Plaintiffs.

11.7 Further, after the 3rd Defendants’ appointment as the provisional liquidators and before their appointment as the liquidators of the IO, the 3rd Defendants through the former chairman of the IO, Madam To Mei Chun (‘Madam To’) contacted the 1st named Plaintiffs and caused him to attend the 3rd Defendant’s Firm to execute documents prepared with contents filled in by the 3rd Defendants’ staff in advance for the 1st named Plaintiffs’ proof of a debt of HK$5,350 owed by the IO to the 1st named Plaintiffs. At all material times, Madam To could be contacted by the 3rd Defendants, and through Madam To the 3rd Defendants could also contact the Plaintiffs and/or obtain the address of the Plaintiffs, namely the Fanling Address.

11.8 However, acting in bad faith, the 3rd Defendants surreptitiously obtained the SCT Order against the Plaintiffs upon the Plaintiffs’ default of appearance.”

21.  Having obtained judgment in default in this way, the statement of claim then goes on to plead in great detail how the Charging Order was obtained through a failure of good service and proper enquiry and by a failure to divulge to the court that this was so.

22.  The pleading set out how, in a way that was completely disproportionate to the debt sought to be recovered, which in fact is said to have been only $5,866 and not $21,552, the liquidators put the IO to the expense of obtaining the Charging Order and obtaining an order for sale when by basic enquiries at the property and from the IO itself the Plaintiffs could have been contacted and the matter of what was owed by them could have been resolved.

23.  As to the sale of the flat by the liquidators to the 2nd Defendant and thereafter to the 1st Defendant, the following is alleged:  Firstly, it is averred that the liquidators, as experienced solicitors, knew that by obtaining the order for sale in default of appearance, caused by their failure to serve the Plaintiffs, the order for sale was liable to be set aside.  This was further compounded by their failure to serve the order for sale itself on the Plaintiffs, made worse by causing one of their trainee solicitors to make an affirmation that was false, affirming that the order for sale had been served.  Notwithstanding having so obtained the order for sale, the liquidators took no steps to obtain a writ of possession and to enforce it by enlisting the assistance of the court bailiffs.  It is averred that this was done on purpose because to have done so would have finally brought to the attention of the Plaintiffs what the liquidator had done behind their back.

24.  In effecting the sale of the property to the 2nd Defendant, the liquidator did so without obtaining the title deeds to the property which have always been in the possession of the Plaintiffs.  It is instructive to repeat here the relevant part of the statement of claim in respect of this sale:

“11.15.1 At all material times, the original title deeds to the Property were and still are in the possession, custody and/or control of the Plaintiffs. The Plaintiffs further refer to paragraph 4 of the Order for Sale as pleaded in paragraph 6.4 hereinabove, pursuant to which the 3rd Defendants could and should take steps to compel the Plaintiffs to deliver up the original title deeds to the Property. Further, by virtue of Sections 13 and 13A of the Conveyancing and Property Ordinance, as well as under the common law, in the absence of special provision in the agreement for sale and purchase, a vendor would be under the duty to show and give good title by producing the delivering to the purchaser the relevant original title deeds to the Property. However, the 3rd Defendants, after obtaining the Order for Sale by default, never obtained and never made any or any bona fide attempt to obtain any of the original title deeds to the Property, knowing that if any attempt were made to obtain the original title deeds the Plaintiffs would be alerted of the Order for Sale (and also the Charging Order Absolute and the SCT Order) and would have the same set aside, or otherwise would have had the sale pursuant to the Order for Sale prevented or averted.

11.15.6 By the Purported 1st Assignment, the 3rd Defendants purportedly sold and assigned the Property to the 2nd Defendant, as pleased in paragraph 7 hereinabove.

11.15.7 The Purported 1st Assignment was dated, and thus purportedly made on 2 February 2010. According to the Stamp Certificate on the Purported 1st Assignment, it had been executed ‘in conformity with a stamped Chargeable Agreement for Sale’. While the Purported 1st Assignment was only delivered to the Land Registry for registration on 3 March 2010 (thus outside the 1-month period for registration to secure the dating back of priority to the date of the instrument pursuant to Section 5 of the Land registration Ordinance) and further that the Purported 1st Assignment had been withheld from registration for months after delivery for registration, there was and is no record of the ‘stamped Chargeable Agreement for Sale’ having ever been delivered to the Land Registry for registration, whereby priority of the interest of the 2nd Defendant as purchaser could have been secured.

11.15.8 Further, according to the Purported 1st Assignment, the 3rd Defendants’ Firm acted or purportedly acted as solicitors for all the parties, namely the Plaintiffs as vendor, the 3rd Defendants as liquidators in exercise of the power of sale under the Order for Sale and also the 2nd Defendant as purchaser, notwithstanding that there were clear conflict of interests amongst the parties in the transaction, including, inter alia, that notwithstanding the terms of the Order for Sale providing for sale with vacant possession of and title deeds to the Property, the purported sale was effected (a) without vacant possession being delivered and (b) without any of the original title deeds to the Property being delivered to the 2nd Defendant.

11.15.9 The Plaintiffs aver that

(a) the non-delivery of the ‘stamped Chargeable Agreement for Sale’ for registration,

(b) the late delivery of the Purported 1st Assignment for registration, and

(c) the 3rd Defendants’ Firm acting or purporting to act for all parties to the transaction under the Purported 1st Assignment notwithstanding the clear conflict of interests,

in the aforesaid circumstances were attempts on the part of the 3rd Defendants and the 2nd Defendant to conceal the fact of the purported sale of the Property for as long as possibly could, and also to conceal the terms of the purported sale of the Property.

11.16 The 3rd Defendants failed to sell the Property at a price significantly higher than the reserve price (i.e. HK$743,496.00) in the Order for Sale whilst knowing, or they ought to have known, that the Property could have been sold at a price significantly higher than the reserve price.

11.16.1 The 3rd Defendants refrained from, and the Plaintiffs aver deliberately so, obtaining vacant possession of and obtaining the title deeds to the Property whilst knowing, or they ought to have known, that the Property could and would be sold at a better price with vacant possession and/or with the original title deeds.

11.16.2 Kai Tak Mansion is a residential development of nearly 50 years old. At all material times, the 3rd Defendants knew, or ought to have known, that a joint sale of the properties in Blocks 1 to 4 of Kai Tak Mansion was contemplated, with the Property to be sold for or the Plaintiffs as owners of the Property to be paid a sum of over HK$4.4 million.”

25.  Because of the age of Kai Tak Mansion, it is alleged that the liquidators would have known that a joint sale of the flats comprising all four blocks was contemplated which, if successful, would result in each flat owner receiving $4.4 million.  There came into existence a joint sale agreement (in draft) dated 27 March 2009 and thereafter a subsequent one, to which the Plaintiffs were parties under which Kai Tak Mansion was to be sold for re-development for $1.5 billion.

26.  It is averred that by February 2009 and no later than early August 2009, the liquidators were aware of the intended joint sale. This information is said to have been available to the liquidators through their frequent contacts with Madam To, the former chairman of the IO and a Mr Chung Siu Kong, the chairman of the co-ordinating committee for the intended joint sale.  The fact of the intend joint sale was common knowledge amongst the 300 owners of Kai Tak Mansion which was something that the liquidators would have known of given their dealings with Madam To and Mr Chung.

27.  As to the sale of the flat to the 2nd Defendant and onwards to the 1st Defendant, the liquidators were instructed in their capacity as solicitors by those in control of the 2nd Defendant to change the name of the original company, purchased by company kit in about November 2009, to the name of the 2nd Defendant.  The liquidators then acted for the 2nd Defendant in its assignment of the property to the 1st Defendant.  The liquidators, as solicitors, also acted in the purchase of three other flats in Block 3 to the 2nd Defendant at prices of $745,000 and $726,000, all of which were assigned without vacant possession, without title deeds and without inspection of the flats being afforded to the 2nd Defendant.

28.  It is submitted by Mr Leong SC, on behalf of the Plaintiffs, that a careful reading of the statement of claim as a whole demonstrates a chain of underhand conduct by the liquidators in obtaining an order for sale of this property thereby giving effect to the charging order having placed before the court a highly suspicious valuation of $745,000 from a valuer whose offices shared the same address as the 2nd Defendant, in order to obtain the court’s approval for this valuation as the reserve price and then selling at this price knowing, which is to be inferred from all the circumstances, that this was at a gross undervalue and all of this being done behind the Plaintiffs’ backs.

HCA 551/2010

29.  This relates to Flat 7 of Block 3.  The arrears in this case were said to be $21,552.  The Plaintiffs are the administrators of the deceased owner of the property.  They hold the title to it in that capacity.  The steps taken by the liquidators in obtaining judgment in the SCT for the amount owing and a Charging Order and an order for sale and then exercising that order for sale are identical to those taken in respect of the flat in HCA 550/2010.  As to service of the proceedings no attempt was made to serve the Plaintiffs at their registered home address which was available on the land search.

30.  All of this was done clandestinely and at a gross undervalue, without possession of the title deeds nor with vacant possession to the purchaser.

The Principles to be Applied on an Application to Strike Out

31.  From that description of the facts as relied on by the Plaintiffs in both actions, which are set out with far greater particularity in the statements of claim, I now turn to the well-known principles which I need to apply on an application such as this.

32.  The burden on Mr Mak for the liquidators and on Mr Hui for the purchasers is a heavy one.  It is a very strong thing indeed to drive a Plaintiff from the judgment seat before he is able to get his case to trial.  It is only in plain and obvious cases that a court will strike out a statement of claim.  The facts are to be taken as they are pleaded in favour of the respondent to the application.  The applicant for a strike out needs to demonstrate that the case as it has been pleaded, assuming the facts to be as they are, is bound to fail.  As it was put in Francesca Ha v Tsai Kut Kan (No. 1) [1982] HKC 382 CA, before it can be struck out the claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed.  [See Hong Kong Civil Procedure 2011, 18/19/4 p.404]

THE APPLICATION OF THESE PRINCIPLES

33.  It seems to me that it is very important having read the statements of claim as a whole to realise that the cases as pleaded entail misconduct of the worst possible kind.  The deprivation of property by the misuse or, perhaps more correctly, the abuse of the processes and procedures of the law.  It is this notion that lies at the heart of the Plaintiffs’ cases against not only the liquidators but also those who have purchased these properties from them.

34.  As will almost always be the case, the statements of claim having first set out the factual bases of the claims then seek to apply the appropriate legal labels to the conduct complained of.  In this case, there is much reference to fiduciary duties owed by the liquidators as mortgagees and sellers of the properties qua mortgagees.  Both Mr Mak and Mr Hui, have invested much effort in seeking to demonstrate that, even taking the facts at their highest against the liquidators and the purchasers, such duties can never be attributed to them so that absent such duties and/or obligations the Plaintiffs are bound to fail.

35.  Both of them have sought to closely analyse the factual bases of the cases and the underlying documents, such as both of the joint sale agreements, in order to persuade the court, even on an application such as this, that the facts as pleaded and the legal obligations which underpin them cannot bear fruit for the Plaintiffs.

36.  To attempt such an exercise, when faced with a formidable factual landscape, which if true may have far reaching consequences for all of the Defendants, is doomed to failure.  The pleaded facts presented in great detail and the evidence which will be called in support, both in terms of live evidence and the numerous documents which form part of the Plaintiffs’ cases are well capable of standing in proof of the cynical and fraudulent conduct which the Defendants stand accused of.

37.  Fraudulent conduct as alleged in this case does, in any event, not depend on proof of breach of any fiduciary duty.  It stands alone as conduct which gives rise to an independent cause of action which, on these pleaded facts, is supported by the statements of claim.

38.  All of the points taken by Mr Mak and Mr Hui, both as to law and fact, cannot be summarily be disposed of in the way that they have so strongly submitted on an application such as this.  These facts and the legal conclusions that are sought to be drawn demand a trial.  In my judgment, this is very much an evidence sensitive contest which simply cannot be disposed of on an application such as this.  In both of these cases, the applications to strike out the statements of claim or, alternatively the specified paragraphs, must stand dismissed.  If the Defendants wish to say that the pleadings, especially those parts which allege fraudulent conduct, are insufficiently particularised, they will no doubt serve appropriate requests for further and better particulars.

39.  It seems to me that costs will have to follow the event.  These will be to be Plaintiffs, in any event, to be taxed if not agreed on a party-and-party basis together with certificate for two counsel. This will be an order nisi.