HEROSTAR PROPERTIES LTDDI AND OTHERS v. CHEUNG YU PING AND ANOTHER

HCA 2236/2014

[2018] HKCFI 1112

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2236 OF 2014

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(By Original Action)

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(By Counterclaim)

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D E C I S I O N

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1.  This was an application by Herostar Properties Ltd (“Herostar”), Pan Di (“Madam Pan”), Liu Hong Xia (“Madam Liu”) and GeoMaxima Holdings Company Limited (“GM”) (collectively “the plaintiffs”) for leave to amend the statement of claim dated 22 July 2016. At the conclusion of the hearing, the decision was reserved which I now give.

2.  The defendants’ objection is limited to the amendments that are pleaded in §§23.5 and 23.6 of the draft amended statement of claim (“the disputed amendments”).

Background

3.  The subject matter underlying the dispute in this action is the ownership of a residential property at Taikoo Shing (“the property”).

4.  On 25 March 2002 Tin Kwong International Enterprises Company Limited, incorporated in Hong Kong and wholly owned by Sun Tian Gang (“Mr Sun”) acquired the property for $4.21 million.

5.  It is the plaintiffs’ case that Mr Sun was the beneficial owner of the property which was acquired to provide residential accommodation for employees of GM, another Hong Kong company which Mr Sun also wholly owned and of which he was chairman. 

6.  Pursuant to the direction of Mr Sun/GM, Tin Kwong provided the property as staff quarters to the 1^st defendant Cheung Yu Ping (“Mr Cheung”) the deputy general manager and an employee of GM.

7.  Mr Sun caused Herostar to be incorporated on 31 March 2003.  Madam Pan and Madam Liu were appointed directors on 16 and 21 July 2003 respectively. At all material times Herostar had 2 issued shares.  Madam Pan and Madam Liu became registered holders of 1 share each on 17 and 22 July 2003 respectively.

8.  Madam Pan was and is married to Mr Sun and Madam Liu was an employee of GM.

9.  At Mr Sun’s direction, on 30 September 2003, Herostar purchased the property from Tin Kwong for $3.15 million financed as to $1.89 million by GM and the balance by a mortgage secured over the property.  After acquiring the property, Herostar ‘allowed’ Mr Cheung (who was an employee of GM) to continue to aside there.  It is the plaintiffs’ case that the property was held by Herostar in trust for GM, with the ultimate beneficial owner being Mr Sun.

10.  Mr Sun was arrested in the Mainland on 11 August 2005 and detained there until 6 March 2012 when he was released.  During that period almost 7 years, Mr Sun little contact with the outside world and lost control of his businesses and companies while Madam Pan who resided in the PRC went into hiding.

11.  The plaintiffs’ case is that during Mr Sun’s detention, Mr Cheung usurped control of Herostar by causing various corporate documents of Herostar including the following to be filed with the Companies Registry:

(i)  a written resolution dated 26 June 2007 recording Madam Liu’s resignation as a director, appointing Mr Cheung as a director and approving the transfer of 1 share from Madam Liu to Mr Cheung bearing the signatures of Madam Pan and Madam Liu (“the written board resolution”);

(ii)  an instrument of transfer and bought and sold notes dated 26 June 2007 showing the transfer of the 1 share held by Madam Liu to Mr Cheung (“the transfer documents”);

(iii)  a letter of resignation from Madam Liu as director (“the resignation letter”)effective 26 June 2007; and

(iv)  minutes of the adjourned meeting of the directors held on 13 November 2008 recording the appointment of Madam Xing as director.

12.  After gaining control of the board, the defendants caused Herostar to sell the property in January 2010 and followed in September 2010 by Herostar being deregistered.

13.  When those matters came to light after Mr Sun’s release from detention in 2012, the plaintiffs made an application in 2013 and obtained an order for Herostar to be reinstated.  The plaintiffs’ case is that Madam Pan and Madam Liu remained the shareholders and directors of Herostar and that Mr Sun as beneficial owner was entitled to the sale proceeds of the property.

14.  The 2^nd defendant Xing Xiao Jing (“Madam Xing”) is the wife of Mr Cheung.  For convenience, Mr Cheung and Madam Xing are hereinafter collectively referred to as “the defendants”.

15.  It is the defendants’ case that Mr Cheung is the beneficial owner of the property.  In outline, their case is that in 2000/2001    GM was interested in setting up a joint venture with the a PRC entity (“CCHT”) in Jilin province.  Mr Cheung, who was well connected in Jilin was asked to head the negotiations with a view to GM entering into a cooperation agreement with CCHT in late 2001.  Mr Sun and Mr Cheung agreed that Mr Sun would purchase a residential apartment at Taikoo Shing, Hong Kong as a bonus/gift to Mr Cheung if the contemplated transaction with CCHT materialised.

16.  Completion of the CCHT transaction took place in December 2001.  In early 2002, Mr Cheung selected the property which Mr Sun caused Tin Kwong to acquire and Mr Cheung therefore became its sole beneficial owner.

17.  Owing to Mr Sun’s detention, Mr Cheung considered it necessaryto take back the legal ownership of the property. He was informed by GM staff that the company kit of Herostar in GM’s office contained undated signed documents.  Having regard to the matters mentioned in §10 above, Mr Cheung decided to sign/execute various corporate documents for filing with the Companies Registry including those referred to in §11(i) to (iii) above.

18.  The validity of those corporate documents is a key issue in the action. 

The amendment application

19.  Mr Man SC who appeared for the plaintiffs referred to the wide powers of the court to allow amendment of pleadings at any stage of the proceedings under Order 20, rules 5 and 8, citing the principles enunciated by Lord Brandon in Ketteman v Hansel Properties Ltd [1987] 1 AC 189 at 212F–G. He submitted that the test to be applied is essentially the same as that of a striking out application so that unless it is demonstrated that the new claim raised in the proposed amendments would be bound to fail, it should be allowed.

20.  As to the pleading of inconsistent alternatives, that is governed by Order 18, rule 12A introduced by the CJR and qualifies and restricts the parties’ ability to plead inconsistent allegations of fact.  It is a pre-requisite that there must first of all exist reasonable grounds, and the inconsistent allegations must be pleaded as alternatives.  Thus, Order 18, rule 12A provides as follows:

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

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

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

21.  The disputed amendments relate to the following corporate documents of Herostar:

(i)  the written board resolution (a) recording Madam Liu’s resignation as director, (b) approving the appointment of Mr Cheung as director; and (c) approving the transfer of Madam Liu’s share to Mr Cheung;

(ii)  the resignation letter; and

(iii)  the transfer documents

(collectively “the disputed documents”).

22.  The plaintiffs first knew about the existence of the disputed documents when the defendants filed their defence and counterclaim on 10 February 2015 to the effect that the disputed documents signed by Madam Liu had been kept or held in escrow by Herostar.  Copies of the disputed documents were supplied to the plaintiffs in March 2015.  There were no blanks and all bore the date “26 June 2007”.  There was nothing at that stage to suggest that any part of the disputed documents when found by Mr Cheung in the company kit contained any blanks other than their being undated.  In other words, it was implicit that the name of (i) the new director and (ii) the transferee of Madam Liu’s share in Herostar had already been filled in when Mr Cheung found them in the company’s kit. 

23.  Madam Pan and Madam Liu’s case was that they never signed documents that effected any change in shareholding and directorship in favour of Mr Cheung.  They maintained that their signatures were forgeries and had obtained an expert’s report to that effect.  

24.  While the disputed documents appeared to bear the signature(s) of Madam Pan and/or Madam Liu, in the statement of claim dated 22 July 2016 (replaced by amendment pursuant to the master’s order dated 21 July 2016) (“ASOC”):

(a)  Madam Liu denied (i) transferring her 1 share in Herostar to Mr Cheung or anyone else, (ii) resigning as director, (iii) appointing Mr Cheung as a director, (iv) executing any document or passing any resolution to such effect, and (v) signing the written board resolution.

(b)  Madam Pan likewise denied (i) executing any document or passing the resolution appointing Mr Cheung as a director, (ii) executing any document or passing any resolution to such effect, and (iii) signing the written board resolution.

25.  In the Defence and Counterclaim filed on 31 October 2016 (“the D&C”), the defendants’ allegation is that on an unknown date shortly after Madam Pan became its shareholder and director (in July 2003) she signed the written board resolution which was undated and which resolved that (i) Madam Liu had tendered her resignation as director (with the date of resignation being left blank); and (ii) Madam Liu shall transfer her share to a third party (with the name of the third party being left blank).

26.  The ‘blanks’ specifically identified related to the name of transferee and the dates in the written board resolution.  A perusal of the written board resolution document shows that the typography of the dates, the name of the transferee of Madam Liu’s share as well as that of the new director is similar but that it was different from the rest of the document.  They did not include the name of the new director. Whether that was also blank when Mr Cheung first discovered it was not specifically mentioned. Even now, that aspect is unclear.

27.  In their Reply and Defence to Counterclaim (“R&DC”) dated 30 November 2016, the plaintiffs pleaded inter alia that Madam Liu and Madam Pan did not know of or consent to the creation of the disputed documents, did not sign the same and did not execute any documents of similar effect.

The amendment application

28.  The disputed amendments seek to introduce an alternative casethat the disputed documents remain invalid even if Madam Pan and Madam Liu did sign them.

29.  So far as concerns the written board resolution, Madam Pan and Madam Liu pleaded that, to the best of their knowledge they did not sign the document at any time when it contained a resolution with Mr Cheung’s name on it, nor did they sign a document with the date, transferee, new director or new shareholder left in blank.  In the alternative, if they did signa blank document, they signed the same under representation that they were for the purpose of holding the property on trust for Mr Sun/GM, and with no intention of approving a transfer of the 1 share to Mr Cheung.

30.  So far as concerns the transfer documents relating to Madam Liu’s 1 share and the resignation letter, the proposed amendment adopts a similar format as that for the written board resolution.

31.  I now turn to consider the question whether they are reasonable grounds to support the alternative plea.

32.  The evidence in support of the alternative plea is set out in Mr Sun’s second affirmation and at §27, Mr Sun stated as follows:

“ Given the new suggestion by the Defendants that Pan and Liu signed the Disputed Documents when they were in blank, the Plaintiffs had to address their minds to that case. I discussed the matter with Pan and Liu in more detail when we were preparing the witness statements with this case. It was during this time when I was able to recall that there were occasions where others who held assets on trust for me to execute documents in blank to facilitate future transfers. These matters were handled by my staff, so I had no clear idea whether such arrangements had been made for any specific assets that were held on trust for me, save a general idea that such arrangements might be made. Therefore it is entirely possible that Pan and Liu could have executed documents in blank concerning Herostar (but certainly not for the benefit of [Mr Cheung].”

33.  The evidence of Madam Pan and Madam Liu may be summarised as follows:

(i)  They were separately requested to become a shareholder of Herostar in 2003 to hold as trustee for GM and Mr Sun;.

(ii)  The request to Madam Liu was made at GM’s Shenzhen office by her boss a Mr Shi. She signed certain documents at GM’s Shenzhen office.

(iii)  The request to Madam Pan was made by Mr Sun. She signed certain documents at GM’s Hong Kong office.

(iv)  As neither Madam Pan nor Madam Liu could read or write English, they both recall that someone explained the documents presented for signature before signing them.  However, given the lapse oftime (some 14 years since the event) neither can now recall who that was but that it was probably Mr Shi or Pei Xiaoxin who was Mr Sun’s secretary at the time.

(v)  They cannot now recall definitively the explanation given as to the sort of documents they were signing but they do not recall having signed any documents in blank although they cannot be totally certain about this.

(vi)  However, they are certain that they had no intention to transfer the share to Mr Cheung or appoint him as director.  Thus, they believed they had not signed any documents with such effect, assuming that the documents had been correctly explained to them.

34.  Mr Man submitted that the matters deposed to in Mr Sun’s 2^nd affirmation dated 5 February 2018 together with the affirmations of Madam Pan and Madam Liu constitute reasonable grounds for the proposed amendment.

35.  Mr A Wong SC who appeared for the defendants objected to the disputed amendments on jurisdictional grounds, namely, that on the basis of the materials before the court, the plaintiffs have no reasonable grounds for pleading in the alternative.  The defendants’ case was firmly placed on Order 18, rule 12A and whether the requisite conditions have been met.

36.  The court was referred to the considerations that led to the introduction of Order 18, rule 12A set out in §§263 and 264 of The Final Report on Civil Justice Reform (the “Final Report”).

37.  The recommendation in the Final Report was made after considering the question of verification in the context of alternative and inconsistent allegations of material fact.  It was a matter that had been highlighted and considered in Clarke v Marlborough Fine Art (London) Ltd [2002] 1 WLR 1731 at §§29 – 30. 

38.  As appears from the Final Report, the purpose orobjective of Order 18, rule 12A of the Rules of the High Court is to exclude dishonest or opportunistic and speculative claims.  It is not intended to exclude honest claims reasonably advanced on the basis of incomplete information which points to alternative sets of fact, each of which would be legally viable as part of the party’s case.

39.  Mr Wong sought to distinguish Clarke on the basis that in that case the plaintiff was an executor who had no personal knowledge of the facts whereas in the present case whether or not Madam and Madam Liu ever signed the disputed documents is a matter within their personal knowledge.

40.  I do not read Clarke as prohibiting the raising of factually inconsistent alternative pleas provided both alternatives are possible onthe evidence.  Here, Madam Pan and Madam Liu do not have any personal interest in the shares but agreed to hold them as nominees.  They recall signing documents in English for that purpose. As neither of them is conversant with the English language which they do not read or write, they were separately given an explanation at the time the details of which they now cannot recall nor the identity of the person giving the explanation.

41.  Mr Man submitted that their situation was akin to that of the executor in Clarke’s case. They do not know how the documents came into existence in the way that they are as Madam Pan and Madam Liu never had any intention of appointing Mr Cheung as director nor transferring the share to him. I would agree. Given the context of the circumstances, there is nothing unbelievable about that and I do not see that they are not in a position to verify the alternative plea. 

42.  Mr Wong stressed the absence of evidence to support the plea of misrepresentation in that Madam Pan and Madam Liu cannot remember what they were told. But soo long as their alternative plea is based on incomplete but plausible evidence, that is sufficient. They are not saying that both sets of facts are true.

43.  On the available evidence, I consider that the party pleading can reasonably say that he did know exactly what happened. As the plea is not so unbelievable as to warrant a strike out application at such an application been made, it would not be right to refuse the amendment.

Conclusion

44.  Accordingly, the plaintiffs’ application is allowed.  There is to be an order nisi that the costs of this summons be to the plaintiffs.