JENHO DEVELOPMENT LTD v. PENSONIC TECHNOLOGY (HK) LTD

DCCJ 4402/2009

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4402 OF 2009

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D E C I S I O N

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1.  In the third party action, the defendant (“PenTech (HK)”) claimed against the 1^st Third Party (“Tse”) for damages, account and declaration for conspiracy as well as breach of fiduciary duties. After trial, I handed down the written judgment on 17 December 2012 (“the Judgment”) whereby I dismissed the claim. By summons filed on 14 January 2013, PenTech (HK) applies for leave to appeal.

2.  Pursuant to section 63A(2) of the District Court Ordinance, Cap 336, leave to appeal shall not be granted unless the intended appeal has a reasonable prospect of success or in the interest of justice it ought to be heard by the appellate court.

3.  Apparently PenTech (HK) does not seek to challenge the findings in respect of the claim for conspiracy and misappropriation by diverting company money into Tse’s personal account.  It would not have succeeded, as the findings are essentially those of fact.

4.  According to the summons, there are 4 grounds of appeal:

(1)  The court failed to properly consider the pleaded claim for breach of fiduciary duties on the part of Tse;

(2)  The court applied the incorrect standard of proof in respect of the claim for breach of fiduciary duties on the part of Tse;

(3)  The court took into account irrelevant consideration; and

(4)  The court erred in refusing to order Tse to account for the sales proceeds in his personal account in the Mainland.

GROUNDS (1) AND (4)

5.  I think the 2 grounds may be considered together.  Essentially the argument runs like this:

(1)  Whilst PenTech (HK) failed to prove that Tse has conspired with others to injure PenTech (HK), Tse was nevertheless liable for keeping the proceeds of sale in his personal account in the Mainland.

(2)  Whilst PenTech (HK) failed to prove that Tse has conspired with others to commit malicious falsehood, Tse was nevertheless liable for failing to prevent the malicious falsehood committed by third parties.

Whether the above alleged breach has been pleaded

6.  Regarding the proceeds of sale of the goods of the company, PenTech (HK) started with the pleading of the alleged lack of record of delivery of the goods and receipt of income from the customers in the company’s document (§12 of the third party statement of claim).  That was a pleading of fact which led to the claim that Tse was liable to compensate (presumably in damages) for breach of fiduciary duties; to account for the sums misappropriated by him or paid away by him or at his direction from the company; to account for secret profits received in fraud of the company; and to account as trustee of the sums received by him in fraud of the company (§13(b)-(f) of the third party statement of claim; §(1)(b)-(e) of the prayer).

7.  Clearly the pleading proceeded on the basis of the conspiracy charge and the alleged misappropriation by Tse’s unauthorised diversion of the proceeds of sale of the goods from the company into his personal account.  That was also the issue in dispute that had to be resolved and tried.  I found against PenTech (HK) on that issue (§§55-72 of the Judgment).

8.  PenTech (HK) now seeks to argue that his keeping the proceeds in his personal account afterwards amounted to misappropriation or breach of his fiduciary duty.  I do not see how that fits into the pleaded case of PenTech (HK).  No doubt Tse had the duty to account; but I see no pleading of breach of fiduciary duty in that Tse had generally or specifically failed or refused to account the proceeds that might still be standing in his personal account in the Mainland for the benefit of the company.

9.  Mr Fong referred to the pleaded case of the associated company of his client in this respect in the High Court actions.  I wonder how that helps.  I am surprised that Mr Fong did that, as it only reinforces my observations about the decision of the parties to resolve the present action and the High Court actions separately (§§21-27; 115 of the Judgment).

10.  The above explains why I decided against ordering Tse to account, though envisaging the general fiduciary duty of Tse to account (§73-74 of the Judgment).

11.  As far as the alleged failure of Tse to prevent the malicious falsehood is concerned, it is specifically argued that:

(1)  Tse ought to have taken step to prevent the alteration of the washing label in the heater bags; and

(2)  Tse ought to have informed the company and to have taken step to prevent the commission of the malicious falsehood against the company.

12.  Mr Fong referred to the pleading of the duty not to do any act or omission which the director knew or ought to have known would cause detriment to the company (§6(f) of the third party statement of claim).  Yet that was pleading of the duties, not breach.  The conspiracy to commit malicious falsehood, of which Tse was allegedly a co-conspirator, was clearly the only pleaded particular of breach of fiduciary duty in this regard (§§14-17 and 19 of the third party statement of claim).  The alleged omission did not form part of the pleaded case.

13.  When it came to the reliefs sought in connection with the malicious falsehood, there was only claim for damages for conspiracy and injunction restraining the continuation of the malicious falsehood against Tse as the alleged co-conspirator (§(2) of the prayer).  There was no prayer for relief for the alleged breach now alleged in connection with the alleged omission on the part of Tse.

14.  Allegations of breach of trust or fiduciary duties must be specifically pleaded.  In Re Wrightson [1908] 1 Ch 789 at 798-799 (per Warrington J):

“ ……It is competent to the plaintiffs in an action of this kind, and with this judgment, to charge the trustees with a breach of trust that is not alleged in the pleadings and proved at the trial? …… Take these present pleadings for example and consider the position of the parties at the time the action came on for trial. Assuming the plaintiffs to have known of another breach of trust which was not alleged, would it have been competent for them on this statement of claim to have obtained a judgment for relief founded on that breach of trust? Plainly not. The rules require that in cases of breach of trust particulars shall be alleged in the pleadings, and without amendment it would have been hopeless for the plaintiffs to have sought to charge the trustees with a breach of trust other than that alleged in the pleadings.

Is it the practice of the Court where on breach is proved to direct some roving inquiry with a view of ascertaining whether there are any other breach of trust?  I think plainly not.  No instance of the sort has been cited, and if it were the practice the rules requiring particulars to be given would be ridiculous and absurd.  It seems to me that, in regard to a breach of trust, that is to say, an active breach of trust, in its active and proper sense, the plaintiffs are not entitled to relief at the trial, except in regard to that which is alleged in the pleadings and proved at trial.”

See also Hong Kong Civil Procedure 2013, Vol.1 at §18/12/45.

15.  What PenTech (HK) suggests now did not form the pleaded basis for the alleged liability of Tse.

Whether the above allegations may nevertheless be entertained on appeal

16.  Should PenTech (HK) be allowed to raise the new points on appeal?  I think not, unless there is no reasonable possibility that the state of the evidence relevant to the allegations would have been materially more favourable to the other side if the points had been taken during the trial.  In Flywin Co Ltd v Strong & Associates (2002) 5 HKCFAR 356 (per Bokhary PJ (as he then was):

“38. …… What is involved is a general principle. Where a point is taken at the trial, the facts pertaining to it are open to full investigation as the evidence-taking stage of the litigation. That is as it should be. Therefore where a party has omitted to take a point at the trial and then seeks to raise that point on appeal, the position is as follows. He will be barred from doing so unless there is no reasonable possibility that the state of the evidence relevant to the point would have been materially more favourable to the other side if the point had been taken at the trial.

39. Clearly the foundational imperative of the “state of the evidence” bar, as I propose to call it, is fairness……”

17.  What was said in this regard (§68 of the Judgment) was as far as it took in connection with resolving the dispute as to whether the payment of sales proceeds in personal account of Tse amounted to misappropriation or breach of fiduciary duty.  Mr Cheng submitted that the possibility referred to in Flywin (above) cannot be reasonably ruled out, if the points now raised had been properly pleaded at the trial.  I tend to agree.

18.  I cannot ignore the factual investigations that could and would have been conducted into the operation and state of the personal accounts of not just Tse but other members of staff that had been used for such purpose, had there been pleading of breach in failing or refusing to account such proceeds in those accounts.

19.  As to the alleged omission to prevent the malicious falsehood,  much about the knowledge on the part of Tse as well as what and how Tse should and could do in the circumstances would have been investigated, had the point been properly pleaded.  Mr Cheng also raised the issue of causation between the alleged omission on the part of Tse, as opposed to his participation in the conspiracy that was pleaded, and the alleged loss.  But as I pointed out above, such point, even if taken, would not have been catered for in the relief set out in the pleading.

Ground (2)

20.  I do not think this is a fair ground of appeal either.  As one only discerns from the pleaded claim for breach of fiduciary duties to be based on the same particulars of conspiracy and misappropriation of company funds, one expect the same to be proved accordingly.  There was never any question of application of various standards of proof.

Ground (3)

21.  What was said in the Judgment (§100) was no more than pointing out the documents whereby the ICAC and police reported that the files, opened upon PenTech (HK)’s complaint, had been closed without further action.  It was pure fact.  In court, Mr Fong abandoned this ground.

Conclusion

22.  For the above reasons, I am not satisfied that the intended appeal has a reasonable prospect of success.  Nor is the other limb of section 63A(2) satisfied.

ORDER

23.  The application is dismissed with costs to Tse.  Costs shall be taxed, if not agreed, with certificate for counsel.