CHENG HUNG KIT AND OTHERS v. TASTY CATERING GROUP LTD AND OTHERS

HCA 1130/2011
and HCA 1137/2011
(Consolidated)

[2020] HKCFI 2477

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1130 OF 2011

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(by Original Action)

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(by Counterclaim)

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(Consolidated pursuant to the Order of the Honorable Mr Justice L Chan dated 16 December 2014)

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D E C I S I O N

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1.  There are 2 summonses before the Court, both taken out in respect of the Defence & Counterclaim filed by the 1^st to 4^th plaintiffs by counterclaim in HCA 1130/2011 (“Ps”) on 27 March 2015 (“D&CC”):

(1)   The Strike out Summons issued by Jerry Jim Yiu Ming, the 13^th defendant by counterclaim (“JJ”), on 6 August 2019 (as amended on 24 January 2020) to strike out the claim on the ground that no relief has been pleaded or sought against him in the D&CC.

(2)   The Amendment Summons issued by Ps for leave to amend the D&CC as per the draft attached (“AD&CC”). 

2.  At the hearing, only Mr Cheng Hung Kit, the 1^st plaintiff by counterclaim (“P1”), appears.  He puts forward a 2-page submissions which only deal with the proposed addition of a new cause of action against D1-D2 (as defined in §4(2) below). 

3.  As the ground for striking out is based on no reasonable cause of action, no evidence has been filed by the parties. 

4.  The Amendment Summons is opposed by:

(1)   JJ on the basis that the proposed amendments, insofar as they relate to him, are demurrable and have no reasonable prospect of success; and

(2)   Tasty Catering Group Limited and Federal Management Limited, the 1^st and 2^nd defendants by counterclaim (together “D1-D2”), on the ground that the new cause of action is time barred and cannot be introduced by way of amendment.

A.      Background

5.  The following facts are taken from the facts pleaded in the Amended Statement of Claim (“ASOC”) which are not in dispute or from the facts pleaded in D&CC, and are assumed to be true for the purpose of the Summonses. 

6.  The consolidated action concerns a dispute over the shares in 2 companies, Hang Heung Cake Shop Company Limited, the 3^rd defendant by original action (“HHCS”), and Hang Heung Hop Kee Investment Co Ltd, the 9^th defendant by counterclaim (“HHHK”), which had been offered as security for a loan and have since been foreclosed by the lender and sold to D1-D2. 

7.  Until the enforcement of the security over the Shares in December 2009:

(1)   the majority shareholders of HHCS and HHHK were P1, Cheng Hung Sang (“P2”), KT Holdings Ltd (“P3”) and Honlex Investment Limited (“P4”); and

(2)   P1-P2 were 2 of the directors of HHCS and HHHK.

8.  In 2001, P1-P3 entered into a series of loan agreements (“Minehead Agreements”) with Minehead Finance Limited, 10^th defendant by counterclaim (“Minehead”), whereby P1 obtained loans in the aggregate amount of HK$3 million and provided security in the form of a charge over the shares in HHHK and HHCS held by P1, P3 and P4 (collectively “Shares”).  JJ was the legal adviser of P1 in relation to the Minehead Agreements.     

9.  On 22 December 2009, Minehead assigned all their rights under the Minehead Agreements to Pitt Tak Group Limited, the 6^th defendant by counterclaim (“Pitt Tak”).  Two days later, Pitt Tak exercised its right as chargee and sold the Shares to the 3^rd to 5^th defendants by counterclaim (collectively “BVI Companies”). 

10.  On 26 January 2011, P1 and P3 signed a letter of intent (“LOI”) stating that they intended to “purchase back” the shares in HHCS from the BVI Companies.   

11.  On 24 February 2011, the BVI Companies sold the shares in HHCS to D1-D2, and they were subsequently appointed as directors of HHCS.

12.  At the Extraordinary General Meeting of HHCS held on 30 April 2011, various resolutions were passed by the shareholders (including D1-D2) to allot 60,000 shares to existing shareholders in proportion to their shareholding (“April EGM”).  The shares were all taken up by D1 in May 2011 and it became the majority shareholder holding 64.55% of its issued shares.

13.  P1 has since April 2011 been challenging D1-D2’s status as shareholders of HHCS on the ground that he had never approved the sale of the Shares to Pitt Tak. 

14.  On 28 June 2011, P1 and P3 signed a written acknowledgement to the effect, inter alia, that P1 would retrieve 29% shareholding in HHCS if he could pay Sir Chan (12^th defendant by counterclaim) HK$12 million in 3 years (“Acknowledgement”). 

15.  In July 2011, the 2 actions were commenced (“Consolidated Action”) in which:

(1)   D1-D2 seek declaration to confirm the validity of the sale and transfer of the shares in HHCS to them and their status as shareholders of HHCS. 

(2)   Ps seek declarations to impugn the series of transactions which cumulated into the transfer of HHCS’s shares to D1-D2 and their status as shareholders and directors of HHCS (including the April EGM), essentially on the grounds that when they signed the relevant Agreements, they did not know that they could lose their rights to the Shares and that the Agreements were invalid by reason of undue influence by JJ and/or unconscionable dealings by the other defendants to the counterclaim.

(3)   Further, P1 alleges that JJ acted in breach of his duty of care and skill and fiduciary duties in that he failed to properly explain the terms of the Minehead Agreements.  As JJ also acted for Minehead in respect of the relevant Agreements, his knowledge could be attributed to Minehead.  The Minehead Agreements were made under the undue influence of JJ and Minehead or that they constituted unconscionable bargains.

(4)   Neither the LOI nor the Acknowledgement signed by P1 could constitute affirmation of the acts carried out by JJ, as the LOI was signed by P1 in reliance on JJ’s and others’ misrepresentation that P1 no longer had any rights in the Shares, while the Acknowledgement was signed by P1 under duress of JJ and others.

16.  On 30 November 2011, P1 commenced HCA 2037/2011 against JJ for damages for breaches of duty of care and skill and fiduciary duties owed to P1 with respect to the Minehead Agreements.  Of the 13 breaches alleged against JJ, 12 of them had already been raised by P1 in their D&CC. The other breach relate to JJ’s failure to pass on a cheque of HK$150,000 to Minehead. 

Strike out Summons and Amendment Summons vis-à-vis JJ

17.  Mr Victor Dawes SC (leading Mr Danny Tang), counsel for JJ, submits that a party should not be joined if no relief is sought against him or he is not necessary for the purpose of the relief sought (Tam Wing Yuen v Siberian Mining Group Co Ltd, HCCW 392/2015, 1 February 2017 §46, per L Chan J; Mitchell v Royal Bank of Scotland Plc [2017] EWHC 1025 (Ch) §51, per Deputy Judge Davies-White QC).  Further, where a party advances a serious allegation against a defendant but seeks no corresponding relief against that party, the allegation would be an unnecessary statement and scandalous of the cause (Chan King Sheen v KC Tsang & Co Solicitors (a firm), HCA 994/2001, 22 November 2001 §§49-50, per DHCJ Gill, citing Brocking v Maudslay [1886] 55 LT 343 at 343).

18.  In the very long list of relief sought in the D&CC which runs to 6 pages with 25 declarations and a series of acts required to be done by various defendants to restore the position to pre-Minehead Agreements, none of them concerns or involves JJ.  In particular, although damages for duress is sought, it is only claimed against the other defendants but not JJ.   

19.  I agree that as no relief is sought against JJ, it is unnecessary to join him as a defendant to the counterclaim and the D&CC should be struck out as against JJ. 

20.  In response to the Strike out Summons, Ps propose to amend the D&CC as follows:

(1)   Add a plea (as underlined) in §140 to the effect that JJ was a party who participated in the alleged duress:

“By reason of the matters pleaded in paragraph 133 of the Amended Defence above, it is averred that [P1] and [P3] have suffered loss and damage, to be assessed, caused by the duress of [D12], [D11], Pitt Tak, [D7], each of the BVI Companies, JJ (being prime mover and engineer to victimize and/or to injure [P1], [P2], [P3] and [P4] mainly via [P1]), [D1-D2].”

(§133 contains the plea in relation to the alleged duress on 28 June 2011 when P1 signed the Acknowledgement.) 

(2)   Add a plea in §142(6) of the D&CC by adding JJ as one of the parties against whom P1 and P3 seek damages or equitable compensation for duress, again on the same basis pleaded in §140.

21.  In my view, the proposed amendments are demurrable and cannot salvage the mis-joinder of JJ for the following reasons.

22.  First, as stated in §16 above, P1 has already commenced another action (HCA 2037/2011) against JJ 8 years before the Amendment Summons.  In that action, P1 claims “damages for loss and damage occasioned to [P1] by [JJ’s] wrongful acts” including (1) the Shares; (2) interest paid to Minehead since 2001; (3) the amount paid in respect of JJ’s legal services which were said to be “valueless”; and (4) the costs incurred in relation to the Consolidated Action.  It has not been identified in the draft Amended D&CC what other loss and damage which had allegedly been suffered but has not been claimed by P1 in HCA 2037/2011.  It is an abuse of process for a party to seek to vex the same defendant twice in separate actions.  For this reason alone, I do not think the proposed amendments, in so far as they relate to JJ, should be allowed. 

23.  Second, as submitted by Mr Dawes SC, it has recently been confirmed in the UK that even if duress is an actionable tort[1], the relief should be restitutionary only, so that rescission of the contract and restitution based on unjust enrichment is the sole remedy; and damages for duress should be excluded except where the conduct of the defendant also amounts to a tort such as tort of intimidation (Investec Bank (Channel Islands) Ltd v Retail Group plc [2009] EWHC 476 (Ch) §122, per Sales J (as he then was); Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan v Kent [2018] 1 CLC 216 at §224, per Leggatt LJ (as he then was)).  As there is no plea that JJ has committed any tort, the proposed amendment in §140 and the claim for damages for duress in §142(6) of the draft Amended D&CC must fail. 

24.  Third, P1 and P3 have failed to demonstrate that they have a reasonably arguable case on loss.  As stated in §20(1) above, the plea on duress relates only to P1 signing the Acknowledgement on 28 June 2011.  Mr Dawes SC submits (and I agree) that in none of the following scenarios will P1 and P3 able to show that they have an arguable claim for loss or damage based on the alleged duress:

(1)  If P1 and P3 fail to establish their right to rescind the Minehead Agreements by 28 June 2011 (on the basis that they cannot establish any of the vitiating factors pleaded or that they have lost their right to rescind by reason of bars to rescission before that date), they will not have any basis to claim that the alleged duress has caused any loss to them.

(2)  If, on the other hand, P1 and P3 are able to establish their right to rescind the Minehead Agreements and prove duress, they will be able to obtain the return of the Shares and set aside the Acknowledgement.  They will not be able to show that they have suffered any loss as a result of duress.

(3)  If P1 and P3 are able to establish their right to rescind the Minehead Agreements but fail to prove duress, the Acknowledgement (which constitutes affirmation) will bar rescission.  In this scenario, they have no right to any damages, both because they have no cause of action (for duress) and have lost nothing (right to rescind).   

Amendment Summons vis-à-vis D1-D2

25.  D1-D2 oppose the proposed amendments in §§138A, 139, 141(15), 142(2)(h) and 142(5)(f) of the draft Amended D&CC where Ps seek to introduce a new cause of action to invalidate the resolutions passed at the Extraordinary General Meeting of HHCS held on 3 August 2011 (“August EGM”) approving the allotment of 60,000 shares to the shareholders.  It is alleged by Ps that the August EGM was held in breach of the articles of association of HHCS as D1-D2, not being the rightful owners of the shares in HHCS, had no right to call or vote at the August EGM.  Essentially, the cause of action is one for breach of contract (the articles of association being a contract between HHCS and each of its member and between the members inter se).

26.  In my view, Ps cannot introduce a cause of action in respect of the August EGM by amending the D&CC as the cause of action only accrued after the commencement date of Ps’ counterclaim, which was 6 July 2011 (i.e. the date when the writ in HCA 1137/2011 was issued by Ps).  This accords with the well established principle that a party cannot introduce a cause of action which did not exist at the date of the issue of the writ (Wing Siu Co Ltd v Goldquest International Ltd [2003] 2 HKC 64 at §18, per Rogers VP).   

27.  Ms Joyce Leung, counsel for D1-D2, submits that Ps should not be allowed to introduce a new cause of action in respect of the August EGM as the 6-year limitation period for such claim had expired on 2 August 2017, long before the Amendment Summons was issued.  The new claim does not comply with the requirements of Order 20 rule 5(5) and section 35(6) of the Limitation Ordinance (Cap 347) (“LO”).  She further submits that if the new claim were allowed to be introduced into the D&CC, D1-D2 would be deprived of a limitation defence as the commencement date of such claim would be the date when the writ in HCA 1137/2011 was issued (6 July 2011). 

28.  By virtue of section 35(1)(b) of the LO, if the new claim is allowed to be made in the D&CC, it shall be deemed to have been commenced on the same date as the original action, that is, 6 July 2011.  The combined effect of section 35(3) and (6)(a) of the LO is that the Court shall not allow the new claim to be made by way of amendment unless “the new cause of action arises out of the same facts or substantially the same facts  as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment”.

29.  In the D&CC, there is no mention of the August EGM or any fact relating to such meeting.  Nor has any relief been claimed by Ps in respect of the August EGM.  That being the position, it is clear that the condition stipulated in section 35(6) of the LO cannot be complied with.  It follows that the amendments, insofar as they relate to the August EGM, cannot be introduced by way of amendment.   

30.  Ms Leung makes 2 other points viz., (1) the difficulty on the part of D1-D2 in locating evidence relating to the August EGM, and (2) the change of circumstances as a result of the ratification of the allotment by the board of directors on 18 December 2017.  P1 contends that (1) he only became aware of the allotment of 60,000 shares when the Decision of DHCJ Le Pichon in HCMP 812/2017 was handed down on 12 September 2017, (2) the alleged difficulty in locating evidence was the result of D1-D2’s own fault, and (3) D1-D2 cannot rely on the ratification by the board of directors which was not properly constituted.  In light of my conclusion that the new cause of action does not satisfy the condition stipulated in section 35(6) of the LO, it is not necessary to consider these other points. 

31.  For the above reasons, I make the following order:

(1)   Ps’ counterclaim as against JJ be struck out;

(2)   the Amendment Summons be dismissed; and

32.  As for costs, I make a costs order nisi that (1) the costs of and occasioned by the Strike out Summons and the costs of and occasioned by the Amendment Summons insofar as it relates to JJ, be paid by Ps to JJ, to be taxed if not agreed with certificate for 2 counsel and be paid forthwith; and (2) the costs of and occasioned by the Amendment Summons be paid by Ps to D1-D2, to be taxed if not agreed and be paid forthwith.