PAK WIN INVESTMENT LTD (IN COMPULSORY LIQUIDATION) v. CHUNG YUET SHEUNG, LORRAIN AND OTHERS

HCA 419/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 419 OF 2011

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D E C I S I O N

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1.  This is an appeal against Master Ho’s order that unless the plaintiff shall take out an application to amend, the plea in relation to conspiracy to injure be struck out.

The facts

2.  The plaintiff (“PWI”) was owned by the first and second defendants (“Chung” and “Mo” respectively) for the purpose of holding assets.  Chung and Mo were directors and shareholders of Great Honest Finance Company Limited (“GHF”) and PWI.  Chung was also a director and shareholder of Great Honest Investment Company Limited (“GHI”).  Chung and Mo ran the business of brokerage of securities through GHI, and a money-lending business through GHF up to 2000.  GHI and GHF (“the companies”) are in compulsory liquidation.  PWI was not supposed to have dealings in clients of these companies of which Shen was a client. 

3.  PWI claims that there had been an arrangement on 8 November 2007 (“the Arrangement”) whereby a so-called “deed of acknowledgement of indebtedness” (“the Deed”) was executed by Chung in her personal capacity in which she claimed that as at 8 November 2007, she personallyowed Shen HK$30,000,000 (“the alleged debt”).  A guarantee (“the Guarantee”) and a mortgage (“the Mortgage”) in respect of the alleged debt were executed by Chung and Mo purportedly on behalf of PWI in favour of Shen.  Pursuant to the Mortgage, Shen became the second mortgagee (after BOCHK) of each of PWI’s properties.  The Deed, the Guarantee and the Mortgage are collectively referred to as "the Documents”.

4.  The statement of claim (“soc”) pleaded that PWI never owed the alleged debt to Shen and Shen never provided consideration in respect of the Arrangement.  The Arrangement should be set aside as a disposition made with intent to defraud creditors of PWI within the meaning of section 60 of the Conveyancing and Property Ordinance (“CPO”) (para 48 soc).  The Guarantee and Mortgage were executed in breach of Chung and Mo’s duties as directors of PWI (para 49 soc).  Shen was liable on the grounds of knowing receipt and dishonest assistance (para 50 soc).

5.  Para 51 soc (“paragraph 51”) avers that there was a conspiracy amongst Chung, Mo and Shen: 

“Further or alternatively, Chung, Mo and Shen are liable for conspiracy in that they did, by unlawful means, wrongfully and dishonestly and with intent to injure PWI, conspire and/or agree together to defraud or injure PWI by the execution of the Guarantee and the PWI Mortgage.

Particulars

(a) As pleaded above, each of Chung, Mo and Shen actively participated in the implementation of the Arrangement. They jointly implemented the Arrangement.

(b) (i) The factual background leading to the Arrangement, (ii) the directorship of Chung and Mo in PWI, (iii) their breach of fiduciary duties towards PWI and its creditors by executing the Guarantee and the PWI Mortgage and (iv) the knowledge of Chung, Mo and Shen in respect of the effects and consequences of the Arrangement all support an inference that they deliberately and without any just cause implemented the Arrangement knowing that PWI (and its creditors) would be injured as an inevitable consequence.”

6.  PWI sought, amongst others, a declaration that the Arrangement be set aside and that it be discharged from its obligations under the Guarantee and Mortgage.

7.  Shen applied to strike out paragraph 51 under the inherent jurisdiction of the court and all limbs of Order 18, rule 19.  The learned master ordered that unless PWI was to take out an application to amend paragraph 51 within 21 days from the date of his order, paragraph 51 be struck out on the ground that it disclosed no reasonable cause of action. 

8.  PWI launched his appeal on 29 December 2011.  It then filed a summons to amend paragraph 51 on 5 January 2012 although it maintains that no amendment was required.  

Abuse of process

9.  Mr Wong, counsel for Shen, submits that PWI has complied with Master Ho’s order.  Pursuing the appeal is an abuse of the process of the court.  In support of the proposition, he relies on Greenswood Property Ltd v IO of Kiu Sun Factory Building, unrep., CACV2266/2001, 21.6.2002, Rogers VP.  There, the Court of Appeal held that by applying for taxation of costs, a party had acknowledged his liability to pay costs and hence should not be allowed to pursue an application in the Lands Tribunal for a declaration that it was not liable to pay those costs.  The abuse lay in the inherently incompatible stances that that party could take before the taxing master and the Lands Tribunal.

10.  I do not consider the circumstances of the present case as comparable to the Greenswood Property case.  An appeal does not operate as an automatic stay of the learned master’s order.  Even if amendment has been made, it cannot be said that it was irreversible if the appeal is allowed.  More importantly, the application for leave to amend was made after the appeal was launched and has been adjourned pending this appeal.  The appeal is thus open to the plaintiff.

11.  I now turn to the merits of the appeal.

The legal principles

12.  The principles on striking out are not in dispute.  It is only in plain and obvious cases that pleadings should be struck out.  The burden to establish this is on the applicant, Shen, in this case.  Disputed facts are to be taken in favour of the party whose pleadings are sought to be struck out.  The claim must be obviously unsustainable, pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed.  Even if a case only has a slim chance of success, this is not sufficient to strike it out: Karex (HK) Ltd v Fortune Talent Development Ltd [1999] 4 HKC 203, at 210F.  Nor should sparsity of detail lead to a similar result.  The sufficiency of the facts pleaded should be assessed in the overall context of the pleadings and the case: The Bank of East Asia Ltd v Labour Buildings Ltd & ors [2007] HKCFI 1129.

13.  Where a pleading is defective only in not containing particulars to which the other side is entitled, application should be made for particulars under Order 18, rule 12, and not for an order to strike out the pleading under rule 19.  Even a serious want of particularity in a pleading will not justify striking out if the defect can be remedied and the defect is not the result of a blatant disregard of court orders: British Airways Pension Trustees Ltd v Sir Robert McAlpine & Sons Ltd & ors (1994) 72 BLR 26.  In other words, deficiencies of averments may justify striking out but not deficiencies in particulars.  HKCP 2012, para 18/19/4.

14.  With regard to conspiracy, Pido v Compass Technology Co Ltd [2010] 2 HKLRD 537, Ma CJHC (as he then was) set out in paragraph 17 of his judgment the averments required:

“17. As a matter of pleading, a case based on conspiracy, must contain the following elements:

(a) The agreement between two or more persons. The means of carrying out the agreement, whether lawful or unlawful, must be set out.

(b) The intention to injure the plaintiff, whether predominant (in the case of a lawful means conspiracy) or merely an intention to injure (in the case of an unlawful means conspiracy).

(c) The acts that were carried out pursuant to the agreement and the stated intention.

(d)   The damage caused to the plaintiff.”

15.  As can be seen from the opening words of paragraph 51, PWI's case rests on conspiracy to injure by unlawful means.  According to Kuwait Oil Tanker Co SAK v Al Bader [2000] 2 All ER (Comm) 271:

“… It is not necessary that every overt act is done by every conspirator, but the act must be done pursuant to the conspiracy or combination. (at page 312g)

… it is not necessary to show that there is anything in the nature of an express agreement, whether formal or informal. It is sufficient if two or more persons combine with a common intention, or, in other words, that they deliberately combine, albeit tacitly, to achieve a common end. (at page 312h)

‘… the origins of all conspiracies are concealed and it is usually quite impossible to establish when or where the initial agreement was made, or when or where other concentrators were recruited. The very existence of the agreement can only be inferred from overt acts. Participation in a conspiracy is infinitely variable: it can be active or passive ... Consent, that is agreement or adherence to the agreement, can be inferred if it is proved that he knew what was going on and the intention to participate in the furtherance of the criminal purpose is also established by his failure to stop the unlawful activity.’ (at page 312j-313b)

Thus it is not necessary for the conspirators to join the conspiracy at the same time, but ... the parties to it must be sufficiently aware of the surrounding circumstances and share the same object for it properly to be said that they were acting in concert at the time of the acts complained of. (at page 313c)

…

In most cases it will be necessary to scrutinise the acts relied upon in order to see what inferences can be drawn as to the existence or otherwise of the alleged conspiracy or combination. It will be the rare case in which there will be evidence of the agreement itself. (at page 313d)

… in order to establish an unlawful means conspiracy, it is necessary to establish an intention to injure the claimant but not a predominant intention or purpose to do so. (at page 314j)

… in many contexts it will be necessary in order to prove intention to ask the court to infer the relevant intention from the primary facts ... in the case of most conspiracies to injure by tortious means it will be clear from the acts of the conspirtors that they must have intended to injure the claimant. In the case of a conspiracy to defraud by wholesale misappropriation it would be absurd to argue that the conspirators did not intend just that.” (at page 315f-g)

The parties’ respective case

16.  Shen’s complaints concerning paragraph 51 can be categorised as follows:

(i)      What agreement had been entered into between him and other defendants as to the alleged conspiracy and what were the obligations that he was to take up?

(ii)     What was meant by unlawful means employed by Shen?

(iii)    What were the averments in support of the dishonesty averred against him under the agreement?

(iv)    Whether the alleged intention on Shen’s part to injure was predominant or merely an intention to injure PWI?

(v)     PWI has not prayed for damages, the usual relief for a conspiracy claim.

17.  PWI argues that, read in the context of the soc as a whole, paragraph 51 contains all factual allegations required to support the case of conspiracy.  Shen should at best have requested for further and better particulars instead of seeking a strike out.  Where the facts have been adequately pleaded, a party should not be vexed with an application for striking out or for particulars:

“The basic purpose of pleadings is to enable the opposing party to know what case is being made in sufficient detail to enable that party properly to prepare to answer it. To my mind it seems that in recent years there has been a tendency to forget this basic purpose and to seek particularisation even when it is not really required. This is not only costly in itself, but is calculated to lead to delay and to interlocutory battles in which the parties and the court pore over endless pages of pleadings to see whether or not some particular point has or has not been raised or answered, when in truth each party knows perfectly well what case is made by the other and is able properly to prepare to deal with it. Pleadings are not a game to be played at the expense of the litigants, nor an end in themselves, but a means to the end, and that end is to give each party a fair hearing. …” British Airways Pension Trustees Ltd v Sir Robert McAlpine & Sons Ltd & ors (1994) 72 BLR 26 at 33i to 34b.

(i)      What agreement had been entered into between Shen and other defendants as to the alleged conspiracy and what were the obligations that he was to take up?

18.  Paragraph 51 had pleaded all defendants as conspirators. Shen’s suggestion that PWI deliberately pleaded his previous solicitor as a party to the Arrangement was erroneous.

19.  The conspiratorial agreement was the Arrangement. Paragraph 51 pleaded “the means of carrying out the agreement” as each of the defendants “actively participated in the implementation of the Arrangement.  They jointly implemented the Arrangement.”  These pleas, in my view, are insufficient.  This is because the Arrangement as defined in paragraph 31 soc merely refers to execution of the Documents.  It is not clear what other “active participation” was that could form “a concerted action to put the assets of PWI beyond the reach of its creditors” (a phrase used by John Lees, PWI’s liquidator).  That execution was on its face consistent with innocence on the part of Shen.  Afterall, PWI has pleaded that it was an asset-holding company and Chung and Mo could be entitled to dispose of its assets.  This complaint of Shen is sustainable.

(ii)     What was meant by unlawful means employed by Shen?

20.  John Lees explains that paragraph 51 builds on pleas in its preceding paragraphs.  The “unlawful acts” were Chung and Mo’s breach of directors’ duties, the fact that the Arrangement should be set aside under section 60 CPO and Shen’s knowing receipt and assistance (para 48-50 soc).

21.  As with the analysis under the preceding complaint, the only act of Shen pleaded in paragraph 51 was the execution of the Documents.  If it was the intention of PWI to rely on the disposition with intent to defraud creditors (para 48 soc), it has never been pleaded in any of the preceding 50 paragraphs that Shen was aware of that intent of Chung and Mo or had that intent himself.

22.  If the proposed amendments are reflective of PWI’s intention, the amended paragraph 51 does not purport to rely on paragraph 50 soc as well.

23.  This complaint of Shen is sustainable.

(iii)    What were the averments in support of the dishonesty averred against Shen under the agreement?

24.  According to John Lees, Shen’s dishonesty can be seen from, inter alia, the particulars under paragraph 50 soc – dishonest assistance of Chung and Mo in executing the Guarantee and the Mortgage.  This is barely tenable as paragraph 50 is the only paragraph in the soc that refers to dishonesty.

(iv)     Whether the alleged intention on Shen’s part to injure was predominant or merely an intention to injure PWI?

25.  John Lees is of the view that predominant intention is not a necessary averment: Kuwait Oil Tanker Co SAK v Al Bader [2000] 2 All ER (Comm) 271,at page 314 j cited above.  I agree. 

26.  I will add that “the intention to injure PWI” was expressly pleaded in paragraph 51(b).  “The factual background leading to the Arrangement” in this sub-paragraph has been scattered in the preceding 50 paragraphs of the soc which contained averments for at least 3 other causes of action.  Effectively this is an invitation to Shen to pick and choose what he considers to be relevant to the claim in conspiracy against him.  In respect of Shen’s “knowledge”, the particulars that have been given in relation to Shen were “in respect of the effects and consequences of the Arrangement” and knowledge that PWI would be injured.  But what the “effects and consequences” were were not made clear.

27.  The formulation of a party’s cause of action should be clearly and cogently made in the pleadings, not left to an exercise of drawing inferences: Pido v Compass Technology Co Ltd [2010] 2 HKLRD 537,at para 25.  It may be that some particulars relevant to the conspiracy claim can be found in paragraphs 1-50 of the soc but PWI should state clearly which paragraph and what, if any, additional particulars are in support of the conspiracy plea. 

28.  Shen was one of the victims of Chung’s fraud. His evidence has contributed to the conviction of Chung.  There is all the more reason for PWI to plead its case against him clearly so that Shen would not be left in doubt as to the case against him.

(v)      PWI has not prayed for damages, the usual relief for a conspiracy claim

29.  “The damage caused to PWI” has been elaborated in paragraph 52 of the statement of claim, which was the liability for the alleged debt it would not have to shoulder but for the Guarantee and the Mortgage.  Mr Wong, counsel for Shen, submits that the relief for a claim in conspiracy is damages, which PWI has not prayed for.  Mr Tollan for PWI, on the other hand, argued that there can also be a declaration that PWI be discharged from its obligations under the Guarantee and the Mortgage, and an account of profits as prayed for.  In my view, it is not plain and obvious that PWI cannot seek relief other than damages for the conspiracy claim.  The issue should be left for trial. 

30.  For the reasons given in paragraphs 19 to 23, 26 to 28 above, I am of the view that the plea of conspiracy to injure has not been sufficiently pleaded as against Shen.  Complaints (i) and (ii) of Shen are established. 

31.  I have considered other grounds put forth by Shen in support of the striking out under other limbs although he has not appealed against Master Ho’s order. Those grounds are matters for trial or irrelevant to this application. I deal with them briefly below:

(i) That the soc did not plead the surplus after BOCHK sold the properties: this, in my view, is not a ground for striking out. At best, Shen should have asked for further and better particulars.

(ii)  That PWI kept silent about another mortgage made to one Get Nice Finance Company Limited for HK$12,000,000 who equally had a claim towards the surplus of the proceeds of sale.  In my view, the existence of another mortgage will not affect the validity or invalidity of the Mortgage.

(iii)  Whether Chung and Mo were true beneficial owners to the mortgaged properties: this is a matter to be decided at trial.

(iv)  Whether the Deed was prepared by Shen’s solicitors: this is irrelevant to the striking out application.

Request for particulars instead of application for striking out

32.  Shen has not sought particulars under paragraph 51 but his solicitors had written to PWI’s pointing out that the particulars set out in paragraph 51 do not support or provide any facts leading to the allegation of conspiracy.  He invited PWI to withdraw paragraph 51.  Such was enough to alert PWI to improve its pleading.  Apart from highlighting that paragraph 51 built on its preceding paragraphs, PWI’s solicitors have not added much to what had been pleaded in paragraph 51.

33.  Overall, I agree with the master that given the state of pleadings it is not appropriate to strike out the statement of claim. It is not an instance where it is impossible for PWI to succeed.  The learned master has rightly given it a chance to improve its pleading. 

Lateness of the application

34.  Mr Tollan points out that the summons for striking out was filed in September 2011, 3 months after pleadings were deemed to be closed.  In the meantime, PWI and Shen had made discovery in June.  PWI had also answered 2 requests for further and better particulars (not in relation to paragraph 51).

35.  In my view, although the summons could have been taken out earlier, it was not shown how progress of the case was affected or how PWI was prejudiced.  The summons was not so late as to justify the court dismissing it without its being heard.  Poon Lai Bing v Gold Dragon Ltd t/a Club Paris,CACV136/2007, 13.12.2007 Cheung JA relied on by PWI is clearly distinguishable on the facts as the application for striking out there was only made on the first day of the trial.

Conclusion

36.  I agree with the decision of Master Ho and dismiss the appeal.

37.  On costs, Mr Tollan complains that many sections in the supporting affirmation of Shen were irrelevant to the application though they could not be left unaddressed by PWI.  These were raised in the affirmation in opposition of John Lees but not disputed in the affirmation in reply of Shen.  Mr Tollan invites the court to take into account the conduct of the parties and Order 1A, rule 1(a) of the Rules of the High Court on costs-effectiveness of practice and procedure.  The irrelevant evidence adduced by Shen has caused PWI to incur more costs than the liquidators wished.

38.  Not all the facts stated by Shen on affirmation were useful.  Some of the arguments he raised were not sustainable.  Overall, my impression was that he had made a bona fide attempt to state his grievances and should not be denied his costs.

39.  This appeal is effectively a re-run of the arguments before the learned master by the same advocates.  Parties have submitted costs statement for amounts that are not very far apart.  I make an order nisi that Shen is to have the costs of this appeal, summarily assessed in the amount of $110,000.