LIANG JUN XIAN v. TSUI HIN CHI

HCA2288/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2288 OF 2007

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BETWEEN

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JUDGMENT

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1.  This is an appeal by the plaintiff against the order of Master de Souza made on 31 May 2010 whereby the Master dismissed the plaintiff’s application by summons dated 25 May 2010 seeking to (i) join Mok Wah Pui as a 2^nd defendant and (ii) to re-amend the Amended Statement of Claim.

2.  For the sake of clarity, the present defendant, Tsui Hin Chi, will be referred to in this Judgement as the 1^st defendant and the intended 2^nd defendant, Mok Wah Pui, will be referred to as “Mok”.

Introduction

3.  This case concerns a dispute over the ownership of shares in China Investment Group Int’l Finance Limited (“CIGIF”).

4.  In 2005, the plaintiff became interested in a redevelopment project at 19-49 De Zheng Road South, Guangzhou City, Guangdong Province of China for a commercial building to be built thereon called “the Finance Tower”.  The rights and entitlement to that redevelopment project was held by 廣州遠興房產有限公司 (“the Land Company”).

5.  CIGIF was incorporated by the plaintiff in Hong Kong on 3 November 2005, and at that time was controlled by the plaintiff being the sole shareholder of the 10,000 issued share capital of CIGIF.

6.  The plaintiff had intended for CIGIF to form a joint venture with a Chinese company known as 廣東中大中鑫投資策劃有限公司 (“the China Partner”) to acquire all the rights benefits and interest in the Land Company for the development of the Finance Tower.  The plaintiff intended for CIGIF to hold 60% of the Land Company with the remaining 40% to be held by the China Partner.  At that time the plaintiff was also the controlling partner of the China Partner.

Plaintiff’s case against the 1^st defendant

7.  The plaintiff came to know the 1^st defendant through the introduction of a friend in mid 2006 at which time the plaintiff was looking for funding for her joint venture.

8.  In or about October 2006, the 1^st defendant orally agreed to provide a loan of RMB50 million to finance that joint venture.

9.  In or about 20 November the 1^st defendant had remitted an initial sum of HK$10 million to the plaintiff’s account as part of the loan promised by the 1^st defendant.

10.  On 6 December 2006, the plaintiff entered into a Co-operation Agreement with the 1^st defendant whereby they agreed, inter alia, to obtain 100% shareholding of the Land Company to develop the Finance Tower and that the 1^st defendant would invest RMB50 million in the joint venture project in Guangzhou owning 40% in the Land Company with the remaining capital to be raised by the plaintiff who would own 60% of the Land Company.  In return, the 1^st defendant was promised an additional 2% (on top of the 40% owned by the 1^st defendant in the Land Company) of the profits from the joint venture project.

11.  On or about 9 January 2007, CIGIF and the China Partner had succeeded in acquiring all the shareholding, rights and interests of the Land Company as well as the development rights of the Finance Tower project.

12.  By February 2007, the 1^st defendant had transferred to the plaintiff totally HK$50 million including the HK$10 million paid in November 2006.

13.  It is the plaintiff’s case that the RMB50 million agreed to be invested by the 1^st defendant under the Co-operation Agreement between them was a loan and not an investment.

14.  The 1^st defendant had on a number of occasions requested the plaintiff to provide him with security for the loan advanced by him.  The 1^st defendant also requested the plaintiff to pledge 40% of the plaintiff’s shares in CIGIF and to appoint the 1^st defendant as a director of CIGIF as security for his being promised 42% of the profits from the Finance Tower project as agreed by them under the Co-operation Agreement.

15.  In February and August 2007, the 1^st defendant had requested the plaintiff to sign documents in English on two different occasions.  The 1^st defendant explained to the plaintiff that these were necessary documents to appoint him as a director of CIGIF and to pledge 40% (on the first occasion) and another 30% (on the second occasion) of the shares of CIGIF as security.

16.  The 1^st defendant further represented to the plaintiff that the signed documents would only be used by him as security and would not in any way interfere with the plaintiff’s running and ownership of CIGIF.  The documents were not dated when they were signed by the plaintiff.

17.  The plaintiff subsequently discovered that the 1^st defendant’s representations were false and that the documents signed by her were Bought and Sold Notes and Instruments of Transfer with which the 1^st defendant had transferred all the 10,000 issued shares in CIGIF (i.e. 4,000; 3,000; and 3,000) to himself on 26 March and 23 August 2007, being the dates now appearing on the documents signed by the plaintiff which were undated when they were signed.

18.  The plaintiff therefore says that the 1^st defendant had fraudulently tricked her into signing the Bought and Sold Notes and the Instruments of Transfer relating the effect of which were to transfer all 10,000 of the issued shares in CIGIF to the 1^st defendant.  Subsequently, the 1^st defendant caused 3,000 of the issued shares of CIGIF to be transferred to Mok on 24 August 2007 and then also transferred the remaining 7,000 shares of CIGIF also to Mok on 31 March 2009.

19.  The plaintiff also discovered that she had been ousted as a director of CIGIF by the 1^st defendant and two other persons, namely, Mok and one Mok Wah Cho were appointed as directors in her place.

20.  The plaintiff therefore seek declarations, inter alia, to the effect that she is the legal and beneficial owner of all the 10,000 issued shares in CIGIF.

Plaintiff’s case against Mok

21.  The plaintiff’s case against Mok, in so far as it has not been touched upon in the claim she brought against the 1^st defendant, is contained in paragraphs 33A to 33I (inclusive) of the proposed draft Re-Amended Statement of Claim and can be summarized as follows.

22.  The 1^st defendant and Mok are cousins.  In early 2008, Mok was introduced to the plaintiff by the 1^st defendant who suggested that Mok be brought in as an investor in the joint venture project, but the plaintiff did not agree to such suggestion.

23.  Upon searches and enquiries made with the Companies Registry the plaintiff came to know of the following :

(a)   by Bought and Sold Notes dated 24 August 2007 signed by the 1^st defendant, the 1^st defendant had transferred 3,000 shares in CIGIF to Mok;

(b)   Mok was appointed a director of CIGIF effective from 23 August 2007;

(c)   the plaintiff resigned as a director of CIGIF with effect from 22 September 2007;

(d)   by a Special Resolution purportedly passed on 24 September 2007 signed by the 1^st defendant, it was recorded inter alia that (i) the plaintiff had transferred 7,000 shares of CIGIF to the 1^st defendant on 26 March 2007; (ii) the plaintiff had transferred 3,000 shares of CIGIF to the 1^st defendant on 23 August 2007 and (iii) the 1^st defendant had transferred 3,000 shares to Mok on 24 August 2007; and

(e)   by Form AR1 dated 3 November 2009, the 1^st defendant had transferred all his shareholding interests in CIGIF (namely the remaining 7,000 shares) to Mok.

24.  It is the plaintiff’s case that the above acts were done or committed by the 1^st defendant and Mok as co-conspirators in furtherance of the conspiracy and/or fraud practiced on the plaintiff.

25.  The plaintiff’s resignation as director of CIGIF contained in Form D2A was submitted to the Companies Registry by the 1^st defendant.

26.  The plaintiff further says that the purported transfer of the CIGIF shares to Mok by the 1^st defendant was a sham transaction and that Mok had knowledge or ought to have known of the 1^st defendant’s fraudulent scheme and assisted or participated throughout.

The practice in pleading conspiracy and fraud

27.  The practice of pleading conspiracy is succinctly stated in marginal note 18/12/8 under Order 18 rule 12 of the Hong Kong White Book as follows :

“When pleading the tort of conspiracy, the pleader must allege at least one overt act which is the act of all the alleged conspirators or, failing that, a number of overt acts which include at least one act on the part of each conspirator. And the overt act or overt acts pleaded must be such as to show : (1) that the conspiratorial agreement alleged against the defendants had been entered into by each and every one of them; (2) that the agreement, and not merely the intention of one person alone, was implemented; and (3) that such implementation caused the damage complained of (per Bokhary J.A. in Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & Co, Ltd. [1994] 2 H.K.C. 264 at 272B-C).”

28.  How an allegation of fraud should be pleaded can be found in the words of Bokhary JA (as he then was) in the case of Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & Co. Ltd [1994] 2 HKC 264 at 269E-270E/F where he said :

“What pleadings must do – generally…

Those complaints go to pleadings. So does the bulk of the other complaints ventilated before us. That being so, it is important to remember this. Our procedure aims to ensure that litigation, particularly the trial itself, is conducted fairly, openly, free from surprise, and without unnecessary delay or expense. In the attainment of that objective, pleadings have a fundamental role to play. Accordingly, there are a number of things which pleadings should do. Ideally, they would do them from the outset. In any event, they must by the time they have been properly particularized – whether particularized on the pleader’s own initiative, upon the other side’s request, or pursuant to the court’s order.

What those things are is to be gathered from the decided cases. That exercise has been performed by the learned editors of the 1993 Supreme Court Practice. And, as one sees from note 18/12/2 at pp 307-308 of Vol. 1 thereof, the things which properly particularized pleadings must do are to :

(1) inform the other side of the nature of the case they have to meet as distinguished from the mode in which that case is to be proved;

(2) prevent the other side from being taken by surprise at the trial;

(3) enable the other side to know what evidence they ought to be prepared with and to prepare for trial;

(4) limit the generality of the pleadings, the claim and the evidence;

(5) limit and define the issues to be tried, and as to which discovery is required; and the hands of the party so that he cannot without leave go into any matters not included (although if the opponent omits to ask for particulars, evidence may be given which supports any material allegation in the pleadings).

… and especially where fraud is alleged

To the generality of the foregoing must be added the special rule that allegations of fraud must be pleaded distinctly and with the utmost particularity. The word ‘distinctly’ is the one used by Thesiger LJ in his well-known statement in Davy v Garrett (1878) 7 Ch.D 473 at p.489 as to how fraud is to be pleaded. And the expression ‘utmost particularity’, as one sees from note 18/8/8 at p.297 of Vol.1 of the 1993 Supreme Court Practice, is the one chosen by its learned editors and has the authority of their combined experience. That special rule arises in this case.

Never before as much as now

None of the basic rules of pleadings have anything to do with technicality.  All of them have everything to do with practical justice.  They have always been of importance.  Never before as much as now.  For these days, there are more and more cases so vast and so complex that they push practicality to its limit our system’s capacity effectively to cope with them.  Any laxity in their proper management, whether in regard to pleadings or anything else, can all too easily result in susch cases spinning into confusion if not chaos – even before trial but especially at trial.  The present case, for the trial of which half a year has been reserved, is such a case.”

29.  There is also the important and oft-quoted passage of Millett LJ (as he then was) in the case of Armitage v Nurse [1998] Ch 241 as to how a plea of fraud should be pleaded when he said (at pp.256F/G – 257D) :

“… The general principle is well known. Fraud must be distinctly alleged and as distinctly proved: Davy v Garrett (1878) 7 Ch. D. 473, 489, per Thesiger LJ. It is not necessary to use the word ‘fraud’ or ‘dishonesty’ if the facts which make the conduct complained of fraudulent are pleaded; but, if the facts pleaded are consistent with innocence, then it is not open to the court to find fraud. As Buckley LJ said in Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch. 250, 268 :

‘An allegation of dishonesty must be pleaded clearly and with particularity. That is laid down by the rules and it is a well-recognised rule of practice. This does not import that the word “fraud” or the word “dishonesty” must be necessarily used… The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatal; the allegation of its dishonest nature will not have been pleaded with sufficient clarity.’

… That case is authority for the proposition that an allegation that the defendant ‘knew or ought to have known’ is not a clear and unequivocal allegation of actual knowledge and will not support a finding of fraud. It is not treated as making two alternative allegations, i.e. an allegation (i) that the defendant actually knew with an alternative allegation (ii) that he ought to have known; but rather a single allegation that he ought to have known (and may even have known – though it is not necessary to allege this).

… Before turning to the pleadings I would add one thing more.  In order to allege fraud it is not sufficient to sprinkle a pleading with words like ‘willfully’ and ‘recklessly’ (but not ‘fraudulently’ or ‘dishonestly’).  This may still leave it in doubt whether the words are being used in a technical sense or merely to give colour by way of pejorative emphasis to the complaint.”

Decision as to joining Mok as a 2^nd defendant

30.  The plaintiff’s pleaded case against Mok falls far short of what is required by the practice stated above.

31.  The plaintiff has failed to allege any one particular overt act of Mok from which it can be shown or inferred that Mok had entered into a conspiratorial agreement with the 1^st defendant in carrying out the deception alleged by the plaintiff to have been practiced on her by the 1^st defendant or which is in furtherance of the alleged conspiracy to defraud the plaintiff.

32.  Those acts now pleaded and relied on by the plaintiff in her case against Mok (namely, the subject shares being transferred by the 1^st defendant to Mok and Mok’s appointment as a director of CIGIF) are firstly, all acts which took place after the deception practiced on the plaintiff by the 1^st defendant.  Secondly, and more important, these acts are just as consistent with innocence on the part of Mok, such that from these acts it will not be open to the court to find or infer fraud on the part of Mok.

33.  Thirdly, no particulars of knowledge have been given in relation to the plea that the transfer of the CIGIF shares by the 1^st defendant to Mok was a sham transaction and that Mok knew or ought to have known of the fraudulent scheme of the 1^st defendant and had assisted or participated throughout.

34.  There is therefore no basis upon which the plaintiff can make out a case of fraud and conspiracy to be brought against Mok as pleaded by the plaintiff in the proposed amendments to the Amended Statement of Claim.

35.  Accordingly, the Master was quite right to have refused the plaintiff’s application to join Mok as a 2^nd defendant in this case.

36.  In so far as this limb of the appeal from the Master is concerned, the appeal by the plaintiff must be dismissed.

Decision on application to amend

37.  The bulk of the amendments to the Amended Statement of Claim relate to the claim against Mok as contained in paragraphs 33A to 33I of the draft Re-Amended Statement of Claim.

38.  Having refused leave to the plaintiff to join Mok as a 2^nd defendant above, it must follow that the proposed pleadings in paragraphs 33A to 33I can have no further relevance to the plaintiff’s claim against the 1^st defendant and must be disallowed.  Any other references in the proposed amendments to Mok as a 2^nd defendant will also be disallowed.

39.  There remains only one relevant amendment which the plaintiff wish to make and which can have a bearing on the case as a whole whether or not Mok is added as a 2^nd defendant.  That relates to the level of English of the plaintiff.  The relevance of this relates to the plaintiff being asked by the 1^st defendant to sign the Bought and Sold Notes as well as the Instruments of Transfer which are all in English and which documents the plaintiff says she did not understand relying only on what was represented to her by the 1^st defendant.

40.  Initially it was pleaded by the plaintiff (in paragraph 1 of the Amended Statement of Claim) that the plaintiff does not read or write any English.

41.  The proposed amendment to that pleading now pleads that the plaintiff can only read and understand simple English.

42.  This is opposed by the 1^st defendant on the grounds that the proposed amendment is inconsistent with the case that had been run by the plaintiff all along and therefore, if allowed, will become incapable of being verified by statement of truth.

43.  The 1^st defendant seek reliance on what is stated in Civil Justice Reform – Final Report at paragraphs 263-264 (pp 127-128).  However, those paragraphs in the Final Report of the Civil Justice Reform deal with inconsistent alternatives, which is not the case here.

44.  I can find nothing to even remotely suggest that the “statement of truth” introduced by the Civil Justice Reform was intended to stranglehold amendments to pleadings such that a party would not be allowed to amend if the proposed amendment was inconsistent with the previous pleading.

45.  The general rule is that an amendment, when made, would date back to the date of the original pleading.  That is still the position after the Civil Justice Reform.  On that basis therefore, there can be no difficulty for the plaintiff to verify the amended pleading with a statement of truth.

46.  While it is true that the plaintiff can be cross examined at trial in respect of the inconsistent pleading being made at different times and verified by a statement of truth.  But, depending on her answers, those matter would go to weight and/or credibility of the person verifying the inconsistent pleading.

47.  The guiding principle whether amendments should be allowed is to ensure justice and fairness between the parties in that the cases of the parties are properly pleaded and the issues clearly defined when it comes to trial.  As long as there can be no prejudice to the other side which cannot be cured by the payment of costs, the general rule is that amendments ought to be allowed.

48.  For these reasons, I am minded to allow the proposed amendment to paragraph 1 of the Amended Statement of Claim.

49.  The remaining proposed amendments to the Amended Statement of Claim are merely cosmetic in nature and no objection to them has been put forward by the defendant.  Since no objection has been made, those remaining amendments as contained in the draft Re-Amended Statement of Claim will be allowed.

Costs

50.  For the first part of this appeal, namely the joining of Mok as a second defendant, there is no reason to depart from the general rule that costs should follow the event and in this case the plaintiff will have to bear the costs of her unsuccessful appeal from the Master.

51.  As for the appeal on the amendment, the general rule is that the party seeking amendment will normally have to pay the costs of and occasioned by such amendments.

52.  However, the plaintiff had to bring this appeal in order to succeed on obtaining leave to amend.

53.  In the circumstances, there will be a costs order nisi as follows :

(1)   the costs order of the Master to stand;

(2)   the costs of and occasioned by the amendments to the Amended Statement of Claim to be borne by the plaintiff in any event; and

(3)   the plaintiff to pay to the 1^st defendant ¾ of the 1^st defendant’s costs of this appeal to be taxed if not agreed; and

(4)   the plaintiff to pay to Mok his costs of this appeal to be taxed if not agreed.