AKAI HOLDINGS LTD (IN COMPULSORY LIQUIDATION) v. DOMINE KO CHEONG WING AND ANOTHER

HCCL 20/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 20 OF 2005

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J U D G M E N T

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The background

1. That which presently is before the court is, in effect, round two of a strike out application which initially was launched by the 2^nd and 3^rd defendants to the proceedings herein, Mr Simon Fung See Man and his wife, Miss Pansy Nip, by summons dated 6 April 2006.

2. That first application was heard by this court on 18 May 2006, and resulted in a judgment dated 9 June 2006.

3. That judgment speaks for itself.

4. For the reasons outlined therein, the Order in favour of the 2^nd defendant upon that application was the grant of the alternative relief specified in the summons, the result being that some 22 paragraphs of the Points of Claim (as specified in paragraph 71 of the judgment), were struck out; at the same time, the court also struck out the claim, as it then stood (in paragraphs 94-97 of the Points of Claim), against the 3^rd defendant, Miss Nip, the wife of the 2^nd defendant.

5. As part of that judgment, the court decided that the plaintiff liquidators should be afforded the opportunity to replead the claim in toto against the 2^nd and 3^rd defendants, and declined to strike out the action against these defendants, which had been the primary relief sought on that first strike out application.

The present application

6. This, then, forms the forensic backdrop to the application the subject of this further judgment.

7. By summons dated 24 August 2006 the plaintiff liquidators now seek leave to file by way of replacement a draft Amended Points of Claim, a copy of which is annexed to this summons.

8. This new document is the product of the repleading of this claim consequent upon the earlier successful strike out, and bears certain obvious changes.

9. First and foremost, the 3^rd defendant, the wife of the 2^nd defendant, no longer is party to this action, which formally has been discontinued against her.

10. Now only the 1^st and 2^nd defendants remain : Mr Domine Ko Cheong Wing, the 1^st defendant, and Mr Simon Fung See Man, the 2^nd defendant.

11. Mr Ko and Mr Fung formerly were employees of Akai Holdings Limited, which currently is in liquidation; Mr Ko was the former Vice President, Banking and Finance, of Akai, and Mr Fung was its Financial Controller.

12. Accordingly, the shape of this application is that Mr Yuen SC (who did not appear on the initial strike out) now moves the court to grant leave to file the now-amended pleading, which he suggests is in a form which meets the criticisms outlined by this court in its earlier judgment.

13. For his part Mr Barlow, who once again appears on behalf of the 2^nd defendant, Mr Fung, objects to this application to file this re-worked amended pleading, and asserts that in fact this new pleading is susceptible to some at least of the criticisms which were aimed at the pleading in its antecedent form which was the subject of the earlier strike out application.

14. The other significant change in the format of the pleas raised is that whereas the case against the 2^nd defendant in the first pleading had maintained a claim in respect of HK$4.6 million, consisting of four monetary tranches (see paragraph 14 of the earlier judgment), the claim as now pursued is confined to but two of those tranches, namely an attempt by the liquidators to recoup the sum of HK$4 million, relating to two sums of HK$2 million each; specific claims in respect of two sums each of HK$300,000 no longer appear in the repleaded Amended Points of Claim, although the existence of such payments is prayed in aid by way of factual background.

15. As was the case in the earlier application, the 1^st defendant, Mr Ko, has made no appearance upon this application, although Mr Yuen SC told the court that Mr Ko had been served with the relevant papers.

Further amendment application

16. At the outset of his application Mr Yuen SC indicated that he wished further to amend the draft Amended Points of Claim which he now sought to file and serve.

17. This further amendment took the form of changes to paragraphs 38 and 40 as they appeared within the draft replacement pleading, and in each instance involved the deletion of the like words “void or in the alternative”.

18. Mr Barlow on behalf of the 2^nd defendant did not object to these proposed amendments, which accordingly were permitted.

19. Thus, paragraph 38 henceforth was to read :

“By reason of Ting’s breaches of duty as set out in paragraph 37 above, the payments set out in paragraphs 25 and 26 above were [deleted words] voidable and to the extent necessary are hereby avoided by and on behalf of Akai”,

whilst paragraph 40 henceforth was to read :

“By reason of Ting’s breaches of duty as set out in paragraph 39 above, the Ko and Fung Loan Waivers [deleted words] were voidable and to the extent necessary are hereby avoided by and on behalf of Akai.”

20. Paragraphs 38 and 40 deal, respectively, with the purported avoidance of a $2 million payment in March 1999 to the 2^nd defendant, and a waiver on 30 June 1999 of a pre-existing $2 million loan to the 1^st and 2^nd defendants.

21. In respect of these additional amendments, Mr Barlow commented that this had helped to narrow the scope of his argument, although, as we shall shortly see, it did little to remove the thrust of his primary point.

The evidence

22. On the hearing of the earlier strike out application, which resulted in the current replacement Amended Points of Claim (as further amended) now being raised, the only evidence then placed before the court was an affirmation sworn on 6 April 2006 on behalf of the 2^nd and 3^rd defendants by Ms Susan Liang, their solicitor. 

23. As the earlier judgment of 9 June 2006 records (at paragraph 5), no evidence then was filed on behalf of the plaintiff liquidators, and this was a feature of which considerable play was made by Mr Barlow at the earlier strike out hearing (see judgment, op cit, at paragraphs 48-54).

24. This situation changed for the purpose of the present application.

25. Ms Liang swore a 2^nd affirmation, dated 4 September 2006, whilst the 2^nd defendant, Mr Simon Fung, also swore an affidavit dated 15 September 2006.

26. On behalf of the liquidators, Mr Cosimo Borelli, who, together with Mr Hill and Mr Christiansen is one of the Joint and Several Liquidators of Akai Holdings Ltd (in liquidation), himself swore an affidavit dated 6 October 2006.

27. Thus, there was before the court rather more in the way of evidential material for the second round of this debate, which, although in the form of an application to amend, effectively now became a strike out in reverse.

The argument

28. In summary, Mr Barlow’s argument, in opposing Mr Yuen’s application on behalf of the plaintiff for leave to file and serve this amended replacement pleading, took the form of three main contentions.  I deal with them in turn.

(i)      No constituted cause of action at date of issue of the writ/limitation considerations

29. This was Mr Barlow’s ‘threshold point’, and applied, he submitted, with equal force to the plaintiff’s amended claim for restitution of the two sums of $2 million which the liquidators now sought to recover from the 2^nd defendant.

30. In short, the argument revolved around the further amended version of paragraphs 38 and 40 of the Amended Points of Claim.  It was this.

31. The present situation, said Mr Barlow, was that no longer was there in place within the proposed amended pleading any allegation that the payment of $2 million and the $2 million ‘loan waiver’ were void, as originally alleged; this now had gone as a result of the further amendment, and as he had submitted at the earlier strike out hearing, in any event this allegation was bad as a matter of law.

32. However, the allegation as to voidability remained, and continuance of this allegation must mean that, as at the date of the writ, namely 29 June 2005, there can have been no completely constituted cause of action against his client regarding the two sums of $2 million, since the payment of that sum, and the subsequent ‘loan waiver’ of a like sum, must be taken to be good, qua the company, until avoided.

33. And, Mr Barlow continued, there cannot have been any such purported avoidance until the date of issuance of the summons presently before the court, namely 24 August 2006, because the pleading in these two paragraphs recites that “to the extent necessary” such payments “are hereby avoided for and on behalf of Akai”, and given that this was a replacement Amended Points of Claim, for which the plaintiff liquidators now sought leave to file and serve, any such avoidance could only take place at earliest by the date of the summons which had placed such replacement pleading before the court.

34. If this analysis be correct, said Mr Barlow, the hard fact is that as at the date of the issue of the writ there was no fully constituted cause of action, given that such purported avoidance on behalf of the company post-dated the writ by almost 14 months, and in any event these causes of action prima facie were time-barred, given that service of the summons, to which the Amended Points of Claim was annexed, took place some 7 years after the transactions in question; moreover, it was in respect of one cause of action only (that is, the $2 million payment to the 2^nd defendant) that the plaintiff sought (at paragraphs 30 and 31 of the replacement Amended Points of Claim) to plead concealment by the 2^nd defendant, and thus to purport to take advantage of the postponement provision within section 26 of the Limitation Ordinance – as to which the 2^nd defendant now had put into evidence (supported by contemporaneous transcripts) the statement that he was never asked by the liquidators about this particular transaction.

35. In this situation, he said, the proper course for the liquidators to adopt, if indeed they wished to pursue such claims, was to issue a fresh writ and, as he neatly put it, “to close off the present demurrable proceedings”.

36. Mr Barlow submitted that, subject to any relevant Rule of the High Court, sections 35(1)(b) – the ‘relation back’ principle – and 35(3) of the Limitation Ordinance – a new claim not to be permitted under (1)(b) to be made in the course of any action after the expiry of any time limit under the Ordinance which would affect a new action to enforce that claim – effectively combined to preclude new causes of action being pleaded by amendment (as distinct from the issue of a new writ), although he accepted that Order 20, rule 5, RHC, conferred a narrow residual discretion on the court “if [the court] thinks it just to do so.”

37. In this connection, however, he pointed to the commentary appearing at M/N G1/35/5 (at page 455 of Hong Kong Civil Procedure, Vol 2), which records that in Welsh Development Agency v. Redpath Dorman Long Ltd, [1994] 1 WLR 1409, the English Court of Appeal had made it clear that in cases where section 35(1) does, or may well, give the plaintiff an advantage, “the correct test to apply is that leave to amend by adding a new claim should not be given unless the plaintiff can show that the defendant does not have a reasonably arguable case on limitation which will be prejudiced by the new claim, or can bring himself within Order 20, rule 5.”

38. And in this instance, said Mr Barlow, the plaintiff could not discharge that which he termed as a ‘reverse onus’, because in argument Mr Yuen had accepted that “in light of the averments in the draft Amended Points of Claim and the affidavit of Mr Borelli, we have an arguable case under section 26 of the Limitation Ordinance” – and hence the clear implication arose that in this regard the 2^nd defendant’s claim at least was arguable.

39. For his part Mr Yuen SC, on behalf of the liquidators, submitted that, as a general proposition, most if not all of the objections raised by the 2^nd defendant were not matters that could or should be dealt with at interlocutory hearing.  This was, he said, no more than an application for leave to file the Amended Points of Claim, and that this hearing was not the appropriate forum in which to determine matters which more properly should be left to trial.

40. On the limitation issue, he said, so far as the $2 million loan to Mr Fung was concerned, this loan (like that to the 1^st defendant) was made on 26 August 1997, and the ‘loan waiver’ purportedly made by Mr Ting in breach of his fiduciary duty to the plaintiff was by letter dated 30 June 1999, and it was this date which was the relevant one since this was the wrongful act of which the plaintiff liquidator complains; hence, since the writ in this action was issued on 29 June 2005 this element of the plaintiff’s claim against the 2^nd defendant clearly was not time-barred as at the date of issuance of the writ.

41. As for the $2 million payment to Mr Fung, this was made on 23 March 1999, and thus, Mr Yuen argued, as was now pleaded in paragraphs 30 and 31 of the proposed replacement pleading, the liquidators first had learned of this payment to Mr Fung after obtaining copies of record listings and banking records pursuant to Orders addressed to the Commercial Crime Bureau under section 221 of the Companies Ordinance, and at no time had Mr Fung disclosed this payment when questioned by the liquidators.

42. In the circumstances, therefore, by reason of section 26 of the Limitation Ordinance the plaintiff clearly had demonstrated that at the least it had “a reasonable answer” to the limitation objections now raised, whilst as to the debate as to whether there had been ‘deliberate concealment’ by the 2^nd defendant of the fact of this payment, this was a matter which could only be dealt with at trial, alternatively on the hearing of a preliminary issue.

43. As to the point as to the lack of a constituted cause of action as at the date of issue of the writ, Mr Yuen further submitted that the factual matrix surrounding these payments to the 2^nd defendant had been squarely raised in these proceedings from the outset, and thus that (and in any event) pursuant to the provisions of Order 20, rule 5 RHC this court should exercise its undoubted discretion to permit amendment in the terms mooted, rather than direct that a fresh writ be issued.

44. I have considered this ‘threshold point’, as raised on behalf of the 2^nd defendant, and I am against Mr Barlow on the point.  Accordingly, I decline to refuse leave to amend on this basis.

45. It seems to me that it would be an arid exercise to require the issuance of a fresh writ, within the context of which fresh action precisely the like arguments would be ventilated, and thus in the exercise of my discretion I am prepared to permit such amendments within the existing action; as to the issue of date of knowledge on the part of the liquidators, it is clear that this is not amenable to summary resolution on the papers at this stage, and will have to await the hearing of evidence on the issue, whether at trial or upon the hearing of a suitably framed preliminary issue on the limitation point.

46. I note further that no discrete argument arises in this context with regard to the claim for money had and received, in that as against the 2^nd defendant recovery of the like sums is pursued under this separate juridical head, which simply constitutes an alternative cause of action which the plaintiff liquidators say will lead to the same conclusion in terms of the recovery of the two sums, each of $2 million, for which Mr Fung now is pursued in this litigation.

(ii)     A sufficient plea of fraud?

47. Mr Barlow’s second main line of attack upon this proposed amended pleading struck me as potentially the more promising.

48. He argued that notwithstanding that this is the second attempt on the part of the plaintiff liquidators to mount a case in fraud, a proper fraud plea still had not been raised against his client.

49. In this connection, he referred the court to the well known principles governing the pleading of fraud, which had been touched upon in this court’s earlier judgment, and further drew attention to the judgment of the Court of Appeal in HKFE Clearing Corp. v. Yicko Future Ltd [2006] 2 HKC 233, in particular the observations of Yuen JA at 237H-238A, wherein her Ladyship observed, inter alia, “It is well established that a party should not be allowed to plead a vague and unparticularised allegation of fraud in the hope of making it good after discovery”.  Reference also was made to HKCP, Vol 1, at M/N 18/8/13.

50. The dominant thrust of Mr Barlow’s argument was that the allegation of fraud on the part of his client, the 2^nd defendant, essentially was derivative from the alleged fraud of Mr Ting, and yet there were no factual allegations pleaded which could provide any basis for the plea that the 2^nd defendant had had “actual knowledge” of Ting’s alleged fraud in terms of the $2 million ‘loan waiver’, or in terms of the $2 million payment to Mr Fung.

51. At its highest, said Mr Barlow, Mr Fung had had no more than the opportunity to know of the alleged defalcations of Mr Ting, in transferring monies from Akai to his private accounts, and thereafter in making the payments of which complaint now is made by the liquidators, but such supposition, he maintained, was a long way from any responsible assertion of ‘actual knowledge’ on the part of his client, and there was no plea of any act by the 2^nd defendant within the context of Ting’s alleged breaches of duty toward the company. 

52. In short, Mr Barlow submitted, the plaintiff was repeating its former pattern of an impermissible pleading approach which had been the subject of earlier criticism, the result of which had necessitated production of the replacement Points of Claim the plaintiff now sought leave to file and serve.

53. This is a contention which has provided pause for thought.

54. The plaintiff liquidators seek to circumvent this analytical criticism of the manner of formulation of their case by invoking what is asserted to be legitimate inference arising from undisputed facts, namely actual receipt of the payment by the 2^nd defendant, together with the fact of the Akai loan waiver.

55. Is this enough to get them home?  Is a plea of fraud couched in this fashion demurrable on its face at this stage?

56. For his part Mr Yuen SC says that it would be incorrect in principle to strike out at this point.  He argues that the knowledge asserted properly may be inferred from the matters pleaded in the draft Amended Points of Claim.  He points to the 2^nd defendant’s position and income within Akai, that he was Financial Controller with unrestricted access to the accounting and financial records of Akai, and that from 1998 onwards, Mr Fung had an annual income of but HK$1.04 million. 

57. He further draws attention to the two payments of HK$300,000 which were made to the 2^nd defendant on 2 February 1998 and 9 February 1999, and says that whilst these payments no longer remain the subject of any claim by the liquidators, the $2 million payment to Mr Fung took place on 23 March 1999, that is, slightly over a month after the second payment of $300,000, and that the purported explanation by the 2^nd defendant raises more questions than it answers.  To make matters even more questionable, he submitted, after another 3 months, on 30 June 1999, when the 2^nd defendant had expressed an intention to leave and already had received the $2 million payment, the $2 million ‘loan waiver’ meant that the 2^nd defendant effectively had received a total of $4 million from Akai during the short span of time between 23 March to 30 June 1999.

58. In the circumstances, Mr Yuen submitted, this could not properly be contended to be a case of ‘mere assertion’, as had been submitted on behalf of Mr Fung, and that the particular circumstances, coupled with the background pleaded in the draft pleading, justified the plea of actual knowledge/dishonesty; and in any event, he said, pre-eminently these were matters for trial and cross-examination.

59. After some reflection, I consider that Mr Yuen is correct, and that in the circumstances this is not the type of ‘plain and obvious’ case that justifies what effectively is a strike out; to an extent, of course, the fact that the argument required careful weighing tends to reinforce the notion that this matter should not be thus summarily determined.

60. After considering all that presently is before the court, not least the fact that in terms of the claim as mounted against the 2^nd defendant there is a parallel plea of money had and received, and that also there is the specific plea of deliberate concealment, both matters which require to go to trial in any event, and further having taken into account the evidence filed by both sides, I have concluded that the 2^nd defendant does not get home on this basis, and that this submission as made ultimately does not merit refusal of leave so to amend.  Accordingly, I will permit this case to proceed in its currently-amended form.

61. I turn, finally, to the third and last of the arguments deployed by Mr Barlow.

(iii)    The release of Mr Ting

62. On behalf of Mr Fung, it is argued that, as is reflected in the earlier judgment of Kwan J, in 2002 the liquidators apparently have chosen to release Mr Ting, the erstwhile Chairman of Akai, from all liability arising from that which is regarded as one of largest corporate frauds in Hong Kong’s history.

63. Accordingly, submitted Mr Barlow, the plaintiff liquidators’ release of the principal tortfeasor in turn released any party accused of derivative liability for ‘knowing assistance’ or ‘knowing receipt’ which was founded upon Mr Ting’s allegedly dishonest breaches of fiduciary duty.

64. Whilst I can appreciate the logic within the argument, I do not think that this submission is good in law.  This situation is not analogous to the contractual position of primary and secondary obligors.  It strikes me that what the liquidators may, or may not, have chosen to do in terms of the principal tortfeasor is nothing to the immediate point : any settlement with Mr Ting, as in fact occurred, cannot affect the liability of a legally separate tortfeasor, which is asserted to be Mr Fung’s status, albeit the alleged liability revolves around, and is derivative from, the like matrix of facts, namely the systematic and allegedly fraudulent ‘bleeding’ of the assets of Akai.

65. Mr Barlow did not press this point, and I reject it.

Decision/Order

66. The result of the foregoing is that, in the exercise of my discretion, I am minded to grant the relief as presently sought by the plaintiff.

67. Accordingly, I make the Order following :

(i) The plaintiff do have leave to file and serve the replacement Amended Points of Claim (as further amended, pursuant to the oral application further to amend as made by leading counsel on 16 October 2006), within 5 days of the date of the Order herein;

(ii) The 2^nd defendant do file and serve his Defence thereto within 28 days of the date of such service of the Amended Points of Claim;

(iii) The plaintiff do file and serve a Reply thereto, if any, within 14 days thereafter;

(iv) There be discovery by list within 28 days of the close of pleadings, and inspection 7 days thereafter;

(v) There be liberty to apply for further directions;

(vi) There be an order nisi that the costs of this application be plaintiff’s costs in the cause, such costs to be taxed if not agreed.