IRONWOOD CAPITAL LTD v. KTH CAPITAL MANAGEMENT LTD

HCA2836/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2836 OF 2004

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R U L I N G 

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1. The plaintiff applies by Summons under Order 43, rule 1 of RHC for :

(a)	Summary Accounts and related reliefs; and
(b)	discovery of unredected copies of copy bank statements specified in paragraph 5 of the summons

against the defendant.

2. At the start of the hearing of this application, I was informed by counsel for the plaintiff that there is no further need to pursue the unredected copies since they have been provided to the plaintiff by the defendant before the hearing.

3. This Ruling therefore concentrates only on the application by the plaintiff for Summary Accounts under Order 43 and related reliefs thereto contained in paragraphs 1 to 4 inclusive of the Summons.

Background

4. The plaintiff, a BVI company, was set up in about 2000 as the investment vehicle to invest in distressed debts of Chinese corporations. The plaintiff was set up by Luo Xian Ping (“Luo”) and his assistant Guo Dan (“Guo”).

5. The defendant, an Exempted Company incorporated in the Cayman Island was at all times under the control of Du Wang (“Wang”) and his wife Vivian Ding Li (“Li”).

6. It was intended that the plaintiff’s knowledge of Chinese corporations and their financial affairs could be combined with the expertise of the defendants in distress debt trading to enable successful trades to be made.

7. For the purpose of such investment, the defendant assisted the plaintiff to open an account with the ABN AMRO Bank (“the ABN Account”).  Li was one of the authorized signatory to the ABN Account and the mandate given to the bank was such that for trading purposes, Li’s signature alone would be sufficient to operate the ABN Account.

8. In December 2000, the defendant caused to be opened a sub-account on behalf of the plaintiff with Bermuda Trust (Far East) Ltd (“BTFE”) in the name of KTH Capital Management Ltd — Ironwood Capital Ltd (“the Sub-Account”).  Wang and Li were the only authorized signatories of the Sub Account.

9. Thereafter the defendant was able to move funds between the ABN Account and the Sub-Account and conducted investments through the Sub-Account on behalf of the plaintiff.

The present claim

10. In this present action it is alleged by the plaintiff that the defendant, who operated the various accounts on behalf of the plaintiff, have not accounted to the plaintiff for all that is due to them.  The major relief sought by the plaintiff in the present claim is for a declaration that the plaintiff is the sole beneficiary of the Sub-Account and also for an account of all investments made and all assets held by the defendant for and on behalf of the plaintiff.

11. For convenience sake this present claim will be referred to as “the Account Action.”

High Court Action 76 of 2005

12. Again for convenience sake, HCA 76 of 2005 will be referred to as “the Recovery Action” and was brought by essentially the same plaintiff as in the Account Action against essentially the same defendant, although notably Wang and Li have also been joined as the 2^nd and 3^rd defendants respectively in the Recovery Action.

13. The Recovery Action arises essentially out of the same dealings between the parties as in the Account Action.

14. Generally, the plaintiffs’ claim in the Recovery Action relates to the investment transactions and how those transactions were handled by the defendant on the plaintiffs’ behalf.

15. However, one specific allegation made by the plaintiff in the Recovery Action was that the plaintiff was misled by various statements made by the defendants including statements that the plaintiff did not have at its disposal sufficient funds to complete particular investment transactions.

16. It is the plaintiff’s case that there were sufficient funds in the plaintiff’s accounts operated by the defendants on the plaintiff’s behalf.

Relationship between Account Action and Recovery Action

17. Since the Account Action and the Recovery Action share the same background facts given above relating to the dealings between the plaintiff and defendant leading to the investments carried out by the defendant on behalf of the plaintiff, it is apparent that there is a close affinity between the two actions albeit that the reliefs claimed are different.

18. Indeed, in an earlier application for consolidation of the two actions heard by Chung J in January 2007, Chung J ordered that the two actions be tried together at the same time before the same judge.

19. On appeal by the plaintiff from that order of Chung J, the Court of Appeal, while accepting that there should be consolidation in the sense that both matters should be heard by the same judge and the findings in the Account Action should stand as findings in the Recovery Action, ruled that the Account Action should be tried and decided first before the Recovery Action.  To that extent, it overruled the order of Chung J.

20. The reason for the Court of Appeal so ruling was that the amounts available to the plaintiffs and which has to be decided first in the Accounts Action is something which has to be decided prior to hearing the Recovery Action.

Application for summary account

21. The present application by the plaintiff is for summary account under Order 43.

22. This application is brought on the basis that it is not disputed by the defendant that it is an accounting party vis-à-vis the plaintiff in that the defendant does not dispute that it has been dealing with investments on behalf of the plaintiff by transferring funds from the ABN Account to the Sub Account opened by the defendant with BTEF and using such funds in the Sub Account for such investments on behalf of the plaintiff.

23. It is also submitted by the plaintiff that since Wang and Li were the only two persons who could and did operate the Sub-Account for investment purposes on behalf of the plaintiff, the plaintiff is in the dark as to all the dealings carried out by them from the Sub-Account without an account being given by the defendant.

Defendant’s objection to summary account

24. The first objection raised by the defendant is that, in the light of the Consolidation order of Chung J which has been varied by the Court of Appeal, and to the extent that the procedure of Summary Account under Order 43 differs in substance from what is contemplated by the Consolidation order as varied by the Court of Appeal, this application for Summary Account amounts to an abuse of process.

25. Secondly, it was submitted that the Summary Account application is not appropriate since under Order 43, rule 1(3) of the Rules of High Court, Summary Account will not be ordered if there is a preliminary question to be tried.  In the present case, as can be seen from the pleadings of the parties, there are a number of factual issues between them in the Account Action.

26. These factual issues are listed out in footnote 1 at page 10 of the skeleton submission of counsel for the defendant at the hearing before me which I do not propose to repeat here in this Ruling.

27. Thirdly, it was submitted that there was some three years delay by the plaintiff after the Writ was issued before applying for summary account and therefore the court ought not to exercise its discretion acceding to such application, delay being itself sufficient ground for disentitling a party to discretionary relief.

28. Moreover, in so far as the exercise of discretion is concerned, the court should also take into account the other matters already raised above together with the delay.

Decision

29. In claims where the relief sought is for the taking of an account, such claims will normally be accompanied by a further claim for an order for payment over of whatever is found due to the claimant upon the taking of the account.

30. It will always be possible for there to be factual disputes between the parties which is relevant to either :

(a)	whether an account ought to be ordered or taken between the parties as where the defendant disputes that he is an accounting party vis-à-vis the plaintiff; or
(b)	the details of the account when it is given and which goes to the amount that should be ordered for payment over.

At times such factual disputes which arise may affect both those issues.

31. Order 43, rule 1(3) provides as follows :

“	On the hearing of the application, the Court may, unless satisfied that there is some preliminary question to be tried, order that an account be taken and may also order that any amount certified on taking the account to be due to either party be paid to him within a time specified in the order.”

32. The “preliminary question to be tried” referred to in Order 43, rule 1(3) can only refer to a disputed factual issue or some other matter that needs to be determined at trial which relates to the question whether an account ought to be ordered as between the parties, as for instance when it is in issue whether the defendant is an accounting party to the plaintiff and whether he should be made or ordered to render an account to the plaintiff.

33. It cannot, in my view, relate to factual disputes which do not touch on the issue whether an account should be ordered, as for instance where there are only factual issues which goes to the details of such account when given.

34. In the present case, admittedly, on the pleadings there are a number of factual issues between the parties. However, none of those factual issues touch on the question of whether an account should be rendered by the defendant to the plaintiff.  Indeed, it is admitted or not disputed by the defendant that it is an accounting party to the plaintiff, having carried out investments on behalf of the plaintiff using funds of the plaintiff from the ABN Account.  Moreover, it was submitted by the defendant’s counsel during the hearing that the defendant will render full accounts but only at the trial of this matter when all the factual issues can be gone into.

35. One would have thought that where it is not in dispute between the parties that the defendant is an accounting party to the plaintiff, there can be nothing to stop the defendant from rendering to the plaintiff as to what the defendant says are the proper accounts to the plaintiff well before the trial so that any dispute between them relating to the details of those accounts can then be properly dealt with at the trial.  Support for this, if needed, can be found at note 43/3/1 of Order 43 where it states :

“

The accounting party will generally be directed to lodge his account, duly verified by affidavit, in accordance with r.4(3), and to serve copies on the other parties concerned. It it is a long account, as in a partnership action, it may be impracticable to comply with r 4 (2), an in such cases a summarized account is usually accepted. In a simple case the vouchers may be ordered to be exhibited to the affidavit: otherwise it is generally ordered that each party permit inspection of all relevant documents in their possession or power relating to the account, to enable the opposing parties in effect to carry out an audit, and so that any necessary verification of the account can be dealt with out of court.

The opposing party will then file a notice of objection, or an affidavit setting out their contention with regard to the accounts, so that it can be seen what issues require determination by the court. It may also assist the court to have the parties’ respective contentions summarized in the form of a Scott Schedule.”

36. From what has been cited above, it would appear to me that the correct and proper practice in this case is for the defendants to render the necessary accounts to the plaintiff and verified by affidavit as to the dealings carried out by the defendant on behalf of the plaintiff and using funds of the plaintiff from the ABN Account and the Sub-Account.

37. When such accounts are rendered by the defendant, only then will the plaintiff be in a position to object to any part of such accounts from the defendant and to record their objection on affidavit (as per paragraph 3 of the Summons).

38. The plaintiff is entitled to know how the defendant has applied the funds from the ABN Account and the funds in the Sub-Account before it can register its objection thereto.  Without those accounts, the plaintiff is in the dark since the defendant was the only party working the Sub-Account.

39. It is only when accounts have been rendered by the defendant and the plaintiff has made objections thereto that the court, and everyone else for that matter, will know what are the disputed issues relating to the details of the accounts that need to be determined between the parties.

40. Those issues can then be properly and effectively dealt with at trial along with all the other factual issues between the parties.

41. If, as suggested by counsel for the defendant, that such accounts asked for by the plaintiff, is only to be rendered by the defendant at trial, the consequence will be that it will effectively cause the trial to be further delayed.

42. I can see no good reason for that, nor why such accounts cannot be furnished by the defendant well before the trial of this matter so that all the issues arising from the details of the accounts can be crystallized for determination at trial.

43. Given the reasons above, I cannot see that this application is in any way an abuse of the court’s process.

44. In this case, for the reasons given above, the Summary Accounts ought to be ordered for the proper and smooth determination of the issues at trial.  That is so irrespective of whether there was any consolidation of the Account Action with the Recovery Action, and irrespective of the variation to the consolidation order by the Court of Appeal.

45. Indeed, that much was recognized by the Vice President at the hearing of this matter before the Court of Appeal when he indicated that this matter was one in respect of which an order for summary account ought to be made.  Quite obviously also, the Vice President, apart from indicating his views, could do nothing more, since an order for summary account had to be made by summons, and there was no such summons when this matter was before the Court of Appeal.

46. As for the discretion point taken by the defendant, the reasons given above, in my view, fully justify the exercise by the court of its discretion to order the summary account sought by the plaintiff in this case.

47. There will accordingly be an order in terms of paragraphs 1, 2, 3 and 4 of the plaintiff’s Summons dated 3 May 2007.

Cost

48. There will be a cost order nisi as follows:

49. Cost of the application will be the plaintiff’s cost in the cause.  Cost of the hearing before me be to the plaintiff in any event.

50. The reason for the above cost order nisi is that the application was necessary to properly determine the issue at trial and in that sense is so intertwined with the trial itself.

51. The cost of the hearing of this matter was however unnecessary if it had been consented to by the defendant as being a proper application.  Instead it was objected to by the defendant and such objection failed.  Cost therefore should follow the event.