HONG KONG NIIROKU LTD. v. KYOKUTO SECURITIES (ASIA) LTD.

HCA 4122/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4122 OF 2000

_____________________

_____________________

__________________

J U D G M E N T

__________________

1. This is an application by the plaintiff to strike out the defendant's defence and certain paragraphs of the counterclaim. On the first day of the hearing on 28 February 2002 I gave leave to the defendant to make further amendments to the re-amended statement of claim. Mr. Bunting SC for the plaintiff submitted that the amendments made no difference to the plaintiff's application to strike out the defendant's pleading. That being so, it seemed to me that on this application I should consider the defendant's further amended pleading, namely, the re-re-amended defence and counterclaim and whether the re-re-amended defence and paras. 21 to 24 and prayers (1), (2) and (6) of the counterclaim ought to be struck out. The plaintiff does not seek to strike out the rest of the counterclaim against the plaintiff in respect of three dishonoured cheques totalling HK$14 million and a promissory note for HK$50 million.

2. The application was made under O.18, r.19(1)(a) RHC as well as under r.19(1)(b) and (d) and under the inherent jurisdiction of the High Court. No affidavit evidence is admissible for an application under O.18, r.19(1)(a) but affidavit evidence is admissible for an application under 19(1)(b) and (d) and under the inherent jurisdiction.

3. The principles applicable to a striking out application are well settled. It is trite law that the court will exercise its powers to strike out a pleading only in plain and obvious cases. In Yue Xiu Finance Co. Ltd. & Anor v. Agnew & Ors (Formerly t/a Deloitte Haskins & Sells (a firm)) & Anor [1996] 2 HKC 122 the Court of Appeal held that no court should strike out a statement of claim unless it was satisfied that the legal basis of the claim was unarguable or almost incontestably bad. An order to strike out should not be made where the legal viability of the cause of action was sensitive as to the facts.

4. On this application the plaintiff has a heavy onus to discharge. It must demonstrate that the defences raised are bound to fail before the court will exercise its summary power to strike out the re-re-amended defence and the said paragraphs of the counterclaim.

5. The plaintiff is and was at all material times a company incorporated in Hong Kong principally engaged in the business of trading in marketable securities on the Hong Kong and Tokyo Stock Exchanges. The defendant is and was at all material times a company incorporated in Hong Kong and engaged in the business of stock broking and trading in stocks and securities on the Hong Kong and Tokyo Stock Exchanges. The plaintiff was a customer of the defendant pursuant to an institution account agreement made between the defendant and the plaintiff dated 22 January 1997. The plaintiff maintained an account with the defendant, namely account no. 70-16565 ("the HK26 account"). This was a margin trading account. On 23 June 1998 the plaintiff and the defendant entered into the margin account agreement whereby the defendant agreed to provide margin facilities to the plaintiff upon the terms and conditions therein stated.

6. As pleaded in the amended statement of claim the plaintiff's case is that the parties agreed that the plaintiff's margin trading would be conducted subject to the guidelines in the document entitled "Guidelines to Margin Account Holders". The plaintiff's case is that there were express terms of the institution account agreement, the margin agreement and the guidelines thereto that, inter alia, any statement of account sent by the defendant to the plaintiff at such address as appears on any such account opening form shall be conclusive as to the state of the plaintiff's account with the defendant as at the date thereof unless written notice to the contrary shall have been received by the defendant by the 15th day of the month following the last month covered by such statement. The plaintiff also relies on an implied term of the institution account agreement and/or the margin agreement that the defendant would deliver up the plaintiff's stocks and shares to the plaintiff or to its order upon demand subject to the plaintiff's account being in credit.

7. The plaintiff's claim is that despite demands the defendant has failed and/or refused to deliver up to the plaintiff or its order the shares and monies which the plaintiff owned and/or to which it was entitled held by the defendant. It is important to bear in mind that the plaintiff has in the amended statement of claim also specifically pleaded and averred that by the terms of the margin agreement the state of the plaintiff's account at each month end was conclusively stated in each monthly statement sent to the plaintiff for those months. The plaintiff's case as pleaded is that the state of its account as at the 28 March 2000 was conclusively stated in the account statement dated 31 March 2000 sent to the plaintiff and that the state of its account as at 12 April 2000 was conclusively stated in an account statement provided to it by the defendant on or about that date. The plaintiff has further asserted that the defendant is estopped and/or precluded from denying that each such monthly account statement was conclusive as to the state of the plaintiff' s account on the dates set out. Thus it can be seen that the plaintiff relies heavily on the conclusive nature of the said statements. The plaintiff therefore claims the sums of ￥344,175,786 and HK$22,434,228.26 as set out in the 1st schedule to the amended statement of claim. These are for the amounts as set out in the statement of account that the defendant sent to the plaintiff as at 12th April 2000 with adjustments made to bring it up to date to 19th April 2000. The plaintiff also claims damages for loss of profits and alternatively, an order that the defendant do deliver up shares as listed in the 1st schedule to the amended statement of claim.

8. In para. 8 of the re-re-amended defence and counterclaim ("the defendant's pleading") the defendant denies the correctness of the plaintiff's account as pleaded in the amended statement of claim. It avers that its account particularised in schedule 1 parts A and B of the defendant's pleading is the correct account as between the parties. This shows an indebtedness from the plaintiff to the defendant of ￥1,131,255,454. Hence the defendant counterclaims this sum in prayer (1) of the counterclaim.

9. The defendant's case is that the monthly account statements relied on by the plaintiff in its amended statement of claim are falsified monthly account statements and that the true position of the state of the plaintiff's HK26 account is in the correct monthly account statements as pleaded in para. 8 of the defendant's pleading.

10. The defendant relies on a conspiracy as pleaded in para. 12. This is pleaded as follows :

“ Further or alternatively, from about June 1998 to April 2000, the plaintiff, Suzuki Junior and Mr. Kotake :

a) conspired and combined with each other, wrongfully and with the sole or predominant intention of injuring the Defendant and/or causing loss to the Defendant to falsify the Falsified Account Statements, and to present the same to the Defendant and/or rely upon the same to demand from the Defendant payment of the falsified sums set forth therein;

b) alternatively unlawfully conspired with each other to injure the Defendant by unlawful means.

Particulars of Unlawful Means

i) Falsifying the Falsified Account Statements; and

ii) Defrauding and/or deceiving the Defendant.

The said conspiracy between the Plaintiff, Suzuki Junior and Mr. Kotake is hereinafter referred to as "the Conspiracy". "

11. It is plain that the defendant's case is that the co-conspirators were the plaintiff, Suzuki Junior and Mr. Kotake as pleaded. Suzuki Junior is Mr. Bunzo Suzuki. It is pleaded that he was at all material times the managing director of the plaintiff and that he directed and controlled the affairs of the plaintiff in Hong Kong. Mr. Ippei Suzuki is the father of Suzuki Junior and he is and was at all material times the Chairman and a director of the plaintiff. He is and was based in Japan. Mr. Kotake is Mr. Hideo Kotake who is and was at all material times the managing director of the defendant. He was the person who dealt with Suzuki Junior in the operation of the plaintiff's HK26 account with the defendant as well as other accounts. Apart from the HK26 account, Suzuki Junior and his wife also maintained margin trading accounts with the defendant. Tranmax Limited also had a margin trading account with the defendant. The two shareholders and directors of Tranmax Limited were Suzuki Junior and his wife.

12. Mr. Bunting submitted that there was no sustainable case of conspiracy involving the plaintiff. He pointed out that the main areas of dispute between the parties on the state of the plaintiff's account was largely in respect of 7 withdrawals and transfers totalling HK$25.3 million and US$1,001,199.73 from the HK26 account and the treatment in the allegedly falsified statements of 3 cheques totalling HK$14 million drawn by the plaintiff in favour of the defendant but which were dishonoured when presented for payment. These are some of the overt acts pleaded in para. 13. It was submitted that there was no sustainable case that the acts and knowledge of Suzuki Junior could be attributed to the plaintiff. It was further submitted that in order to establish the plaintiff's involvement in the conspiracy the defendant must establish that in the transactions Suzuki Junior acted on the plaintiff's behalf as its agent.

13. The defendant's case has been supplemented by further and better particulars. The defendant's case is that the conspiracy was a combination of Suzuki Junior, the plaintiff and Mr. Kotake from June 1998 to April 2000 by carrying out the overt acts as particularized in para. 13(a) to (r) of the defendant's pleading. The conspiracy is said to arise from or is to be inferred from the conduct and/or overt acts carried out by Suzuki Junior, the plaintiff and Mr. Kotake during the said period. It is said that each of the acts provided a part of the foundation of the conspiracy and/or was preparatory to the same. It should be borne in mind that if a conspiracy be established, the actions of any one of the conspirators in furtherance of the objects of the conspiracy will be treated as the actions of all of them (para. 24-135 Clerk & Lindsell on 'Torts' 18th Edn.).

14. Mr. Whitehead SC submitted that there are two routes by which the plaintiff was involved in the conspiracy. Agency is but one of the routes and it has been pleaded in para. 17 that alternatively, Suzuki Junior at all material times was acting as an agent for the plaintiff. Apart from agency, the plaintiff can be liable on the basis that Suzuki Junior was the directing mind and will of the plaintiff in respect of the transactions. It seems to me that this is at the very least arguable.

15. In E1 Ajou v. Dollar Land Holdings Plc and another [1994] 2 All ER 685 where the directing mind and will doctrine was applied, Nourse L.J. said at page 695 :

“ Because a company's directing mind and will are often the mind and will of one or more of its directors and because a director is for many purposes an agent of the company, there is a danger of confusion between the two grounds on which the plaintiff relies. But they are, as the judge made clear, quite separate. The plaintiff can succeed on either".

16. It was held in that case that the directing mind and will of a company was not necessarily that of the person or persons who had general management and control of the company since the directing mind and will could be found in different persons in respect of different activities. It was therefore necessary to identify the person who had management and control in relation to the act or omission in point. On the facts it was held that a non-executive director was the directing mind and will of the company. He had the de facto management and control of the relevant transactions. His knowledge that the moneys received by the company were proceeds of fraud could be attributed to the company.

17. In the present case it has been asserted that Suzuki Junior directed and controlled the affairs of the plaintiff in Hong Kong. He was the managing director. He was an authorised signatory of the plaintiff. He was the authorised signatory of the HK26 account. He had the authority to operate the HK26 account which he did at all material times. He also had the authority to make withdrawals from the HK26 account. The defendant's case on the withdrawals is that the relevant sums were withdrawn or caused to be withdrawn by Suzuki Junior alternatively, the plaintiff acting through Suzuki Junior or alternatively, Suzuki Junior and the plaintiff. Mr. Whitehead emphasized that the overt acts did not stop with the withdrawals and transfers. It must be remembered that the purpose of the conspiracy was to falsify the account statements and to present the same to the defendant and/or rely upon the same to demand from the defendant payment of the falsified sums. It is also asserted that the plaintiff was enabled to obtain the falsified account statements from the defendant. In particular, the plaintiff has presented the falsified account statement as at 12 April 2000 to the defendant and has relied on the conclusive nature of the same in its claim against the defendant. This is for the benefit of the plaintiff.

18. In Meridian Global Funds Management Asia Ltd. v. Securities Commission [1995] 2 AC 500 it was held that a company's right and obligations were determined by rules whereby the acts of natural persons were attributed to the company normally to be determined by reference to the primary rules of attribution generally contained in the company's constitution and implied by company law and/or general rules of agency; but that, in an exceptional case, where application of those principles would defeat the intended application of a particular provision to companies, it was necessary to devise a special rule of attribution to determine whose act or knowledge or state of mind was for the purpose of that provision to be attributed to the company. Although the description of such a person as the "directing mind and will" of a company did not have to be apposite in every case, knowledge of an act of a company's duly authorised servant or agent, or the state of mind with which it was done, would be attributed to the company only where a true construction of the relevant substantive provision so required. In that case the court was concerned with the construction of S. 20 of the New Zealand Securities Amendment Act 1988. The Securities Commission instituted proceedings against the company for failing to comply with the disclosure provisions under the Act as the company became a substantial security holder in a public issuer. It was held that the knowledge of the chief investment officer and the senior portfolio manager should be attributed to the company.

19. And in R. v. Rozeik [1996] 1 WLR 159 when dealing with whether the acts and knowledge of an employee or officer are attributed to a company, Leggatt L.J. said at page 164:

“ Whether or not a company is fixed with the knowledge acquired by an employee or officer will depend on the circumstances. It is necessary first to identify whether the individual in question has the requisite status and authority in relation to the particular act or omission in point : E1 Ajou v. Dollar Holdings Plc. [1994] 2 All E.R. 685, 696. It follows from this that information given to a particular employee, however senior, may not be attributed to the company if that employee is not empowered to act in relation to that particular transaction. An employee who acts for the company within the scope of his employment will usually bind the company since he is the company for the purposes of the transaction in question : see per Lord Templeman in In re Supply of Ready Mixed Concrete [1995] 1 A.C. 456, 465. The company may be liable to third parties or be guilty of criminal offences even though that employee was acting dishonestly or against the interests of the company or contrary to orders. But different considerations apply where the company is the victim, and the employee's activities have caused or assisted the company to suffer loss. The company will not be fixed with knowledge where the employee or officer has been defrauding it."

20. In the present case, it is important to bear in mind that the purpose of the conspiracy was to falsify the falsified account statements and to present the same to the defendant and/or rely upon the same to demand payment of the falsified sums. This was all for the benefit of the plaintiff. The plaintiff has presented the allegedly falsified statements to the defendant and has in this action relied on the conclusive nature of the same.

21. It seems to me that whether or not the acts and knowledge of Suzuki Junior could be attributed to the company as its directing mind and will is a matter that should be investigated at trial. It is at the very least arguable that the acts and knowledge of Suzuki Junior could be attributed to the plaintiff. The plaintiff has failed to satisfy me that the defendant's case is unsustainable or that the defendant is bound to fail.

22. As regards the alternative case that Suzuki Junior acted as agent of the plaintiff, I agree with Mr. Whitehead that this is a mixed question of fact and law. It seems to me that the defendant's pleading sufficiently pleads the material facts. Further and better particulars of the allegation of agency have been supplied. It must be a matter for trial whether in making the withdrawals and the transfers from the HK26 account Suzuki Junior was acting as an agent of the plaintiff or on a frolic of his own. The parties have not yet had discovery in this case and it is not known where the moneys withdrawn and transferred from the HK26 account ultimately went save for US$1,001,199.72 which was transferred to a Mr. Yung, a friend of Suzuki Junior. In my view, the defendant's case is at the very least arguable.

23. Mr. Bunting also relied on the 1st affirmation of Mr. Hideo Kotake affirmed on 22 May 2000. The deponent stated that Suzuki Junior told him that he needed to transfer the funds comprising of the withdrawals totalling HK$25.3 million and US$1,001,199.72 for his own purposes but that he would pay them back into the HK26 account as soon as possible. There was also evidence from Mr. Kotake that he sent both the false and correct monthly statements to Suzuki Junior for the HK26 account. Mr. Kotake presumed that the false statements would be sent by Suzuki Junior to his father and in this way he would not find out about the withdrawals Suzuki Junior had made from the HK26 account. It was submitted that as the evidence showed that Suzuki Junior made the withdrawals for his own purposes and not for the plaintiff's purposes, the defence of conspiracy involving the plaintiff as a co-conspirator was unsustainable.

24. It must be borne in mind that the said affirmation of Mr. Kotake is but one of several affirmations filed in respect of mareva injunction proceedings. I have also been informed that Suzuki Junior has denied the alleged conversations with Mr. Kotake. The said evidence of Mr. Kotake cannot and should not be regarded as the totality of all the evidence to be adduced and accepted at trial.

25. It is useful to remember what Danckwerts L.J. said in Wenlock v. Moloney [1965] 1 WLR 1238 at page 1244 :

“ But this summary jurisdiction of the court was never intended to be exercised by a minute and protracted examination of the documents and facts of the case, in order to see whether the plaintiff really has a cause of action. To do that is to usurp the position of the trial judge, and to produce a trial of the case in chambers, on affidavits only, without discovery and without oral evidence tested by cross-examination in the ordinary way. This seems to me to be an abuse of the inherent power of the court and not a proper exercise of that power."

26. It may well be that the said evidence of Mr. Kotake poses a difficulty for the defendant to establish the conspiracy at trial. But that is something to be investigated at trial. It is also useful to bear in mind what Godfrey J. (as he then was) said when dealing with an application to strike out the defence in Hutchison Asia Ltd. v. Asia Television Ltd. [1993] 2 HKC 510 at page 514 :

“ That is a formidable case, no doubt. But any lawyer with any experience of private practice will be able to remember, only too well, those cases which appeared to be certainties but which, to his surprise, nevertheless failed, and by the same token, those cases which seemed bound to fail but which, to his surprise, nevertheless succeeded. It is for just this reason that the court will not embark, at this stage of an action, on a consideration whether the case of one side or the other is true or false. It will consider only whether the nature of the defence is such that is has to be characterized as an abuse of the process of the court, which is something else together."

27. In my judgment the plaintiff has failed to demonstrate that the defendant's pleading ought to be struck out. This is not a plain and obvious case. The defences raised and the said paragraphs of the counterclaim are not bound to fail. I dismiss the plaintiff's application. I also make an order nisi for costs in the defendant's favour.