CHENG HUNG KIT v. TSOI CHIK SANG LAWRENCE

HCSD 32/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO. 32 OF 2016

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AND

HCA 2742/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2742 OF 2016

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(Heard together)

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D E C I S I O N

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Introduction

1.  Mr Tsoi Chik Sang Lawrence (“Tsoi”) and Fonduet Industrial Limited (“FIL”) obtained a judgement against Mr Cheng Hung Kit (“Cheng”) in a High Court Action under HCA 4341/2003 (“the Action”) on or about 30 March 2004 (“the 2004 Order”), which was subsequently varied on 26 August 2005 (“the 2005 Order”). Under the 2005 Order, Cheng should pay Tsoi and FIL a sum of HK$ 20 million (“the Sum”).

2.  In default of payment of the Sum, Tsoi served a statutory demand based on the Sum (“the Statutory Demand”) on 1 June 2016.

3.  On the other hand, Cheng commenced the present action to claim primarily for a declaration that by reason of estoppel/laches, Tsoi and FIL are precluded from enforcing the 2005 Order.

4.  Against this background, by his application dated 20 June 2016 (“the Setting Aside Application”), Cheng seeks an order that the Statutory Demand be set aside.

5.  Apart from opposing the Setting Aside Application, Tsoi and FIL took a summons dated 17 January 2017 for their application to strike out Cheng’s claim in the present action (“the Striking Out Application”).

6.  Both applications are now calling for my determination at the same time pursuant to the order of G. Lam J dated 5 April 2017. The hearing of the Setting Aside Application was conducted in camera whereas the hearing of the Striking Out Application was open to public. In this Decision, which is publicly circulated, I shall deal with the Striking Out Application only and a separate written decision for the disposal of the Setting Aside Application shall be handed down in confidence.

7.  The two applications share the same background facts and Mr Bernard Man SC together with Mr James Man, for Tsoi and FIL, provided this court with a useful summary. Ms Yu, for Cheng, confirms with this court its accuracy save one qualification. Thus, this court gratefully adopts the summary and the abbreviations used therein as follows.

Background facts

8.  By a writ dated 25 November 2003, Tsoi and FIL instituted the Action against Cheng for, inter alia, specific performance of an agreement made between the parties in 2003 (the “2003 Agreement”) whereby Cheng should purchase 15,000 shares in Hang Heung Cake Shop Company Limited (“HHCS”) and 28,000 shares in Hang Heung Hop Kee Investment Company (“HHHK”) (collectively, the “Sale Shares”) from Tsoi and FIL in consideration of HK$20,000,000.

9.  Master Levy made the 2004 Order granting a decree of specific performance of the 2003 Agreement. On 2 April 2004, Cheng lodged an appeal against the 2004 Order. The appeal was dismissed by A. Cheung J (as he then was) on 15 October 2004 (“the Appeal”).

10.  Tsoi and FIL then proceeded to enforce the 2004 Order. On 7 February 2005, they obtained a charging order nisi against Cheng (the “Charging Order Nisi”) against the following shares owned by Cheng: (a) 21,200 shares in HHCS; (b) 28,000 shares in HHHK; (c) 1 share in K.T. Holdings Limited (“KT Holdings”); and (d) 4,405,764 shares in Honlex Investment Limited (“Honlex”) (collectively, the “Charged Shares”).

11.  KT Holdings and Honlex are companies owned and controlled by the members of Cheng’s family. KT Holdings, Honlex, Cheng and Cheng Hung Kung (an elder brother of Cheng) together held 75% of the total issued shares in HHCS.

12.  On 12 July 2005, Master Ho discharged the Charging Order Nisi (the “Discharge Order”). By Notice of Appeal filed on 26 July 2005, Tsoi and FIL lodged an appeal against the Discharge Order.

13.  Subsequently, DHCJ Saunders allowed the appeal and made the 2005 Order to vary paragraph 1 of the 2004 Order to the following terms:

(a) On or before 17 November 2005, Cheng do pay to Tsoi and FIL HK$20,000,000 and interest thereon (the “Outstanding Sum” or the “Debt”).

(b) Upon receiving the Outstanding Sum, Tsoi and FIL shall at the same time deliver to Cheng the bought and sold notes and instruments of transfer of the Sale Shares to Cheng.

14.  Further, by the 2005 Order, the Charging Order Nisi was made absolute (the “Charging Order”), but the execution thereof be stayed until further order, such Charging Order not to be enforced before 17 November 2005.

15.  Cheng did not pay the Outstanding Sum to Tsoi and FIL on or before 17 November 2005. He has still failed to pay to date.

16.  Since March 2016, in light of the imminent effluxion of 12 years following 17 November 2005, Tsoi and FIL embarked on a series of enforcement actions against Cheng in relation to the 2005 Order and the Charging Order.

17.  By an Originating Summons dated 29 March 2016 under HCMP 735/2016, Tsoi and FIL sought to enforce the Charging Order by seeking an order for sale of the Charged Shares.

18.  By an ex parte application made on 26 April 2016 under the Action, Tsoi and FIL sought to examine Cheng orally pursuant to RHC O.49B. On 6 May 2016, Master Ho granted an order for examination of judgment debtor (the “Examination Order”).  Cheng did not appeal against the Examination Order.

19.  On 1 June 2016, Tsoi served the Statutory Demand on Cheng in respect of the Debt, as well as the legal costs assessed at HK$78,000 under the 2005 Order (such legal costs have now been repaid). This prompted Cheng to make the Setting Aside Application.

20.  On 25 July 2016, the call-over hearing of the Examination Order took place before Master Leong. Without adducing any evidence, Cheng requested the substantive hearing of the Examination Order be adjourned until determination of Tsoi and FIL’s application in HCMP 735/2016 and the Setting Aside Application in HCSD 32/2016. Master Leong rejected Cheng’s request, and adjourned the hearing of the Examination Order to a date to be fixed with 1 day reserved. He also ordered Cheng to produce various documents before the adjourned hearing.

21.  On 5 September 2016, Anthony Chan J gave directions for the substantive hearing of the Setting Aside Application.

22.  On 20 October 2016, Cheng commenced the Action against Tsoi and FIL. The Statement of Claim (“SOC”) was filed on 27 October 2016 seeking the following relief:

a. A declaration that by reason of estoppel/laches Tsoi and FIL are precluded from enforcing the 2005 Order;

b. Further or alternatively, variation of the 2005 Order for damages in lieu of specific performance and an enquiry into the damages; and

c. An order that the enforcement proceedings in HCA 4341/2003, HCMP 735/2016 and bankruptcy proceedings in relation to the 2005 Order be dismissed.

23.  At the call-over hearing of HCMP 735/2016 on 8 November 2016, Master R. Lai adjourned HCMP 735/2016 sine die with liberty to restore in light of the disputes in HCSD 32/2016 and HCA 2742/2016.

24.  On 20 December 2016, as a result of Cheng’s failure[1] to comply with the disclosure obligations specified in the order of Master Leong dated 25 July 2016, the hearing of the Examination Order was further adjourned. The adjourned hearing is now scheduled to take place before Master A. Ho on 19 July 2017.

25.  Against this background, Tsoi and FIL made the Striking Order Application.

Grounds of Striking Out

26.  The major ground of Cheng’s claim is equitable estoppel. This plea is premised on an allegation that Tsoi on behalf of FIL and he himself made the following oral representations to Cheng (“the 2007 Representations”):

(1) The performance of Cheng of his obligations under the 2005 Order is suspended and would only be enforceable upon his success in raising sufficient funds from financiers to pay the purchase price of the Sale Shares, i.e. the Sum;

(2) once funds were raised from the financiers, Cheng would complete the purchase of the Sale Shares by paying Tsoi the Sum by instalments.

27.  Cheng further alleges that it was the common understanding between the parties and an implied representation from Tsoi that in exchange of Tsoi and FIL’s forbearance not to take action to enforce the 2005 Order, Cheng would employ all reasonable means to ensure the profitability and ongoing business of the HHCS.

28.  Cheng alleges that in reliance of the 2007 Representations, Cheng acted to his detriment in the following manners:

(1) He sought/continued to seek financial assistance for the HH business, took out personal loans on behalf of HHCS; paid interest on loans on behalf of HHCS and acted as guarantor of loans taken out by HHCS;

(2) He continued to be heavily involved in the management of the HHCS business ensuring the quality of its cake products and ongoing profitability until around June 2011, when the creditors of Cheng took over the management of the business; and

(3) As director and majority shareholder of HHCS and HHHK, Cheng did not press for the active litigation relating to certain loans extended to Tsoi by HHCS against Tsoi.

29.  Mr Man confirms that they do not rely on the ground that the pleading of Cheng does not disclose any cause of action in respect of this plea of equitable estoppel. Rather, he invites this court to examine the evidence and conclude that it is plain and obvious that the allegations of Cheng are hopeless. I first turn to the factual allegations of Cheng underpinning his plea.

30.  In his affirmation, Cheng alleged that on a day in 2007, Tsoi telephoned him and asked him to meet at Pizza Hut in Happy Plaza, Yuen Long near his residence. He did so and during the meeting, Tsoi gave him a document written in the Chinese language containing his proposal (“the Document”) for the consideration of Cheng.

31.  Cheng found the proposal to be reasonable and immediately he indicated to Tsoi his agreement to the same. However, Cheng did not sign the Document. He alleges that the parties have implicitly agreed that should Tsoi wish to resume enforcement of the 2005 Order, he would at the very least give reasonable notice to him, so that Cheng would have a final opportunity to find a financier under their agreement as embodied in the Document.

32.  Tsoi categorically denies his alleged creation of the Document and the 2007 Representations. He claims that it is a complete fiction. He goes on to explain why it is inherently improbable that he reached such an agreement with Cheng.

33.  Thus, there is clearly a serious factual dispute as to the existence of the 2007 Representations, which is the basic element of Cheng’s plea of equitable estoppel. Either party must have told this court a blatant lie on oath and I fail to see that there can be a halfway house. In light of the established principles governing striking out applications, in particular that there should be no trial upon affidavits and that disputed facts were to be taken in favour of the parties sought to be struck out, there appears to be a mammoth task for Mr Man to convince this court that an order of striking out is still appropriate in spite of the factual disputes.

34.  Mr Man manfully handled the difficulty of his application by placing particular emphasis on the fact that the Document was not signed by the parties despite its alleged importance to Cheng. Indeed, Cheng in his affirmation says that he has throughout the years kept the Document as evidence of the 2007 Representations and his agreement to the same.

35.  Mr Man makes two points. First he submits that in the absence of the signature of Tsoi in the Document, even if this court accepts all the evidence of Cheng relating to the 2007 Representations, Tsoi has not made any clear and unequivocal promise, which is essential to the plea of equitable estoppel: Luo Xing Juan v Estate of Hui Shui See (2009) 12 HKCFAR 1 at §55 per Ribeiro PJ.  On this basis, his plea must be struck out.

36.  I cannot agree to this submission. Upon a fair reading of the affirmation of Cheng, his allegation is that Tsoi’s oral offer, by way of the 2007 Representations, was reflected in the Document. I note that the contents of the Document do not really have the full effect of the 2007 Representations. Cheng’s immediate indication of his agreement to the said offer should suffice to conclude the deal orally even the parties did not sign the Document. Tsoi’s failure to sign the Document to confirm the accuracy of the contents of the Document cannot impugn the validity of his oral offer and alter its clear and unequivocal nature.

37.  Mr Man further submits that on the evidence, the 2007 Representations have no chance to be established.

38.  To start with, he submits that there is no reason why Tsoi would on his own initiatives propose to Cheng to forebear from proceeding with the enforcement of the 2005 Order and the Charging Order so as to allow Cheng more time to look for financial assistance in July 2007. The fact that the Document was not signed is inexplicable and cries out for explanation. Nonetheless, Cheng said nothing about this.

39.  I agree that the allegation of the 2007 Representations is conspicuously suspicious against the background facts. I am not persuaded by Ms Yu’s submission to the effect that the alleged forbearance served significant commercial interest to Tsoi. If the three loan actions against Tsoi had been one of the important considerations, Tsoi should have made an express reference to those actions in the Document purportedly drafted by him. Those actions were not even mentioned in the 2007 Representations.

40.  The Document was entitled Repayment Agreement. It contained no obligation on the part of Tsoi and FIL to withhold the enforcement of the 2005 Order. There, it was expressly provided that the parties were required to sign the same to confirm their agreement. The execution was required to be witnessed by a witness and the identity card numbers of the parties were printed under their names.

41.  The uneasy relationships between the parties, mildly put, is clear in light of their legal actions including the Examination Order. Even if Tsoi had generously agreed to make a huge concession and give Cheng some breathing space of his own volition, I would not accept that he would have found it necessary to take the trouble to prepare the Document and require the parties’ signatures to confirm its contents. If he had done so, it is only unreasonable that Tsoi at the end did not sign the Document himself.

42.  On the other hand, given the extraordinary indulgence given by Tsoi and FIL, I do not believe that Cheng would allow the Document to remain unsigned so as to avoid Tsoi’s resiling from the agreement. At the very least, he himself should sign the Document and then ask Tsoi to do the same. There is no evidence that he had done anything to cause the Document duly executed as per the 2007 Representations over the years though he allegedly has treated it as important and serious evidence of the alleged agreement. It must be clear to him that the parties’ signatures on the Document would be of critical importance to prove the alleged agreement made orally.

43.  The last straw is that Cheng did not proffer any credible explanation for the lack of signatures in the Document at all. It is plain to me that the story built around the Document and the 2007 Representations is a sheer fabrication.

44.  I am well aware of the high threshold of striking out applications and the danger of attempting to resolve factual disputes on affidavits. However, I do not think that this court must accept factual allegations despite their incredibility. Mr Man refers to this court the following dictum of Godfrey Lam J in Lam Kit Sing v Chungshan Commercial Association, Hong Kong, unreported, HCA 2011/2014, 29.6.2016 at §18:

“Ms Catrina Lam, who has appeared with Mr Martin Ho on behalf of the plaintiff, argued that on a strike-out application, the factual allegations in the pleading in question must all be taken as true. While that may be the proper approach in most applications, Ms Lam’s proposition is in my view too widely stated. There are authorities that show that the court’s power to strike out a pleading can be exercised where it is plain and obvious that the plaintiff’s case has no factual basis: Oh Jae-Hoon, Eugene v Richdale [2004] 4 HKC 315, at paragraph 15, or has no “solid basis capable of proof” and is a “myth” with “no substantial foundation”, per Lord Herschell in Lawrence v Lord Norreys (1890) 15 App Cas 210, 220, or presents “a tissue of improbabilities which ought not to be sent to proof”, per Lord Watson at page 222; see also Overseas Trust Bank v Coopers & Lybrand [1990] 1 HKLR 568 at 583. Thus if a plaintiff pleads as a fact something which can clearly be shown to be incontrovertibly false, then on an application to strike out on that basis the court is not bound to accept the allegation as true and to proceed on a fictional basis.”

45.  Mr Man also relies on Beijing Tong Gang Da Sheng Trade Co Ltd v Allen & Overy [2015] 3 HKLRD 247. There, Kwan JA, with whom Cheung CJHC and Lam VP agreed, upheld the decision of DHCJ Le Pichon to strike out the writ and the statement of claim. The deputy judge accepted that the usual rule in a striking out application that the court would normally take the opposing parties affidavits to be true does not apply when the party’s material assertions were not supported by the necessary documentary evidence despite ample opportunities to adduce such evidence. Kwan JA endorsed her observation and concluded that the gaps in the plaintiff’s evidence were intentionally unfilled, creating self-induced disputed issues. The inference to be made was that there was no solid basis for the disputed assertions made by the plaintiff. Hence, his claim was liable to be struck out.

46.  In the present case, the plea of equitable estoppel is premised upon a bare assertion of the 2007 Representations, purportedly evidenced by the Document, which was dubiously unsigned without any explanation. By reason of the foregoing analysis, it is plain and obvious to me that the assertion has no factual basis and has no solid basis capable of proof. It presents a tissue of improbabilities and is incontrovertibly false in my view. I believe this is one of those cases which justifies an evidentiary approach and I am of the view that a striking out order should be made to call a halt to Cheng’s hopeless plea.

47.  For completeness, I should add that the plea also suffers another intractable problem as pointed out by Mr Man. Even on the evidence of Cheng, the 2007 Representations do not constitute a permanent non-enforcement of the 2005 Order. Cheng merely alleges that Tsoi should give him reasonable notice of his intended resumption of the enforcement of the 2005 Order so as to afford him a final chance to find a financier.

48.  As such, the alleged estoppel is only suspensory in nature. Cheng could resume his position upon being given reasonable notice. The alleged promise of  Tsoi by way of the 2007 Representations had therefore not yet become final and irrevocable and there could be no equitable estoppel: Emmanuel Ayodeji Ajayi v R.T. Briscoe (Nigeria) Limited.[1964] 1 WLR 1326 at 1330 per Lord Hudson.

49.  In the present case, the Statutory Demand served on Cheng must serve to be a clear and unequivocal notice that Tsoi intended to enforce to 2005 Order. Yet, Cheng has made no payment of the Debt or any part of the same. There is no evidence that Cheng had ever looked for a financier to assist his payment of the Debt. Cheng has plainly shown that he has no intention to pay the Debt at all pursuant to the Statutory Demand.

50.  Mr Man next argues that the pleaded detrimental reliance could not be sufficient. Given my conclusion on the non-existence of the 2007 Representations, I need only point out that whether such detrimental reliance is sufficiently detrimental to the interest of Cheng to feed the estoppel could not be resolved at this stage in light of the high threshold.

Laches and acquiescence

51.  Ms Yu submits that the 2005 Order is not enforceable by reason of laches and acquiescence on the part of Tsoi and FIL in that:

(1) they were guilty of prolonged, inordinate and inexcusable delay in enforcing the 2005 Order;

(2) they acquiesced in the non-enforcement of the 2005 Order and caused or permitted Cheng to believe that Tsoi did not intend to enforce the 2005 Order, such that Cheng would now be prejudiced; and

(3) to the knowledge of Tsoi and FIL, Cheng suffered prejudice and hardship and/or circumstances which have arisen making specific performance an inappropriate remedy.

52.  In respect of this claim, Mr Man makes a short point: laches and acquiescence have no application if the cause of action is subject to a statutory limitation period. His submission is supported by good authorities and appears to be a complete answer.

53.  First, in Incorporated Owners of So Tao Centre v Lam Kong Wan, unreported, CACV 158/2007, 12.12.2007, the trial judge refused to award default interest as provided for in the DMC on the basis that there had been unreasonable delay on the part of the plaintiff causing prejudice to the defendant. The DMC was a document under seal and the relevant limitation period is 12 years. Le Pichon JA applied the well-settled law that the equitable doctrine of laches has no application where there is an express statutory provision providing a period of limitation for the plaintiff’s claim, making reference to In re Pauling’s Settlement Trusts [1962] 1 WLR 86, 115 affirmed [1964] Ch 303, 353. Her ladyship concluded that there was no basis upon which the trial judge could have cut down the plaintiff’s legal entitlement to default interest to a two-year period and therefore allowed the appeal.

54.  In Re Li Man Hoo (A Debtor) [2013] 4 HKLRD 247, Barma JA held that “action” referred to in section 4(4) of the Limitation Ordinance, Cap.347 (“the LO”) has the very wide meaning attributed to it by section 2 of the LO and it includes legal proceedings by way of bankruptcy or winding-up petitions based on a judgment debt. Under section 4(4) of the LO, an action upon judgment shall not be brought after 12 years from the date on which the judgment became enforceable.

55.  In view of these two binding authorities, the clear conclusion to be drawn in the present case is that the enforcement of the 2005 Order should be time-barred only after a lapse of 12 years since its making. Accordingly, Cheng cannot rely on the equitable doctrine of laches and acquiescence to prevent Tsoi and FIL from taking steps to enforce the 2005 Order when the statutory limitation period had yet to expire.

56.  I should also make it clear that I accept submission of Mr Man that the service of the Statutory Demand is a step to enforce the 2005 Order and not an enforcement of the 2003 Agreement or the specific performance remedy in the Action.

57.  In the premises, I accept that the plea of laches and acquiescence is not sustainable in law. It must be struck out.

Abuse of process

58.  Mr Man lastly relies on the doctrine of Henderson v Henderson and submits that the present action is, irrespective of its merits, an abuse of process, which can take many forms such as oppression, and just harassment and bringing the administration of justice into disrepute by using the resources of the court: Ko Hon Yue v Chiu Pik Yuk (2012) 15 HKCFAR 72.  

59.  The gravamen of his complaint is that prior to the commencement of the present action, there have already been ongoing enforcement proceedings in the Action. Cheng should seek to enforce the alleged agreement including the 2007 Representations in the Action or in any one of the enforcement proceedings (e.g. HCMP 735/2016 and HCSD 32/2016) instead of instituting the present action.

60.  Initially I had doubt as to the feasibility of Cheng’s raising the allegations in the present action and establishing the 2007 Representations in the enforcement proceedings in the Action to forestall any enforcement of the 2005 Order. For example, the hearing of the Examination Order concerns primarily the cross examination of Cheng about his assets and does not really involve Tsoi and FIL. There are technical difficulties in handling the factual disputes as to the existence of the alleged agreement between the parties.

61.  However, on second thoughts, I am of the view that there is no reason why Chang cannot establish his grounds in the present action to avoid enforcement of the 2005 Order in the Action. To begin with, he could have applied for a stay of execution by way of his affirmations setting out all his allegations in the present action and Tsoi could come back with his denials in his opposing affirmations.  The deponents could be required to be cross-examined on their affirmations so that factual disputes could be resolved in the conventional manner. Pending the determination of such an application for a stay of execution, all other enforcement actions could be stayed. This single application could save Cheng the legal costs incurred in or other enforcement proceedings as well.

62.  I have perused the relief claimed in the SOC, which are set out above. Apart from the declaration sought to the effect that Tsoi and FIL are precluded from enforcing the 2005 Order because of estoppel/laches, Cheng also asks to vary the 2005 Order for damages in lieu of specific performance because of the delay in their enforcement actions and hence an enquiry into the damages. He also prays that all the enforcement proceedings relating to 2005 Order be dismissed.

63.  For the former, I am unable to accept that Cheng can as a matter of law ask the court to vary an order in the Action (which he failed to do in the Appeal) in another action. For the latter, I agree with Mr Man that it is totally unheard of to seek adjudication or dismissal of other proceedings by way of a fresh writ action.

64.  In the circumstances, I agree with Mr Man that the present action is an abuse of process in that it causes unjustifiable harassment to Tsoi and FIL and misuses the judicial resources. The present action has to be struck out on this ground as well.

Conclusion and order

65.  By reason of the foregoing analysis, I am of the firm view that all the grounds of striking out have been made out. Accordingly, I make an order that the SOC be struck out and the present action be dismissed.

66.  There is no reason why the general principle of costs following the events should not apply. I make an order nisi I that the costs of the present action including this application be borne by Cheng, to be taxed if not agreed, with a certificate for two counsel.