MICHAEL YAP AND ANOTHER v. LAI YIP DYEING FACTORY LTD AND OTHERS

HCA 1084/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1084 OF 2011

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D E C I S I O N

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THE APPLICATION

1. The 2^nd defendant (“D2”), the 3^rd defendant (“D3”) and the 4^th defendant (“D4”) (collectively called respective “Ds”) took out this application by way of summons to amend their respective Defence and Counterclaim dated 6 October 2011, some five and a half years ago.

2. The plaintiffs (“Ps”) oppose this application.

3. The parties are legally represented.[1]

THE GROUNDS OF OPPOSITION

4. Ps oppose this application on the grounds as follows:

(a)  The proposed amendments are bound to fail;

(b)  The amendments do not help to determine the real question in controversy (in fact, they are blatantly misleading the Court and are bound to fail);

(c)  The amendments do not correct any defects or error;

(d)  The amendments are useless, inconsistent or irrelevant; and

(e)  The amendments should not be allowed for the need to ensure the case to be dealt with fairly and expeditiously.

THE BRIEF FACTS

5. Both parties have submitted their alleged brief facts for this hearing and Ps submit that they agree to most of the facts as alleged by Ds, but they disagree the others.  The difference in the facts in dispute will have to be resolved in the trial.  Since this is Ds’ application, this Court will rely upon Ds’ case.  See paragraph 2 of Bank of China (Hong Kong) Limited v Leigh Hardwick (unreported, HCA 1110/2006, A. Chan J., 28 August 2013)

6. P1 is the controlling shareholder of P2.  Win Talent Development Limited (“Win Talent”) and Koyo Investment Ltd (“Koyo”) are P1’s nominee companies. Pursuant to a loan agreement dated 21 July 2005, P1 and D4 had made a loan of HK$15 million to D1, guaranteed by D2 and D3.  This is the 1^st loan.  A second loan for the amount of HK$30 million was lent by P2 to D3 and D4.  It is agreed that D1 was unable to repaid the 1^st loan and a default judgment has been entered against it on 15 September 2011.

7. With a view to having P1 participating in D1’s business, arrangements had been made whereby 3,000,000 shares of D1 were transferred to P1’s nominee companies, by D4 who also held the shares on trust for D2 and D3.[2]

8. The partnership between P1 and D1 fell out in 2010.  It is Ds’ case that by then they agreed with P1 that the share transfer price should be determined based upon the fair market value of D1 as on 9 November 2007.  They say that the value of the shares exceeds the loans by Ps to them and there should be surplus which they now counterclaim against Ps.  It is Ps’ case that those shares were bought by P1 by way of separate transactions unconnected with the loans.

THE AGREED ISSUES FOR RESOLUTION AT TRIAL

9. The parties agree the following issues in dispute:

(a)  Whether the interest rate claimed by P1 against Ds arising from the 1^st Loan Agreement is extortionate and unreasonable;

(b)  Whether the loan arising from the 1^st Loan Agreement has been paid by D2 and D3;

(c)  Whether the loan arising from the 2^nd Loan Agreement has been repaid by D3 and D4;

(d)  What is the value of the 2,999,999 shares of D1 as at 9 November 2007;

(e)  Whether the consideration of transferring of the 2,999,999 shares of D1 by D4 to Win Talent could set off the repayment of the loans under the 1^st and 2^nd Loan Agreement;

(f)  Whether D4 was holding 16.35% of his 2,999,999 shares of D1 on trust for D2 and another 16.35% of his 2,999,999 shares of D1 on trust for D3 as at 9 November 2007.[3]

10. Those issues above are set out by Ds and agreed by Ps.  Even if the amendments were allowed, the pleadings would be further amended as well, such as the number of shares in D1 transferred to P1’s nominee companies will be 3 million instead of 2,999,999 and a person called Leung Ting Kuen should be deleted from the pleadings because he had transferred his one share back to D4, who then transferred the total of 3 million shares in D1 to P1’s nominees.  These discrepancies were pointed out Ps’ counsel this morning and agreed by Ds’ counsel.

THE RELEVANT LEGAL PRINCIPLES

11. There is really not much difference between the parties on the legal principles for this application.  The relevant authorities are set out in the following cases cited by the parties:

(a)  Topwell Corp Ltd v Kwan Kam Kee [2014] 5 HKLRD 1;

(b)  Tsang Foo v Chu Jim Mi Jimmy (unreported, HCA 7140/1995, 8 October 2013);

(c)  Liu Kam Hoi & Others v Liu Ping Kuen, the personal representative of the estate of Liu Fun Kee (unreported, HCA 6728/1998, 22 December 2010).

12. Interlocutory applications are usually matters for the court’s discretion in case management for a fair trial of the matter. The court will bear in mind the following factors in its exercise of discretion:

(a)  Order 1A, r.2(2), the underlying objectives;

(b)  The court’s duty to prevent abuse for a fair trial; and

(c)  The court being guided by the authorities of the higher courts.

See paragraphs 11-18 in Lam Sai Wan v Minloy Ltd. (unreported, HCA 31/2014, 18 October 2016)

DISCUSSION

13. Ps have raised those grounds as set out in paragraph 4 above in their opposition.  They will be discussed below.

The 1^st ground: the proposed amendments are bound to fail

14. Ps complained of inconsistency in the proposed amendments, which are contradicted by Ds’ witness statements.  In my preparation for this hearing, I found that it was not easy to identify from the reference of Ps’ counsel’s written submissions to the documents in the bundle.  See paragraphs 27 and 28 of the Ps’ written submissions.  I am grateful for respective counsel’s assistance for their further written submissions.

15. Ps’ complaint is that in the proposed amendments, Ds pleaded that D4 was holding one third of D1’ shares for D2 and D3 whereas in the witness statements, he said he was holding 16.35% of D1’s shares only.  Ds’ counsel accepts this discrepancy. But she submits that supplemental witness statements will be prepared to rectify this discrepancy.  However, she further submits that, given such discrepancy, Ps cannot argue that Ds are bound to fail in their respective Defence and Counterclaim because this is a matter of discrepancy between the pleadings and the evidence in support, which should be addressed by the parties and determined by the trial judge.  I agree.  The legal principle of “bound to fail” should refer to the case of the applicant rather than the discrepancy of the evidence.

16. The next discrepancy complained by Ps is that Ds had cherry picked the positive assets of D1 from the expert report as the basis of their proposed amendments.  But their experts had already set out in the joint expert report that D1’s assets should be negative. Ds’ counsel explains that the positive figure is the going concern basis of D1, which both experts had already agreed in their joint statement.  This is the reason why Ds had adopted the positive figures.  In the circumstances, this issue should be resolved by the trial judge as this Court should not go into the evidence, in particular, the expert evidence where the experts are not available for assistance.

17. This ground does not support Ps’ argument.

The 2^nd ground: the amendments do not help determine the real question in controversy

18. Ps admit that they had notice of the amendments intended before this application from Ds’ respective Defence and Counterclaim as indicated in the Listing Questionnaire dated 8 June 2015 [238].  Ps’ criticism is that Ds intend to plead the evidence in the pleadings. Ds’ case is that the value of D1’s shares transferred by Ds to P1’s nominee companies exceeded the loans advanced by Ps.  They have to state the value of D1’s shares.  I do not accept that this approach is, as Ps submit, “putting the cart before the horse”.  Ps then complain that the evidence of the expert was wrong and might mislead the court.  This is a question for the trial judge. In interlocutory proceedings, no mini-trial is necessary.  The court is required to come to a conclusion on the material before it.  Liaoyang Shunfeng Iron and Steel Company Limited (遼陽順鋒鋼鐵有限公司) & Another v Yeung Tsz Wang (楊梓鈜) & Another (unrep., CACV 234/2011, Hartmann JA, 14 June 2012 §107).  This legal principle will apply to other arguments below where Ps complain that the facts as pleaded in the proposed amendments are not correct.  To disallow Ds’ application will simply deny their opportunity of putting their case to the trial, which is unfair in the circumstances.  This ground fails to support Ps’ argument.

The 3^rd ground: the amendments do not correct any defects or error

19. This ground fails in limine as Ds are in fact seeking to correct the facts, by substituting 3 million shares in D1 for 2,999,999 shares as originally pleaded.

The 4^th ground: the amendments are useless, inconsistent or irrelevant

20. Ps complain that the amendments bring in the one share assigned by D4’s trustee, Leung Ting Kuen to P1’s nominee company, Koyo, is useless as the value of it is only HK$38.7.  It is obvious that the purpose of such amendment is not on the quantum, but rather on the factual situation of the deals among the parties.  It is also obvious that bringing in Leung Ting Kuen by the proposed amendments will be unnecessary as Ds agreed.  The facts will be set right in the subsequent amendments.

The 5^th ground: Need to ensure case to be dealt with fairly and expeditiously

21. It is indeed a long time since the institution of these proceedings, a lapse of five and a half years, that this application is taken out for the amendments to the Defence and Counterclaim.  This Court will, of course, take this factor on board when exercising its discretion.

22. Exercising the discretion is very much a balancing act, taking all relevant circumstances into consideration.  The fundamental principle for the court to exercise its discretion is fairness as the Court of Final Appeal in Poon Hau Kei v Hsin Chong Construction Co Ltd Taylor Woodrow International Ltd Joint Venture (2004) 7 HKCFAR 148 at §21, citing Bank of America v Chai Yen [1980] 1 WLR 350 at p353 D, Lord Lane, delivering the advice of the Privy Council: “ ‘the essence of any rule of procedure must be fairness’.  The same is true of any rule of practice.”

23. Ds had given notice to Ps of the prospect of amendment in the Listing Questionnaire because they required expert evidence to support their claim that the value of D1’s shares which they had transferred to Ps exceeded the loans.  They had obtained expert evidence on this issue. They also want to rectify the facts of their case by saying that instead of 2,999,999 shares in D1 were transferred to P1’s nominee companies, the number of shares in D1 should be 3 million, adding one more share from D4.  Fairness of a trial dictates that the defendants must be allowed to plead their amended cases to the court unless such amendments will cause disadvantage or prejudice to Ps which cannot be compensated by costs or such amendments are abusive of the legal proceedings rendering unfairness to Ps in the trial.  The burden is on Ps to persuade this Court of such disadvantages.  Topwell Corp Limited.

24. Having considered Ps’ grounds and for the reasons above, I am not satisfied that Ps are able to discharge this burden.  As such, Ds must be given leave to amend their respective Defence and Counterclaim.  So I order.

25. As to the costs of this application and the costs for the hearing today, Ps ask for costs for the reasons that Ds have made some mistakes on their amended cases.  They have accepted that Leung Ting Kuen should not be pleaded and that the proportion of the shareholding is not correct.  They are also late in their application, almost six years from the claim being first launched.  Ds did not file their supporting affidavits in support of their application.  The supporting affidavits were filed and served about five months later. The 2^nd affirmation of Chung Lim Tung was wrongly described.  It should be the first affirmation.  This has wasted Ps’ time for clarification.  This Court will certainly take all the factors into consideration as provided under O.62, r.5 RHC.  But all these factors do not change the general legal principle that the costs should follow the event. Only the quantum of costs should be affected.  Overall, Ds are successful in their application for amendment of their respective Defence and Counterclaim.  The costs of and occasioned by the application will be given to the Ps, to be taxed if not agreed, by Ds.  The costs of today’s hearing, together with the costs reserved should be to Ds.  Taking into consideration of the circumstances as described above, Ds will have only 75% of the costs.  The assessed costs are $49,500 to be paid by Ps to Ds (with certificate for counsel) within 14 days from the date hereof.

26. This Court shall now make an order in terms as follows:

(a)  Leave be given to Ds to amend their respective Defence and Counterclaim as per the draft subject to the deletion of Leung Ting Kuen;

(b)  Ds shall serve their respective Amended Defence and Counterclaim within 7 days from the date hereof;

(c)  Ps be at liberty to serve their Amended Reply and Defence to Counterclaim in respect of Ds’ Amended Defence and Counterclaim respectively within 28 days thereafter;

(d)  Costs of this application and the costs of the hearing today be as per paragraphs 25 above.