PACIFIC ELECTRIC WIRE & CABLE CO LTD v. HARMUTTY LTD AND OTHERS

HCA 2203/2004
HCA 2746/2004
HCA 2763/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2203 OF 2004

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BETWEEN

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HCA 2746/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2746 OF 2004

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BETWEEN

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AND

HCA 2763/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2763 OF 2004

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(Heard together)

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REASONS  FOR  RULING

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Background

1.  In these three actions, through which there runs a common thread enabling them to be conveniently heard together, the plaintiff, Pacific Electric Wire & Cable Co Ltd, (PEWC), seeks summary judgment pursuant to O 14 r 1.

2.  The common thread uniting the three actions is an allegation that three senior officers of PEWC, Tung Yu Jeh, formerly the Chairman, Sun Tao Tsun, formerly the President, and Hu Hung Chiu, formerly the Chief Financial Officer and Executive Vice-President, had channelled, by means of false accounting, a large amount of PEWC’s funds into hidden investments, concealed through a maze of companies managed from Hong Kong.

3.  The three actions now before the court are actions against PEWC’s three former officers, and the companies allegedly used by them, in which PEWC seeks to recover properties purchased with PEWC’s funds.  In addition to seeking to recover actual properties allegedly acquired with PEWC’s funds, the proceedings seek also to recover the proceeds of sale of properties so acquired, and rentals and disposal proceeds in relation to properties so acquired, and other consequential orders.

4.  The property primarily in issue constitutes shares in PacMos Technologies Holdings Ltd, (PacMos), commercial property constituting the West Commercial Centre of the South Horizons residential complex at Ap Lei Chau, together with car parks, land and buildings at Shouson Hill, and sums of money arising from that property.

The Order 14 applications:

5.  PEWC now makes application for summary judgment under Order 14 contending that the case against certain of the various defendants, essentially the current holders of the properties, is unanswerable and accordingly there ought to be judgment now.

6.  In HCA 2203/2004, (the PacMos action), PEWC seeks summary judgment against Texan Management Ltd, the 1^st Defendant, (Texan), Pacific Capital (Asia) Ltd, the 3^rd Defendant, (PC Asia), All Dragon International Ltd, the 4^th Defendant, (All Dragon), and Super Wish Ltd, the 7^th Defendant, (Super Wish), by way of declarations that PacMos shares held by those companies were held in trust for PEWC, together with consequential orders.

7.  In HCA 2763/2004, (the South Horizons action), summary judgment is sought against Haddowe Ltd, the 2^nd Defendant, (Haddowe), and Casparson Properties Ltd, the 3^rd Defendant, (Casparson), seeking the return of the West Block of the Horizons Commercial Centre, and accounting for rentals received and other consequential orders.  Summary judgment has also sought against Blinco Enterprises Ltd, the 18^th Defendant, (Blinco), and Patagonia Ltd, the 19^th Defendant, (Patagonia), both BVI companies, for the return of shares in a company known as PCL Holdings Ltd, (PCHL).  Third, summary judgment is sought against Harmutty Ltd, the 1^st Defendant, (Harmutty), for the return of shares it owns in Haddowe and Casparson.

8.  In HCA 2746/2004, (the Shouson Hill action), summary judgment is sought against Greateam Ltd, the 3rd Defendant, (Greateam), for the return of the Shouson Hill property and accounting for the dealings with that property, and against Gold Global Ltd, the 1st Defendant, (Gold Global), and PCL Nominees Ltd, the 2nd Defendant, (PCL Nominees), for the return of shares those companies own in Greateam.  Summary judgment is sought also against Harmutty, the 8th Defendant, for the return of shares in Gold Global and Greateam, together with money received and forfeited in an aborted sale of the Horizons Commercial Centre.

The issue:

9.  On reading the skeleton submissions it became immediately apparent to me that the defendants intended to argue that the action included a claim by the plaintiff, based upon an allegation of fraud, and consequently the bar to summary judgment contained in O 14 r 1(2)(b) prevented PEWC from pursuing an application for summary judgment would operate to defeat the applications.  If that argument were successful, it would not be necessary to hear detailed argument on the substantive summary judgment application, and I heard argument on that point first.

10.  Having heard from all counsel I ruled that in the circumstances of the three actions, the fraud exception to O 14 was not a bar to PEWC seeking summary judgment against the particular defendants who had been made parties to the summary judgment application.  I said that I would give my reasons for the ruling when delivering judgment on the application for summary judgment.

11.  Mr Neoh then sought to introduce an amendment to the statement of claim in the PacMos action, and the South Horizons action, the amendments being designed to clarify the fact that PEWC intended to rely upon the cause of action known as “money had and received”, a cause of action which Mr Neoh frankly conceded was “subsumed” within the statements of claim as drawn.

12.  Ultimately, Mr Westbrook and Mr Smith offered no objection to the amendments but required time to deal with those amendments.  The cause of action had been sufficiently subsumed in the statement of claim that they had, reasonably in my view, not appreciated that that particular cause of action formed part of the case.

13.  I have accordingly adjourned the applications for summary judgment, to be set down for six days commencing 30 August 2007.  The adjournment was on terms as to costs to be paid by PEWC, and with the clear understanding that a re-amended statement of claim, and appropriate verifying affidavit, will be filed promptly, and that re-amended defences, together with any affidavits the defendants may wish to file, will be equally promptly filed.

14.  As it will be some time before judgment on the summary judgment application will be given, I now give reasons for my ruling that, in the particular circumstances of this case, the fraud exception to O 14 does not apply.

The relevant law:

15.  O 14 r 1(2)(b) states:

“(2)   Subject to paragraph (3) this rule applies to every action begun by writ other than-

(b)     an action which includes a claim by the plaintiff based on an allegation of fraud,”

Paragraph (3) does not apply in this case.

16.  The exclusion in the rule is to be construed narrowly, and is confined to an action based on fraud strictly defined in Derry v Peek (1899) 14 App Cas 337, and has been held in Hong Kong not to include an action based on fraud on the minority: see Tan Eng Guan & Anor v Southland Company Ltd & Ors [1996] 2 HKLR 117 CA.  The practice noted in Hong Kong Civil Procedure Vol 1, 2007, at 14/1/1, records that notwithstanding the narrow definition of fraud, save in the clearest possible case, it is inappropriate for the court to decide in summary proceedings whether a defendant has been fraudulent or dishonest.

Discussion:

17.  While the statements of claim and three actions do not expressly use the word “fraud”, Mr Neoh readily accepted that the conduct of the three former executives of PEWC in diverting funds from the company by way of false accounting may be characterised as a fraud.  Mr Neoh argues that the concealment of the conduct that had taken place, by those executives, from PEWC, was itself a fraud, a submission that may be necessary in relation to limitation issues.

18.  Both Mr Smith and Mr Westbrook, while accepting that in Hong Kong the exclusion is to be construed narrowly, contended that the fraud being at the centre of the claims, the matter was not appropriate for summary judgment, as to give summary judgment would be to hold that a fraud had been committed.

19.  The causes of action upon which Mr Neoh relies to seek summary judgment do not include a cause of action based on an allegation of fraud.  Three causes of action are pursued in the summary judgment applications against the various defendants who are to be subjected to that procedure.  They are first, allegations based upon a resulting trust, second, allegations based upon a constructive trust, and third, a claim based upon money had and received. 

20.  Mr Neoh’s argument, which I accepted, was that in relation to each of those three causes of action, while a fraud was the means by which the funds were transferred out of PEWC, and were concealed from PEWC, it is not necessary for the plaintiff to establish the fraud to establish the cause of action.  It is sufficient, Mr Neoh says, if he can demonstrate simple that PEWC’s funds were used for the acquisition of the property.  The particular means by which the funds came to be used in that way, while interesting and illustrative, do not constitute an essential step in the causes of action.  The crucial element is not how the funds came to be used, but that PEWC’s funds were used to acquire the property.

21.  I was satisfied that in order to find liability upon the causes of action upon which Mr Neoh relies, a finding of fraud, in the classic sense, is not required.  That said, I record that Mr Neoh appreciates the heavy burden upon him having regard to the requirement of knowledge involved in establishing a constructive trust.

Conclusion:

22.  I was accordingly satisfied that the claims upon which summary judgment was sought do not include claims by PEWC based upon an allegation of fraud, such as to bring into operation the provisions of O 14 r 1(2)(b).  It is accordingly open to PEWC to seek summary judgment.