TELECOMMUNICATIONS & TECHNOLOGY ASIA (BVI) LTD v. OUTBLAZE LTD AND ANOTHER

HCA 2541/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2541 OF 2009

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J U D G M E N T

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1.  There are two summonses before the court:-

(1) the 1^st Defendant’s application dated 23 July 2010 to strike out the Writ and the Statement of Claim under Order 18 rule 19 of the Rules of the High Court and/or the inherent jurisdiction of the court on the grounds that they disclose no reasonable cause of action against the 1^st Defendant and/or they are an abuse of the process of the court, and for an order that the Plaintiff’s action against the 1^st Defendant be dismissed with costs; and

(2) the Plaintiff’s application dated 8 November 2010 to amend the Statement of Claim, effectively to reconstitute the present action as an action brought by the Plaintiff in its own right against the 1^st Defendant.  In the existing the Writ and Statement of Claim, the Plaintiff is suing on its own behalf and on behalf of all other shareholder of the 2^nd Defendant other than the 1^st Defendant by way of a derivative action.

2.  The background facts giving rise to these applications can be shortly stated as follows.

3.  The 1^st and 2^nd Defendants are each a company incorporated in Hong Kong, and the Plaintiff is a company incorporated in the British Virgin Islands.

4.  The 1^st Defendant currently holds 28% of all the issued share capital of the 2^nd Defendant, and the Plaintiff 29%.  There is a third shareholder of the 2^nd Defendant, namely, Shun Hing Overseas Investment Limited, which holds the remaining 43% of the issued share capital of the 2^nd Defendant.

5.  According to the Plaintiff, the 1^st Defendant was in breach of a Sale and Purchase Agreement entered into with the 2^nd Defendant dated 1 June 2007, under which the 1^st Defendant had agreed to transfer certain “Assets” and “Business” to the 2^nd Defendant but the 1^st Defendant failed and/or refused to do so.

6.  On 28 December 2009, the Plaintiff brought the present action, by way a derivative action on its own behalf and on behalf of all other shareholder of the 2^nd Defendant other than the 1^st Defendant, seeking specific performance of the Sale and Purchase Agreement or damages in lieu of specific performance against the 1^st Defendant.

7.  The 1^st Defendant disputes the allegation of breach of the Sale and Purchase Agreement, and contends that in any event the 2^nd Defendant’s cause of action against it is time barred.  For the purpose of the present applications, it is not necessary for me to consider the merits of the 1^st Defendant’s defence.

8.  Apparently, the Plaintiff decided to bring this action as a derivative action because of Clause 3A.1 of a Shareholders’ Agreement dated 1 June 2007, under which the 2^nd Defendant agreed that it would not without the prior written approval of 75% of its shareholders (expressed as a percentage of the shareholding) institute, withdraw or settle any legal action or proceedings.

9.  It is clear, however, from the ruling of Poon J given on 22 December 2009 in HCMP 1608/2009, as confirmed by the Court of Appeal on 8 July 2010 in CACV 17/2010, in a separate action brought by the 1^st Defendant against the 2^nd Defendant, that Clause 3A.1 of the Shareholders’ Agreement has application only to actions brought by the 2^nd Defendant against third parties, but not those brought against its own shareholders.  Thus, there would seem to be no legal basis for the Plaintiff to bring this action as a derivative action against the 1^st Defendant.

10.  On 23 July 2010, the 1^st Defendant took out a summons to strike out the Writ and the Statement of Claim.  The strike out application was fixed to be heard by Deputy High Court Judge Carlson on 9 November 2010.

11.  On 8 November 2010, the Plaintiff took out a summons to amend the Statement of Claim.  In the proposed Amended Statement of Claim, the Plaintiff pleads that the 2^nd Defendant’s cause of action against the 1^st Defendant for breach of the Sale and Purchase Agreement was assigned to the Plaintiff pursuant to a Deed of Assignment dated 4 November 2010, and notice of the assignment was given to the 1^st Defendant on 8 November 2010.  Accordingly, the Plaintiff no longer sues the 1^st Defendant in a representative capacity, but is entitled to sue the 1^st Defendant in its own right.

12.  The hearing before Deputy High Court Judge Carlson on 9 November 2010 was adjourned to a date to be fixed, and the two summonses have now come before me for determination.

The 1^st Defendant’s strike out application

13.  As earlier mentioned, the Plaintiff’s only basis for bringing this action as a derivative action was Clause 3A.1 of the Shareholders’ Agreement.  Once it is accepted (as it must now be accepted) that Clause 3A.1 of the Shareholders’ Agreement does not preclude the bringing of an action by the 2^nd Defendant against the 1^st Defendant for the alleged breach of the Sale and Purchase Agreement, it should be clear that the Plaintiff has no legal basis to bring this action as a derivative action.  Generally, the only proper party to assert a cause of action vested in the 2^nd Defendant would be the 2^nd Defendant and not any other party on its behalf.  Accordingly, the Writ and the Statement of Claim are liable to be struck out, unless they can be saved by the proposed amendments.

The Plaintiff’s application to amend

14.  Mr Bernard Man on behalf of the Defendant objects to the Plaintiff’s application to amend on the ground that its effect is to plead a fact (i.e. the Deed of Assignment) which occurred after the Writ, without which the Plaintiff would not have a relevant cause of action against the 1^st Defendant.

15.  The effect of the Deed of Assignment dated 4 November 2010 is to vest in the Plaintiff a title to sue the 1^st Defendant for breach of the Sale and Purchase Agreement in its own right, which the Plaintiff did not have at the time of the issue of the Writ on 28 December 2009.

16.  It is well established in Hong Kong that a statement of claim cannot be amended to introduce a cause of action which was not in existence or had not yet accrued at the time of the issue of the writ: see Lark International Finance Ltd v Lam Kim Marisa [2004] 4 HKC 688; and Wing Siu Co Ltd v Goldquest International Ltd [2003] 2 HKC 64 (affirming the first instance decision of Ma J, as he then was, reported in [2002] 4 HKC 408), both being decisions of the Court of Appeal binding on me.

17.  In Chan Yuen Yee v Chan Chuck Kwong [2005] 2 HKLRD 416, Deputy High Court Judge Saunders applied Wing Siu Co Ltd to disallow a proposed amendment to introduce a post writ assignment which gave the plaintiff the right to seek the relief sought in that action (namely, a sale under s.6 of the Partition Ordinance, Cap. 352).

18.  In Lead Mile Ltd v Sino Peak Finance Ltd [2004] 4 HKC 646, Recorder Joseph Fok SC (as he then was) drew a distinction between the addition of a cause of action after the date of the writ (which the learned judge considered to be permissible) and an amendment to cure a defective claim by the addition of a plea of a necessary factual averment that could not be pleaded as at the date of the writ (which the learned judge considered not to be permissible).  It is not necessary for me to decide in this case whether it is permissible to add, by way of amendment, a cause of action not in existence as at the date of the writ (i.e. the first type of situation mentioned by the learned judge), and I express no view on this point.

19.  The present case falls within the second type of situation mentioned by the Recorder in Lead Mile Ltd.  For reasons mentioned above, the existing Writ and Statement of Claim are defective.  The Deed of Assignment was not in existence as at the date of the Writ.  Thus, the Statement of Claim cannot be cured by the introduction of the Deed of Assignment by way of amendment, which I consider to be a necessary factual averment to support the Plaintiff’s cause of action in its personal capacity against the 1^st Defendant.

20.  Mr Man has taken me through a line of English authorities (including Roban Jig & Tool Co Ltd v Taylor [1979] FSR 130; Vax Appliances Ltd v Hoover plc [1990] RPC 656; Hendry v Chartsearch Ltd [1998] CLC 1382; Maridive & Oil Services (SAE) v CNA Insurance Co (Europe) Ltd [2002] CLC 972) and submits, correctly in my view, that they cannot all be reconciled with the Hong Kong authorities mentioned above.  Mr Man also fairly accepts that the English position as it has now been developed is a reasonable way in which the law may be developed, but submits that I should follow the Hong Kong approach, as indeed I am bound to do so in view of the fact that both Lark International Finance Ltd and Wing Siu Co Ltd are decisions of the Court of Appeal in Hong Kong.  I may add that in Wing Siu Co Ltd, Ma J acknowledged, at paragraph 23 of his judgment, that the English High Court decision in Vax Appliances Ltd supported the proposition that causes of action which accrued only after the issue of a writ could be pleaded by way of amendment, but observed that it was for a higher court to overrule the clear effect of Lark International Finance Ltd.  For my part, I consider that I should apply the law as it has been developed in Hong Kong.

21.  Mr Douglas Lam for the Plaintiff submits that the above Hong Kong authorities are distinguishable or not applicable to the present case because the 2^nd Defendant’s cause of action was complete prior to the issue of the Writ, and this cause of action was assigned to the Plaintiff on 4 November 2010.

22.  I accept that the 2^nd Defendant’s cause of action against the 1^st Defendant was complete prior to the issue of the Writ.  However, by the proposed amendments to the Statement of Claim, the Plaintiff is no longer seeking to assert a cause of action belonging to the 2^nd Defendant, but is seeking to advance a cause of action vested in itself by the Deed of Assignment which was not available to it as at the date of the issue of the Writ.

23.  In Letang v Cooper [1965] 1 QB 232, referred to by Ma J in Wing Siu Co Ltd at paragraph 21 of his judgment, it was said that a cause of action meant “simply a factual situation the existence of which entitles one person to obtain from the Court a remedy against another person”.  The Deed of Assignment is a fact or matter which is essential to the cause of action which the Plaintiff now seeks to assert by way of amendment, but not to the cause of action previously vested in the 2^nd Defendant which the Plaintiff sought to assert in the original Writ and Statement of Claim.  The original cause of action belonging to the 2^nd Defendant is not something which the Plaintiff had locus to assert at the time of the issue of the Writ, and the current cause of action vested in the Plaintiff is something which had not yet accrued as at the date of the Writ.

24.  As held by Recorder Joseph Fok SC in Lead Mile Ltd, an amendment to cure a defective claim by the addition of a plea of a necessary factual averment that could not be pleaded as at the date of the writ is not permissible.  The existing claim brought by the Plaintiff, purportedly by way of a derivative action, is clearly defective.  It cannot be cured by the addition of a factual averment which could not be pleaded as at the date of the Writ.

25.  I should add that the Plaintiff ought to have been aware, at the time of the issue of the Writ, that there was no legal impediment to the 2^nd Defendant commencing the present action in its own name against the 1^st Defendant to assert its claims for the alleged breach of the Sale and Purchase Agreement on the part of the 1^st Defendant, having regard to the fact that the ruling of Poon J had been given prior to the date of the Writ.  The fact that the 2^nd Defendant might not have the necessary financial resources to prosecute the action is not a valid reason for the action to be brought by the Plaintiff. 

26.  Also, the 1^st Defendant’s objection to the proposed amendments is not a pointless exercise.  As submitted by Mr Man, there is an issue as to whether any claim against the 1^st Defendant for breach of the Sale and Purchase Agreement is now time barred, by reason of Clause 6.7 of the Sale and Purchase Agreement.  This is, I understand, accepted by Mr Lam.  Accordingly, if leave to amend as sought by the Plaintiff is granted, the 1^st Defendant will, by the operation of the doctrine of relation back, be deprived of the limitation defence.

27.  In all, I am not prepared to grant leave to the Plaintiff to amend the Statement of Claim, even if it is permissible to do so under the existing Hong Kong authorities, which I do not think it is.

28.  I would therefore dismiss the Plaintiff’s application to amend, and allow the 1^st Defendant’s application to strike out the Writ and Statement of Claim and dismiss this action, with costs to the 1^st Defendant to be taxed if not agreed.

29.  Lastly, I wish to thank counsel for their helpful assistance in this matter.