IRONWOOD CAPITAL LTD v. KTH CAPITAL MANAGEMENT LTD

HCA 2836/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2836 OF 2004

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BETWEEN

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AND

HCA 76/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 76 OF 2005

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(Heard together)

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REASONS   FOR   DECISION

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Introduction

1.  At the end of the hearing on 24 January 2007, I ordered the two actions to be tried together (unless the trial judge otherwise directs), and gave related directions for their further conduct.  The following are the reasons for the decision.

The Defendants’ Summons

2.  The above-mentioned order was made pursuant to the defendant’s summons taken out on 1 September 2006 which sought three alternative orders:-

(a)     the actions be consolidated; or

(b)    the actions be tried together; or

(c)     the account action (as defined in para. 5 to 6 below) be stayed pending the trial of the recovery action (as defined in para. 7 to 8 below).

3.  Further to the said summons, the defendants’ preference has been made clear in their written skeleton submission (from para. 2(a) to (c) above in descending order).

4.  On the other hand, the plaintiffs’ position (also stated in their skeleton argument) was that the actions should be heard by the same judge, but the account action should be tried and determined before the recovery action (with a 3-month time gap in-between).

The Two Actions

5.  On 14 December 2004, HCA 2836/2004 was commenced alleging that the defendant therein breached its duty to account in relation to an account opened by it for the plaintiff therein (the account was called “the Sub-Account” in the pleadings).  The Sub-Account was opened with the Bank of Bermuda’s subsidiary around the beginning of 2001.  The relevant time period is pleaded to be from about October 2000 to October 2003.  Relief sought in the action include a declaration that the plaintiff is the beneficiary of the Sub-Account and for a full and proper account to be rendered by the defendant.

6.  The above action is called “the account action” in this “Reasons for Decision”.  The defendant, after admitting:-

“… the money and assets held in the Sub-Account … are beneficially owned by the Plaintiff” (para. 23(3), Defence),

pleads essentially that a full account has already been rendered to the plaintiff.

7.  On 12 January 2005, HCA 76/2005 was commenced by 3 plaintiffs (including the plaintiff in the account action (“Ironwood”)) against 4 defendants (including the defendant in the account action).  In gist, it alleges that:-

(a)     the defendants procured the plaintiffs to enter into an agreement called “the Participation Agreement” in about December 2002 by fraudulent or negligent misrepresentation.  The Participation Agreement was in short an agreement whereby the plaintiff, together with other investors, was to purchase certain non-performing loans as a means of investment;

(b)    the misrepresentation was to the effect that the plaintiffs needed to make payment for the purchase immediately and that they did not have sufficient funds to do so;

(c)     but for the said misrepresentation, the plaintiffs would have purchased the whole of the said non-performing loans (rather than purchasing them jointly with other investors).

Among the relief sought are declaration orders that the Participation Agreement has been validly rescinded and that the plaintiffs are the true owners of the said non-performing loans.  The rendering of related accounts is also sought.

8.  The above action is called “the recovery action”.  The following averment appears in the statement of claim:-

“In early 2003, sums derived from Ironwood totalling at least US$5,141,059 were paid into the Fund II Account, and used or made available for use in the purchase of [the non-performing loans in question].  The Defendants have admitted that sums derived from Ironwood totalling US$4,806,865 were so paid in.  As appears below, the Plaintiffs’ case is that sums belonging to Ironwood totalling substantially more than US$5,141,059 were in fact so paid in … ” (para. 34, statement of claim).

9.  The reason why the above averment is referred to in particular is this.  The plaintiffs accepted during the hearing that the matters referred to in that averment should be included as part of the records of the Sub-Account (being part of the assets held by or on behalf of Ironwood in that account) if those records are full and accurate.

RHC Ord. 4 r. 9(1)

10.  This rule provides:-

“Where two or more causes or matters are pending, then, if it appears to the Court -

(a)     that some common question of law or fact arises in both or all of them, or

(b)     that the rights to relief claimed therein are in respect of or arise out of the same transaction or series of transactions, or

(c)     that for some other reason it is desirable to make an order under this rule,

the Court may order those causes or matters to be consolidated on such terms as it thinks just or may order them to be tried at the same time, or one immediately after another, or may order any of them to be stayed until after the determination of any other of them” (emphasis supplied).

11.  The court’s discretionary power under this rule only becomes exercisable when the requirements set out in one or more of para. (a) to (c) of the rule are met.  The learned authors of Hong Kong Civil Procedure 2007, para. 4/9/2 said:-

“The main purpose of consolidation is to save costs and time, and therefore it will not be usually be ordered unless there is ‘some common question of law or fact bearing sufficient importance in proportion to the rest’ of the subject-matter of the actions ‘to render it desirable that the whole should be disposed of at the same time’” (emphasis supplied).

12.  But even if the above prescribed criteria of the rule are met, the court can still refuse to exercise its discretion if there are circumstances which militate against consolidation: Hong Kong Civil Procedure 2007, para. 4/9/2.

Applying Ord. 4 r. 9(1) to this Application

13.  The defendants argued that the actions fall within Ord. 4 r. 9(1) because:-

(1)     procedurally, the actions have reached basically a similar stage;

(2)     there are overlaps in the identity of the parties (the additional parties in the recovery action are in truth only different alter egos), the principal witnesses, the factual background and factual disputes;

(3)     there are common questions of law arising on the pleadings;

(4)     the same legal advisers (solicitors and counsel) act for the parties.

Reliance is also placed on how the two actions have been looked at by the parties in the past.

14.  The plaintiffs, on the other hand, while accepting the actions are related, contended that they are unsuitable to be consolidated (or tried together) for the following reasons:-

(a)     the recovery action is primarily about the defendants’ misrepresentation of the status of the Sub-Account which induced the plaintiffs to dilute their interest in the acquisition of the non-performing loans, thereby causing them loss;

(b)    the account action involves only one issue, namely, whether the defendant therein has rendered a full and proper account to Ironwood in respect of the Sub-Account;

(c)     because of its relative simplicity, the account action should be tried first because it can be resolved quickly;

(d)    further, in order to assess whether there has been misrepresentation (the main issue in the recovery action), it is necessary to examine the status of the Sub-Account (para. 5.1, plaintiffs’ skeleton argument).

The plaintiffs also said in their skeleton argument the issues in the recovery action are “narrower” (see para. 2.3 thereof).  It is difficult to understand how the issues can be narrower than the account action which involves only one issue (see para. 2.2 thereof and sub-para. (b) above).  Consequently, I read that to mean the issues are different (from those in the account action).

15.  With respect to the plaintiffs, they have over-simplified the issues in the account action, and understated the relationship between the two actions.

16.  Apart from the issue referred to in para. 14(b) above, the commencement date of the agency is also in dispute in the account action; Ironwood contends that the agency commenced from October 2000 whereas the defendant says it commenced from March 2003.  Ironwood also alleges the defendant has:-

“[since the beginning of 2001] … moved funds between the ABN Account and the Sub-Account, conducted investments through the Sub-Account and exercised full control over the funds and assets in the Sub-Account to the exclusion of [Ironwood]” (para. 17, amended statement of claim).

This allegation is denied by the defendant therein, who claims that it always followed Ironwood’s instruction in the handling of funds and investment transactions and Ironwood was fully aware of that.

17.  In order to determine if a full and proper account in relation to the Sub-Account has been rendered (which is the main issue in the account action), it would be necessary for the trial court to examine (among other things) the transactions pleaded in para. 17, amended statement of claim.  In this connection, it is likely the court also has to examine if the amount of funds available to the plaintiffs at the time of the acquisition under the Participation Agreement (one of the main issues in the recovery action).

18.  Although, as state in para. 7 above, the main dispute in the recovery action concerns the alleged dilution of the plaintiffs’ acquisition of the non-performing loans, it must be noted that allegation is built on the defendants’ misrepresentation, which in gist was pleaded as a mis-statement regarding the sufficiency of funds kept in Ironwood’s account.

19.  In view of the matters set out in para. 16 to 18 above, a proper adjudication of the main issue in the account action by the trial court will very probably be assisted greatly by having available to it evidence (both documentary and testamentary) regarding the above matters.  In fact, the plaintiffs’ argument referred to in para. 14(d) above supports this point.

20.  Having the whole dispute tried at the same time will also reduce any problem arising from the admissibility of evidence which may be only admissible in one action and not the other.

21.  Further, judging from the issues outlined above, the credibility of the witnesses will be very important to the proper determination of the two actions.  Their cross-examination will likely involve an examination of the contemporaneous records of the Sub-Account (and other financial records relating to transactions made through the Sub-Account).

22.  Because the principal witnesses in the actions overlap, the trial court will obviously benefit from being able to hear their testimony, and assess their credibility, in the same trial.

23.  In these circumstances, ordering the actions to be tried together will not only likely to result in substantial savings in costs and time, it will enable the parties and the trial court to deal with the whole matter in dispute at the same time.

24.  The plaintiffs also asserted that the determination of the account action (ahead of the recovery action) may assist it to trace Ironwood’s assets from other parties.  I do not see how they can achieve this in view of the relief sought in the account action:-

(1)     a declaration that Ironwood is the sole beneficiary of the sub-Account;

(2)     an account of all investments made and all assets held by the defendant for and on account of Ironwood;

(3)     the defendant do deliver all investments made and all assets held by it.

25.  The plaintiffs changed their argument when the matter in para. 24 above were raised with them.  They said the plaintiffs might not be able to establish their claim of misrepresentation in the recovery action due to the lack of evidence relating to the sufficiency of funds in the Sub-Account for payment under the Participation Agreement.

26.  Even if the new argument was correct, I do not consider it (which incidentally almost amounts to an admission that there is insufficient evidence to establish the claim in the recovery action) to be a valid point.

27.  Finally, the plaintiffs rely on the decision in Re Prudential Enterprises Ltd., HCCW 594/1999 and HCA 1240 & 4225/2001 (19 August 2003) wherein the court ordered the trials of the various proceedings to be held sequentially, with intervening breaks.

28.  I do not think the Prudential Enterprises decision could assist the plaintiffs in this application.  The court’s decision on this kind of application is usually dependent on the facts of the case before it.  The facts peculiar to that decision included:-

(a)     although there were substantial overlapping of parties and of issues in two of the actions (para. 7, judgment), from a case management perspective joint trial should not be ordered (para. 7 and 8, judgment);

(b)    in terms of case management, the two drawbacks of a joint trial were, one, there was a real risk of losing part or all of the scheduled trial dates (para. 11 to 13, judgment) and, two, there were outstanding interlocutory matters in relation to one of the proceedings (para. 11, judgment);

(c)     further, one proceeding involved complex and voluminous documentary and expert evidence (para. 15, judgment).

Those matters did not feature in this application.

Conclusion

29.  In short, I agree with the defendants that this application falls within Ord. 4 r. 9(1) in that:-

(a)     some common questions of fact arise in the two actions;

(b)    the right to relief claimed in the actions are in respect of or arise out of the same transaction or series of transactions.

I also find that these bear sufficient importance in proportion to the rest of the subject-matters of the actions to justify the making of an order pursuant to Ord. 4 r. 9(1).

30.  I also find that there is no militating factor which is of sufficient weight to prevent the exercise of my discretion to grant an order thereunder.

31.  It is more appropriate to order the actions be tried together than to order their consolidation.  The former option does not require the filing of consolidated pleadings and/or discovery and the like.