Siberian Mining Group Co Ltd v. Cheung Keng Ching and Others

HCA 706/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 706 OF 2010

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R U L I N G

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Introduction

1.This is the application by the plaintiff (“P”) for leave to amend its Indorsement of Claim (“IS”)[1] and Statement of Claim (“SC”)[2] against the defendants (respectively “D1‑D3”). 

2.P’s action against D1‑D3, who were its former directors, relates to three of its transactions which took place not long after it became publicly listed in October 2002.  They are referred to in SC as: (1) the Acquisition of Grandtop Shares in December 2003; (2) the Acquisition of the MAIL’s Share Option in 2004; and (3) the Investment and Advancement of Loan to KKL Fashion in 2004 and 2005, all of which eventually resulted in substantial losses.  During the material period of time, D1‑D3 were P’s only executive directors.  P alleges that the defendants are accountable for the losses it sustained.

3.P’s Writ of Summons (accompanied by IS) was taken out on 15 May 2010.[3]  Subsequently, SC (dated 11 July 2011) was served.  The Summons for application for leave to amend now under consideration, however, was only taken out on 5 July 2016.[4]  Eventually, the application for leave was listed and heard before me on 26 January 2017.

4.The proposed amendments concern all of the three aforesaid transactions.  However, for present purposes D1 and D2 only object to the proposed amendments relating to Transaction 1 (“the relevant amendments),[5] whilst D3 does not object to any of the proposed amendments.

CONTENTION OF THE PARTIES

5.As can be seen from the various dates given above, a major problem facing P in the present application is one of time limitation.  The 6‑year time limitation under s 20(2), Limitation Ordinance (Cap 347) would apply, directly or by analogy, unless excluded by s 20(1)(a) or (b) of the Ordinance:[6] see Gwembe Valley Development Co Ltd v Koshy.[7] However, by the time the Writ of Summons was taken out, more than 6 years had elapsed since Transaction 1 was done. 

6.P’s primary contention is that the relevant part of CS in its original form regarding Transaction 1 includes a case of fraud or fraudulent breach of trust for which there is no time limitation: see s 20(1)(a), Limitation Ordinance.  The relevant amendments are just “particulars added to the original pleaded case of fraud on the basis of the available evidence that makes P’s case more complete”. Alternatively, if the relevant amendments do raise a new cause of action which has not previously been pleaded, then they can still be allowed pursuant to O 20 r 5(5), Rules of the High Court (“RHC”)[8] on the basis that they arise out of the same or substantially the same facts as the original one.

7.On the other hand, it is the contention of D1 & D2 that the plaintiff’s claim regarding Transaction 1 had already been time barred when the Writ of Summons was taken out.  It is because, D1 and D2 contend, that the claim, whether in its original form or after the relevant amendments, is not distinct enough to amount to an allegation of fraud or fraudulent breach of trust.  It is also submitted that the relevant amendments actually raise a new cause of action which does not arise out of the same or substantially the same facts as the original one.  In particulars, it is submitted that the original cause of action does not contain any allegation of deliberate and dishonest concealment.  It is also submitted that the new claim of dishonest concealment is “self‑contradictory” and “bound to fail”.  Lastly, it is submitted that the relevant amendments to CS are not permissible as IS in its original form does not contain a specific plea of fraud or fraudulent breach of trust.

THE APPROACH TO GRANTING OF LEAVE TO AMEND

8.It is a guiding principle of cardinal importance on the question of amendment that, generally speaking, all such amendments ought to be made “for the purpose of determining the real question in controversy between the parties to any proceedings or of correcting any defect or error in any proceedings”: see G L Baker Ltd v Medway Building & Supplies Ltd[9]; and generally Hong Kong Civil Procedure 2017 (“HKCP”), at §20/8/6.

9.Mr Hui, and with him Mr Chan, counsel for D1 and D2, relying on Global Bridge Assets Ltd v Sun Hung Kai Financial Ltd,[10] submit that the correct approach to a leave application in a situation like the present one is to refuse leave to amend unless the plaintiff can show that the defendant does not have a reasonably arguable case on limitation, or can bring itself within O 20 r 5(5), RHC.  But in the latter case, the Court still retains a discretion whether or not to allow the amendments.  It is submitted that it is open to P, if it has an arguable case on the new cause of action, to take out separate proceedings and have a separate trial.

10.With respect, I am unable to accept Mr Hui’s submission above and I am of the view that Global Bridge’s case does not in fact support his proposition.  My reasons are as follows:

(a)  Global Bridge was not a case on s 20(1) but on s 26(1) of the Limitation Ordinance.[11]  In that case, the original claim was based on contract and the plaintiffs sought to add a new cause of fraud by way of amendment.  By the time the plaintiffs applied for leave to amend, however, that new cause of fraud would have already been time barred unless the exception provided in s 26(1) was applicable.[12]  The plaintiffs contended that the new cause of fraud was based on new facts known to them only subsequently and that time did not start to run against them in respect of the fraud until after the new facts were discovered.  The judge who heard the plaintiffs’ application granted them leave to amend on the basis that they had an “arguable case” that the new cause of fraud had not been time barred and that the dispute as to the time of discovery of fraud would remain “live” and would be contested at trial.  It was in the above context that the Court of Appeal said that leave to amend should not be given if its effect would be to deprive the defendant of an accrued limitation defence, which would be lost as a result of the operation of the relation back rule in s 35(1)(b).  Moreover, as the plaintiffs asserted that the new cause of action was based on new facts, the Court of Appeal said that the right course was to refuse the amendment and to let the question of whether s 26 applied to be determined in a fresh action.

(b)  In the present case, however, if P were right that CS in its original form has already included or implied a cause of action based on fraud or fraudulent breach of trust, then that cause of action would have never been subject to any time limitation by virtue of s 20(1)(a).  As such, it is not the case, if leave to amend were to be granted, that the defendants would be deprived of any accrued limitation defence, as none would have ever been available to them.

(c)  Alternatively, if the relevant amendments did raise a new cause of fraud or fraudulent breach of trust and if the relevant amendments were to be allowed pursuant to O 20 r 5(5), the defendants would also not be deprived of any accrued limitation defence in respect of the new cause of action.  This is because the new cause of action would also not be subject to any time limitation by virtue of s 20(1)(a).

(d)  Therefore, the present case is similar to the situation in Akai Holdings Ltd (in comp liq) v Everwin Dynasty Ltd[13]where Court of Appeal held that the defendant X, being a director of the claimant, was to be regarded for the purposes of s 20(1), Limitation Ordinance as a trustee in respect of the claimant’s property so that a claim by the claimant against him for fraud or fraudulent breach of trust was not subject to any limitation period.  Thus, granting leave to amend would not involve any risk of depriving him of an arguable accrued limitation defence.

MAJOR ISSUES

11.Based on the above, the pertinent question to ask in the present application is not whether P can show at this stage that D1 and D2 do not have a reasonably arguable case on limitation as contended by Mr Hui. Nor does the court concern with the issue as to when P could with reasonable diligence have discovered the alleged fraudulent acts.  Instead, the disposal of the present application would depend on the resolution of the following issues:

(1)  whether P’s original case relating to Transaction 1 has already included or implied in it a distinctly alleged cause of action based on fraud or fraudulent breach of trust: see HKCP, at §18/8/15;

(2)  whether the relevant amendments are simply further particulars which seek to clarify P’s case and narrow down the issues or whether they raise a new cause of action;

(3)  if the relevant amendments raise a new cause of action, whether it arises out of the same facts or substantial the same facts as the original one;

(4)  if so, whether the relevant amendments to SC should still be rejected on the basis that IS in its original form does not contain a distinct reference to fraud or fraudulent breach of trust; and

(5)  if not, whether there is any reason to exercise the court’s discretion to refuse leave.

The resolution of issues (1) to (3) above requires the court to look at and compare CS in its original form and the relevant amendments: see Darlington Building Society & Anor v O’Rourke James Scourfield & McCarthy,[14] applied in Bank of China (Hong Kong) Ltd v Leong Mei Yong.[15]

THE ORIGINAL CASE AS REGARDS TRANSACTION 1

12.Before I go on to consider the issues, it would be convenient for me to summarise the relevant part of P’s case as originally pleaded:[16]

(a)  At all material times including the period between November 2002 and November 2005, the defendants were the only executive directors of P since the listing of it on the SEHK.[17]

(b)  As such, each of the defendants owed to P a “fiduciary duty to act in good faith and in the best interests” of P.[18]

(c)  On or about 22 December 2003, P acquired 2.2 million shares in Grandtop through private channels,[19] the bought and sold notes of which were signed by D3 and the price was stated to be $2 per share.[20]  The board minute authorising the transaction at that price, on the other hand, was signed by D1 and D2.[21]  That stated price of $2 per share was also the then prevailing market price.[22]

(d)  However, the aforesaid shares were in fact purchased by P at a price of $2.9 per share as shown in an undated internal accounting records prepared by D3.[23]  The price of $2.9 per share also conformed to the information contained in P’s annual report for the year 2004/2005.[24]

(e)  The acquisition of the Grandtop shares at the price of $2.9 per share was not in the interests of P since the prevailing market price was around $2 per share trading on the SEHK.[25]

(f)  Causing P to acquire the Grandtop shares at such a high price through private channels was “not justifiable and could not be justified on any good or sound commercial reasons at all”.  Therefore it was not and could not be in the interests of P to do so.[26]

(g)  In addition, at the material times the trading price of Grandtop shares was trending downwards on SEHK from around $3 per share in June 2003 to around $2 per share in December 2003 and Grandtop declared no dividend at all between March 2003 and March 2005.[27]

(h)  The said acquisition by P caused by the defendants constituted “misfeasance, misconduct and/or defalcation” in relation to the business and affairs of P.[28]

(i)  Based on the matters pleaded above, the defendants at the material time “either knew that it was contrary to the interests of P to acquire the Grandtop shares or did not honestly believe that the acquisition of the Grandtop shares was in the interests of P or were recklessly indifferent as to whether it was contrary to P’s interests to do so”. In the premises, “causing or procuring of P to enter into Transaction 1 was a fraud and/or fraudulent breach of the fiduciary duty” owed to P. Further, it was also a “fraudulent breach of trust” on the part of the defendants.[29]

AS TO (1): WHETHER FRAUD HAS BEEN PLEADED

Relevant legal principles

13.I start by considering what a cause of action means.  As per the following dictum of Diplock LJ (as he then was) in the oft-quoted case of Letang v Cooper,[30]

“A cause of action is simply a factual situation the existence of which entitles one person to obtain from the court a remedy against another person.”

In Paragon Finance plc v DB Thakerar & Co,[31] Millett LJ (as he then was) said,

“The classic definition of a cause of action was given by Brett J in Cooke v Gill (1873) LR 8 CP 107 at 116: ‘“Cause of action” has been held from the earliest time to mean every fact which is material to be proved to entitle the plaintiff to succeed, - every fact which the defendant would have a right to traverse.’ (my emphasis) ... I do not think that Diplock LJ [in Letang v Cooper] was intending a different definition from that of Brett J.”[32]

14.It is well‑established that a cause of action based on fraud has to be distinctly alleged and distinctly proved.  Therefore, if the facts pleaded are consistent with innocence it is not open to the Court to find fraud.  An allegation that the defendant “knew or ought to have known” is not a clear and unequivocal allegation of actual knowledge and will not support a finding of fraud even if the Court is satisfied that there was actual knowledge.  An allegation that the defendant had actual knowledge of the existence of a fraud perpetrated by others and failed to disclose the fact to the victim is consistent with an inadvertent failure to make disclosure and is not a charge of fraud.  It will not support a finding of fraud even if the Court is satisfied that the failure to disclose was deliberate and dishonest.  Where it is expressly alleged that such failure was negligent and in breach of a contractual obligation of disclosure, but not that it was deliberate and dishonest, there is no room for treating it as an allegation of fraud.  See Paragon Finance plc v D B Thakerar & Co.[33]  For the rationale behind this rule, see ADS v Wheelock Marden & Co Ltd.[34]

15.In order to engage s 20(1)(a) of the Limitation Ordinance, there has to be a cause of action based on fraud or fraudulent breach of trust to which the trustee was a party or privy.  For that purpose, the expressions “trust” and “trustee” include “constructive trust” and “constructive trustee”.  However, it is noted by Millett LJ in Paragon Finance that the expressions “constructive trust” and “constructive trustee” have been used by equity lawyers to describe two entirely different situations:

(i)     The first covers those cases where the defendant, though not expressly appointed as trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the plaintiff.

(ii)    The second covers those cases where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff.

It was held that s 20(1)(a) applies to (i) above but not (ii).  The judgment of Millett LJ in Paragon Finance was explained in Secretary for Justice v Hon Kam Wing & Ors[35] where Deputy Judge Barma (as he then was) said the distinction between the two classes should bear some relation to the reasoning for denying trustees the benefit of limitation periods, in that the trustee was never in possession of a right of his own but rather for and on behalf of the beneficiaries.  Thus, it is important to consider whether or not the alleged constructive trustee was someone who held the property for the benefit of some other person, in whom the equitable ownership of the property vested.

16.As to what constitutes a fraudulent breach of trust, Millett LJ in Armitage v Nurse[36] noted that a deliberate breach of trust is not necessarily fraudulent.  As regards the expression “actual fraud”, his Lordship said,

“I accept the formulation put forward by Mr Hill on behalf of the Respondents which (as I have slightly modified it) is that it

‘connotes at the minimum an intention on the part of the trustee to pursue a particular course of action, either knowing that it is contrary to the interests of the beneficiaries or being recklessly indifferent whether it is contrary to their interests or not.’

It is the duty of a trustee to manage the trust property and deal with it in the interests of the beneficiaries. If he acts in a way which he does not honestly believe is in their interests then he is acting dishonestly. It does not matter whether he stands or thinks he stands to gain personally from his actions. A trustee who acts with the intention of benefiting persons who are not the objects of the trust is not the less dishonest because he does not intend to benefit himself.” (Emphasis supplied)

Furthermore, his Lordship added,

“In order to allege fraud it is not sufficient to sprinkle a pleading with words like “willfully” and “recklessly” (but not “fraudulently” or “dishonestly”).”[37]

17.It has to be noted that whether a person’s conduct was accompanied by a certain state of mind (e g dishonesty) is essentially a question of fact.  In the absence of an admission from the person concerned, that fact is usually proved inferentially by circumstantial evidence including what he said and done prior to and after the conduct in question.  It is not necessary for a claimant to use the word “fraud” or “dishonesty if the facts which make the conduct complained of fraudulent are pleaded.[38]  What is important is that the defendant is distinctly informed by the claimant’s pleadings that he is being alleged of fraudulent or dishonest conduct.  Thus, Lord Millett said in Three Rivers District Council & Ors v Bank of England (No 3):[39]

“As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference.”

However, it is also important to note “a more subtle point” made by Lord Hope who was in the majority in Three Rivers District Council:[40]

“Of course, the allegation of fraud, dishonesty or bad faith must be supported by particulars. The other party is entitled to notice of the particulars on which the allegations is based. If they are not capable of supporting the allegation, the allegation itself may be struck out. But it is not a proper ground for striking out the allegation that the particulars may be found, after trial, to amount not to fraud, dishonesty or bad faith but to negligence.”

18.It is well‑settled that directors are to be regarded, for the purpose of s 20(1) of the Limitation Ordinance as trustees in respect of the property of the companies of which they are directors, and as such, claims against them by the company for fraud or fraudulent breach of trust are not subject to any limitation period.  In Paragon Finance, in the course of explaining why, historically, trustees were not able to assert any period of limitation against their beneficiaries, Millett LJ pointed out that: [41]

“The rule did not depend upon the nature of the trustee’s appointment, and it was applied to trustees de son tort and to directors and other fiduciaries who, though not strictly trustees, were in an analogous position and who abused the trust and confidence reposed in them to obtain their principal’s property for themselves. Such persons are properly described as constructive trustees.”

19.Thus, in Peconic Industrial Development Ltd v Lau Kwok Fai,[42] Lord Hoffman NPJ said:

“18. The terms “trust” and “trustee” are defined to extend to constructive trusts: s.2(1) and s.2 of the Trustee Ordinance (Cap. 29). It is accepted that, within this extended definition, a director of a company is a trustee in relation to its assets. So the action against Chio was an action by a beneficiary in respect of his fraudulent breach of trust and no limitation period applied. ...” (Emphasis supplied)

This is because a director had “trustee‑like responsibilities” in the exercise of the powers of management of the property of the company and in dealing with the application of its property for the purposes, and in the interests, of the company and of all its members.  Accordingly, the claim for an account, if it was based on a failure in the exercise of those responsibilities, was within the scope of s 20 and subject to a six‑year time-limit unless it was excluded under s 20(1)(a) and (b): see Gwembe Valley Development Co Ltd (in receivership) and Anor v Koshy & Ors (No 3).[43]  See also Akai Holdings Ltd (in comp liq) v Everwin Dynasty Ltd.[44]

20.I note that in Cia de Seguros Imperios v Heath (REBX) Ltd,[45] a case relied upon by Mr Hui, it was held that a claim for damages against a dishonest breach of fiduciary duty is still subject to time limitation by analogy with a claim of damages for breach of contract or a breach of duty in tort.  I note, however, that that case is not about trustee or directors and is not a case on the English equivalent of s 20(1) of the Limitation Ordinance.

Applying to the present case

21.Mr Hui submitted that the facts relied upon by P listed above are also consistent with the defendants being incompetent or negligent, so that the allegation in CS in its unamended form is not distinct enough to constitute a plea of fraud or fraudulent breach of trust.  Mr Hui also submitted that there is no assertion that D1 and D2 were aware of the prevailing market price of Grandtop at the time.

22.With respect, I am unable to accept the above submissions.  Applying the aforesaid legal principles to the present case, in my judgment CS in its originally form has already included or implied in it a distinct case of fraud or fraudulent breach of trust against D1-D3.  My reasons are as follows:

(a)  there is an explicit assertion that the defendants, as P’s only executive directors, owed to it a fiduciary duty;

(b)  there is also an explicit allegation of fraud and/or fraudulent breach of the fiduciary duty” as well as an explicit allegation of “fraudulent breach of trust” against the defendants.  I am alive to the principle that a mere allegation of “fraud” without sufficient particulars will not do: see Three Rivers DC v Bank of England.[46] However, what constitute sufficient particulars in a particular case is a matter of degree and must necessarily be case-specific;

(c)  the aforesaid allegations are preceded by a set of alleged facts, namely that D1 and D2 had caused P to acquire from private channels the 2.2 million Grandtop shares, at a price which was grossly in excess of the prevailing market price then trading on SEHK and in circumstances where there was no likelihood of a rebound of the market price and without any justifications for the transaction;

(d)  have not ignored the fact that references are made in SC to what the defendants said when they were interviewed by the Securities and Futures Commission (“SFC”) back in 2005.  I note in particular that D1 had said he did not know about the difference in price of the Grandtop shares set out above.  As regards D2, I note that she told SFC that her practice was just to append her signature to whatever D1 had signed without asking anything.  However, it is obvious that P is only recounting what D1 and D2 had told the SFC without accepting the truth of what they said at face value.  Otherwise, P would not have said that:

“based on the matter pleaded hereinabove, the 1^st, 2^nd and 3^rd Defendants at the material time either knew ... or did not honestly believe ... or being recklessly indifferent ... [as to] whether it was contrary to the Plaintiff’s interest to do so”;

(e)  on the other hand, one would expect that the defendants, having been P’s executive directors for many years, would have known that they owed to P a fiduciary duty to act in its best interests.  Hence, a plain and ordinary reading of the allegation in quote above carries with it the obvious imputation that the defendants were at the very least aware of the serious risk that the shares they were then causing P to acquire would not be worth the amount what P was going to pay and yet they went ahead regardless; 

(f)  the assertion that the defendants “either knew ... or did not honestly believe ... or were recklessly indifferent” as to whether it was contrary to P’s interests to acquire the Grandtop shares[47] follows closely the formulation of “fraud” approved by Millett LJ in Armitage v Nurse;

(g)  applying Peconic Industrial Development Ltd v Lau Kwok Fai, as a matter of law the defendants, as the only executive directors of P at the material period of time, were treated as trustees in respect of P’s property; and

(h)  thus, reading the original pleadings relating to Transaction 1 as a whole and following the decision of the majority in Three Rivers DC v Bank of England,[48] I am satisfied that there is an unequivocal plea that the defendants had acted fraudulently and that sufficient particulars have been provided in support which are capable of proving the fraud or fraudulent breach of trust alleged.  In my view, the allegations in SC in its original form are not consistent with innocence, negligence or even gross negligence.  Any question as to whether the evidence points to innocence or negligence rather than to fraud is a matter which has to be judged not on the pleadings, but on the evidence, which is a matter for decision by the trial judge.

AS TO (2): THE RELEVANT AMENDMENTS

23.It is noted that many of the proposed amendments are cosmetic in nature.  The more substantial parts of the relevant amendments, however, are as follows:

(i) at §10(a),

" ... and that that information was deliberately and dishonestly concealed from the Plaintiff and its members";

(ii) at §10(d),

“The Plaintiff asserts that the bought and sold notes evidencing the acquisition of the shares by the Plaintiff and the minutes of the Board of Directors Meeting dated 22^nd December 2003 falsely and deliberately concealed from the Plaintiff and its members the true purchase price of the 2,200,000 Grandtop shares, because those two documents indicated a purchase price of HK$2.00 per share, when the actual purchase price was HK$2.90 per share";

(iii) at the new §12

“(a) The Plaintiff repeats paragraph 3(d) pleaded hereinabove and alleged that the acquisition of the Grandtop shares was not consistent with and in fact was contrary to the representations in the Prospectus that the investment portfolio of the Plaintiff should be balanced and investments should be in high‑quality listed equity securities from the worldwide stock markets.

(b) The Plaintiff’s investment in Grandtop shares represented about 99%of its investment portfolio in listed equity securities up to 31^st March 2006.”

(iv) at the new §13(a),

“ ... was fraudulent and was”;

(v) at the new §13(c),

" ... and by inter alia, the preparation of (i) false bought and sold notes which falsely indicated that the purchase price of the shares was HK$2.00 per share, and (ii) minutes of a Board of Directors meeting dated 22^nd December 2003, which also indicated that the purchase price of the shares was HK$2.00 per share, ... and was patently misleading and in the circumstances amounted to dishonesty"; and

(vi) at the new 13(f),

“as each of the 1^st, 2^nd and 3^rd Defendants was regarded as a trustee or otherwise their positions were analogous to positions of trustees in relation to the assets of the Plaintiff as pleaded in paragraph 5(a)[49] above”

24.It is Mr Hui’s submission that the above proposed amendments raise a new claim of fraud, in particular a new claim of “fraudulent and dishonest concealment” which has not been pleaded before.  It is also submitted that the new claim is self‑contradictory and therefore “bound to fail”.  This is because, according to P’s own case, the actual purchase price of the Grandtop shares had actually been disclosed in an undated internal accounting records prepared by D3 and in its annual report. It is submitted, therefore, that leave to amend should not be granted.

25.Having considered Mr Hui’s submission, in my view item (iii) is not objectionable as it only serves to provide further particulars to support P’s original case that the defendants had acted dishonestly in the share acquisition.  This is because a trier of fact may draw an inference of dishonesty if he finds that the defendants must have been aware of P’s published policy on investment and they had deliberately departed from that policy in the transaction in question which was apparently a major investment.

26.As regards item (iv) above, since I have already ruled that CS in its original form has already included or implied in it a case of fraud or fraudulent breach of trust by the defendants, I can see no valid objection to add the word “fraudulent” to that paragraph so as to make the allegation more explicit.

27.As regards items (vi), it is just an application of the statement of law in Gwembe Valley Development Co Ltd (in receivership) and Anor v Koshy & Ors (No 3).

28.More problematic, however, is whether the other items concerning “dishonest concealment” do raise a new cause of action or whether they are no more than adding new particulars to the fraud or fraudulent breach of trust already been pleaded.  In Chan Sik Pan v Wylam’s Services Ltd (CA),[50] which was about an industrial accident, the plaintiff’s original cause of action was that the defendants were in breach of their duty as employer and negligent in failing to provide and maintain safe tools.  After the time limitation had expired, the plaintiff sought to add two new allegations, namely failure to provide a safe work place and breach of statutory duty.  The Court of Appeal held that the new allegation of failure to provide a safe work place was no more than adding new particulars to the breach of employer's duty and negligence already alleged in the statement of claim and therefore the question of limitation did not arise.  However, the allegation of a breach of the statutory duty was different in that it was a new cause of action, the limitation period for which had long expired before the trial started and therefore the trial judge was wrong in allowing the plaintiff to add by way of amendment that cause of action.  However, he was right in so far as he allowed the amendment relating to the duty of care of an employer at common law.

29.In the present case, as discussed above the original case regarding Transaction 1 is that the defendants had caused P to acquire through private channels the Grandtop shares at a price which was grossly in excess of the prevailing market price then trading on HKSE and in circumstances which rendered it dishonest on the part of the defendants to do so.  If the factual allegations relating to the making of misleading and false documents are just further particulars provided in support of the original case that the defendants had acted dishonestly in the share acquisition, then I can see no valid objection to their inclusion in CS.  On this limited basis, I would allow item (v).

30.However, in my view items (i) and (ii) go further than just supporting P’s original case of dishonesty.  This is because in P’s Supplemental Skeleton Submissions, Ms Chan says:[51]

“In causing the Plaintiff to pay more than the market price, not informing the shareholders, and deliberately and fraudulently concealing the fact from the shareholders, it is the Plaintiff’s case that the Ds have committed, inter alia, both a fraudulent breach of trust and fraud.”

Thus, P is saying that the allegation of “fraudulent/dishonest concealment” as contained in items (i) and (ii) is not just evidence of the defendants’ dishonesty but is an aspect of their fraudulent breach of fiduciary duty and fraud.  It is well-established that in case of fraudulent concealment of a material fact by a fiduciary, the party to whom the duty of disclosure is owed and suffered loss by reasons of the breach may recover damages for that loss in the tort of deceit: Conlon & Anor v Simms.[52] As such, the allegation of “fraudulent/dishonest concealment” in question is tantamount to an allegation of deceit which entitles P to damages. 

31.However, the allegation of “fraudulent/dishonest concealment” as a form of deceit has been patently absent from P’s original pleaded case of fraud or fraudulent breach trust, the essence of which is only that the defendants had dishonestly misapplied P’s money in the acquisition of Grandtop shares.  Therefore, in my view items (i) and (ii) do raise a new cause of action.

32.As regards Mr Hui’s contention that the new cause of action of “fraudulent/dishonest concealment” is “bound to fail” as being self‑contradictory, however, with respect I am unable to agree.  This is because:

(a)  whether or not the new claim of “concealment” is in fact inconsistent with the revelation of the undated internal accounting records of P[53] depends on how the latter had come into existence, how it had been kept and what use, if any, had been made of it by the defendants, all these depends on a consideration of the relevant evidence which is a matter for the trial judge;

(b)  although the total amount of P’s investment in securities was reported in its annual report, the annual report did not indicate the names of the company or companies and the prices at which the securities were purchased;[54] and

(c)  the material already available to P provides reasonable ground for thinking that they may be able to advance their case by the cross-examination of the defendants.[55]

In short, the strength of the new claim of “fraudulent/dishonest concealment” would depend on the evidence and therefore is not a matter that this court can decide at this stage.  The fact that fraud had not been pleaded in Carecraft Procedure,[56] which was disposed of summarily based on an agreed schedule of facts, is neither here nor there. 

33.Based on the above, in my ruling the allegation of “fraudulent/dishonest concealment” as contained in (i) and (ii) above does raise a new cause of action.  Therefore, they should not be permitted unless they fall within O 20, r 5(5), RHC.

AS TO (3): ARISING OUT OF SAME FACTS OR SUBSTANTIALLY THE SAME FACTS

34.In Welsh Development Agency v Redpath Dorman Long Ltd,[57] it is said that:

“whether or not the new cause of action arises out of substantially the same facts as that already pleaded is substantially a matter of impression.”

35.With respect, a perhaps more instructive approach can be found in Ng Kam Chuen v Attorney General.[58]  In that case, Deputy Judge Patrick Chan (as he then was), following Grewal v National Hospital for Nervous Diseases & Anor (CA)[59] and Sayer v Kingston & Esher Health Authority (CA),[60] held that the court in determining the issue should consider what facts would have to be investigated on the original statement of claim and what facts would have to be investigated on the amended statement of claim.  Having obtained two series of facts from these two considerations, the court should ask itself whether the two were the same or substantially the same.

36.Applying Ng Kam Chuen’scase to the present case, I am satisfied that P’s original cause of action (one of dishonest misapplication of company property) and the new cause of action (fraudulent/dishonest concealment of the misapplication of company property) arise out of the same or substantial the same facts.  My reasons are as follows:

(a)  the two causes of action have the same factual origin and are about the same transaction of P;

(b)  potential witnesses of the original cause of action would inevitably give evidence on the bought and sold notes, the minutes of the Board of Directors authorising the purchase, the undated internal accounting records and the relevant part of the annual report about P’s investment on securities, which are also the subject documents of the new cause of action; and

(c)  as aforesaid, the fact (if proved) that the defendants had attempted to conceal the actual purchase price of the Grandtop shares from the shareholders would be relevant to and in fact an important piece of evidence of them having acted dishonestly in the transaction.

37.I conclude therefore that the condition in O 20 r 5(5), RHC is met in the present case in that the new cause of action (fraudulent/dishonest concealment by directors of their own dishonest conduct) arises out of the same or substantially the same facts as the original one (fraud or fraudulent breach of trust by directors as trustees).

AS TO (4): ABSENCE OF ALLEGATION OF FRAUD IN IS

38.In IS, P has only pleaded the following causes of action:

(a)  misfeasance, misconduct and defalcation[61] in relation to the business and affairs of the Company;

(b)  mismanagement of the Company money;

(c)  breach of fiduciary duties; and

(d)  breach of duty of care.

39.Corresponding to the proposed amendments to SC, P now also seeks to amend IS by:

(1)  adding

“deliberate concealment by them of the facts concerning the Company’s investments, from the Company and its members”

(2)  changing “breach of fiduciary duties” to

“fraudulent breach of fiduciary duties owed by them to the Company and because their position as executive directors were analogous to that of trustees, constituting fraudulent breach of trust”

40.Mr Hui submitted that the relevant amendments to SC should not be allowed as they have not been contained in IS in its unamended form.  However, Mr Hui did not cite any direct case authority in support of his proposition and he simply sought to rely on what he described as “the general principles” of pleadings.

41.With respect, I am unable to accept the above submissions of Mr Hui.  My reasons are as follows:

(i) a general indorsement on the writ consists only of “a concise statement of the nature of the claim made or the relief or remedy required in the action begun thereby”: see O 6, r 2(1)(a), RHC; and

(ii) as a general rule, a plaintiff is permitted in his subsequent statement of claim to alter, modify or extend his original claim and to claim further or other relief without amending his writ provided that the new cause of action arises from facts which are the same as, or include or form part of, facts giving rise to a cause of action mentioned in the writ.  A defect in a writ may, therefore, be cured by a proper statement of claim which may operate in the same way as the obtaining of leave to amend: see Hill v Luton Corp;[62]see also HKCP at §18/15/7.

42.My attention has also been drawn by Mr Kong and Ms Chan to Phelps v Spon‑Smith & Co (a firm),[63] where it was held that there was jurisdiction to grant leave to amend the writ outside the limitation period when the result of doing so was merely to regularize claims already made before the expiry of the limitation period.  The effect of that judgment would be that the absence of a cause of action in the general indorsement is not bar to a claim of relief based on that cause, if it had already been pleaded in the statement of claim.

AS TO (5): DISCRETION

43.Mr Hui submitted that this court should exercise its discretion by refusing leave to amend on the grounds that (i) insufficient particulars of fraud have been pleaded; and (ii) the new fraud claim is self‑contradictory and bound to fail.

44.Again, I am unable to accept Mr Hui’s submissions.  As regards (i), I have already ruled that P has already pleaded a distinct case of fraud or fraudulent breach of trust by the defendants.  I do not see that, if leave to amend was granted, the state of P’s pleadings would prejudice D1 and D2 in advancing any arguments available to them.  However, if D1 and D2 consider that there is a need for further and better particulars, it is a matter for them to consider making the relevant application.

45.As regards (ii), I have already ruled that whether the new fraud claim (fraudulent/dishonest concealment) is in fact contradictory to P’s original case would require a detail consideration of all the relevant evidence which is not a matter of present concern but a matter within the province of the trial judge.  Based on the limited material before me, I do not agree that the new fraud claim is bound to fail.

46.Lastly, I have considered the matter in the round.  I do not see any prejudice to D1 and D2, should leave to amend be granted, which cannot be compensated by costs.

CONCLUSION

47.P is granted leave for the proposed amendments to SC and IS.  I also grant leave to the defendants to file amended defence within 21 days of this judgment, if so advised.

COSTS

48.I make an order nisi that:

(i) D1 and D2 have the costs of the application and the consequential amendments in any event, to be taxed if not agreed; and

(ii) the costs of the hearing be costs in the cause.

Mr Hatten Kong and Ms Candy Chan instructed by M.M. Wong & Co, for the plaintiff

Mr John Hui and Mr Jonathan Chan instructed by Cheung & Yip, for the 1^st and 2^nd defendants

Tang & So, for the 3^rd defendant (attendance excused)