Polyline Development Ltd v. Ching Lin Chuen and Others

CACV 139/2021

[2022] HKCA 787

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 139 OF 2021

(ON APPEAL FROM HCA NO 2319 OF 2019)

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BETWEEN

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Before:  Hon Kwan VP and Yuen JA in Court

Date of Hearing and Judgment:  27 May 2022

Date of Reasons for Judgment:  2 June 2022

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REASONS FOR JUDGMENT

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Hon Yuen JA (giving the Reasons for Judgment of the Court):

1.This is an application by D1, D7-12, D14-16 and D18 (collectively the “WG defendants”)  for security for costs for the plaintiff’s appeal from the Judgment of Recorder Manzoni SC (“the judge”)  given on 3 March 2021 (“the Judgment”)  in which he struck out the statement of claim (“SOC”)  against each of the WG defendants¹, and ordered the action as against each of them to be dismissed. At the same time, the judge dismissed the plaintiff’s summons filed on 27 October 2020 for leave to amend the SOC. The judge also ordered the plaintiff to pay the costs.

2.1.On 31 March 2021, the plaintiff filed a Notice of Appeal.  On 21 April 2021, the WG defendants filed a Respondent’s Notice to affirm the Judgment on additional grounds.

2.2.On 16 April 2021, the WG defendants issued a summons applying for security for costs which was opposed by the plaintiff.  The summons was supported by affirmation evidence as to the plaintiff’s impecuniosity.  On 20 May 2022, the WG defendants filed a summons containing further material about another defendant’s claim for costs against the plaintiff.  We indicated that we would deal with this summons at the hearing.

2.3.At the conclusion of the hearing, we dismissed the summons for security for costs for reasons appearing below.  It was therefore not necessary to deal with the summons of 20 May 2022 and we make no order on it.

Summons for security for costs

3.1.The WG defendants asked for security for costs of more than $2.7 million.

3.2.The plaintiff is in liquidation, and it does not dispute the WG defendants’ assertion that it would not be able to pay the costs of an unsuccessful appeal (or a smaller amount than that claimed)  or provide any security for costs.

3.3.However, the plaintiff asserts that its liquidation and inability to provide security arise from the misconduct of D1, assisted by the other WG defendants.  D1 was a director of the plaintiff from 8 August 1991 to 23 December 2002, about 6 months before the plaintiff was wound up on 25 June 2003.

3.4.In any event, the plaintiff contends that the merits of its appeal are such as to provide a countervailing factor to resist the application for security.  It is well-established² that on considering the merits of the appeal for these purposes, while a detailed examination is not required or desirable, the court should form some sort of preliminary, even instinctive, view.

The claim

4.The judge considered the strike-out summons by reference to the draft Amended SOC³.  In essence, the following were pleaded:

(1)   The plaintiff was a developer of ding houses.

(2)   D1 was a director of the plaintiff, and also directly or indirectly controlled some other corporate defendants.

(3)   §18A pleaded “9 Steps of Ding House Development” as usual steps taken by ding house developers generally in ding house development.

(4)   Essentially, this involved a developer acquiring lands, finding dings to “sell” their ding rights and getting them to sign “ding trust documents”, making applications on the dings’ behalves to the authorities for licences (etc)  at various stages, constructing houses, and selling them or retaining them for letting.

(5)   §18B pleaded “9 Steps of [the plaintiff] Polyline’s Ding House Development”, with each “Step” given a number.

(6)   The main difference between the usual steps in §18A and the plaintiff’s steps in §18B was the interposition of special purpose vehicles (“SPVs”)  which were named in §18B(2).  The plaintiff pleaded that it would

“designate special purpose vehicles (“SPVs”)  for them to be exclusively responsible for developing ding houses within a particular village. ... [The plaintiff] might then transfer part of the lands to its designated SPV for ding house development in that particular village, leaving the remaining part of the lands in that village to be developed by [the plaintiff] itself. Thus, [the plaintiff] would transfer lands in different villages to different SPVs for ding house development in those different villages. At the same time, [the plaintiff’s] SPVs held all the lands transferred by [the plaintiff] to them on trust for [the plaintiff] (“Step 2”)”

As far as the SPV’s are concerned, in §18B,

-  Steps 4, 6, 7 and 9 refer to the plaintiff or its SPVs;

-  Step 5 refers to “ding trust documents” in favour of the plaintiff “and/or its alter ego”. As Step 4 had referred to “ding trust” in favour of the plaintiff or its SPVs, it would be logical to construe §18B(5)  as meaning that the SPVs were the plaintiff’s alter ego (although it has not been pleaded that the SPVs were the plaintiff’s subsidiaries cf Notice of Appeal para. 8(4)(b)).

(7)   Then, as pleaded in §18B(9):

“If a ding house or land was (to be)  sold, [the plaintiff] or its SPV would arrange for the sale proceeds to be paid either to [the plaintiff] direct, or via the relevant SPV (or its servants or agents).

If a ding house or land was not sold, its (legal)  title would either be reverted back from the ding to, or be retained by the ding pending further instructions from, [the plaintiff] or its SPV (“Step 9”)”.

(8)  The plaintiff purchased a number of lots, listed in Schedules 1, 2 and 3.

(9)  Subsequently on 30 May 2001, the plaintiff transferred Schedule 1 and Schedule 3 lots⁴ to D12. No consideration was paid by D12 even though the plaintiff acknowledged receipt of the purchase price in a receipt clause in the assignments.

(10)  Thereafter, D12 transferred the Schedule 1 and Schedule 3 lots to other corporate defendants.

(11)  No consideration, alternatively consideration at substantial undervalues, was provided to the plaintiff.

(12)  Based on the above, the plaintiff claimed that (of the WG defendants):

- D12-18 held the lots on resulting trust for it, as it had received no or no market consideration;

- further, these defendants had been unjustly unriched, or had conspired to cause the plaintiff to make those transfers, and so they hold the lots on constructive trust for it;

- in causing those transfers, D1 as a director of the plaintiff acted in breach of fiduciary duty;

- the transfers were sham;

- the plaintiff was thus entitled to an account;

- there was an unlawful means conspiracy between (inter alia), D1 and D12-D16;

- there was an intent to defraud the plaintiff’s creditors; and

- D1-D11 were guilty of dishonest assistance and knowing receipt.

5.Finally, the plaintiff pleaded that as the defendants had concealed material facts, the liquidators did not discover the above until 16 November 2016.  The writ was issued on 16 December 2019.

WG defendants’ summons to strike out

6.On 21 August 2020, the WG defendants issued a summons to strike out the claim on all the available grounds, alternatively for security for costs.

Plaintiff’s summons to amend the SOC

7.On 27 October 2020, the plaintiff issued a summons to amend the SOC.

The judge’s Judgment

8.The judge heard the summonses over 2 days in February 2021.  On 3 March 2021, he handed down a 70-page Judgment, essentially holding the following:

(1)   in respect of the plaintiff’s transfers of the Schedule 1 and Schedule 3 lots to D12 for no or no adequate consideration, “with the pleading of the business model as set out in paragraph18B, one can see that the real complaint is not the passing of the properties to persons or entities for no or no adequate consideration; indeed the business model itself anticipates that the properties will pass to at least 2 persons other than the plaintiff for no or no adequate consideration” (emphasis added)  [§69];

(2)   “as a result, taking an overall view of the statement of claim, it seems to me that there is a fundamental problem with it, in that the only transfer of any land out of the ownership of the plaintiff was done expressly pursuant to the plaintiff’s own business model ...” (emphasis added)  [§77];

(3)   consequently, the plaintiff’s claims based on the transfers of the lots to D12 for no or no adequate consideration (breach of fiduciary duty⁵, constructive trust⁶, sham⁷, transfers with intent to defraud creditors caught by s.60 Conveyancing and Property Ordinance, and dishonest assistance and knowing receipt⁸)  must fail;

(4)   the judge accepted that if no⁹ consideration had passed to the plaintiff for the Schedule 1 and Schedule 3 lots, a reasonable cause of action may arise that D12 held the lots on resulting trust for the plaintiff [§84]; however, that claim was bound to fail because the receipt clause in the assignments created a contractual estoppel, such that the plaintiff could not now contend, as against D12, that no consideration had passed [§126-130];

(5)   as for the Schedule 2 lots, it had not been alleged that no consideration had passed, so no cause of action in resulting trust arose [§87];

(6)   on the basis of the above, the judge struck out the claim; nevertheless, he set out his conclusions on the limitation and laches arguments advanced by the WG defendants [§131];

(7)   the WG defendants accepted that no period of limitation applied to the resulting trust claim against D12 [§132];

(8)   as for all the other causes of action, he was “satisfied that it is at least arguable that s.26(1)(a)  [Limitation Ordinance] is capable of being activated ...” [§148];

(9)   as for laches, this “depends upon the overall balance of justice and when the knowledge and understanding of the Liquidators is disputed, the question of where the balance of justice lies is not plain and obvious” [§167].

9.Consequently, the judge struck out the claim against the WG defendants, dismissed the action against them, refused the plaintiff leave to amend the SOC, and ordered that it pay the costs.  It was not necessary for the judge to deal with the WG defendants’ alternative application for security for costs.

Discussion

10.As held in Chung Kau, it is not necessary or desirable for this court to conduct a detailed examination of the merits of the appeal, but we must form a preliminary view.

11.1.With respect to the judge, it would appear that his application of the plaintiff’s “business model” to its transfers of land to D12 may have been unjustified.  In §18B, the plaintiff had pleaded that under its business model (as distinct from the usual business model for developing ding houses pleaded in §18A), it interposed designated SPVs which were named in §18B.  Significantly, D12’s name does not appear in the list of the plaintiff’s SPVs.

11.2.Mr Horace Wong SC (leading Mr Michael Lok)  for the WG defendants sought to argue that §18B(2)  did not exclude the interposition of a company other than a designated SPV as the transferee of land for development.  We do not agree. The relevant passage reads: “Polyline might then transfer part of the lands to its designated SPV for ding house development in that particular village, leaving the remaining part of the lands in that village to be developed by Polyline itself” (emphasis added).  That pleading leaves no room for the argument that the business model also included the transfer of land to a non-designated SPV.

12.Since D12 was not an SPV of the plaintiff, the plaintiff’s transfer of lots to this company would not have been part of its business model.  Such a transfer without consideration¹⁰ to a company which was not a designated SPV would give rise to some (if not all)  of the pleaded causes of action.  Mr Wong’s argument that transfers without consideration to a ding were envisaged in the business model does not answer the point.  Under the business model, the plaintiff or the SPVs would be protected by the ding’s trust documents.  More importantly, the rationale of the Judgment was that the transfer of land to D12 was within the business model.

13.The judge’s apparent error in assuming D12 was the plaintiff’s designated SPV (see eg §74 and 77)  may have been due to the way §19(5)  of the draft Amended SOC was pleaded.  This read:

“Thereafter, Polyline transferred and/or assigned the Schedule 1 and 3 Lots to the 12^th defendant and the Schedule 2 Lots to individual dings with an intent to complete Step 3” (emphasis added).

14.However the words “with an intent” would not in themselves turn D12 into the plaintiff’s designated SPV, for those SPVs had been named in §18B, and D12 was not one of them.

15.1.Moreover, the words “with an intent to complete Step 3” cannot assist the WG defendants’ argument, for “Step 3” was only concerned with sub-division of lands and/or change of zoning (in other words, legal preparation of the land), and had nothing to do with transfers to another entity (eg D12)for onward transfers to yet other entities, none of which was the plaintiff’s designated SPVs, before eventual sale to the end-user.

15.2Step 3 was defined in §18B(3)  thus:

“(3)  Polyline would subdivide the relevant lands into individual lots capable of ding house construction, and/or change the zoning of the relevant pieces of agricultural land so acquired from agricultural use to residential use (“Step 3”)
(Sub-paragraphs (1)  - (3)  hereinabove broadly corresponded to steps 1 and 2 in the 9 Steps of Ding House Development referred to in paragraph 18A hereinabove)” (emphasis added).

15.3.Steps 1 and 2 in §18A also referred only to a developer acquiring lands, then sub-dividing the lands and applying for rezoning.

15.4.When the reader reads that Steps 1 - Step 3 in §18B “broadly corresponded” to the usual steps 1 and 2 in §18A (there being no SPVs at all in the usual 9 steps in §18A), the reader would not think that Step 3 had anything to do with a transfer of the lots.

15.5.As for Mr Wong’s argument that §19.51(8)  and 19.52(5)  give the impression that the plaintiff accepted that the development of those lots showed that “the 9 steps of Polyline’s Ding House Development had been fully completed”, it is very clear from other passages in the same pleading (eg §24 and 26)  that the plaintiff was complaining about the transfers of the lots to D12 (not its designated SPV)  for which it received no (or nominal)  consideration.

16.As noted above¹¹, the judge’s apparent error in assuming that D12 was a designated SPV, so that the plaintiff’s transfer of lots to it without consideration was part of the plaintiff’s business model, carried through to his consideration of all the causes of action.

17.1.At this stage, it is not necessary or desirable for us to say anything more, save that in light of the above, we consider the merits of the appeal are a sufficient countervailing factor such that we would decline the application for security for costs.

17.2.Suffice to say also that we note that this court¹² had in Asgain Co Ltd v Cheng Ka Yan (No.2)¹³ expressed reservations at §48 that “as far as Hong Kong law is concerned, Prime Sight¹⁴ may still be subject to further debate in our courts notwithstanding our judgment in this appeal”.

Order

18.1.For the reasons set out above, we dismissed the summons for security for costs.  As for costs, we indicated that we would make a costs order nisi in these Reasons for Judgment.  We have to say that the draft Amended SOC was very poorly drafted (not by Mr Barlow SC).  The objective of pleadings is to fairly and precisely inform the other parties and the court of the pleader’s case.  If the pleader has thought out his case (however complex)  sufficiently, he should be able to plead it methodically and consistently.

18.2.In the present case, the draft Amended SOC is 80 pages long.  Particulars which should have been placed in schedules were not.  The content was sloppily presented.  As shown in §19, the pleader could not even get right whether a passage was meant to apply to certain sub-paragraphs or not.  This shows an inattention on the part of professional legal advisers which may well justify a wasted costs order.

18.3We have every sympathy for the judge who had to sift through the draft Amended SOC over two days to attempt to understand the plaintiff’s case.  We also have to say that the Notice of Appeal and Annexures, which can only be described as verbose and argumentative, have not assisted this court.

18.4For these reasons, we would make an order nisi that there be no order as to costs.

Mr Horace Wong SC and Mr Michael Lok, instructed by Chungs Lawyers, for the 1^st, 7^th – 12^th, 14^th – 16^th and 18^th defendants

Mr Barrie Barlow SC, instructed by William K W Leung & Co, for the plaintiff