River Plate Co Ltd v. Tang Tung Sang and Another

HCA 476/2021

[2023] HKCFI 611

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 476 OF 2021

--------------------------

--------------------------

--------------------------

DECISION

--------------------------

THE APPEAL

1.By summons filed on 11 January 2022 (“the Summons”), the plaintiff sought summary judgment on part of its claims against the defendants, or alternatively, for an order of interim payment.

2.Having heard the parties, a Master granted the defendants conditional leave to defend, the conditions being the 1^st and 2^nd defendants’ paying into Court the sums of $4,160,773.66 and $2,348,000 respectively. After the hearing, the defendants’ solicitors wrote to the learned Master and asked for leave for the defendants to adduce further evidence on their respective financial status, but it was refused (collectively, “the Decisions”).

3.This is the defendants’ appeal against the Decisions.

4.It is trite that an appeal brought against Master’s decision is dealt with by way of rehearing, and the judge treats the matter as though it came before him for the first time. The judge will give the weight it deserves to the previous decision of the Master, but is in no way bound by it. The judge in chambers is in no way fettered by the previous exercise of the Master’s decision. (Hong Kong Civil Procedure 2023, Volume 1, paragraph 58/1/2 (at page 1214)).

BACKGROUND

5.The background of the present case has been summarised by Au-Yeung J in her Decision dated 30 January 2023 which I respectfully adopt as follows:

“2. Fant Chuck Lam Sanchez (‘FC’), Nam Chuck Lam Sanchez (‘NC’) and D1 are shareholders of the Plaintiff, holding 33%, 34% and 33% shares respectively. Since incorporation, the 3 of them used to be directors of the Plaintiff but D1 was removed as a director after 1 May 2021 upon discovery of his alleged dishonest acts forming the subject matter of this action. D1 was terminated as an employee on 8 April 2021.

3. The Plaintiff’s previous registered address was the residence of D2. D2 is the mother of D1.

4. The Plaintiff operated a bar with a trading name of La Luna. FC and NC were allegedly responsible for daily operation of the bar. D1 was responsible, principally, for the financial side, including accounting, book-keeping, personnel, banking, managing the payroll and other administrative work. Each of the directors was supposed to receive salary and/or bonus in the same amount.

5. The Plaintiff maintained a bank account with HSBC (‘HSBC Account’) with 3 directors being its authorized signatories until D1 was removed as a signatory on 31 March 2021. Prior to his removal, any payment by cheque had to be signed by 2 of the 3 signatories. D1 had access to the ebanking system of the HSBC Account.

6. There was no dispute that all cash income of La Luna would be passed to D1 for checking and he would be responsible for depositing it into the HSBC Account.

7. There was no dispute that D1 had control of a Corporate Credit Card and had used it for his personal spending.

8. Allegedly as a result of D1’s fraud, fraudulent misrepresentation, breach of trust and breach of director’s duties, the Plaintiff’s funds had been, amongst others, transferred or paid to D1 as unauthorized salary / bonuses / dividends and for personal spending; and to his affiliates without the Plaintiff’s authorization or commercial reasons. D1 used the Corporate Credit Card for personal expenses. He also fraudulently employed D2. The Plaintiff thus claimed against D1 for various heads of loss and damage to the tune of HK$15 million.

9. In respect of D2, she was purportedly employed by the Plaintiff since 1 October 2016. The Plaintiff claimed that her employment, the services she provided or termination were never made known to or authorized by FC and NC. The Plaintiff therefore claimed against D2 for repayment of her purported salary in the amount of $2,348,000 (being HK$42,000 per month from 1 October 2016 to 31 May 2020 and thereafter at HK$50,000 per month from 1 June 2020 to 31 March 2021).

10. The Defendants denied the claims against them.

11. D1 did not deny having taken money from the Plaintiff but the general theme of his defence could be summarized as follows:

(1) He had repaid by deposit into the HSBC Account by cash, cheque or bank transfer.

(2) He put back cash into the cash pile for the business to be banked into the HSBC Account.

(3) There was an account reconciliation exercise every year when the Plaintiff prepared its financial statements.

(4) The amount owed by D1 to the Plaintiff should be set off against the amount owed by the Plaintiff to D1.

(5) FC and NC as the other directors knew of and approved of the payments that were made by cheques as one of them had to sign on the cheques alongside D1 for the cheques to be valid.

(6) What D1 had taken as salaries/bonuses/dividends were similar to the amounts received by FC and NC.

(7) FC and NC themselves had taken cash of the Plaintiff and that was dealt with by account reconciliation as well.

(8) FC and NC knew and approved of the employment of D2.

12. D2 admitted receiving salary but only in the total amount of HK$742,600. Even the MPF records at best showed that she had received only HK$972,000. She claimed to have used past business experience to assist the Plaintiff and provided service as an employee.

13. The Plaintiff denied D1’s defence for, amongst others, the following reasons:

(1) D1 has not provided any substantial evidence on the agreement to let him use the Corporate Credit Card for his personal spending. He only purportedly dealt with 83 out of over 840 items of credit card spending. The explanations he offered defied commercial sense and appeared to be a cherry‑picking exercise of random deposits with irregular timing. Some items were for entertainment with customers and study of the Taiwan market which was not part of the Plaintiff’s business plan. The Plaintiff had evidence of D1’s admission to a regular customer that he had been using the Corporate Credit Card for his personal expenses;

(2) D1 has failed to produce any evidence of cheque or bank transfer as repayment. He could only allege that he had repaid by cash, but the bank statements did not show who deposited cash or for what purpose;

(3) If D1 had repaid by bank deposit or by adding cash to the cash pile to be banked in, the net cash inflow into the HSBC Account should have been larger than its revenue from its bar business, yet this was not the case;

(4) The annual financial statements (which was the responsibility of D1 to prepare) did not accurately reflect the Plaintiff’s financial situation, as D1 had no record or recollection of whether certain payments by him or for him had been recorded properly, and there was no evidence to suggest that any sum owed to D1 was closely connected to any of the Plaintiff’s claims. The alleged account reconciliation was not supported by evidence of actual transfers and accounting record;

(5) Cheques prepared by D1 included blank cheques pre-signed by FC or NC en-masse, on the basis that these were reserve cheques in case D1 made mistakes, but D1 breached FC and NC’s trust in him in using those cheques;

(6) D1’s explanations on the Unauthorised Transfers Claim and the Unauthorised Salary Claim were not supported by or contradicted by contemporaneous documents;

(7) Regarding the Unauthorised Transfer to Affiliates Claim, D1’s explanation that they were for investment not only did not make commercial sense, but it flew in the face of reason that the Plaintiff would have taken no action at all since 2016 to chase after the sum of HK$1,700,000 paid to ‘Lok Ka Fai’ for alleged investment in his business and which as admitted by D1 was lost. The only explanation must be that none of the other directors had knowledge of this transaction; and

(8) D1 had not and could not point to any specific incident where the income from the bar was misappropriated by FC and NC.

14. The Plaintiff denied D2’s defence as bare assertions. It was D2’s own case that she would only communicate with D1 in respect of the company’s affairs. She had at most been assisting D1 in the discharge of his own duties, which was a far cry from the Plaintiff formally employing her. Her prior business experience could hardly be relevant to assist the Plaintiff’s business. The Plaintiff’s own evidence showed that other employees were not aware that D2 had ever been employed at La Luna.”

LEGAL PRINCIPLES

Summary judgment

6.In Li Chuen Kwai v. Po Lam Construction Development Limited (HCA 2376/2013, unreported, 24 September 2014), it was held that:

“12. As far as the defendant’s defence is concerned:

(1) The defendant shoulders the burden to satisfy the court that he has a real or bona fide defence (ie that there are triable issues), or that there ought for some reason to be a trial of the plaintiff’s claim.

(2) However, a complete defence need not be shown. The defence set up need only show that there is a triable issue or question or that for some other reason there ought to be a trial; and leave to defend ought to be given unless there is clearly no defence in law and no possibility of a real defence on the question of fact.

(3) Although the mere assertion in an affidavit does not, ipso facto, provide leave to defend, the court will not embark upon a mini‑trial of the action on paper and leave to defend will be granted unless the defence raised is so incredible or so contradicted by contemporaneous documents or circumstances that it becomes clear that the defence is a sham.

(4) The test is not whether the defendant’s assertions are to be believed, rather it is whether those assertions are believable, ie capable of being believed. If so, the defendant must have leave to defend.

(5) Whether the defendant’s assertions are believable is a question that should be answered not by taking those assertions in isolation bur rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute.”

7.In Ju Yan Di Embroidery Genesisy v Yau Wai Han [2015] 1 HKLRD 822, 827, Cheung JA held that:

“14. It is well-established that the burden on the defendant in a summary judgment application is to show that he has a credible defence and he must condescend to give particulars of his defence. However, this does not mean that once the plaintiff invokes the application and irrespective of the strength of his case, the defendant bears all the burden of showing that there are triable issues in the case. This is because the starting point in a summary judgment application is that it should only be invoked when there is no defence to the claim. This means that the plaintiff must in the first place demonstrate that the defendant has indeed no defence. This requirement is further recognised in the procedural rules which mandate the plaintiff to state his belief in the verifying affidavit that there is no defence to the claim. This requirement must be kept in proper perspective when assessment is made of the strength of the application, otherwise there is a danger that the attention will be focused solely on what the defendant has said without consideration at the same time of the basic premise of the plaintiff’s claim or its inherent strength and weakness…”

8.In Time Rich 08 Limited v DBE (HK) Limited & Others [2018] HKCA 404, it was held by the Court of Appeal that:

“…in deciding whether a plaintiff is entitled to summary judgment the relevant test is whether the defendant has raised credible triable issues. If there are, the matter should go to trial. If not, judgment should be entered against the defendants. In considering whether there are triable issues, the Court will not take the defence on its face value but test it against the evidence disclosed in the affidavit including matters such as contemporaneous documents, whether the alleged defence is inconsistent with the defence previously put forward or whether the defence is only recently raised despite opportunity being given to the defendant to respond earlier. The Court will also consider the inherent probability of the defence but what the Court should not do is to conduct a mini-trial on complicated factual issues : Paul Y Management Ltd v Eternal Unity Development Ltd (CACV 16/2008)” (at paragraph 5.2)

Interim payment

9.In Delco Participation B V v Chiho Environmental Group Limited (formerly known as Chiho-Tiande Group Limited) & Another [2020] HKCFI 1643, the plaintiff therein also applied for summary judgment and alternatively interim payment. Coleman J had the following to say in his Decision:-

“31. As to an application for interim payment under Order 29 rule 10, whether to order interim payment is an exercise of the court’s discretion. There is some overlap with the test for granting conditional leave to defend, namely whether the defences and/or counterclaims raised can be said to be shadowy. But, essentially, the burden is on the plaintiff to show on the balance of probabilities that it would, and not merely that it is likely to, succeed at trial. The standard of proof required is high.

32. Where unconditional leave to defend is granted, it is at least unlikely that the plaintiff will be able to satisfy the burden of proof required to make an order for interim payment. But that may depend in each case on the nature of the claim and the defence put forward.”

THE PLAINTIFF’S CLAIMS

10.The plaintiff has pleaded the following heads of claims against the 1^st defendant in its Statement of Claim:

(1)  The 1^st defendant had caused the plaintiff to transfer the plaintiff’s company funds from the plaintiff’s bank account to his own bank account for a total sum of $246,000 without authorization and commercial reason (“the Transfer to Personal Account Claim”);

(2)  The 1^st defendant had caused the plaintiff to pay himself a total remuneration of $1,037,000 in the financial year 2019/2020, when both NC and FC had only received $339,000 each during the same period. Hence, the 1^st defendant had received an extra remuneration of $698,000 (“the Extra Remuneration Claim”);

(3)  The 1^st defendant had caused the plaintiff to transfer the plaintiff’s company funds in the total sum of $1,750,000 to his affiliates and/or unknown third parties without authorisation or commercial reason (“the Transfers to Unknown Third Parties Claim”);

(4)  The 1^st defendant had caused the plaintiff to pay for a series of his own personal expenses in the total sum of $766,422.04 which was unrelated to the plaintiff’s business (“the Personal Spending Claim”);

(5)  The 1^st defendant is still keeping at least $171,466 of the plaintiff’s money in his possession, which he should return to the plaintiff;

(6)  The 1^st defendant had failed to properly discharge his fiduciary duty in keeping proper accounts of the plaintiff’s revenue and expenses, and as a result, the cash revenue recorded by the plaintiff when compared to the cash deposited into the plaintiff’s bank account over the same period showed a missing cash revenue of around $5,286,253, which the 1^st defendant should account for;

(7)  In breach of the agreement reached among the 1^st defendant, FC and NC that the corporate credit card of the plaintiff should only be used for the legitimate business purposes of the plaintiff, the 1^st defendant had used the same to pay off his personal expenses in the total sum of $1,466,773.66 (“the Credit Card Claim”);

(8)  At the time of its incorporation, it was agreed among FC, NC and the 1^st defendant that each of them should inject $700,000 into the plaintiff. However, since the 1^st defendant did not have enough money to pay at the time, he borrowed $100,000 from FC. It was subsequently agreed among them that the plaintiff shall settle the said loan on the 1^st defendant’s behalf, and that the 1^st defendant should repay the same to the plaintiff. The plaintiff also lent another $135,500 to the 1^st defendant subsequently. The total amount of loan in the sum of $235,500 remained unpaid by the 1^st defendant;

(9)  The plaintiff expanded its business in around September 2018 and rented some extra spaces for that purpose. The 1^st defendant was responsible for arranging renovation work of the said new area. While doing so, he had incurred total construction costs in the sum of around $3 million, when such work should normally cost less than $2 million. He should therefore be responsible for the plaintiff’s loss in the sum of around $1 million;

(10)  In order to perform his duties, the 1^st defendant has at all material times kept the plaintiff’s assets and properties, including a computer hard disk, financial documents, etc. (“the plaintiff’s Assets”). Despite repeated requests, the 1^st defendant has failed to return the plaintiff’s Assets (“the Return of Assets Claim”);

(11)  As the 1^st defendant had failed to properly discharge his duties in his handling of the plaintiff’s affairs, the plaintiff has suffered loss and damage by having to pay $2,908 late and financial charges to HSBC;

(12)  Since 29 March 2021, the 1^st defendant had made false representations to the plaintiff’s suppliers, landlord and others, to the effect, inter alia, that the plaintiff would not continue to rent its then business address. As a result, the plaintiff could not renew its tenancy agreement with its landlord of the then address, and had to rent another premises at a higher rent. The plaintiff has therefore suffered loss and damage in the total sum of $3,463,086 being the total of the additional rent payable for the new premises and the costs of the renovation work thereat.

11.As far as the 2^nd defendant is concerned, the only claim made by the plaintiff is that she had been allegedly employed by the plaintiff and received salary in the total sum of $2,348,000 but such an alleged employment had never been properly authorized by the plaintiff (“the D2 Salary Claim”).

THE SUMMARY JUDGMENT APPLICATION

12.By virtue of the Summons, the plaintiff only asked for partial judgment against the defendants, which included:

(1)  The Transfers to Personal Account Claim;

(2)  The Extra Remuneration Claim;

(3)  The Transfers to Unknown Third Parties Claim;

(4)  The Personal Spending Claim;

(5)  The Credit Card Claim;

(6)  The Return of Assets Claim; and

(7)  The D2 Salary Claim.

13.At the hearing, Mr Chan for the plaintiff informed the Court that the plaintiff would not pursue the Return of Assets Claim in this application. I will therefore deal with the remaining six heads of claim in turn below.

The Transfers to Personal Account Claim

14.Under this claim, the plaintiff alleged that the 1^st defendant had caused the plaintiff to issue 4 cheques to himself as follows:

Transaction Date	Amount
6 August 2014	$220,000
2 September 2014	$6,000
6 October 2014	$5,000
5 November 2014	$15,000

15.The 1^st defendant’s case is that the first cheque dated 6 August 2014 (No.388423) represented the bonus/dividend which was distributed by the plaintiff to him, whereas the other three cheques were payments of his salaries. The 1^st defendant, in his 8^th Affirmation, also referred to the plaintiff’s monthly bank statement issued on 11 August 2014 which showed that three cheques with sequential numbers (Nos.388421, 388422 and 388423 respectively), each for the amount of $220,000, had been issued. He alleged that the other two cheques were issued to FC and NC respectively for payments of bonus/dividend to them at the same time.

16.Mr Chan for the plaintiff accepted fairly that FC and NC did receive the amount of $220,000. However, he queried the 1^st defendant’s case that such a sum represented bonus/dividend, because this allegation is not supported by the audited financial statements of the plaintiff for the year ended 30 June 2015 which show that the “salaries and other emoluments” paid by the plaintiff in that financial year were only in the total sum of $585,000. Risking to state the obvious, if the said payments were made for distribution of bonus/dividend, the total amount of “salaries and other emoluments” for that financial year would have been at least $660,000.

17.While Mr Chan may well have a point that the payments of $220,000 were not for distribution of bonus/dividend, the fact that FC and NC had also received the payment of $220,000 at the same time as the 1^st defendant did would immediately cast doubt on the plaintiff’s case that the payment of $220,000 to the 1^st defendant was unauthorised. In my view, there must be a triable issue as to whether the payment of $220,000 to the 1^st defendant was unauthorised as alleged.

18.In relation to the other three cheques which allegedly represented payments of salaries to the 1^st defendant, Mr Chan challenged the same by pointing out that the 1^st defendant had not explained why the amounts of salary would fluctuate from month to month.

19.However, it is undisputed that all three directors were the authorized signatories of the HSBC account at the material time, and that any cheque, to be valid, had to be signed by two of the three signatories. In other words, either FC or NC must have signed on the cheques before those cheques could be presented for payment. If either FC or NC had signed the cheques concerned, that would bring a question as to how it could be said that the relevant payments were unauthorized, as it is arguable that FC/NC had knowledge about such payments and the purpose thereof.

20.In this regard, Mr Chan for the plaintiff argued that:

“P does not shy away from the fact that the relevant cheques were signed by NC/FC and D1. However, it is P’s case that the cheques were pre-signed en masse for the operation of La Luna (FC 5^th §92 [A2/383]). […]”[1]

21.Paragraph 92 of FC’s 5^th Affirmation reads:

“[…] I would simply re-iterate paragraph 8(j) of [FC’s 1^st Affirmation] regarding D1’s practice on issuing cheques, and would like to add that since cheques would be signed en-masse, and D1 would often choose peak hours of the pub’s operations to ask [NC] and I to sign cheques, we may not be able to trace the payment made out from each cheque.” (emphasis added)

22.It can therefore be seen that FC did not say that the cheques were “pre-signed en masse” as alleged by counsel.

23.What FC said in paragraph 8(j) of his 1^st Affirmation was that:

“D1 was also responsible for making monthly salary payments to staff members of La Luna as part of his job duties. Salary payment was made by cheque which requires two directors to sign on. It has been his practice every month to ask either [NC] or myself to counter-sign on one extra blank and undated cheque which according to him was a spare cheque to cater for typographical error or mistake on the cheque. He said he would not have to trouble us to sign another cheque that way. Again, out of our trust in him at the time, neither [NC] nor myself questioned the practice of D1. Apparently, as we now discovered, he abused on such trust.” (emphasis added)

24.Hence, counsel’s submission that cheques were “pre-signed en masse” is unsupported by evidence.

25.Mr Lam for the defendants had drawn this Court’s attention to two photocopies of the same cheque which was used to pay the alleged monthly salary to the 2^nd defendant on 1 July 2020. Only the 1^st defendant’s signature could be found in the first copy, whereas two signatures were found in the second copy. It was said that this shows, by way of an example, that the 1^st defendant did not use cheques which were allegedly pre-signed by FC/NC to make payments which are now challenged by the plaintiff.

26.Considering the above matters in the round, I hold the view that the 1^st defendant’s argument that FC/NC had knowledge about the aforesaid payments made to the 1^st defendant and the purpose(s) thereof at the material time as supported by FC/NC’s signature on the cheques (“the Two Signatories Argument”) has given rise to a triable issue which can only be resolved at the trial.

The Extra Remuneration Claim

27.Under this claim, the plaintiff’s case is that while FC and NC had received $339,000 each as salary and bonus in the financial year 2019/2020, the 1^st defendant had received $1,037,000 in the same period. That means he had received $698,000 more than the other two partners. Given the 1^st defendant’s acceptance that the three of them as partners were entitled to an equal amount of salary and bonus at the material time, the plaintiff has suffered loss and damage in the said sum of $698,000.

28.Mr Chan for the plaintiff accepted that all the payments to the 1^st defendant under this claim were made by way of cheques.

29.The Two Signatories Argument is therefore applicable to this claim. Hence, I am of the view that the 1^st defendant has successfully raised a triable issue in relation to this claim.

30.That being the case, without disrespect to counsel, I do not propose to deal with the other arguments raised by the 1^st defendant. Indeed, given there will be a trial on the matter, the less I express my view on the merits of the case at this stage the better. The same approach would be adopted when I consider the other claims made by the plaintiff below.

The Transfers to Unknown Third Parties Claim

31.Under this claim, the plaintiff’s case is that the 1^st defendant had caused the plaintiff to pay the following sums to his affiliates and/or unknown third parties without authorisation and any commercial reasons:

(1)  On around 27 June 2016, a cheque in the sum of $1,700,000 was issued by the plaintiff to a person known as “Lok Ka Fai”;

(2)  On around 5 April 2018, a cheque in the sum of $50,000 was issued by the plaintiff to a company known as “China Brothers Entertainment Culture Limited” (“China Brothers”).

32.The 1^st defendant case is that:

(1)  The sum of $1,700,000 was paid as the plaintiff’s investments in the business of “Lok Ka Fai”;

(2)  The sum of $50,000 was paid to China Brothers as sponsorship cum advertisement fee for the promotion La Luna in that its name would appear in one of the online movies to be produced.

33.As the above payments were made by cheques, the Two Signatories Argument is applicable here. It is arguable that FC/NC had knowledge about these payments at the material time. Therefore, the matter should be resolved at the trial.

34.It should also be noted that in the audited financial statements for the years ended 30 June 2015, 30 June 2016, 30 June 2017 and 30 June 2018 respectively, the plaintiff’s auditor did opine that the audit evidence that was obtained was sufficient and appropriate for him to provide a basis for his audit opinion (“the Auditor’s Opinion”). If the payments concerned were not for the proper purpose(s) of the plaintiff, there is a question as to how come the auditor would have expressed the Auditor’s Opinion as he did. The Court is simply not in a position to say that the 1^st defendant has no arguable defence in the light of the Auditor’s Opinion at this stage.

The Personal Spending Claim

35.Under this claim, the plaintiff’s case is that the 1^st defendant had caused the plaintiff to pay for a series of expenses in the total sum of $766,422.04 which was unrelated to the plaintiff’s business, but rather, for his own personal expenses.

36.The 1^st defendant admitted that some of those expenses were indeed for his personal spending. However, he alleged that the plaintiff would conduct an account reconciliation exercise every year when its financial statements were prepared, such that the amount owed by each individual director would be set-off against the amount owed by the plaintiff to the director concerned (“the Account Reconciliation Argument”).

37.Mr Chan for the plaintiff argued that in order for the accountant to conduct any alleged reconciliation exercise, the 1^st defendant would have to prepare and provide detail record and ledger on the amount of the plaintiff’s money which had been used, how much had been repaid, etc. However, the 1^st defendant had not been able to provide any proof to show that contemporaneous record had been kept in relation to these matters. It was further argued out that this argument of the 1^st defendant is incredible because, as can be seen from the “Director’s emoluments, Loans, and Interest in Contracts for the period ended 30 June 2018”, the “Balance at the beginning of the period” of both FC and the 1^st defendant was $1,046,336, whereas the “Balance at the end of the period” of both of them was $978,227. It was submitted if the account reconciliation exercise did take place, it is impossible for two directors to have identical figures as such.

38.Mr Chan also submitted that the 1^st defendant’s reliance on the audited financial statements was premised on the assumption that the auditor had all the necessary information. However, it is unknown as to what had been provided to the auditor for his reference. If the auditor still managed to sign off the audited financial statements despite the fact that so many items of unauthorised expenses had been incurred, the inference must be that the 1^st defendant did not provide the auditor with adequate materials for audit in the first place.

39.I am unable to accept the aforesaid submissions. As Mr Chan accepted, the plaintiff has a heavy burden to discharge before it can challenge the audited financial statements successfully. While he maintained that he is not challenging the Auditor’s Opinion as such, I am of the view that he plainly is, because in effect he is saying that the auditor had given his opinion unreservedly although there was an inadequate basis to do so. This Court is simply unable to accept such a serious allegation against the auditor at this stage without a trial.

40.Further, it should be noted that the use of the plaintiff’s money by the 1^st defendant for his personal spending had been ongoing for years, and there were quite a number of different occasions when he did that. Prima facie, these expenses could not have escaped the auditor’s attention.

41.All in all, I am of the view that the 1^st defendant has raised a triable issue by the Account Reconciliation Argument.

Credit Card Claim

42.The plaintiff’s case under this head is that while there was an agreement reached among the 1^st defendant, FC and NC that the corporate credit card held by the 1^st defendant should only be used for the legitimate business purposes of the plaintiff, the 1^st defendant had used the same to pay off his personal expenses in the total sum of $1,466,773.66, and there were no less than 840 items of expenses incurred in this way.

43.While the 1^st defendant admitted that he had indeed made use of the said corporate credit card for his personal expenses, he alleged that it had been agreed among the three of them that he could do so, so long as he reimbursed the plaintiff for such expenses. As a result, he did go ahead to use the said credit card for his own expenses, but he had repaid the plaintiff in cash for some of such expenses, and the balance had been set-off in the annual account reconciliation exercise conducted by the plaintiff.

44.In my view, apart from the fact that there is a factual dispute here, the discussion on the Account Reconciliation Argument is equally applicable here, and I therefore reach the conclusion that the 1^st defendant has raised a triable issue in relation to this claim.

D2’s Salary Claim

45.The only claim made by the plaintiff against the 2^nd defendant is that while she had been allegedly employed by the plaintiff from 1 October 2016 and received salary in the total sum of $2,348,000, such an alleged employment had never been properly authorized by the plaintiff.

46.It is evident that at least some of such payments of salary were made by cheques, and there is prima facie evidence that one of the cheques dated 1 July 2020 in the sum of $48,500 was signed by FC/NC after the 2^nd defendant’s name and the amount had been filled in. The Two Signatories Argument is applicable, and in my view, that would be adequate to raise a triable issue on whether the 2^nd defendant’s alleged employment was properly authorised.

47.Furthermore, if the 2^nd defendant had not been properly employed by the plaintiff, there is a question as to why the auditor did not point this out in the audited financial statements in all these years, but proceeded to express the Auditor’s Opinion.

48.Mr Chan submitted that the Court has to bear in mind that the auditor was admittedly introduced by the 2^nd defendant to the plaintiff, and that the 2^nd defendant was the contact person in the plaintiff’s liaison with the auditor.

49.Insofar as it is suggested that the auditor had, because of the aforesaid connections, not properly discharged his duty, I am afraid the Court is unable to accept such a serious allegation at this stage without a full trial.

50.I therefore come to the conclusion that the 2^nd defendant has a bona fide defence to the plaintiff’s claim against her.

Dismissal of the Summons vs Unconditional leave to defend

51.By reasons of the above, I am of the view that the defendants have raised bona fide defence to the plaintiff’s claims under the Summons.

52.The Court has two options in such circumstances: it may either dismiss the Summons, or grant the defendants unconditional leave to defend.

53.It is trite that whether the Court should dismiss an application for summary judgment rather than granting leave to defend would depend on whether the plaintiff had knowledge about the defendant’s arguable defence before the taking out of the summons. The rationale of the above has been explained in Commentary 14/7/3 of Hong Kong Civil Procedure 2023, volume 1 (at page 371) as follows:

“If before the issue of the summons the plaintiff knows that the defendant is relying upon a contention which would entitle him to unconditional leave to defend, he cannot properly invoke the jurisdiction of the court under O.14 to give him summary judgment, for neither he nor any one on his behalf can make the affidavit in support stating that ‘in his belief there is no defence to the claim or part to which the application relates’ (see r.2(1)). The belief that must be deposed to is, not that the ground of defence relied upon is not good, or substantial or has been raised very late or will in all probability fail at the trial, but that there is no defence to that claim or part. The plaintiff may acquire knowledge of an arguable defence from the parties’ correspondence, even if a pleaded defence has not yet been served: Promotion Bus Ltd v. Chan Sik Ping (HCA 1467/2011), [37]-[39]. If, therefore, notwithstanding such knowledge, the plaintiff proceeds under O.14, the application should be dismissed: see Sterling Services Ltd v. Tan Kee Cheang [2003] 3 HKLRD 894 at 898 and Weltime Hong Kong Ltd v. Cosmic Insurance Corp. Ltd [2004] 2 H.K.C. 155 at 167. ‘I wish it to be known as a practice rule that the proper course for a Master to take, if he considers that in a summons under O.14 it is clear that the plaintiff knew that there was an arguable defence to the claim, is to dismiss the summons with costs. Masters should use their powers under O.14 much more freely’ (per Lord Goddard C.J., in M. Pocock v. A.D.A.C. [1952] 1 T.L.R.29 at 34). […]”

54.Having said that, it should also be remembered that even in the situation where the plaintiff had knowledge of the defendant’s arguable defence before the summary judgment application was made, the Court still retains a discretion on costs. This has been explained in the following part of the said Commentary:

“The mere fact that a line of defence was known to a plaintiff does not mean that he should have known that it was not appropriate to proceed by way of application for summary judgment. A wrong exercise of judgment by the plaintiff as to whether it is appropriate to proceed under O.14 does not necessarily call for sanction in the same manner as an abuse of the procedure: Greater China Capital Inc v Gbtimes Ltd [2018] 1 HKLRD 210, [8].”

55.In the present case, the following procedural history should be borne in mind when the Court considers whether the Summons should be dismissed:

20 Sep 2021		The plaintiff took out a summons for summary judgment (“the Previous Summons”) at the time when the “fraud exception” under Order 14 was not yet abolished
6 Dec 2021		The 1st and 2nd defendants filed their respective affirmations in opposition to the Previous Summons (i.e. the 1st defendant’s 8th Affirmation and the 2nd defendant’s 2nd Affirmation)
11 Jan 2022		The plaintiff took out the Summons after the “fraud exception” under Order 14 had been abolished
17 Jan 2022		Both the Previous Summons and the Summons were heard by Recorder Jin Pao, SC who dismissed the Previous Summons[2]
7 Feb 2022		Recorder Jin Pao, SC dismissed the remaining paragraph of the Previous Summons on interim payment and adjourned the Summons to be further dealt with by Master

56.In opposition to the Summons, the defendants still relied heavily on the 1^st defendant’s 8^th Affirmation and the 2^nd defendant’s 2^nd Affirmation filed on 6 December 2021. In other words, there is no doubt that the plaintiff knew the defence intended to be run by the defendants before the Summons was taken out on 11 January 2022.

57.Mr Chan for the plaintiff submitted that the Summons should not be dismissed with costs even in such circumstances. He stated that, while the 1^st defendant was subject to a Mareva injunction order, he had been permitted by the Court to withdraw money for the purposes of paying off his living and legal expenses, and as a result, the plaintiff was minded to act swiftly in this action, otherwise it might only be able to obtain an empty judgment against the 1^st defendant at the end of the day.

58.I cannot accept Mr Chan’s submissions. While I can understand the reason why the plaintiff felt that the matter should move ahead as quickly as possible (indeed, I would say that most plaintiffs would have the same desire), that cannot be an excuse for making an application under Order 14 when the nature of the disputes and the defence raised render it inappropriate to do so. In fact, going ahead with the summary judgment application in such circumstances would only delay the resolution of the whole matter.

59.The Summons should therefore be dismissed.

Interim payment

60.As I am of the view that the defendants have raised arguable defence, the plaintiff has failed to establish that it “would” obtain judgment for substantial damages against them, as required under Order 29 rule 11(1)(c) of the Rules of the High Court (“RHC”).

61.The plaintiff’s application for interim payment is therefore dismissed.

Appeal against Master’s refusal for the defendants to adduce evidence

62.The defendants also appealed against the learned Master’s refusal of their application for leave to adduce further evidence on their financial position.

63.By reason of this Court’s conclusion that the Summons should be dismissed, this part of the appeal has become academic. Be that as it may, counsel agreed that this Court should a form a view on the matter because it would have bearing on costs.

64.Order 58 rule 1(5) of the RHC provides that:

“No further evidence (other than evidence as to matters which have occurred after the date on which the judgment, order or decision was given or made) may be received on the hearing of an appeal under this rule except on special grounds.”

65.It is trite that in order to establish “special grounds”, the criteria laid down in Ladd v Marshall [1954] 1 WLR 1489 have to be satisfied. Under those criteria, further evidence is admissible on appeal only when such evidence:

(1)  could not have been obtained with reasonable diligence for use at the hearing below;

(2)  would or might, if believed, have an important influence on the result of the case, though it need not be decisive; and

(3)  is apparently credible though it need not be incontrovertible.

66.Mr Chan for the plaintiff did not make any submission in relation to criteria (2) and (3) above. His only attack was on criteria (1).

67.I have been informed by counsel[3] that, after the learned Master had decided that conditional leave to defend should be granted to the defendants at the hearing on 22 August 2022, the learned Master did invite the defendants’ counsel to make submission on the conditions to be imposed. Mr Lam then made his submissions accordingly, and in the course of which he had referred to the 2^nd Affirmation of the 1^st defendant as well as the 8^th Affirmation of FC. However, he did not ask for any leave on behalf of either of the defendants to file further evidence on their respective financial positions at that time. Having heard parties’ submissions, the learned Master gave a decision on the conditions to be imposed by the end of the hearing.

68.Two days later (24 August 2022), the learned Master issued directions to the parties, in which the orders made at the hearing on 22 August 2022 were recapped, and the parties were asked to submit a draft order for the Court’s approval.

69.On 30 August 2022, the defendants’ solicitors wrote to the learned Master, and asked the Court to “withhold making a formal order” until the defendants were given an opportunity to adduce evidence on their financial ability to satisfy the conditions imposed by the Court.

70.Such a request was rejected by the learned Master, for the reason that:

“[…] there is no basis to ask for leave after the hearing when it was a live issue in the evidence filed for the purposes of, and as raised, at the hearing […]”

71.In this appeal, the defendants’ counsel relied on Liu Ke Mian Lorraine v De Xin Da Trading Co., Limited (HCMP 1481/2016, unreported, 30 September 2016) (CA), in which Chu JA (as her Ladyship then was) held that:

“23. […] The defendant also seeks to adduce Fong’s third affirmation to make good the argument that it is impossible for it to meet the condition. Relying on Kwong Key Construction & Engineering Ltd v. Sunlink Ltd [2003] 4 HKC 300, at 305 and 306, it is argued that it would not be practical to prepare and file in advance an affirmation on the defendant’s means because the Judge did not indicate that conditional leave to defend would most likely be given.

24. From the transcript of the summary judgment application hearing, it can be seen that the after hearing counsel’s submissions, the Judge indicated in no unambiguous term that he considered the defence was shadowy and that it was a case for conditional leave. He went on to state that the condition should involve payment into court of the full amount claimed and that the Mareva injunction should then be discharged.

25. In our view, given what the Judge had said, it would be incumbent upon the defendant’s legal representatives to there and then inform him that the defendant wished to be heard on its ability to meet the condition to be imposed by the court, and to ask for an opportunity to file evidence on the defendant’s financial ability, if they had not come prepared with it. […]” (emphasis added)

72.With greatest respect, in my view, this authority is clearly against the defendants.

73.In the present case, the learned Master had quite properly allowed the defendants a chance to make submissions at the hearing on the conditions to be imposed. If the defendants considered it necessary to file further evidence in support of their submission, it was totally up to Mr Lam to make the application there and then before making submissions on the conditions to be imposed. However, he had not done so, but proceeded with his submissions on the basis of the materials already placed before the Court. In such circumstances, the defendants could not blame the learned Master for refusing them leave to file further evidence after the oral hearing (which was entirely within the Master’s discretion to do so), given there was no change in the circumstances since the oral hearing. The defendants were only trying to have a second bite of the cherry, which should not be allowed.

74.I therefore hold that the defendants could not satisfy criteria (1) of Ladd v Marshall.

DISPOSAL OF THE APPEAL

75.I therefore allow the defendants’ appeal to the extent that the Summons be dismissed.

76.The Judgment entered on 27 September 2022 against the defendants upon their failure to comply with the conditions imposed by the learned Master should also be set aside.

COSTS

77.It has been agreed by all parties that 10% of the costs of the hearing before the learned Master should be attributed to the defendants’ application for leave to adduce further evidence.

78.I am of the preliminary view that the same approach should be adopted as far as the hearing of the appeal is concerned.

79.Furthermore, it appears that the plaintiff should not be ordered to bear the costs which were incurred before it had knowledge about the defendants’ arguable defence.

80.I therefore make a costs order nisi as follows:

(1)  Subject to sub-paragraphs (2), (3) and (4) below, the plaintiff shall bear the defendants’ costs of the Summons in any event, to be taxed if not agreed;

(2)  The costs of the 3^rd Affirmation of Fant Chuck Lam Sanchez, 8^th Affirmation of the 1^st defendant and 2^nd Affirmation of the 2^nd defendant be in the cause;

(3)  The plaintiff shall bear 90% of the defendants’ costs of the hearing before the learned Master held on 22 August 2022;

(4)  There be no order as to the costs of the correspondence between the defendants’ solicitors and the Court exchanged between 30 August 2022 and 6 September 2022 concerning the defendants’ application to file further evidence;

(5)  The plaintiff shall bear 90% of the defendants’ costs of the appeal in any event, to be taxed if not agreed.

81.The above order nisi shall become absolute in the absence of application to vary (which, if any, shall be made by letter, and will be disposed of on the papers) within 14 days hereof.

DIRECTIONS

82.This action has not progressed for a long time by reason of the plaintiff’s applications for summary judgment. It should move on as soon as possible.

83.I therefore give the following directions on a nisi basis:

(1)  The defendants shall file and serve their Defence (and Counterclaim, if any) within 28 days hereof;

(2)  The plaintiff shall file and serve its Reply (and Defence to Counterclaim, if applicable) within 28 days thereafter;

(3)  Parties shall file and serve their respective Timetabling Questionnaires within 28 days after the close of pleadings;

(4)  The plaintiff shall inform Master Rita So in writing within 2 days after all timetabling questionnaires have been filed pursuant to sub-paragraph (3) above.

84.Parties shall inform the court within 7 calendar days hereof as to whether they agree to the above proposed directions. Reasons shall be stated if they have any objection thereto.

Mr Avery Chan, instructed by Oldham Li & Nie, for the plaintiff

Mr Vincent Lam and Mr Kurt Ng, instructed by M. L. Tam & Co, for the 1^st and 2^nd defendants