Gobind Mohan and Another v. Brian Shane Mcelney and Others

HCA004611G/1978

BETWEEN

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Coram: Hon. Liu J. (in Chambers)

Date: 31st March, 1983.

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JUDGMENT

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1. This action arose as a result of the floatation of Mohan's Property and Investment Ltd. (hereinafter referred to as "M.P.I.L.") in all the four stock exchanges in Hong Kong on the 10th May 1973. Public listing of M.P.I.L.'s shares was preceded by the issue of its prospectus to the public on the 24th April 1973. All the plaintiffs' causes of action seem to have accrued by mid 1973. The writ in this action was issued on the 20th December 1978. The 1st plaintiff in this action faced criminal charges including those in connection with his authorization of or being a party to the issue of the M.P.I.L. prospectus. He was acquitted by the Court of Appeal on the 5th December 1980 of the charges preferred against him on the format of the M.P.I.L. prospectus.

2. In December 1981, proceedings were instituted for striking out this action for want of prosecution by reason of delay. The court was informed that Rhind J. took the view that delay was both inordinate and inexcusable. But the proceedings for striking out failed on the ground that no substantial prejudice to the defendants had been shown. In the course of those proceedings before Rhind J., it was felt that a tidying up operation would be necessary. A summons to amend the Statement of Claim was taken out on the 12th January 1983. It was charged that in addition to good house-keeping, the proposed amendments sought to introduce new causes of action. The limitation period has expired since mid 1979.

3. Subject to suitable terms in an order to be made, the 4th defendant left the arena in harmony. The 1st and the 2nd defendants objected to the proposed amendments in Particulars B, C and D of paragraph 35 of the proposed Amended Statement of Claim. The 5th defendant also objected to the proposed amendments in the Particulars of Negligence A, B and the last portion of C of paragraph 40. These defendants contended that the proposed amendments in the Particulars of these paragraphs of the proposed Amended Statement of Claim would give rise to new causes of action and were not in reality, as counsel for the plaintiffs held them out to be, an operation of merely putting flesh onto the skeleton. As any new causes of action now proposed would be time barred, counsel for these defendants argued that the proposed amendments should not be allowed unless the new causes of action arose out of the same or substantially the same facts as any of the existing causes of action under Order 20 rule 5 of the Rules of the Supreme Court. It was further argued that even if the proposed new causes of action were founded on the same facts or substantially the same facts, the court should not, in the exercise of its discretion, grant leave for the proposed amendments if only on account of irrelevancy and/or lack in particularity.

4. For the 5th defendant, counsel adopted the same line of approach with an indication that his client would stand or fall with the 1st and the 2nd defendants in the instant application.

5. In so far as it is material, Order 20 rule 5 of the Rules of the Supreme Court is set out below:

6. On behalf of the 1st, 2nd and the 5th defendants, the court was invited to find in one of the observations of Sachs L.J. in Brickfield Properties Ltd. v. Newton ⁽¹⁾ the real rest for Order 20 rule 5(5) viz. whether or not the materials in support of the new causes of action have "inevitably to be closely examined" if the existing causes of action are the only claims of the plaintiffs. But it would seem that that is only one of the many facets to be taken account of. Other material considerations include, for example, whether the defendants were "under a continuing duty to check that (the materials in support of the new causes of action would) work in practice and to correct any errors which (might) emerge"; ⁽²⁾ whether the materials in support of the new causes of action and those in support of the existing causes of action "are inextricably" entangled until such time as the court succeeds in elucidating the position through evidence";⁽³⁾ whether the omission was "wholly inadvertent"; whether the complaint had formerly been made known to the defendants so that they were in fact "never misled as to the true position"; ⁽⁴⁾ or whether "some of the facts out of which the new cause arises are peculiar to it and that some of the facts out of which the old cause of action arises are peculiar to it ............ (provided that) the overlap is so great that the new cause of action can fairly be said to arise out of substantially the same facts as the old cause of action."⁽⁵⁾ I do not believe that an exhaustive list was attempted.

7. Before I turn to the proposed amendments, it is necessary to set out the facts. The judgment of the court delivered by McMullin J.A. in Criminal Appeal 455 of 1980 was read to me in extenso. The background information relating to the floatation of M.P.I.L. in the four stock exchanges of Hong Kong were succinctly set out therein, but I cannot take advantage of that synopsis as I must confine myself to the facts pleaded in the Statement of Claim. In the course of my attempt, considerable difficulties were encountered because some of the allegations are less than precise. In my narration, whenever convenient and possible, I would give the source of the information. I shall use the abbreviations "S/C" for Statement of Claim.

8. The 1st plaintiff is the son of the 2nd plaintiff (S/C 1(b)). Both plaintiffs were effectively the sole owners of Mohan's Ltd. (S/C 1(a)). Mohan's Ltd.  was the register owners of 17,457,566 shares representating 46.6% of the issued share capital of M.P.I.L. (S/C 1(c)).  The 1st defendant was at the material time the senior partner of the 2nd defendant, a firm of solicitors (S/C 2). The 1st and the 2nd defendants had acted in their professional capacity for the plaintiffs' interests and were consulted on behalf of the plaintiffs in the proposed public listing of M.P.I.L. shares on the four stock exchanges in Hong Kong (SIC 4(a)). The 1st and the 2nd defendants were at the material time also the solicitors for the 5th defendant (S/C 4(e)). For the purpose of the proposed floatation of M.P.I.L., the 5th defendant became the financial advisers and merchant bankers of the plaintiffs and in the public listing of the M.P.I.L. shares as merchant bankers and in its capacity of underwriters (S/C 8 ).

9. In October 1972, the 1st plaintiff on behalf of himself and his father consulted the 1st defendant and through him the 2nd defendant with a view to seeking a public listing for M.P.I.L. shares based upon an asset value of $50,000,000 (S/C 9). The 1st and the 2nd defendants accordingly advised the plaintiffs on (1) what assets would be sufficient, (2) how such assets could be acquired and (3) the methods by which the acquisitions could and should be financed (S/C 10(a)).  The 1st and the 2nd defendants advised the plaintiffs to feed the $50,000,000 target by transferring assets from Mohan's Ltd. to M.P.I.L. and an injection of landed properties into M.P.I.L. through the acquisitions in the name of and by the 1st plaintiff to be financed by his own funds and bank loans. Such transfers and injections were to be made in exchange for M.P.I.L. shares. The 1st and the 2nd defendants further advised as to how bank loans were to obtained by the 1st plaintiff on inter alia his personal bridging overdraft facilities for the purchase of additional landed properties in the proposed scheme (S/C 10(b) & 11). The 5th defendant was well aware of these arrangement in the overall proposed scheme, in particular the 1st plaintiff's personal liability for repayment of bank loans (S/C 15). For the purposes of explaining to the plaintiffs how many shares deposited as security with the bank would need to be sold for repayment of the bank loans in redemption of the 1st plaintiff's personal liabilities and what profitability the scheme was expected to generate, the 1st defendant and one Mr. Purves of the bank, the 4th defendant,. allegedly "represented and promised to" the 1st plaintiff that the M.P.I.L. shares would upon public listing rapidly reach at least $3 per unit (S/C 11(3)). The 1st and the 2nd defendants in conjunction with the 5th defendant also "represented and promised to" the plaintiffs that the shares of M.P.I.L. floated in the four stock exchanges in Hong Kong would, immediately or shortly after public listing, reach at least $3 per share (S/C 16). The 1st plaintiff' thereafter acquired through the good offices of the 1st and the 2nd defendants, the Tai Garden flats and the Herald Luxim Building (S/C 18 & 19). In the acquisition of the Herald Luxim Building, the vendor was paid by the 1st plaintiff $4,000,000 cash and by M.P.I.L. in the form of a transfer of 2½ million shares against the 1st plaintiff's personal undertaking to repurchase the same  2½ million M.P.I.L. shares so transferred at the price of $2.60 from Herald Luxim Investment Co. Ltd. or its assignees at the option of Herald Luxim within 6 months from the first public listing of M.P.I.L. shares (S/C 23). The 1st plaintiff thus incurred personal liabilities with the 4th defendant bank (S/C 11) and with Herald Luxim on his undertaking to repurchase the 2½ million M.P.I.L. shares at $2.60 (S/C 24).

10. In the first week of March 1973 to the 24th April 1973, the stock exchange index dropped more than 900 points in Hong Kong (S/C 30). On the 17th March 1973, the 4th defendant bank took an assignment of the 2½ million M.P.I.L. shares from Herald Luxim on notice to the 1st plaintiff (S/C 31). The prospectus of M.P.I.L. was issued to the public on the 24th April 1973. The floatation on the 10th May was a failure.

11. I should also deal with Fenchurch Finance Ltd. In the Bundle of "Amended Further and Better Particulars of the Statement of Claim" given in answer to the 1st and the 2nd defendants requests (hereinafter refer to as "Amended Particulars"), information was given of Fenchurch Finance Ltd. Fenchurch was incorporated by the 1st and the 2nd defendants. (Item (1) at p.10 of the Amended Particulars). Fenchurch was "a nominee company" used by M.P.I.L. to transfer its "uncertain share portfolio" and there was a "Fenchurch Finance Loan with M.P.I.L. and Mohan's Ltd." (Items (I), (J) & (K) at p.9 of the Amended Particulars). Fenchurch was allegedly formed for the purpose of taking an "uncertain element out of the balance sheet of M.P.I.L." and it was intended that a loan was to be granted by M.P.I.L. to pay for the portfolio held by M.P.I.L. prior to its floatation. (P. 13 of the Amended Particulars) During the fall of the stock market in March, it was alleged that the 1st defendant, 3rd defendant and 5th defendant through their servants advised the plaintiffs to dispose of the portfolio of M.P.I.L. to Fenchurch despite the falling market. (P.44 of the Amended Particulars).

12. Fenchurch Finance Ltd. had a role to play in the overall financing for the proposed public listing of  M.P.I.L.

13. There was concessions made on objections to the other proposed peripheral amendments. The remaining principal objection from the 1st and the 2nd defendants was that whilst on the existing causes of action, the plaintiffs' complaints were that the 1st and the 2nd defendants negligently allowed the proposed public listing and issuance of the prospectus to continue despite the fall in the stock market from early March 1973 and failed to advise their discontinuance thus allegedly causing loss and damage to the plaintiffs, the objectionable proposed amendments in the Particulars B, C and D of paragraph 35 would raise allegations of negligence of a different kind against the 1st and the 2nd defendants as regards advising on the devices for arranging the assets of M.P.I.L. and the preparation of the prospectus for public issue. In essence, it was submitted that whilst the existing causes of action related to discontinuance of the scheme, these amendments sought to challenge the intrinsic merits of it. In point of time, so ran counsel's arguments, these defendants were not called upon to advise on the discontinuance of the scheme until well into April/May after the market drop from early March, but matters on the intrinsic merits of the scheme for consideration in the course of its preparation had long been concluded. It was submitted that the existing causes of action had adequately been dealt with in the Particulars A, E and P of paragraph 35 of the Amended statement of Claim and that by Particulars B, C and D these defendants did seek to introduce new causes of action. It was urged that the existing causes of action and the new causes of action were each dependant on their own set of well-defined facts, one closing at the date of completion of the preparation of the scheme and the other commencing from the time of the market drop when the scheme was about to be put into execution. In another words, for some time before the public listing of M.P.I.L. shares in the four stock exchanges in Hong Kong, all preparation had been completed and the scheme was ready for implementation. At that stage, all professional advice on assets arrangements for reaching the desired level of $50,000,000 as well as on the format of the prospectus for public issue had both been exhaustively given and accepted. Therefore, it was argued that at the time of the market crop in March, the intrinsic merits of the scheme could not be a material consideration because the real question then was whether the scheme as prepared ought to be, despite the market fall, put to test. The sad truth seems to be that the more exaggerated the prospectus as by non-disclosure, concealment or misrepresendations, the less likely the scheme would falter unless the omissions and inaccuracies were exposed, and there was no suggestion of any untimely discovery of these alleged untruths or half-truths. Counsel for the 1st and the 2nd defendants concluded that not only were these causes of action different but they were founded on quite dissimilar facts.

14. Pausing here for a moment to note that at each stage in a scheme such as that undertaken by the plaintiffs, varying criteria would possibly rule the day. But different considerations material to any one phase in the scheme may not necessarily be based on its exclusive facts. In a single venture, facts material to its successful execution and those for judging its intrinsic merits may well be indistinguishable. Each case has naturally to be examined on its own. Generally the latter would, to a degree, affect the former.

15. Counsel for the plaintiffs directed my attention to the fact that the 1st and the 2nd defendants were retained on one single retainer for a specific purpose in one indivisible scheme. Therefore, so it was submitted, the widely--ranged particulars of negligence could only be supplemental to the very same allegation pleaded in paragraph 35. I find myself at variance with that contention of Mr. Paine. The existing causes of action in negligence are based on the 1st and the 2nd defendants' alleged failure to stop the scheme and/or to advise against it when the market started to drop commencing from March 1973. On the other hand, the causes of action sought to be introduced by the proposed amendments are founded on the alleged negligence in unlawfully and/or improperly arranging for the true net assets of M.P.I.L. with the result that the true asset value of that company was grossly exaggerated and in unlawfully and/or improperly preparing or causing to be prepared a prospectus riddled with misrepresentations and omissions. In my view, they are decidedly, different causes of action.

16. For easy reference, I list out the proposed amendments in the Particulars of Negligence B, C and D of paragraph 35 of the Statement of Claim:

17. The existing causes of action as particularised in Particulars A allege that the 1st and the 2nd defendants failed to give any warning as to the different risks between corporate and personal liabilities and as to the inherent risk of the 1st plaintiff's personal financial loss in the scheme. Particulars A also complains of the alleged omission on the part of the 1st and the 2nd defendants to enquire as to the plaintiffs' ability to repay personal loans and interest in the event of M.P.I.L. shares failing to trade at a sufficient premium AND to warn the plaintiffs against potential financial consequences in the event of such failure. These allegations must call in question the whole arrangement which in turn must necessarily include the soundness of the prospectus and the real asset backing of M.P.I.L.

18. The Particulars B, C and D of paragraph 35 are essentially allegations of improper and unlawful conduct on the part of the 1st and 2nd defendants in the course of preparing M.P.I.L. for public listing. These allegations can broadly be divided into two categories: the exaggeration of the assets position of the company and nondisclosure and misrepresentations in the prospectus.

19. The proposed Particulars B to paragraph 35 alleges that the 1st and the 2nd defendants negligently failed to advise that it was improper and unlawful as well as unwise to proceed unless the asset value of M.P.I.L. had truly reached HK$37.5 million.

20. Particulars C of paragraph 35 raises the allegations that the 1st and the 2nd defendants negligently failed to advise against or negligently permitted the adoption of devices for exaggerating the true net assets of M.P.I.L. It is also alleged that the 1st and the 2nd defendants negligently failed to warn the plaintiffs of the legal and financial consequences because of the adoption of such improper and unlawful devices. Particulars C concentrates on Fenchurch and the two acquired properties.

21. Particulars D alleges that the 1st and the 2nd defendants negligently failed to advise as to the directors' duty of disclosure in the prospectus of material interest and material contingent liabilities. These Particulars further allege that the 1st and the 2nd defendants negligently failed to enquire from the plaintiffs of an item described as cash at bank to the extent of HK$4,380,678 at page 10 of the prospectus. By these Particulars, the 1st and the 2nd defendants are also said to have negligently allowed the 1st plaintiff to undertake a contingent liability with the United Commercial Overseas Bank. They charge the 1st and the 2nd defendants for being responsible for non-disclosure of such a material contingent liability and of a material interest of the 1st plaintiff in his undertaking to repurchase from Herald Luxim the aforesaid 2½ million shares of M.P.I.L. at HK$2.60 per share.

22. I can find no justification for drawing any line of demarcation separating the facts up to the completion of all preparations, financial and procedural, on the one hand and those affecting the final decision to put into execution the prepared scheme on the other. The decision whether or not to continue with the issue of the prospectus to the public and the application for public listing of M.P.I.L. must be dependent also on the intrinsic merits of the scheme, which would in turn cover the whole period of preparation: the arrangement for finance, the involvement of personal risks and the format of the prospectus.

23. Not only are all the essential facts material to the plaintiffs' existing causes of action, the plaintiffs have explicitly put the defendants on notice that they would rely on all these facts from start to finish for their unchallenged paragraph 33 of the Statement of Claim. In furnishing further and better particulars to paragraph 33 of the Statement of Claim, at page 44 of the Amended Particulars the plaintiffs referred to "inherent danger of entering into such transactions as the plaintiff did, in fact, enter into". The cause of action in paragraph 33 is the 1st and 2nd defendants' negligence in not advising the public listing and issue of prospectus to be stopped or withheld, but the plaintiffs rely on all the transactions including acquisition of properties the undertaking to repurchase shares from Herald Luxim and the Fenchurch manoeuvre. Again at page 46 of the Amended Particulars, in answer to a request for particulars under the same paragraph 33 as to how the defendants and each of them allegedly allowed and/or resolved to continue with the public listing of M.P.I.L., the plaintiffs state that the matter is one "peculiarly within the defendant's own knowledge". That must mean the defendants' overall knowledge of the entire circumstances including each and every transaction or measure entered into or adopted.

24. The facts in support of the new causes of action proposed by the amendments and those for the existing causes of action would seem to be substantially the same if not, in fact, the came up to early March 1973. P.11 these pre-1973 essential facts must be relevant to the 1st and the 2nd defendants' consideration up to the very last moment at which they allegedly ought to have advised the plaintiffs not to proceed with the public listing or issue of the M.P.I.L. prospectus. Therefore, even if the trial judge were to be confined to the existing causes of action, he would inevitably have to be involved with the examination of the same facts in support of the new causes of action raised by the proposed amendments.  I have said that the defendants have been put on notice that the plaintiffs would seek to rely on all these essential facts. On the other hand, although the facts in support of the proposed amendments are substantially the same as those in support of the existing causes of action, obviously they cannot be as extensive just because the existing causes of action relate to a phase of the same scheme slightly later in time. The decision to proceed would seem to be dependent on a constant review of the merits of all the past transactions and arrangements which might or might not require readjustment, revision or rearrangement. As Sachs L.J. so well observed at page 873 F of Brickfield: "It savous of the' ridiculous for the (solicitors or merchant bankers) to be able to say ....... that-,. (they) could say: "true, (our scheme) was faulty, but, of course, (we) saw to it" that the faulty scheme including the impugned prospectus were faithfully implemented. The duty of care owed to the plaintiffs in advising whether or not to continue with the execution of the scheme in the instant case seems inherently linked to its merits.

25. It was one indivisible scheme, and examination of substantially the same or the same facts was expected to be inevitably involved at all stages.  The later the action or inaction, the more facts there must have been accumulated for deliberation, In any case, the matters of floatation seem so "inextricably entangled" that if my understanding of the situation is  erroneous, there will be all the more reason for leaving the true position to be elucidated through evidence

26. Lastly, I come to the submission on judicial discretion. The plaintiffs and his legal advisers ought to have been aware of the matters pleaded in these proposed amendments objected to, but this action is complex and Mr. Paine is the third counsel recently instructed. The plaintiffs have also not persuaded me that any further substantial damages would flow from the new allegations sought to be introduced by the proposed amendments. In fact, it would not be unfair to say that the new causes of action would probably attract only nominal damages.  The 1st plaintiff has been acquitted of charges in relation to the prospectus. The plaintiffs have a right to assert. They must be anxious that their friends, relatives and business associates should not be left to speculate that the plaintiffs were parties to any of the alleged improper or unlawful manoeuvres in the public listing of M.P.I.L. and issue of its prospectus. Nominal damages are nevertheless damages. In addition, the use of a verdict for nominal damages as a means of vindication is, in my view, perfectly legitimate. Therefore, the new causes of action are not irrelevant though it must be recognised that the alleged exaggerated asset value of M.P.I.L. has not been shown to have operated to the plaintiffs' detriment. It was not suggested that any of these alleged irregularities had been unearthed in time to reduce the potentials or prospects of the plaintiffs' public listing. No purchasers of M.P.I.L. shares are said to have made claims against the plaintiffs on account of alleged misrepresentation in the prospectus. In fact, if the allegations of the plaintiffs are true, the manipulated prospectus for giving a more favourable commercial front would more likely than not have aided the plaintiffs.

27. No real prejudice has been shown in the preparation of the defence of the 1st and the 2nd defendants, nor has any been suggested except for a vaguely suggested difficulty in valuation. Much play was made of the lapse of time, but there was no specific suggestion as to any difficulty in the conservation of material documents. The court was time and again reminded that almost ten years had lapsed since the public listing, four years after the expiration of the limitation period and more than four years after the institution of this action. The claims of the plaintiffs are substantial. The allegations are serious and grave. There is no reason to believe that any of the parties would not conserve and preserve all documentary and other evidence with great care and circumspection. It was suggested by counsel for the 1st and the 2nd defendants that it would be difficult to evaluate the assets held by M.P.I.L. as at the material time, but apart from a general observation on the lapse of time, no specific obstacle was pinpointed for my consideration.

28. The objection as to lack of particularity should best be left to a request for further and better particulars to which Mr. Paine had indicated his preparedness to cooperate.

29. As for the 5th defendant, I need not go into specifics. Counsel adopted the same argument that the existing causes of action do not attack the intrinsic merits of the scheme or the preparation of the prospectus. I am in agreement with counsel as I do with counsel for the 1st and the 2nd defendants that the proposed amendments raise new causes of action. Mr. Wong, counsel for the 5th defendant craved in aid the submissions advanced by Mr. Li, counsel for the 1st and the 2nd defendants. In addition, the question of capacity in which the 5th defendant was sought to be proceeded against under the new causes of action was brought into play. However, Mr. Wong fairly conceded that the 5th defendant would stand or fall with the 1st and the 2nd defendants. I have come to a conclusion adverse to the 1st and the 2nd defendants and therefore the resistance of the 5th defendant must also fail.

30. In the circumstances, I would allow the proposed amendments. All these matters were hotly contested by the 1st and the 2nd defendants and the 5th defendant who, unlike this court, must have been well briefed on the historical background and the essential facts. Up to the second day if the defendants had been prepared to yield to the application of the plaintiffs, counsel for the plaintiffs indicated that all costs should have been borne by his clients. But in the circumstances, subject to what counsel have to say, I propose to award three-quarters of the costs on this application to the 1st and the 2nd defendants and the 5th defendant and one-quarter of the costs against the 1st and the 2nd defendant and the 5th defendant in favour of the plaintiffs. Naturally, the 4th defendant is to have the costs of its appearance in this application wholly from the plaintiffs.

Representation:

Mr. Ian Paine instructed by Messrs. Robertson, Double & Bcase for the Plaintiffs.

Mr. Andrew Li instructed by Messrs. Lo & Lo for the 1st and 2nd Defendants.

Mr. Anthony Dicks instructed by Messrs. Baker & McKenzie for the 4th Defendant.

Mr. Ronny Wong instructed by Messrs. Deacons for the 5th Defendant.

(1)    [1971] 1 W.L.R. 862 at 873 E

(2)    See p.873 F per Sachs L.J.

(3)    See p.873 E,per Sachs L.J.

(4)    See p.877 G - H per Edmund Davies L.J.

(5)    See p.380 D/E per Cross L.J.