Skink Limited (in Liquidation) v. Comtowell Limited and Another

HCA003514/1993

1993 No. A3514

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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Coram: The Hon. Mr. Justice Kaplan in Chambers

Date of hearing: 4 March 1994

Date of handing down of judgment: 28 March 1994

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J U D G M E N T

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1. This application has been very well argued by both sides. It is a claim under O.14 brought by the Plaintiff, through the Official Receiver, seeking a declaration that two assignments made by it to the 1st Defendant should be set aside under S.60 of the Conveyancing and Property Ordinance Cap. 219 on the grounds that at the time of the assignments, the Plaintiff intended to defraud its creditors within the terms of the section.

2. As a preliminary issue, I have to decide whether a claim such as this, based on S.60, can be brought within the terms of O.14 of the Rules of the Supreme Court of Hong Kong which, it should be noted, at the outset, are different to the English equivalent.

3. Excluded from the ambit of O.14 in Hong Kong is an

"action which includes a claim by the Plaintiff based on an allegation of fraud." (O.14 rule 1(2)(b)).

4. Rule 1(2)(b) was abrogated in England by rule 5 of the Rules of the Supreme Court (Amendment) 1992 which came into force on 1st June 1992. The White Book having made the point goes on to state at p.141:

"Notwithstanding this change it is anticipated that judgment under this order will only be granted where, if it is necessary to rely on fraud as the sole cause of action, the evidence of fraud is overwhelmingly clear."

5. In due course, I will have to consider the English cases which led to the abrogation of the fraud exception and see whether they apply to the facts of the case and, if so, whether I should follow them and, if I do, whether I consider the Defendants have shown an arguable case.

The facts

6. The Plaintiff was incorporated in June 1981 under the provision of the Companies Ordinance Cap. 32.

7. On the petition of the Director of Legal Aid presented on 14th January 1993, an order for the compulsory winding-up of the Plaintiff was made on 17th February 1993 and the Official Receiver was appointed provisional liquidator of the Plaintiff pursuant to that order. The Official Receiver was also confirmed as liquidator of the Plaintiff by a resolution passed at the first meeting of creditors held on 27th April 1993.

8. As at the date of the Plaintiff's last Annual Return made up to 31st December 1991, the directors of the Plaintiff were Malcolm Basil Maydwell (the 2nd Defendant) and Comtowell Ltd. (the 1st Defendant). The company had $100,000 issued share capital of $1 shares, of which 9,999 shares were held by the 2nd Defendant and 90,001 shares were held by the 1st Defendant.

9. According to the last Annual Return for the 1st Defendant made up to 15th August 1991, the directors of the 1st Defendant were the 2nd Defendant and his wife. The 1st Defendant had a $10,000 issued share capital of $1 shares of which 9,999 shares were held by the 2nd Defendant and 1 share held by his wife.

10. The Plaintiff was the owner of two properties. The first property was a residential property situated at 5th floor, 108 Macdonnell Road, Glory Mansion, Hong Kong. It was occupied by the 2nd Defendant and his wife and was purchased by the Plaintiff on 20th March 1985 for HK$1.2 million. The property was sold on 10th June 1992 for a consideration of HK1.1 million to the 1st Defendant. The property was mortgaged on 11th June 1992 by the 1st Defendant to Foreign Exchange and Investment Ltd. (Forex) for general credit facilities granted to the Plaintiff.

11. The second property owned by the Plaintiff was a commercial property situated at 4th floor (Front Portion), Ocean View Court, 33 Mody Road, Kowloon which is the registered office of the 1st Defendant and was believed to be used by the 2nd Defendant as an office from which the affairs of 1st Defendant and other companies under his control were conducted. This property was purchased by the Plaintiff on 16th January 1982 for a consideration of HK$1 million and was sold on 10th June 1992 for a consideration of HK$800,000 to the 1st Defendant. This property was also mortgaged on 11th June 1992 to Forex for general credit facilities granted to the Plaintiff.

12. The Official Receiver has obtained a professional valuation in respect of both properties from surveyors which showed that the respective market values for the two properties, as at the date of assignment in favour of the 1st Defendant, were $7,350,000 and $2.5 million.

13. It is common ground that in relation to these two assignments, no money passed hands and all that occurred was an inter-company record of indebtedness. It is also fair to point out that the 2nd Defendant obtained a valuation of the two properties which came to $6,630,000. Further, Mr. Maydwell deposes to the fact that he is negotiating a sale of the Hong Kong property for HK$6,700,000, this sale being sanctioned by the Court by an order made on 25th January 1994.

14. I do not think it necessary to be too precise about the valuations, because whichever valuation one takes of the properties as at June 1992, these valuations were clearly far in excess of the consideration stated in the assignments. As Mr. Fitzpatrick, who appeared for the Plaintiff, but it in his very useful skeleton argument, the stated consideration, by whatever standard it is assessed, was a gross undervalue, at best about a third of the open market value. The Plaintiff and the 1st Defendant, through the 2nd Defendant, had knowledge that the recorded consideration represented a gross undervalue when compared with the valuations of which all three had notice. Mr. Fitzpatrick also submits that at the time of the assignments of both properties, namely the 10th June 1992, the Plaintiff was indebted, inter alia, to its main trading partner, an Australian company known as Australian Telephone Distributors Ltd. (ADT). He submits that the motive and purpose of the Plaintiff, the 1st Defendant and 2nd Defendant was to transfer the assets represented by the properties to the 1st Defendant so as to be better able to realise their full market value as a means of obtaining credit.

15. Mr. Fitzpatrick goes on to submit that in cases where there is a sale at an undervalue, there was strong authority for the proposition that such a sale at an undervalue leads inevitably to a presumption of an intention to defraud creditors. However, even if such intent is not to be presumed irrebuttabily, it would appear to give rise to a rebuttable presumption with a heavy onus to demonstrate the contrary falling upon the 1st and 2nd Defendants. It might be helpful if, at this stage, I set out the terms for S.60.

"(1) Subject to subsections (2) and (3), every disposition of property made, whether before or after the commencement of this section, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.

(2) This section does not affect the law of bankruptcy for the time being in force.

(3) This section does not extend to any estate or interest in property disposed of for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent to defraud creditors."

16. Mr. Fitzpatrick submits that it is well established that the onus of establishing the defence in S.60(3) is upon the transferee. The defence has three elements, so he submits; (i) good or valuable consideration (ii) good faith and (iii) lack of notice of the Plaintiff's intention. He submits that the 1st Defendant must fail. For the purposes of notice, he submits the 2nd Defendant is both the Plaintiff and 1st Defendant. With such notice there can be no good faith. The circumstances of the assignments appear to lead to a situation where the 1st Defendant is the constructive trustee of the First Property and Second Property for the Plaintiff, on the basis of knowing receipt of an undervalued asset, and as a result of the conflict of interest in benefiting from a transaction while acting as a director of the Plaintiff.

The Defence

17. The 2nd Defendant has placed before the Court a lengthy affidavit which was sworn on 28th February 1994. The core of the Defendants' defence is set out in para. 2 which I propose to quote:

"The short answer to the Plaintiff's claim in this action is that the transfer of the two properties was not made with the intention of defrauding the Plaintiff's creditors but as part of a genuine restructuring which enabled the Plaintiff to obtain access to more favourable credit facilities. This is set out in the Defence which was served on 2nd December 1993, before the Plaintiff's application for judgment. Neither Miss Silkstone nor Mr. Chung has dealt with the Defence in the evidence which they have submitted in support of the Plaintiff's application for judgment. I would add that at the time of the transfer, the Plaintiff was able to pay its debts as they fell due without recourse to the properties (provided these remained available as security for bank facilities) and had no reason to believe that that would cease to be the case."

18. A summary of the Defendants' case is as follows. In early 1990, the 2nd Defendant was advised by the Plaintiff's financial controller, a Mr. Mo, who was a qualified accountant and believed to be a member of the Institute of Bankers, that the Plaintiff could obtain better banking facilities if the properties were held by a non-trading company and that the non-trading company then made the properties available as security for bank loans to the Plaintiff than if they remained with the Plaintiff. He says that Mr. Mo advised him that bankers preferred to lend in this way. Bankers apparently did not want to become directly involved with a trading company.

19. In early 1990, Mr. Mo and the 2nd Defendant approached the Bank of Credit & Commerce Hong Kong Ltd. (BCC) for an increased credit facility from a maximum of HK$5.5 million to a maximum of HK$7.6 million. An unfavourable response was received from BCC, so other banks were approached and, ultimately, an offer of credit was made by Forex on 1st May 1992. Forex offered a credit facility of HK$8 million subject to the following terms and conditions:

(a) "all moneys" first legal mortgage on the Kowloon property;

(b) "all moneys" first legal mortgage on the Hong Kong property;

(c). a corporate guarantee signed by the 1st Defendant for not less than HK$8,000,000;

(d) a personal guarantee from the 2nd Defendant for not less than HK$8,000,000.

20. These terms and conditions were accepted and the Plaintiff drew down under these credit facilities. The total drawings by the Plaintiff under this facility as at the date of the commencement of the winding-up were HK$4,926,740 plus interest. As at 28th February 1994, the sums of HK$5,356,540 and US$65,021 were owing on the security of the mortgage.

21. The 2nd Defendant goes on to say that for the purposes of the credit facilities, Forex had the properties valued. Messrs. Richard Ellis valued the Kowloon property on 2nd July 1992 at HK$2,080,000 and the Hong Kong property on 23rd July 1992 at HK$4,550,000 being a total security value of HK$6,630,000. The 2nd Defendant says that the credit facility was thus available for HK$1,370,000 more than the two properties were worth. Both the 1st and 2nd Defendants gave guarantees for HK$8,000,000.

22. I now turn to para. 12 for the 2nd Defendant's affidavit which was also crucial and I quote it in full:

"The reason why the consideration in the assignment of the Kowloon property was stated to be HK$800,000 and the consideration in the assignment of the Hong Kong property was stated as HK$1,100,000 was that this was approximately their historic cost. I was worried that if I inserted a higher price, there might be tax implications when the company was assessed to tax. I respectfully point out that as, under the restructuring, the 1st Defendant was to charge the properties to Forex for credit facilities to be extended to the Plaintiff and to give its guarantee for those credit facilities, it would be inappropriate for the 1st Defendant to pay the full market price for the properties on the assumption that it was taking them free from incumbrances and without making them available to the Plaintiff as security for substantial credit facilities."

23. Mr. Fitzpatrick relies heavily on some observations of Sir George Jessel, M.R. in Re Butterworth Ex parte Russell [1882] 19 Ch. D. 588 at 598 where he said:

"[A] man is not entitled to go into a hazardous business, and immediately before doing so settle all his property voluntarily, the object being this: "If I succeed in business, I make a fortune for myself. If I fail, I leave my creditors unpaid. They will bear the loss." That is the very thing which the statute of Elizabeth was meant to prevent."

24. The statute of Elizabeth was a forerunner to S.172 of the Law Property Act 1925 which is in almost identical terms to the Hong Kong S.60. In essence Mr. Fitzpatrick is submitting that by these assignments, these valuable properties were taken out of the reach of creditors and that this, in the circumstances in which it happened was something prohibited by S.60.

Is O.14 applicable to this case?

25. When I first read these papers, I was under the impression based on my experience in previous cases, that O.14 would not be available for a claim based on S.60 which I loosely term a claim based on fraud. However it is necessary to consider the case law to see how this point has developed.

26. In Barclays Bank Ltd. v. Cole [1967] 2 Q.B. The bank sued the Defendant, who had been found guilty of robbery, for a certain sum of money, as money had and received to their use, damages for trespass and an injunction to prevent him from dealing with ?16,076. The Defendant wished to have his guilt or innocence of the robbery retried, and the Defendant applied for the action to be tried with a jury. The master refused the application and this was upheld by the judge. On appeal by the Defendant, it was contended on his behalf that the charge of robbery was "a charge of fraud" within the meaning of S.6(1) of the Administration of Justice (Miscellaneous Provisions) Act 1933 which provides for jury trial in cases of a charge of fraud. A Court of Appeal consisting of Lord Denning M.R., Diplock and Russell L.JJ. dismissing the appeal held "that as fraud involved deceit and not violence, the charge of robbery did not make the action one in which "a charge of fraud" was in issue within the meaning of S.6 of the Act of 1933.". At p.743/4 Denning M.R. said this:

"'Fraud' in ordinary speech means the using of false representations to obtain an unjust advantage: see the definition in the Shorter Oxford English Dictionary. Likewise in law "fraud" is proved when it is shown that a false representation has been made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false: see Derry v. Peek, per Lord Herschell. In any case, "fraud" involves a false representation. Robbery does not. It involves violence, not fraud. If a man were convicted of murder or rape, and, after conviction, were sued in a civil case for damages, he would not be entitled as of right to a jury. Nor is he on a charge or robbery."

27. At p.744/5 Diplock L.J. said:

"Robbery is not included in the ordinary meaning of the word "fraud" - as the Oxford Dictionary confirms. But the section is dealing with procedure in an action in the Queen's Bench Division. If the expression "a charge of fraud" has a special meaning in this context as a term of art, that special meaning must be ascribed to it. I think it has. For at least 100 years ... "fraud" in civil actions at common law, whether as a cause of action or as a defence, has meant an intentional misrepresentation (or, in some cases, concealment) of fact made by one party with the intention of inducing another party to act upon it, which does induce the other party to act upon it to his detriment. A charge of robbery is clearly not embraced in "a charge of fraud" in this sense."

28. In Newton Chemical v. Arsenis [1989] 1 WLR 1297:

The Plaintiffs had engaged the Defendant as a self-employed sales representative and had paid him on a commission basis. Subsequently he was found to have been fabricating orders and the Plaintiffs commenced proceedings against him for repayment of commission and for sums in respect of "bonus" goods to which the Defendant had had access. In criminal proceedings in respect of those matters, the Defendant pleaded guilty to a number of charges of false accounting under the Theft Act. The Plaintiffs sued the Defendant and they made allegations against him based solely on his breaches of contract and fiduciary duty and his negligence and did not make any claim for damages for fraud or deceit. The Plaintiffs took out a summons for summary judgment under O.14. The Defendant resisted having judgment entered against him on the ground that the Plaintiffs' statement of claim "was based on an allegation of fraud" against him and they were accordingly precluded under O.14 r. 1(2)(b) from obtaining summary judgment. The judge upheld the Defendant's case but the appeal was allowed on the basis

"that the exclusion contained in O.14 r. 1(2)(b) was directed at and confined to actions based on a claim founded on fraud as strictly defined in Derry v. Peek [1889] 14 App. Case. 337, namely a false representation made knowingly without belief in its truth; that, although the Plaintiffs' statement of claim contained an averment of all the essential factual ingredients of such fraud, they had expressly chosen to found their action on breach of contract and fiduciary duty and negligence and not on fraud, and to succeed with the claims as pleaded the Plaintiffs did not have to prove that the Defendant had acted dishonestly; and that, accordingly, in the circumstances they were not precluded by O.14 r.1(2)(b) from obtaining summary judgment against the Defendant."

29. The Court went on the comment that:

"whatever the origin of Derry v. Peek fraud being outside O.14, it is difficult to perceive any justification for requiring a Plaintiff to prove at trial a claim based on Derry v. Peek fraud, alone of all forms of dishonesty. The rule could with profit be considered by the Supreme Court Rules Committee."

30. No doubt, it was this invitation which led to the abrogation of this rule in the English Rules of the Supreme Court.

31. In this case, the judgment of Nicholls L.J. particular pp. 1302/3 is worth noting. He analyses the way in which the claim against the Defendant was pleaded and noted that there was one paragraph which contained an averment of the essential factual ingredients of a claim of Derry v. Peek fraud. He went on to note that the use of the word 'fraud' in this case was not essential. The Plaintiffs had chosen not to found their case on Derry v. Peek fraud. They based their claim on contract, fiduciary duty and negligence. Nicholls L.J. concluded this part of his judgment as follows:

"In setting out this analysis one cannot but be conscious of a large element of artificiality. In practice in the course of proving that the Defendant claimed commission on non-existent sales the Plaintiffs will prove that the Defendant was aware of the true position. He was aware of the true position because he had fabricated the invoices. He put forward false claims. It is this feature which underlies what happened in this case, as alleged and deposed to by the Plaintiffs. Further, an implied term to claim only in respect of actual orders comes very close to being no more than an implied term that the Defendant would act honestly.

Despite this I do not feel constrained to conclude that this case falls outside the scope of O.14. As presently framed, O.14 r.1(2)(b) is itself somewhat anomalous. If "fraud" in that rule had been interpreted by the Court as having a wide meaning, so that all cases in which a Plaintiff alleged dishonest conduct by a Defendant were outside the scope of the order, the argument based on artificiality and contrivance would be powerful. But once fraud is to be understood as having the strict meaning of Derry v. Peek fraud, this argument is far less compelling. Once it is accepted that claims based on allegations of all forms of dishonest conduct other than Derry v. Peek fraud can, in a suitable case, be the subject of summary judgment, I confess to having difficulty in understanding why the same should not also be true of a claim based on an allegation of Derry v. Peek fraud."

32. The statement of claim in this case is based upon the sale at an undervalue, knowledge of that sale at an undervalue and an allegation that there were breaches of fiduciary obligations to act bona fide for the benefit of the Plaintiff and to exercise the Defendants' powers as directors for their proper purpose and to avoid any conflict between their fiduciary duties as directors of the Plaintiff and with their interest. It is alleged that the acts complained of were acts of misfeasance and/or breaches of trust, and there was an allegation of a constructive trust. It is alleged that the sales, purchases and assignments were made with intent to defraud the creditors of the Plaintiff and as such are voidable under the section. The prayer claims a declaration which specifically refers to the sales being made with intent to defraud the creditors of the Plaintiff. Mr. Fitzpatrick has said that the allegations which it is necessary to prove do not involve any Derry v. Peek deception because what the Defendants did was perfectly open, as indeed it had to be under the system of Land Registration of Hong Kong.

33. Reference was also made to the case of Sony Corporation v. Anand [1982] FSR 200 which involved claims in respect of trademarks and copyrights. Walton J. held:

"An "allegation of fraud" in O.14, r.1(2)(b) means an allegation of the tort of deceit. In order to come within r.1(2)(b), it is necessary that a claim should be based on an allegation of fraud against the Plaintiffs. The present application therefore did not fall within r.1(2)(b) even though the allegations of knowledge indicated that the Defendants were intending to defraud the public."

34. Walton J. referred to the statement of claim which dealt with the question of knowledge and referred to the fact that para. 11 alleged that the Defendants knew, when they imported the tapes into England, that those tapes were breaching the Plaintiffs' copyright. However the judge was not able to characterise that as an allegation of fraud. He held that it was simply an allegation of they knew what they were doing and that it was wrong. Further the fact that the acts of the Defendants were done with a cynical disregard of the rights of the Plaintiffs were also, in the opinion of the judge, nothing whatsoever to do with fraud.

35. The Sony case was considered by Barnett J. in Peninsula Fur Trading Ltd. v. George Chen Dah-shing & others HCA 3550/1987, judgment delivered 14th March 1988. The basic allegation in that case made by the Plaintiff was that the Defendants had made a secret profit and some transactions had been discovered in which one of the Defendants had caused a loss to the Plaintiffs. The Plaintiffs sought the return of that profit as being in breach of fiduciary duty owed to them as constructive trustees.

36. The Plaintiff applied for summary judgment under O.14 and the master gave judgment in respect of most of the claims. The Defendants appealed and on the appeal, for the first time, the point was taken that this claim was not amenable to an application under O.14, because of the terms of O.14 r.1(2)(b) of the Rules of the Supreme Court. The Defendant submitted that although the Plaintiff's claims were prima facie based on breach of trust and the existence of constructive trusts, the action was in essence one in fraud or deceit. Reference was made to the use of the word "illegally" in the amended statement of claim and also the use of the word "connived".

Further, reference was made to 13 convictions of one of the Defendants in the District Court which were pleaded in respect of some of the transactions. The reference to those convictions, it was said, necessarily involved the repeated use of the word "dishonest".

37. Barnett J. had little difficulty in distinguishing the Sony case from the one before him. He said: "The claims and the Plaintiff's amended statement of claim are much fuller and more pointed and more particular than in Sony." He held, as Counsel had conceded, that a claim for breach of trust does not necessarily involve fraud or dishonesty. He then said this:

"In the present case however, the essence of the Plaintiff's claim is not an "innocent", if I may call it that, breach of trust, but a long term thoroughly dishonest course of conduct. Even if fraud is not expressly pleaded, it is certainly alleged. Additionally, for the purpose of establishing liability against (some of the Defendants) the Plaintiff must show a fraudulent and dishonest design. Fraud is therefore an inherent allegation against those parties. In my judgment, therefore, this action is beyond question based upon an allegation of fraud and is not amenable to O.14 proceedings. In the circumstances, I allow the Defendants' appeal and dismiss the Plaintiff's appeal."

38. Mr. Coleman, who appears for the Defendants, submitted that the Plaintiff's allegations in the present case are of "an intention to defraud". He submits that in order to succeed in this claim, the Plaintiff must show a fraudulent and dishonest design and therefore fraud is an inherent allegation against the Defendants (to use the words of Barnett J.) Mr. Coleman relied heavily on the observations of Cairns L.J. in Lloyd's Bank v. Marcan [1973] 1 WLR 1387 at 1392 where he said:

"My mind fluctuated much during the argument of this appeal and it is only by a narrow margin and with some reluctance that I agree that the appeal should be dismissed. Both under the Statute of Elizabeth I and under section 172 of the Law of Property Act 1925 it is clear from the words of the enactment that fraud has to be established before a transaction can be avoided. In my opinion, fraud involves dishonesty and I cannot go with Pennycuick V.-C. in his observation [1973] 1 W.L.R. 339, 344 that the word "defraud" in section 172 "is not intended to be confined to cases of fraud in the ordinary modern sense of that word, i.e., as involving actual deceit or dishonesty". It is clear enough that deceit is not a necessary element, but in my view dishonest intention is, at any rate when the conveyance is for consideration. ... Other cases make it clear that if the conveyance is voluntary it is easier to infer a dishonest intention than when it is made for consideration or even that no dishonest intention need then be established ... It does, however, appear that a conveyance for good consideration will be regarded as fraudulent if made with the deliberate intention of hindering creditors and for the benefit of the debtor himself rather than as a bona fide family arrangement or an arrangement which merely prefers one set of creditors to another set."

39. Mr. Coleman submits that the present claim and the one in the Peninsula Fur case necessarily involves fraud or dishonesty. In the Newton case such a finding was not necessary.

40. Mr. Fitzpatrick submits that the Peninsula Fur case is at odds with the English Court Appeal decision in the Newton case. He submits that the Peninsula Fur case supports the following proposition:

"Where a course of conduct, which may be described as dishonest, whether or not the word fraud or dishonesty are pleaded, appears in the statement of claim, then whatever be the Plaintiff's cause of action relying upon or derived from the course of conduct, such a case is outside O.14, r.1(2)(b) of Hong Kong Rules of Supreme Court."

41. He submits that the judgment of Nicholls L.J. in the Newton case supports the following proposition:

"Unless the Plaintiff expressly founds its case upon the cause of action known as deceit, in the sense as it is described in Derry v. Peek. it will not be excluded from the summary process set out in O.14. In particular even if the specific factual elements alleged and pleaded might amount to Derry v. Peek deceit, if the Plaintiff is able to found his claim upon another cause, for example, breach of fiduciary duty, he will not be precluded by O.14 r.1(2)(b) (as it was in England and Wales and now remains in Hong Kong). Furthermore, as in the pleadings in the Newton case the incorporation of the word "fraudulently" does not affect the position."

42. Mr. Fitzpatrick points out that I am not bound by the Peninsula Fur decision which preceded the Newton case. He respectfully submits that I should prefer English authority, and he particularly submits that the cause of action relied upon by the Plaintiff in this action is not deceit, but is a statutory cause of action given by S.60 of Cap. 219. Even if the factual elements amounted to deceit (which the Plaintiff says it clearly does not), or even if a form of dishonesty needed to be proved, it would not place the action outside the O.14.

43. I am thus faced with a stark choice between what I might refer to as the limited interpretation of fraud, apparently favoured in England, or the wider interpretation favoured by Barnett J. in Hong Kong. I do not doubt the correctness of any of the English decisions cited to me, but each of them has to be considered in the context of its own facts. None of those cases was a case based on S.172 of the Law Property Act 1925, and I specifically asked Mr. Fitzpatrick whether he had come across any case under that section in England or under S.60 in Hong Kong where summary judgment had been given. He was not able to point to any such case. He did, however, refer me to Bishopsgate Investment Management Ltd. (in liquidation) v. Maxwell (No.2) [1994] 1 AER 261, where the Court of Appeal upheld an order for summary judgment against lan Maxwell. It was held that the Defendant was in breach of his duty, because he had given away company assets for no consideration to a private family company in which he was a director. The cause of action was constituted not by the failure to make enquiries, but by the improper transfer which had caused the company loss and the Court of Appeal was satisfied that the necessary causal connection had been established. This was clearly a claim based on the breach of Mr. Maxwell's duty as a director of the company, and was neither a Derry v. Peek situation nor statutory claim such as that set out in S.60 where an intention to defraud has to be proved. The claim against Mr. Maxwell was in negligence and breach of fiduciary duty, and I find nothing in the fact that summary judgment was awarded against him as supportive of the proposition that O.14 is appropriate for claims under S.172 or S.60.

44. I do not think that when any of the judges in England made their observations about the then fraud restriction in O.14 cases they had in mind the statutory claim, which is the subject matter of the cause of action in this case. I have given this matter long and careful consideration, but I find it impossible to conclude that this is not a claim based upon an allegation of fraud. If I were with the Plaintiff, I would have to declare that certain assignments have to be set aside on the grounds that they had been carried out with intent to defraud creditors. I can only think that the fraud exception to O.14 was inserted in England and maintained in Hong Kong because the O.14 jurisdiction was wholly inappropriate for cases where the Court had to consider whether a person was guilty of fraud or at the material time had an intention to defraud. Such findings have very serious consequences, and it could not have been thought right that persons should be condemned, as it were, unheard save on affidavit. I therefore favour the wider approach insofar as I am not prepared to hold that only Derry v. Peek fraud comes within the exception as I am satisfied that the claim in this case also comes within the exception. As there will be no further jurisprudence on the subject from England in the light of the abrogation of this rule, it may be helpful if at some stage there was guidance from the Court of Appeal as to whether my approach and that of Barnett J. is correct in the circumstances of Hong Kong.

45. I, therefore, conclude that this claim is not amenable to an application for summary judgment, and, on that ground, I dismiss the application.

46. I should, however, go on to say that if I had concluded that there was jurisdiction, I would, nevertheless, have declined to give summary judgment. Mr. Fitzpatrick made out a very strong case, but at the end of the day I think this is an appropriate case in which to exercise discretion in favour of granting leave to defend. I do not wish to say too much about the strength and weaknesses of the case. It seems to me that the Defendants, may well have an uphill battle but nevertheless, it seems to me that they should be given an opportunity of arguing the merits as set out in Mr. Maydwell's long and detailed and, I think, candid affidavit.

47. I cannot leave this case without commenting, that, in my judgment, it is a pity that an application under O.14 was taken out because it would have been better, as it usually is, to pursue an early hearing date. The writ was issued almost 12 months ago, on 28th April 1993. For some reason it took 5 months for the statement of claim to be issued. The defence was dated the 1st Deceber and there were consequential amendments. The O.14 summons was not taken out until 31st January 1994. Had the statement of claim been taken out earlier, bearing in mind that this is not a case where there can be a great deal of discovery as the documents speak for themselves, by mid 1994 the matter could have, perhaps, been ready for trial. The issue of fact is relatively simple and I do not think that this case could or should last more than a couple of days. At the O.14 hearing before me, the hearing lasted less than a day and we canvassed most of the authorities that would be required at trial. O.14 applications seem to be a reflex action in Hong Kong, and a great deal of a civil judge's time is taken up deciding whether or not cases should go on for a hearing. In many of them, the parties would have been better off o go on with the matter and get a final judgment at trial.

48. The Plaintiff has commenced this O.14 application and has failed, and in those circumstances, I propose to make a costs order nisi in favour of the Defendants.

49. I am particularly grateful to both Counsel for their research and for the clarity of their argument.

Representation:

Mr. David Fitzpatrick inst'd by the Official Receiver for the Plaintiff.

Mr. Russell Coleman instructed by Wilkinson & Grist for 1st Defendant.