Infinity Development (Holdings) Co. and Another v. Bank of China and Others

HCA005491/2000

HCA 5491/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5491 OF 2000

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Coram: Hon Chung J in Chambers

Dates of Hearing: 26 and 27 October 2000

Date of Handing Down Judgment: 30 November 2000

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J U D G M E N T

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Introduction

1. This is the defendants' application to strike out either the whole, alternatively, para. 17(2) and/or 19, of the Statement of Claim.

2. The bases of the plaintiffs' claims are set out in the Statement of Claim. For the purpose of this application, the nature of these claims (see para. 1(a) to 1(c) of the plaintiffs' skeleton submissions) can be summarized as follows:-

(1) P1's claim against D4 to D6 for damages for breach of the Shareholders Agreement dated 22 September 1993 ("the Agreement") (as modified by an agreement dated 23 September 1997 ("the modification") (the Agreement and the modification are collectively "the Agreement as modified")) and/or the modification as evidenced by a Memorandum dated 23 September 1997 ("the memorandum");

(2) P1's claim against D1 to D3 and D7 to D11 for damages for procuring D4 to D6 to breach the said contract(s); and

(3) P1 and P2's claim against all the defendants for damages for conspiracy to injure the economic interests of the plaintiffs.

3. By the Agreement, a joint venture was formed among P1 and D4 to D6. A corporate vehicle, one Applecrest Properties Limited ("Applecrest") (which also signed the Agreement) was used to carry on the business of the joint-venture which in essence was the development of a real property project in Dongguan.

4. The joint-venture turned out to be unsuccessful. Applecrest was ultimately wound up in December 1999. The plaintiffs consider that the failure of the joint-venture was brought about by the defendants' wrongful acts. They also consider they have suffered loss as a result and hence commenced this action against the defendants.

5. For the avoidance of doubt, when determining this application, I have borne in mind:-

(1) a statement of claim can only be struck out in plain and obvious cases; and

(2) the plaintiffs' submissions, even though they may not be expressly referred to herein.

The Breach of Contract Claim

6. Para. 17 of the Statement of Claim alleges that D4 to D6 breached the following contracts:-

(a) clauses 7.2(b), 9.5 and 16.3 of the Agreement (as modified); and

(b) the modification and/or the memorandum.

7. Clause 7.2(b) of the Agreement provided that:-

"Each of the Shareholders agrees to exercise its respective rights hereunder and as a shareholder in [Applecrest] (insofar as it lawfully can) so as to ensure that ... the business of [Applecrest] shall be carried on in a proper and efficient manner and for its own benefit and in accordance with the highest ethical standards".

8. Clause 9.5 of the Agreement provided that:-

"The Shareholders shall cooperate in good faith and promptly execute all documents and do all things reasonably within their respective powers which are necessary or desirable to promote the business of [Applecrest] and to give effect to the spirit and intent of this Agreement. Without prejudice to the generality of the foregoing the 'A' Shareholders [that is, D4 to D6] shall exercise or refrain from exercising and shall procure, to the extent allowed by law, that every person for the time being representing them, shall exercise or refrain from exercising any rights of voting at any general meeting or meeting of the Directors of [Applecrest] and any other rights or powers of control so as to ensure the passing of any and every resolution necessary or desirable to ensure that the affairs of [Applecrest] are conducted in accordance with this Agreement and with the object of [Applecrest] as described in Clause 7 and otherwise to give full effect to the provisions of this Agreement and likewise to ensure that no resolution is passed which does not accord with such provisions or with the object of [Applecrest] as described in Clause 7".

The "A" shareholders of Applecrest were the only shareholders who could vote at the general meetings or board meetings of Applecrest.

9. Clause 16.3 of the Agreement provided that:-

"Each of the Shareholders of [Applecrest] shall keep confidential and shall not disclose the execution, contents or any matter relating to this Agreement (except where disclosure is required by any government or regulatory authority to which any Shareholder or [Applecrest] is subject)".

10. The terms of the modification and the memorandum are set out under the sub-heading "(1) The Relevant Facts" below. The plaintiffs aver that notwithstanding the terms were clearly in the interests and for the benefit of Applecrest and its shareholders, the defendants decided not to approve King Tai's acquisition of 10% interest in the development project (through the acquisition of 10% of the shares of a shelf company) by voting against it at a meeting of Applecrest: para. 14, Statement of Claim. The defendants' disapproval of the transaction (so the plaintiffs claim) amounted to a breach of the contract(s).

(1) The Relevant Facts

11. Para. 8 of the Statement of Claim avers that:-

"By September 1997, Applecrest was facing and foreseeing serious cashflow problems in respect of the Development Project. Under such circumstances, at the meeting of the board of directors of Applecrest held on 11th September 1997 ... it was resolved, inter alia, that Applecrest should consider raising capital for the Development Project by some new means, such as forming business partnership with a publicly listed company, rather than to take out loans from banks, which would invariably impose heavy financial burdens (in the form of interest) on Applecrest, and that [P2] be authorized to represent Applecrest to make inquiries and to select suitable candidates to form such a partnership with Applecrest" (emphasis supplied).

12. Para. 9 of the Statement of Claim pleads the modification which was said to be contained in or evidenced by the memorandum. As stated earlier, the modification was relied upon by the plaintiffs as either a variation of the Agreement or an agreement in its own right. On the other hand, the defendants contend that it was nothing more than statements of intention. In any event, the terms of the modification were set out in para. 9(1) to 9(10) of the Statement of Claim:-

(a) each shareholder shall dispose of half of its respective shareholdings in Applecrest to a prospective investor at a consideration to be agreed upon;

(b) the shareholdings of D4 and D6 shall be counted in aggregate;

(c) the consideration for the shareholdings in Applecrest shall be based on the shareholders' investment, including but not limited to the shareholders' loans, at cost plus interest costs;

(d) the consideration can be paid half in cash and half in listed securities acceptable to the shareholders;

(e) P1 is thereby authorized to negotiate the sale and purchase of the shareholdings of Applecrest;

(f) if the consideration is paid half in cash and half in listed securities, the shareholders shall distribute among themselves the allocation of cash and listed securities in proportion to their respective percentages of shareholdings. D4 to D6 shall have the first right to choose to be allocated the percentage in cash and listed securities, but in any event not more than 50% to be allocated in listed securities;

(g) [this deals with the conversion of type of shares in Applecrest after the sale and purchase];

(h) the investor shall execute a counter-guarantee to D6 for the HK$90 million loan from the National Commercial Bank, Limited on a pro rata basis;

(i) the investor shall subscribe and Applecrest shall issue new shares at a price to be agreed upon representing approximately 20% of the enlarged issued share capital of Applecrest; and

(j) the proceeds from the subscription shares shall be used to repay in part the HK$150 million Guaranteed Notes.

13. From the averments in para. 8 and 9 of the Statement of Claim, it is clear that in order to solve the "serious cashflow problems", the parties "resolved ... that Applecrest should consider raising capital ... by some new means, such as forming business partnership with a publicly listed company ... ". Further, it was contemplated by the memorandum inter alia that each shareholder should dispose of half of its shareholding to an investor in exchange for consideration (half in cash and half in listed securities) which would be used for distribution among the shareholders. Moreover, the investor was to subscribe for new shares and the proceeds was to be used to repay in part the HK$150 million Guaranteed Notes. The investor was also to execute a counter-guarantee in D6's favour regarding the HK$90 million loan.

14. The plaintiffs negotiated with a Kong Tai International Holdings Company Limited ("Kong Tai") for the sale of Applecrest's shares in exchange for cash consideration and Kong Tai's shares: para. 10, Statement of Claim.

15. Para. 11 of the Statement of Claim pleads that an agreement was reached (provisionally) between Applecrest and Winhill Investment Limited ("Winhill") (Kong Tai's subsidiary) on 3 February 1998 in the following manner:-

(a) Winhill agreed to pay HK$70 million to acquire 10% of the issued shared capital of the new shelf company and 10% of some of the shareholders' loans and third party loans;

(b) the said payment would be settled by the issue of 350 million new shares of Kong Tai at an issue price of HK$0.20 per share;

(c) [this deals with the question of directorship]; and

(d) Winhill would be granted an option to buy in cash up to an additional (remaining) 90% of shares in the new shelf company and the said shareholders' loan and third party loans for a period up to 1 year from the date of signing of the final agreement.

There is an issue between the parties herein as to whether this provisional agreement was binding between Applecrest and Kong Tai.

16. Further, Kong Tai published a press release on 5 February 1998 regarding the above provisional agreement. The above terms were set out in the press release. The following statement therein is relevant to this application:-

"[Kong Tai] is unable to estimate the development cost for the entire project. It does not anticipate to have any further significant capital commitment in the near future ... " (emphasis supplied).

17. As stated above, D4 to F6 did not approve the above transaction by voting against it. The plaintiffs complain that they acted in breach of contract(s) in doing so because the transaction was clearly in the interests and for the benefit of Applecrest and its shareholders: para. 14 to 15 and 17(1), Statement of Claim.

18. This application is brought on several grounds including that this action is an abuse of the court's process. It is thus permissible to consider the parties' affidavit evidence. A number of factual disputes were raised: see para. 4(a) to (b), (d) to (j) and (l), the plaintiffs' skeleton submissions. However, the defendants (quite correctly) are prepared to proceed on the basis that some of the facts stated in the Statement of Claim are correct. These facts have been set out in this Judgment.

(2) Is it Plain and Obvious that there was No Breach of Contract?

19. I proceed under this sub-heading on the assumption that:-

(a) the modification and/or memorandum was at least arguably a valid variation of the Agreement and/or a binding agreement in itself; and

(b) the provisional agreement of 3 February 1998 was at least arguably binding on the parties thereto.

I also approach this aspect of the application on the basis that to disapprove a transaction which was clearly in the interests and for the benefit of Applecrest is at least arguably a breach of contract(s) (that is, Clauses 7.2(b) and 9.5 of the Agreement as modified and/or a breach of the modification and/or the memorandum).

20. It is clear that the transaction between Winhill and Applecrest does not accord with the modification or the memorandum. The modification and the memorandum contemplated the injection of capital by a new partner to solve the "serious cashflow problems" of Applecrest. However, no cash would be paid by Kong Tai under the provisional agreement (at least for 1 year after the signing of the final agreement): Kong Tai would pay for the shares and the loans (at HK$70 million) by the issue of new Kong Tai shares. When I enquired how this would solve Applecrest's liquidity problems, Ms Eu for the plaintiffs suggested that the new Kong Tai shares might for example be pledged. There is no evidence that the Kong Tai shares would be used in this manner. Further, the only purpose of pledging the shares must be to raise loans which would clearly not accord with the shareholders' earlier resolution which was to avoid bank loans. There is no suggestion that the new Kong Tai shares would be sold by the shareholders of Applecrest either.

21. It is also clear from Kong Tai's press release that Kong Tai did not intend to provide other forms of funding to Applecrest "in the near future".

22. For the above reasons, I fail to see how the transaction can be said to be in the interests or for the benefit of Applecrest or its shareholders because it did not serve the purpose intended for by the shareholders. In these circumstances, I agree with the submissions of Mr Tang for the defendants that it is plain and obvious that there was no breach of contract(s) by D4, D5 or D6 when they decided to disapprove the transaction.

23. In this connection, Mr Tang referred to the following passage in Overseas Trust Bank v. Coopers & Lybrand [1990] 1 HKLR 568, 583:-

"It seems to me that in these circumstances, owing to the unusual and possibly extravagant nature of this claim ... it was one which should be struck out, not on the ground that the facts disclosed were improbable or that it was difficult to believe that they could be proved, (see per Lord Herschell in Lawrence v. Lord Norreys (1888) 39 Ch D 213 at 217) but on the ground that 'the case has not a solid basis capable of proof ... the story told in the pleadings is a myth ... and has no solid foundation' (per Lord Herschell at p. 220) and one where 'the statement of claim presents ... a tissue of improbabilities, which ought not to be sent to proof.' (per Lord Watson, at p. 222)" (per Fuad, V-P).

I agree that the above observations in the Overseas Trust Bank case can equally apply to this part of the plaintiffs' claim.

(3) The Plaintiffs' Alternative Cases

24. Mr Tang submitted that even though the plaintiffs' case has not been so pleaded, he is prepared to meet the following 2 alternative cases:-

(1) the transaction between Applecrest and Kong Tai was one which a reasonable shareholder (in D4 to D6's position) acting in good faith could have approved. For this reason, the plaintiffs' claim is arguable and should not be struck out; and

(2) even if the said transaction was one which such a reasonably shareholder could have disapproved, the defendants did so with actual bad faith.

25. In relation to alternative case (1) above, Mr Tang put forward the following arguments. At one extreme are transactions which are so clearly in the interests and for the benefit of Applecrest (and/or its shareholders) that no reasonable shareholder acting in good faith could properly reject. At the other extreme are transactions which are so clearly not in the interests or for the benefit of Applecrest (and/or its shareholders) that no reasonable shareholder acting in good faith could properly approve. There should be no difficulty in determining whether there has been a breach of the above-said contract(s) for these extreme cases.

26. For those transactions falling between these 2 extremes, that is, whether the transaction was in the interests and for the benefit of Applecrest falls somewhere in-between, Mr Tang contended that the defendants should succeed in this application. He said in order for the plaintiffs to succeed in relation to such kind of transactions, they will have to prove that D4 to D6 failed to:-

(a) "exercise its ... rights ... so as to ensure [Applecrest's] business shall be carried on in a proper and efficient manner and for its own benefit ... " (clause 7.2(b) of the Agreement); and

(b) "cooperate in good faith ... and do all things ... necessary or desirable to promote the business of Applecrest ... and ... shall exercise or refrain from exercising ... rights of voting ... so as to ensure the passing of any ... resolution necessary or desirable to ensure ... [Applecrest's] affairs ... are conducted in accordance with [the Agreement] ,,, and with the object of Applecrest as described in Clause 7 ..." (clause 9.5 of the Agreement).

27. He submitted that in deciding whether there was a breach of these contract terms, the proper test to be applied (be it in this application or at the time of trial) is analogous to that set out in Gore-Browne on Companies 44th Ed., para. 4.8:-

"'Bona Fide for the Benefit of the Company as a Whole'

The power conferred by ... the Companies Act 1985 to alter the articles by special resolution may not be abused by a majority of shareholders ... The courts will intervene where it is established that the majority have not acted 'bona fide in the interests of the company as a whole' ...

The courts regard 'the benefit of the company as a whole' as being an issue primarily for the majority to decide, since in principle they are best qualified to decide this question. The courts will not interfere with their decision unless, on the evidence, it could not have been arrived at in good faith by reasonable men ... " (emphasis supplied).

Thus, if the disapproval of the transaction between Applecrest and Kong Tai was not a "decision [which D4 to D6] could not have been arrived at in good faith by reasonable men", that disapproval is in law a decision made "bona fide for the benefit" of Applecrest. This part of the plaintiffs' claim therefore fails.

28. In relation to alternative case (2) above, Mr Tang made the following submissions. Neither the Statement of Claim nor the plaintiffs' affidavit evidence alleges actual malice. The plea of "not acting bona fide" at para. 18 of the Statement of Claim is premised on "[by reason of] the matters aforesaid", namely, para. 14 of the Statement of Claim (the disapproval of the transaction) and 17 (breach of the contract(s)). Since the plaintiffs have failed to establish their case regarding the alleged breach, the plea of a lack of good faith should fail as well.

29. I agree with Mr Tang's argument that clauses 7.2(b) and 9.5 of the Agreement (or the Agreement as modified) should be construed in the manner he contended for. In other words, the issue of whether the shareholders acted for Applecrest's benefit should be a matter for the shareholders. I also agree with him that the plea of "not acting bona fide" at para. 18 of the Statement of Claim does not put forward any allegation in addition to those made in para. 14 and 17 of the Statement of Claim.

30. For the above reasons, I consider that it is plain and obvious that the plaintiffs have not established a valid claim against D4 to D6 on the so-called "alternative" cases referred to by Mr Tang.

(4) Was there any Breach of Clause 16.3?

31. This aspect of the plaintiffs' claim relates to the press release of 16 February 1998. The plaintiffs allege that it disclosed the lack of voting rights and the lack of power to nominate any director in respect of P1's shares. The defendants asserted that the press release was made pursuant to enquiries from the regulatory authorities.

32. I agree with the defendants' argument that even if the defendants breached the Agreement by doing so, there was either no loss suffered or that the loss would be nominal. The claim for relief in this action does not hinge on this aspect of the claim: see para. 20, Statement of Claim. In any event, there is no basis (evidential or otherwise) to think that loss and damage was suffered by the plaintiffs as a result of the alleged breach of clause 16.3.

(5) Other Matters

33. Having dealt with this aspect of the application (see above) it is strictly unnecessary to deal with the other matters raised by the defendants. I shall nevertheless do so for completeness. They also argued that the following matters are plain and obvious:-

(1) the memorandum was plainly a mere statement of an intended plan to find prospective investors, and not an independent contract or a variation of the Agreement;

(2) the memorandum was not a valid contract because material terms were missing, such as the consideration for the price of the shares to be sold, whether D6 was bound to dispose of all its shares or the consideration for the issue of new shares by Applecrest;

(3) even if the memorandum was a binding contract, there was no breach of its terms because the provisional agreement between Applecrest and Kong Tai was not a transaction made in accordance with the terms of the memorandum;

(4) clause 26 of the Agreement stipulated that any variation would need to be made in writing and signed by inter alia Applecrest but the memorandum was not so signed and thus it could not be a variation of the Agreement;

(5) even if there had been a breach of the Agreement (and/or the modification), it resulted from a decision of Applecrest's directors and not its shareholders. Hence, there could not be a breach of the Agreement which was an agreement among the shareholders;

(6) clause 7.1 of the Agreement defined Applecrest's "business" as "the business of investing in the Development Project". The provisional agreement between Applecrest and Kong Tai was about finding prospective investors and so not about Applecrest's business;

(7) the memorandum concerned the disposition of the parties' shareholdings. Applecrest's shareholders could not be forced to sell their shares by virtue of clause 7.1 of the Agreement; and

(8) clauses 11.2 and 11.4 of the Agreement conferred an absolute discretion on the board of directors to determine all matters in connection with the land and the development project and P1 expressly waived all claims against D4 to D6 for all claims and damage suffered as a result of the decisions made by the board related thereto.

34. If it were necessary to consider the above additional matters, I consider that (1) and (2) above are arguable and hence a case for striking out is not made out by the defendants. (3) above has been dealt with under the earlier sub-headings and will not be repeated. I also consider (4) and (5) above to be arguable. In relation to (4) above, Chitty on Contracts (1999) 28th Ed., para. 23-033, text to nn. 19 and 20 is relevant. In relation to (5) above, it is arguable whether this is a plain and obvious case that a clear distinction can be made between Applecrest's directors and its shareholders. It is arguable whether finding a prospective investor to provide an alternative means of financing the development project was incidental to the business of Applecrest and hence (6) above is not plainly and obviously in the defendants' favour. Since I found that (1), (2) and (4) are arguable, I also find (7) above to be arguable. I agree with the defendants' argument at (8) above but this only relates to P1's claim against D4 to D6.

The Procuring Breach of Contract Claim

35. Since I concluded there was no breach of contract(s) by D4 to D6, there could not be any valid claim for alleging D1 to D3 and D7 to D11 procured the breach.

36. The defendants made the following additional points:-

(1) the Statement of Claim does not plead any act of procurement or inducement by D2 or D3. Liability for procuring breaches of contract(s) cannot be inferred or presumed purely from their being the holding companies or shareholders of D4 to D6;

(2) D7 to D9 are sued as Applecrest's directors and not as directors of D4 to D6. D7 to D9 were nominated by D4 to D6 to be Applecrest's directors. There is no plea specifying how D7 to D9 committed acts of procuring the breach by D4 to D6. The argument at (1) above was in essence repeated;

(3) D1 is the ultimate holding company of D4 to D6. The argument at (1) above was repeated; and

(4) the Hong Kong-Macau Regional Office issued the said press release under the leadership of D10 and D11. The argument at (1) above was repeated. Further, D10 and D11 are only officers of the Regional Office which in turn is part of D1. They were only acting in their capacity of the senior officers of D1.

37. In deciding whether the plaintiffs must plainly and obviously fail in relation to the above additional points, the press release of 16 February 1998 has to be looked at because this was put forward by the plaintiffs as a piece of evidence of the alleged procurement. Although the provisional agreement was made between Applecrest and Kong Tai, the press release was issued in D1's name. Further, although D1 (and D2 to D3 and D7 to D9) were legally separate legal entities, the press release did not draw any distinction between them and D4 to D6 but repeatedly referred to "Bank of China" therein. Further, the press release stated (in the English translation):-

"... Due to the complexity of the situation and involvement of Applecrest, Bank of China took some time to study the situation ... Having studied the whole transaction, Bank of China has decided that the Board of Directors of the Applecrest will not approve the transaction ... " (emphasis supplied).

38. In these circumstances, and bearing in mind the corporate structure of D1 to D9, whether or not the defendants treated themselves as one and the same entity in disapproving the transaction is an arguable issue.

The Conspiracy Claim

39. The plea of conspiracy is contained in para. 19, Statement of Claim:-

"Further or alternatively, ... The rejection or disapproval of the proposed transaction with Kong Tai and the decision to do so in wrongful breach ... the Court will be asked to so infer from the matters pleaded herein, in fact pursuant to and the result of a conspiracy or part of a conspiracy between [D1 to D11] to injure the economic interests of [the plaintiffs]".

40. By reason of the earlier conclusions as regards the alleged breach of contract(s) and alleged procurement of breach, this plea should also be struck out.

41. The defendants further relied on the following passage in ADS v. Wheelock Marden [1994] 2 HKC 264, 272B-C:-

"When it comes to a claim in the tort of conspiracy, what the pleader has to do in regard to pleading an overt act or over acts is this. He has to plead at least one overt act which is the act of all the alleged conspirators or, failing that, a number of overt acts which include at least one act on the part of each conspirator. And the overt act or overt acts pleaded must be such as to show: (i) that the conspiratorial agreement alleged against the defendants had been entered into by each and every one of them; (ii) that the agreement, and not merely the intention of one person alone, was implemented; and (iii) that such implementation caused the damage complained of.

If the pleader fails to do that, then, depending on whether the failure is in respect of all the defendants or only some or one of them, then either the plea is liable to be struck out altogether or it is liable to be struck out as against some or one of the defendants" (Bokhary, JA (as he then was)).

42. There are 2 types of actionable conspiracy: the so-called "unlawful means" conspiracy and the so-called "lawful means" conspiracy. In relation to the "unlawful means" type of conspiracy, the unlawful means relied on herein was the alleged breach of contract(s) and/or procurement of breach. As stated above, the defendants have shown that it is plain and obvious there was no breach or procurement.

43. In relation to the "lawful means" type of conspiracy, this requires the plea and proof of a predominant intention to injure: Lonrho v. Fayed [1992] 1 AC 448. No specific plea to this effect is made in the Statement of Claim, nor is there evidence of such predominant intention. Since this issue has been discussed above in relation to "not acting bona fide" pleaded at para. 18, Statement of Claim, it will not be repeated here.

44. Further to above, I agree with Mr Tang's submission that the plea of conspiracy at para. 19 of the Statement of Claim falls far short of the requirement set out in the ADS case.

Other Matters

45. The defendants also argued that the plaintiffs lack the locus standi to plead that D7 to D9 breached their fiduciary duty or have been negligent as against Applecrest because this action was not brought by Applecrest.

46. Moreover, they argued that the plaintiffs' plea for damages is fundamentally flawed. First, it is speculative on the conduct of a third party. Secondly, any loss arising from the falling through of the transaction between Applecrest and Kong Tai was a loss of Applecrest and not either of the plaintiffs.

47. There is no need to deal with these arguments in view of the conclusions reached regarding the other arguments (above). These arguments are only set out for the sake of completeness.

Conclusion

48. By reason of the matters aforesaid, I will make an order in terms of this application. The Statement of Claim is struck out, the plaintiffs' action is dismissed and the defendants are at liberty to enter judgment for their costs herein.

Costs

49. The parties agreed a costs order nisi pursuant to RHC Ord. 42 r. 5B(6) can be included in this Judgment. There is no apparent reason for departing from the usual rule that costs should follow the event. Costs of this application are to be paid by the plaintiffs to the defendants to be taxed if not agreed with certificate for 2 counsel.

Representation:

Ms Audrey Eu, SC leading Mr Chua Guan Hock instructed by Messrs Wai & Co., for the 1st and 2nd Plaintiffs

Mr Robert C Tang, SC leading Mr Godfrey Lam instructed by Messrs Deacons, for the 1st - 11th Defendants

HCA019328/1999

HCA 19328/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 19328 OF 1999

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Coram: Hon Chung J in Chambers

Date of Hearing: 27 February 2001

Date of Decision: 27 February 2001

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D E C I S I O N

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50. This is the Defendant's appeal against the order of Master Kwan dated 22 November 2000 whereby she entered summary judgment against the Defendant in the sum claimed in the amended Writ herein.

51. The Plaintiff brings this action based on 2 dishonoured cheques drawn in its favour by the Defendant. The cheques were respectively dated 12 January 1999 and 19 January 1999. The Defendant does not dispute that the cheques were issued by it. The main defence advanced in the Amended Defence and Counterclaim filed on 17 January 2000 (amended on 15 May 2000) is in essence that the cheques were drawn by mistake because the Defendant has in fact overpaid the Plaintiff. The Defendant also (by way of amendment) counterclaims the allegedly overpaid sum of about $7.4m.

52. It appears to be common ground that the 2 cheques were related to 7 joint venture contracts entered into between the Plaintiff and the Defendant. These joint venture contracts were for the development of small village houses for the New Territories residents. A partnership was in effect formed between the Plaintiff and the Defendant regarding the said joint venture contracts and a "running account" of some sort existed between them at one time or another. Because of the lack of evidence, details of the "running account" are unknown at present.

53. The particulars of payment (which can be found in the Amended Defence & Counterclaim) relied upon by the Defendant in this appeal show that total payment of about $21.39 million was made to the Plaintiff from about April 1997 to January 1999. The Defendant contends that the total amount due to the Plaintiff was only about $13.98 million. At the hearing it was mentioned that the total payment from the Defendant to the Plaintiff amounted to about $41 million.

54. The Plaintiff argues firstly that even if the Plaintiff has in fact been overpaid, the Defendant does not have any defence in law to a claim based on the cheques. The Plaintiff submits that whether the 2 cheques were issued in October 1998 (as the Defendant avers) or in January 1999 (as is the Plaintiff's case), the evidence shows that there was some debt (the exact amount of which is now unknown but, according to the Plaintiff, this is irrelevant) due from the Defendant to the Plaintiff. That debt (irrespective of its exact amount) was sufficient consideration in support of the 2 cheques. The fact that that debt was subsequently paid off (or even overpaid) does not give the Defendant a defence. There is no need to go into the details of this argument for the propose of this appeal save to say that I disagree with it and conclude that a defendant has at least a triable defence to a claim based on a cheque for the payment of a debt when that debt has in fact been fully paid (whether at the time of the cheque or subsequently).

55. The Plaintiff's second argument is that the Defendant's case is unbelievable because if the Defendant has in fact overpaid the Plaintiff, there was no proper reason for it to issue the 2 cheques.

56. The Plaintiff submits that matters relevant to credibility include:-

(a) the Defendant has said that the 2 cheques were countermanded but the bank record shows they were dishonoured by reason of insufficient fund in the bank account;

(b) the Defendant has written a number of contemporaneous documents stating in effect that it owed the Plaintiff some money;

(c) belated allegations were made by the Defendant in this action;

(d) further payments were made by the Defendant to the Plaintiff after the date of the 2 cheques.

57. The Defendant's response to point (b) above can be summarized as follows. Because the real property market in Hong Kong suffered a downturn, the Plaintiff's financial position deteriorated. Its bank pressed the Plaintiff for payment of its loans. The Plaintiff's former director, a Mr Wang, asked the Defendant to write a number of letters and to issue the 2 cheques (in short) to give the Plaintiff a better appearance regarding its financial position.

58. I agree with the Plaintiff that the above matters make the Defendant's assertions suspicious. Having said that, the main defence raised herein (as stated earlier) is that the Plaintiff was overpaid. I concluded earlier that it is a triable defence in an action based on a cheque for a defendant to establish that the underlying debt has been fully repaid. It is therefore relevant to consider whether the "running account" between the Plaintiff and the Defendant (arising from the underlying joint venture contracts between them) resulted in overpayment to the Plaintiff. In other words, there is a need for an account to be taken before it can properly be known if the Plaintiff was overpaid.

59. The parties have not produced undisputed (or indisputable) documents to establish the exact state of the "running account". The Plaintiff's reason for this is that the accounting documents are incomplete, that some of the matters were not in writing and some of the documents are unclear as to their meaning. In these circumstances, I consider that there is a "shadowy" aspect to both parties' case and this is therefore a case where unconditional leave to defend should be given: see, for example Goldrein: Commercial Litigation: Pre-emptive Remedies (1997) 3rd ed., p. 396.

60. Defence counsel referred me to a letter dated 22 August 2000 from the Plaintiff's solicitors to the Defendant's solicitors. It shows that the Plaintiff's solicitors knew (and probably have advised the Plaintiff) that it is not unlikely the Defendant would be given leave to defend this action.

61. In these circumstances, despite the Plaintiff's explanation about this letter (which I do not accept), I agree with the Defendant's argument that this application falls within Order 14 rule 7. The correct order should have been for its dismissal.

62. There is no need to deal with the other arguments of the Plaintiff, including whether the cheques were "accommodation" bills.

63. For the above reasons, the appeal is allowed. The Master's order is set aside. The Order 14 application is dismissed.

Representation:

Mr Thomas Lai, instructed by Messrs Chan & Chuk, for the Plaintiff

Mr Andy Hung, instructed by Messrs Chan & Tsu, for the Defendant

Remarks:
Appeal by the Plaintiffs to the Court of Appeal. Appeal dismissed. Please refer to the Appeal Judgment CACV001069/2000.