Haifa International Finance Co Ltd v. Concord Strategic Investments Ltd and Others

CACV 168/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 168 OF 2008

(ON APPEAL FROM HCA 2308 OF 2006)

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BETWEEN

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Before : Hon Cheung JA and Sakhrani J in Court

Date of Hearing : 10 March 2009

Date of Judgment : 23 March 2009

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J U D G M E N T

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Hon Cheung JA :

Striking out application

1.In High Court Action No. HCA 4442 of 2003 the plaintiff sued the present 1^st defendant for the sum of HK$30,281,806.33 together with interest and costs.  The action was based on a loan agreement signed by the parties dated 27 February 1998 in which the plaintiff agreed to lend the money to the 1^st defendant and which the 1^st defendant agreed to repay by 28 February 2001. 

2.The plaintiff pleaded that the loan was made by the plaintiff to the 1^st defendant for the discharge of other loans previously lent by the plaintiff to the 1^st defendant. 

3.The defence raised by the 1^st defendant was that the loans were not lent to the 1^st defendant but to another company registered in British Virgin Islands (‘BVI’) whose name was exactly the same as that of the 1^st defendant.  That company is the 3^rd defendant in the present action. 

4.The plaintiff’s application in that action for summary judgment against the 1^st defendant on the loan was dismissed. 

5.The plaintiff then on 16 October 2006 commenced the present action against the 1^st and 3^rd defendants.  The 2^nd defendant who was a director of the 1^st and 3^rd defendants was also sued.  The plaintiff obtained judgment against the 2^nd defendant on 3 November 2007.  The documents disclosed that the 3^rd defendant was struck off from the register of companies in BVI. 

6.Hence the 1^st defendant is the only remaining defendant in this action.  It applied to strike out the plaintiff’s claim.  The application was refused by the Master who granted leave to the plaintiff to amend its statement of claim.  The 1^st defendant appealed to Suffiad J who allowed the appeal and set aside the orders of the Master.  The 1^st defendant now appeals to this Court. 

Background

7.The background of the case has been succinctly summarised by Suffiad J which I will gratefully adopt in this judgment :

‘ Background

2.  The plaintiff is a company incorporated in Hong Kong with backing from Hainan Development Bank.

3.  Upon its incorporation in Hong Kong, its two directors were Liu Yu and Gu Rong who were also the shareholders nominated by Hainan Development Bank to hold the shares in the plaintiff on its behalf.

4.  Liu Yu was the managing director responsible for the day to day running of the plaintiff while Gu Rong was a non-executive director taking no active part in the management of the plaintiff.

5.  The 1^st defendant was incorporated in Hong Kong on 20 January 1997 initially under the name of Fine Honest Development Ltd.  On 18 May 1997 it changed its name to Concord International Group Ltd.  On 19 September it further changed its name to Concord Strategic Investments Ltd.

6.  The 3^rd defendant is a company incorporated in the British Virgin Island on 12 December 1996 initially under the name of Union System Ltd.  On 22 May 1997, it changed its name to Concord International Group Ltd and on 29 August 1997 it further changed its name to Concord Strategic Investments Ltd.

7.  The 2^nd defendant was at all material times a director of the 1^st and 3^rd defendant.

8.  Prior to 15 October 1997, the shareholders of the 1^st defendant were :

(a) the 3^rd defendant (about 40%);

(b)   the plaintiff (about 30%);

(c) China Great Wall Coins Investment Ltd (about 30%); and

(d)   Liu Yu (about 0.0024%).

9.  On 15 October 1997, the shareholders of the 1^st defendant transferred all of their shares of the 1^st defendant to :

(a)   Concord Group (BVI) Ltd (999,999 shares); and

(b)   the 2^nd defendant (1 share).

10.  As of 1 August 2000, the 3^rd defendant owned 70% interest in the 1^st defendant.

11.  As of 31 August 2000, the 3^rd defendant still held a 70% interest in Concord Group (BVI) Ltd, the parent company of the 1^st defendant.

12.  During the period between April 1997 to September 1997 a total of eight loans were advanced by the plaintiff pursuant to eight written loan agreements.  In February 1998 a 9^th loan agreement was entered into by the plaintiff which was a consolidation of all the outstanding amounts from the earlier eight loans advanced by the plaintiff and stated therein to be $30,281,806.33.

13.  In the 1^st loan agreement, the borrower was named as Fine Honest Development Ltd.

14.  In the 2^nd and 3^rd loan agreements, the borrower was stated to be Concord International Group Ltd.

15.  In the remaining six loan agreements including the 9^th loan agreement, the borrower was stated to be Concord Strategic Investments Ltd.

16.  The 9^th loan agreement was effectively an embodiment of the total outstanding sums (including interest) owed to the plaintiff from the earlier eight loan agreements which was stated therein to be $30,281,806.33. In that sense, it embodied and superseded the earlier eight loan agreements.

17.  All the nine loan agreements were executed by Liu Yu for and on behalf of the plaintiff on the one hand, and by the 2^nd defendant for and on behalf of the borrower on the other hand.

18.  In May 1998, Liu Yu suddenly left Hong Kong and resigned all his executive posts with the plaintiff only remaining as a non-executive director.  Since then Liu Yu has not returned to Hong Kong.

19.  On 26 April 1999, Cheng Xiaoling and Chen Bing Lian were appointed as additional directors of the plaintiff.  Upon their appointment, one of their tasks was to recoup the outstanding loans owed to the plaintiff.

20.  In this respect, a settlement agreement was entered into by the plaintiff dated 17 October 2000 with the 3^rd defendant.  In that settlement agreement, it was (inter alia) stated that the 3^rd defendant owed to the plaintiff (up to 31 August 2000) the principal amount of $45,280,000 and interest thereon of $12,000,000.  I am told that the principal amount of the loan stated in the settlement agreement includes the amount of $30,281,806.33 being the subject matter of the present claim.

21.  When no payment of the outstanding loans and/or any sums under the settlement agreement was received by the plaintiff, the plaintiff commenced HCA4442/2003 against the present 1^st defendant for repayment of such loan.’

8.The additional information relating to the background of the case is Liu Yu (‘Mr. Liu’) apart from being a shareholder of the 1^st defendant, was also one of its directors. 

Basis of striking out

9.The striking out application was based on the following grounds :

1.The cause of action of fraud was not properly pleaded.

2.The plaintiff’s claim was time-barred.

10.The Judge struck out the claim on the basis that it disclosed no reasonable cause of action against the 1^st defendant on fraud but he refused to strike out the claim by reason of limitation.

Principles on striking out

11.Striking out application is a drastic remedy.  As it is an attempt by the 1^st defendant to drive the plaintiff from its judgment seat, the Court must exercise great caution and would only accede to the application in clear and plain cases.  The Court must satisfy itself that the claim is clearly unsustainable and it should not embark upon a mini trial of the action.  The relief is not suitable where fact sensitive issues are involved.

Claim based on fraud

12.I will address first the issue of pleading fraud.  The following is the plaintiff’s pleaded case against the 1^st defendant.

‘5.  In an attempt to deceive and/or defraud the plaintiff, the 1^st and 2^nd defendants caused and/or procured the 3^rd defendant to impersonate the 1^st defendant, both under the same name at all material times, to conclude with the plaintiff 9 loan agreements evidenced and/or contained in writing over the period of 29 April 1997 to 27 February 1998, pursuant to which 9 loans were advanced by the plaintiff to the 3^rd defendant (which the plaintiff does not admit) in the belief that it were the 1^st defendant :-

Particulars of Fraud

(1)  The 2^nd defendant represented to the plaintiff that the 1^st defendant was the borrowing party of the loans and loan agreements.  By the time the 1^st and 2^nd loans were extended to the 1^st defendant by the plaintiff pursuant to the 1^st and 2^nd loan agreements, the 3^rd defendant was not yet incorporated.

(2)  By reason of the matters pleaded in (1) above, the plaintiff deposited the 1^st loan under the 1^st loan agreement to the account of the 1^st defendant, then known as “Fine Honest Development Ltd”.

(3)  Neither the 1^st nor the 2^nd defendant mentioned to the plaintiff about the 3^rd defendant insofar as the loans and loan agreements were concerned.

(4)  The 1^st and 3^rd defendants deliberately adopted the same name as each other and held themselves out at large: they first changed their name to “Concord International Group Limited (“協和國際控股有限公司”) on 14 May 1997 and 22 May 1997 respectively, and then to “Concord Strategic Investments Limited” (“協和策略投資有限公司”) on 10 September 1997 and 29 August 1997 respectively.

(5)  The 2^nd defendant was a director of both the 1^st and 3^rd defendants for the period of 29 April 1997 to 27 February 1998.  All the loans and loan agreements were concluded with the plaintiff by the 2^nd defendant who purported to act for and on behalf of the 1^st defendant, referring to “Concord Strategic Investments Limited” (“協和策略投資有限公司”) in the 1^st, 4^th, 5^th, 6^th, 7^th, 8^th and 9^th loan agreements and “Concord International Group Limited” (“協和國際控股有限公司”) in the 2^nd and 3^rd loan agreements.

(6)  The 3^rd defendant was an unregistered company in Hong Kong.

(7)  The 2^nd defendant did not dispute about the 1^st defendant being the borrowing party of the loans and loan agreements in the course of the plaintiff’s subsequent investigation of the matter.  On this basis, the 2^nd defendant signed the acknowledgement of liability of the loans and loan agreements for and on behalf of the 1^st defendant with the plaintiff on or about 15 April 1999.

(8)  The plaintiff was misled by the 2^nd defendant into signing the agreement dated 17 October 2000 for production of financial statements and other relevant records by the 1^st defendant.

(9)  The plaintiff only became aware of the defence of the 1^st defendant, namely, that it disputed about being the borrowing party of the loans and loan agreements, when it filed the defence in HCA 4442/2003 on 22 September 2004.’

13.The plaintiff’s claim against the 1^st defendant together with the other defendants is for, among other things, a declaration that

‘ the 1^st and 3^rd defendants were parties to a fraud in causing and/or procuring the plaintiff to have concluded the 1^st and 9^th loan agreements and advanced the 1^st to 9^th loans to the 3^rd defendant and that the same were vitiated by fraud.’

14.It asks for the repayment of $30,281,806.33, together with interest.

Elements of fraud

15.In order to examine whether the claim on fraud has been properly pleaded it is necessary to remind oneself the elements of fraud or deceit.  A clear exposition can be found in Winfield and Jolowicz on Tort 17^th Ed 2006 at para 11-3 :

‘1.  There must be a representation of fact made by words or conduct.

2.  The representation must be made with knowledge that it is or may be false.  It must be wilfully false, or at least made in the absence of any genuine belief that it is true.

3.  The representation must be made with the intention that it should be acted upon by the claimant, or by a class of persons which includes the claimant, in the manner which resulted in damage to him.

4.  It must be proved that the claimant has acted upon the false statement. 

5.  It must be proved that the claimant suffered damage by so doing.’

Requirement in pleading fraud

16.In Armitage v Nurse [1998] Ch 241 at 256-257, Millett LJ (as he then was) emphasised the seriousness of a plea of fraud and explained how the plea should be pleaded :

‘  The general principle is well known.  Fraud must be distinctly alleged and as distinctly proved: Davy v Garrett (1878) 7 Ch. D. 473, 489, per Thesiger LJ.  It is not necessary to use the word “fraud” or “dishonestly” if the facts which make the conduct complained of fraudulent are pleaded; but, if the facts pleaded are consistent with innocence, then it is not open to the court to find fraud.  As Buckley LJ said in Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch. 250, 268:

“An allegation of dishonesty must be pleaded clearly and with particularity.  That is laid down by the rules and it is a well-recognised rule of practice.  This does not import that the word ‘fraud’ or the word ‘dishonesty’ must be necessarily use... The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged.  If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatal; the allegation of its dishonest nature will not have been pleaded with sufficient clarity.” ’

The plaintiff’s argument

17.Mr. Chua, SC who appeared together with Ms Teresa Wu for the plaintiff, submitted that the plaintiff is no longer able to locate Mr. Liu its former managing director and its current management does not have a full picture of the circumstances of how the loan agreements were entered.  He frankly and properly admitted that the current pleading on fraud is not adequate but he submitted that the claim of the plaintiff should not be struck out.  He argued that the circumstances surrounding the loans when the 1^st and 3^rd defendants changed their names to identical names in close proximity were so suspicious that there must be a scheme going on.  He submitted that the plaintiff should be allowed to conduct discovery and administer interrogatories so that the particulars of fraud could be supplied later.  In Leitch v. Abbott (1886) 31 ChD 374 (C.A.) where Bowen L.J. at 378-379 stated that：

‘ Ought, then, the generality of an allegation of fraud to be a bar to the right to discovery?  It seems to me that the very fact that the pleader is unable to plead except in general terms, is in many cases the very reason why he should have discovery from the other party, so as to enable him to plead the fraud in detail.  If at a particular stage of an action you are stopped by reason of your ignorance of some fact which is known only to the other party, that is the very reason why you should have discovery of that fact from him, and what difference does it make whether you are stopped at the trial or before?’ 

18.Likewise in Deak Perera Far East Ltd v. Deak & Ors [1995] 2 HKC 28 (C.A.) Penlington JA at page 36 stated that :

‘  In my view those particulars, as DPFE concedes, may be amplified after discovery, are sufficient to inform Chase of the claim they have to meet.  This is not a case of a party saying ‘we think you have defrauded us and now wish to look at your records to see if we can prove it’.  Full particulars of fraud do have to be given but in my view this is an appropriate case where the plaintiff, DPFE, is entitled to discovery before giving such full particulars.’ 

In the same case Nazareth VP at page 37 also stated that,

‘ Those conclusions are not affected by the possibility that further particulars might be given after discovery. I would add that, given the circumstances and the nature of what is averred and particularized, Chase Manhattan should be left in little doubt as to the plaintiff’s case that it has to meet, particularly as the matters involved seem to be peculiarly within its own knowledge and unlikely to be within that of the plaintiff.’

Reliance on fraud

19.In my view the Judge was correct to hold that the claim on fraud was not properly pleaded and the plaintiff’s claim was properly struck out by the Judge on the basis that it disclosed no reasonable cause of action. 

20.It is not apparent from the pleadings as to how the fraud was practised.  The 1^st defendant was a separate legal entity and operated by those who controlled it.  At the material time, the plaintiff together with the 3^rd defendant were the majority shareholders of the 1^st defendant.  To say in the circumstances that the 1^st defendant caused or procured the 3^rd defendant to ‘impersonate’ the 1^st defendant and to conclude the loans with the plaintiff is farfetched.  If the plaintiff was one of the majority shareholders of the 1^st defendant, how could it have believed that the 3^rd defendant was the 1^st defendant when the loan agreements were signed? 

21.One of the essential requirements of fraud and deceit is that the victim relied upon the fraud and deceit to his prejudice.  In this case it is clear that the plaintiff has not pleaded that it had relied on the fraud and deceit practised on it by the 1^st defendant (even assuming that was the case) to enter into the nine loan agreements. 

22.Despite Mr. Chua, SC’s submission to the contrary, I do not agree that the fact the plaintiff entered into these agreements in the light of the 1^st defendant’s fraud (again assuming that was the case) would necessarily mean that the plaintiff had relied upon the fraud or deceit.  If the matter is so straightforward one may ask why is this not pleaded explicitly?  Instead, even at the hearing of the appeal, no further amendment has been provided on this point.

23.In my view the plaintiff has not even reached the stage where it can be said that it has sufficiently pleaded a general case of fraud and it is merely the particulars that are lacking and allowance should be given to it to flesh out the details later on.  Whether the plaintiff had relied upon the fraud or not must be within its particular knowledge through its own managing director, Mr. Liu.  The difficulty faced by the plaintiff is that Mr. Liu played a dual role in the transactions.  While on the one hand he signed the agreements on behalf of the plaintiff, on the other hand, he was also a shareholder and a director of the 1^st defendant at the time when the 1^st defendant changed to its present name.  Mr. Liu also signed the shareholders resolutions for the 3^rd defendant to change to its name.  As the Judge observed, it is inescapable that Mr. Liu must have known of the 1^st and 3^rd defendants changing their respective names to the same name, not once but twice in 1997.

24.In my view the plaintiff has not satisfied the threshold that the law requires for pleadings when it seeks to pursue a case of fraud against the 1^st defendant.  Ultimately the requirement is one of fairness : you must let your opponent know what is the case against him so that he can respond accordingly.

Limitation

25.As the 9^th loan agreement was entered into on 27 February 1998 which the parties agreed was for the purpose of consolidating all the previous loans, it is common ground that the limitation period of the cause of action of six years commenced on that date.  The present claim, however, was only commenced on 16 October 2006 which was beyond the limitation period.  The plaintiff’s case is that the limitation period has been extended under section 26(1) of the Limitation Ordinance (Cap. 347) by reason of fraud.  The section provides that in action for fraud the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.

26.The Judge refused to strike out the plaintiff’s claim by reason of limitation.  He held that this is a fact sensitive issue.

27.The 1^st defendant by respondent’s notice seeks to affirm the judgment on the ground that the limitation period has expired.  Mr. Chan, SC who appeared together with Mr. Stanley Siu for the 1^st defendant, argued that the plaintiff could with reasonable diligence have discovered the fraud within the limitation period because the plaintiff through Mr. Liu was well aware of the identical names of the 1^st and 3^rd defendants.  Mr. Chan, SC argued that this is sufficient to strike out the plaintiff’s reliance on section 26(1) even without the additional factors such as the plaintiff must be aware that the accounts of the 1^st defendant did not record the loans or that the plaintiff had demanded repayment and received part repayment from the 3^rd defendant.

28.In my view the personal involvement of Mr. Liu in the change of names of the 1^st and 3^rd defendants provides strong argument that the fraud could have been discovered with reasonable diligence.  However, at the same time, the disappearance of Mr. Liu from Hong Kong in May 1998 may have put a different complex on the matter in terms of discovery of the fraud.  This may be as the Judge said a fact sensitive issue.  Bearing in mind that this is a striking out application and having been satisfied that the claim was properly struck out by reason of insufficiency of pleadings, it is not necessary for me to decide on the issue of limitation.

Conclusion

29.Accordingly the appeal must be dismissed.  There will be no order made on the respondent’s notice.

Costs

30.The plaintiff is to pay the 1^st defendant the costs of the appeal.  As to the respondent’s notice, the issue raised was not a cross appeal and as the argument did not materially prolong the appeal, I will not make any costs order on the respondent’s notice.

Hon Sakhrani J :

31.I agree.

Mr. Chua Guan-Hock, SC and Ms Teresa Wu, instructed by Messrs Wong Poon Chan Law & Co, for the Plaintiff

Mr. Edward Chan, SC and Mr. Stanley S K Siu, instructed by Messrs Dominic Y K Lai & Co, for 1^st Defendant