Hui Yin Sang and Another v. Tsoi Ping Kwan and Another

HCA 392 / 2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 392 OF 2008

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Before:  Hon Au J. in Chambers

Dates of Hearing:   14 December 2009

Date of Handing Down Decision:  28 January 2010

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D E C I S I O N

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A.  Introduction

1.This is the 1^stand 2^nd Plaintiffs’ application to amend the Writ and the Statement of Claim, in the form of the draft as attached to their Summons date 25 June 2009.

2.The amendments include:

(1)  Joinder of two additional corporate plaintiffs, respectively Shanghai Consultant Ltd and Direct Properties Ltd, suing respectively on behalf of itself and other shareholders of various companies.

(2)  Joinder of two additional corporate defendants, namely New Land Holdings Ltd (“New Land Holdings”) and Catford Development Ltd (“Catford”).

(3)  Various substantial amendments in the Statement of Claim.   Effectively, these include additional pleas on (a) various fraudulent representations against 1^st Defendant and (b) trust claims against the shareholding of certain companies and/or properties held by some companies.  I will deal with these amendments in greater details below.

3.The 1^st and 2^nd Defendants do not oppose the joinder amendments.  However, they oppose most of the other amendments of the draft Amended Statement of Claim.  In gist, the complaints are that the fraudulent representation amendments lack the necessary particulars or are not supported by evidence, and the other amendments are bound to fail or useless and thus should not be allowed.

B. Background

4.To understand the contentions raised in this application, it is necessary to set out some of the relevant background concerning the Plaintiffs’ claim as originally set out in the Statement of Claim. 

5.The Statement of Claim is a lengthy one, and cannot be said to be easily understood.  However, relevant to the present purpose, the original claims can be briefly and simply summarized as follows.

6.It is the 1^stand 2^nd Plaintiffs’ case that they together with the 1^stDefendant and another person known as Cheng entered into a joint venture in 1994 of 1995 to develop, inter alia, certain land projects in Shanghai.  One of these projects is known as the New Land Plaza Project.

7.It is also the 1^stand 2^nd Plaintiffs’ case that the investors’ respective shareholding in the New Land Plaza Project was achieved by various layers of corporate structure, making use of and with the imposition of a number of corporate vehicles.  These corporate vehicles are incorporated in various places, including the BVI and the Mainland.

8.Under the corporate structure, and relevant to the claims, are two companies known as New Land Holdings and Catford.

9.The Plaintiffs claim that they are the ultimate and direct shareholders of the corporate structure, including New Land Holdings and Catford. 

10.Put very simply, it is the Plaintiffs’ case that by various wrongful acts on the part of the 1^stand 2^nd Defendants, they have caused two share transfer transactions, involving the shares in New Land Holdings and Catford, to themselves (the Defendants), by which the Defendants have also wrongfully caused the transfer of the New Land Plaza Project to themselves.

11.In March 2008, the Plaintiffs issued the original Statement of Claim against the 1^stand 2^nd Defendants.   The claims were brought by the Plaintiffs in their personal capacity:

(1)  The claims against the 1^stDefendants are premised on (a) various allegations of breach of duties as a fiduciary and as the managing director of the boards of directors of New Land Holdings and another company known as Shanghai New Land, and (b) the 1^st Defendants’ frauds in making or fabricating a series of fake and false documents to deceive the 1^stand 2^nd Plaintiffs into causing the various complained share transfers of the various companies under the corporate structure.

(2)  The claims against the 2^ndDefendant are essentially one of constructive trusteeship, premised on the basis that she is in receipt of the shareholding and/or properties that have been transferred to her by reason of the 1^stDefendants’ various wrongful acts and breach of fiduciary duties.

12.Apparently prompted by the Defendants’ striking out application made earlier last year on the basis that the Plaintiffs in their personal capacity cannot mount the claims as pleaded under the reflective loss principles, the Plaintiffs took out the present Summons for the various amendments.

C.  The present application

C1.    The amendments on fraudulent misrepresentations

13.Paragraphs 23(d)(i), 23(e)(i) and 23(g)(iv) of the draft Amended Statement of Claim propose to add allegations of fraudulent misrepresentations against the 1^stDefendant.  The amendments read as follows:

“23.   In 1999, 2000 and/or 2001, in breach of his fiduciary duty to the 1^st and 2^nd Plaintiffs, and to New Land Holdings and Catford, the 1^st Defendant committed the frauds of making a series of fake and false or invalid documents to deceive the 1^st and 2^nd Plaintiff, New Land Holding and Catford, and third parties, or committed the following breaches of fiduciary duties.

…

(d)   Catford Instrument of Transfer

(i)  In about 1999 or 2000 or 2001, in breach of his fiduciary duty owed to the 1^st Plaintiff, the 2^nd Plaintiff, New Land Holdings and Catford, the 1^st Defendant did, and/or conspired with unknown person(s) to, procure and make up a fake document titled Instrument of Transfer dated 1 December 2000 (“the Catford Instrument of Transfer”) signed by Cheng.  Cheng was misled by the 1^st Defendant into signing the document (which was then undated), relying on the 1^st Defendant’s fraudulent misrepresentation (the 1^st Defendant knowing the representation was false) that it was proper and that it was agreed between the 1^st Defendant and the 1^st and 2^nd Plaintiffs, and relying on the signature of the 2^nd Plaintiff on the New Land Holdings Board Resolution shown to Cheng.

…

(e)   New Land Holdings Letter of Resignation

(i)   In about 2000 or 2001, in breach of his fiduciary duty owed to the 1^st Plaintiff and the 2^nd Plaintiff and New Land Holdings, the 1^st Defendant did and/or conspired with unknown person(s) to, procure and make up a fake document titled Letter of Resignation dated 1 December 2000 (“the New Land Holdings Letter of Resignation”) signed by Cheng.  Cheng was misled by the 1^st Defendant into signing the document (which was then undated), relying on the 1^st Defendant’s fraudulent misrepresentation (the 1^st Defendant knowing the representation was false) that it was proper and that it was agreed between the 1^st Defendant and the 1^st and 2^nd Plaintiffs, and relying on the signature of the 2^nd Plaintiff on the New Land Holdings Board Resolution shown to Cheng.

…

(g)   New Land Holdings Board Resolution

(v)    In the New Land Holdings Board Resolution, it was purported to be signed by Choi Man Ching as a director, but Choi Man Ching was never a director of New Land Holdings.  Further, the 2^nd Plaintiff signed the same on the misrepresentation of the 1^st Defendant that the New Land Holdings Board Resolution the 2^nd Plaintiff was signing was just one of usual ordinary documents of New Land Holdings in its ordinary course of business.  The 2^nd Plaintiff signed the New Land Holdings Board Resolution not knowing the content of the same, which was not explained to him by any person.  Cheng signed upon seeing the signature of the 2^nd Plaintiff, in similar circumstances as averred in paragraph 23(d)(i) above.”

14.The new allegations are essentially that the 1^st Defendant induced Cheng to sign the said pleaded three documents (which had the effect of transferring the shares in Catford held by New Land Holdings to the 1^st Defendant) by fraudulently misrepresenting to Cheng that it was proper for him to sign those documents and that the underlying transactions of those documents were agreed by the 1^st and 2^nd Plaintiffs.

15.It is a well-established principle that fraud cannot and should not be pleaded unless the pleader has clear instructions to plead fraud and he has before him reasonably credible material which, as it stands, establishes a prima facie case of fraud. See:  Tam Chi Kok Gabriel v Fok Eugina (unrep.., HCA 1859/1992, 12 June 2003, Deputy High Court Judge A Cheung), at paras 83-85; Code of Conduct of the Bar, para 113.

16.Relying on this principle, Mr Johnny Mok, Leading Counsel for the Defendants, objects to these new pleas on fraudulent misrepresentations on the primary basis that there cannot be any reasonably credible material based upon which the Plaintiffs could plea these.   Mr Mok’s arguments run as follows:

(1)  Upon enquiry from the Defendants’ solicitors, the Plaintiffs’ solicitors provided a copy of a statement said to be signed by Cheng on 31 May 2006 as the basis upon which the Plaintiffs say support their plea on fraudulent misrepresentations.

(2)  However, Cheng’s statement does not in any way support these new allegations of fraud.

(3)  Further, Cheng’s statement has been in existence for nearly 2 years even before the issue of the original Statement of Claim.  If the allegations of fraudulent misrepresentations are substantiated by it as now alleged, it is simply untenable as to why these were not pleaded and raised in the first place in the Statement of Claim.

(4)  Moreover, these new allegations of fraudulent misrepresentations are inconsistent with a case advanced by the 1^st and 2^nd Plaintiffs in an affirmation of Hui Yan Sang filed previously in opposition of the Defendants’ earlier striking out application.  On that occasion, the 1^st and 2^ndPlaintiffs only alleged^[1] that Cheng had no authority to sign the documents. 

17.I agree with Mr Mok’s submissions.  

18.In particular, in my judgment, Cheng’s statement, whether viewed alone or in the context of the evidence filed before me (as the Plaintiffs’ Senior Counsel Mr Chan urges me to do so), do not support a prima facie case of the pleaded fraudulent misrepresentations.  I quote Cheng’s statement (originally in simplified characters) as follows.

“聲明

本人鄭松興(香港身份證號碼 *******(*))，茲於1999年(具體時間記不清楚)，蔡炳坤[i.e., the 1^st Defendant] 以 BVI 嘉福發展有限公司 (Catford Developments Limited) 辦理有關手續需要我配合為由，請求我在若干英文文件上簽名，因為我看到黃偉及蔡炳坤都已親筆簽名，所以我就簽名並只留下複印件，蔡炳坤請求我不要寫上日期，因為所有的人還沒有簽齊名，當時該公司的公章也不在我手上，所以我僅簽名而已。

就此事件我沒有接受蔡炳坤的任何經濟利益。

特此聲明”

19.I cannot see how this statement can amount to reasonably credible evidence to support the pleaded case of fraudulent misrepresentations.   It does not make any reference to the three documents specifically pleaded, nor to any representations made by the 1^stDefendant, let alone the alleged misrepresentations.   

20.I therefore refuse to give leave to the 1^st and 2^ndPlaintiffs to amend the Statement of Claim in relation to the allegations of fraudulent misrepresentations as sought to be pleaded at paragraphs 23(d)(i), 23(e)(i) and 23(g)(iv) of the draft Amended Statement of Claim.

C2. Trust claims asserted by the 1^st and 2^nd Plaintiffs

21.By joining the corporate parties as plaintiffs in this action, a derivative claim on behalf of New Land Holdings and a double derivative claim on behalf of Catford are brought to seek recovery against the Defendants for procuring the transfer of the interest in the New Land Plaza Project from New Land Holdings and Catford to the Defendants.  These were premised upon the various alleged wrongdoings of the 1^st Defendant in causing the transfer of the shareholding under the corporate structure.   

22.These are added, as mentioned above, to apparently counter the Defendants’ earlier striking application mounted on the basis that the 1^st and 2^ndPlaintiffs cannot pursue any personal claims for the recovery, as the New Land Plaza Project was held by the companies under the corporate structure, and that the 1^st and 2^nd Plaintiffs are at best shareholders in the ultimate holding companies.

23.Notwithstanding the now constituted derivative claims, the 1^st and 2^ndPlaintiffs still seek to maintain a personal trust claim against the Defendants by claiming that they (the 1^st, 2^ndPlaintiffs and the 1^stDefendant) were partners and the direct beneficial owners of the New Land Plaza Project.  In support of such claims, the 1^st and 2^nd Plaintiffs by way of various amendments sought to be made principally at paragraphs 5A-5I and 17A of the draft Statement of Claim allege that the 1^stDefendant and his privy are estopped by convention that they (the 1^st and 2^nd Plaintiffs) were partners and direct beneficial owners of the New Land Plaza Project despite the existence of the intervening companies under the corporate structure.

24.These principal amendments are as follows:

“5A.  Further or in the alternative, the 1^st Plaintiff, the 2^nd Plaintiff and the 1^st Defendant carried on business in common in the New Land Plaza Project with a view to profit and dealt with each other as partners despite the introduction of the intervening companies (Smart Lot, Location Plus, Direct Properties, New Land Holding, Catford and Shanghai New Land) used as corporate vehicles, owning a total of 66% of the interest in the New Land Plaza Project, Shanghai New Land and New Land Plaza in the proportion of 26/66, 20/66 and 20/66 respectively.

5B. In reliance on the common understanding and convention and course of dealing between the 1^st Plaintiff, the 2^nd Plaintiff and the 1^st Defendant that they dealt with each other as partners in the New Land Plaza Project, the 1^st Plaintiff and the 2^nd Plaintiff left it to the 1^st Defendant to deal with the company kits and documents (including the financial statements and the share registers of and share certificates in) of Smart Lot, Shanghai Consultants, Direct Properties, New Land Holdings, and Shanghai New Land.

5C.    In the Spin Off Agreement referred to below, the 1^st Plaintiff (and Shanghai Consultants), the 2^nd Plaintiff (and Direct Properties) and the 1^st Defendant (and Locations Plus) on the one part as Party A entered into the said agreement with Cheng on the other part as Party B.  The 1^st Plaintiff executed the agreement on his own behalf but not for and on behalf of Shanghai Consultants.  The 1^st Defendant executed the agreement on his own behalf but not for and on behalf of Loctions [sic] Plus.  In the premises, the 1^st Plaintiff, the 2^nd Plaintiff and 1^st Defendant had been dealt with as a partnership by Cheng and had dealt with one another on the basis of partners with one another.

5D.    Clause 11 of the Spin Off Agreement provides that Party A and Party B shall each hold an original of the Spin Off Agreement.  In the premises, the 1^st Plaintiff, the 2^nd Plaintiff and 1^st Defendant had been dealt with as a partnership by Cheng and had dealt with each other on the basis of partners with one another.

5E. In the Supplemental Agreement referred to below, the 1^st Plaintiff (and Shanghai Consultants), the 2^nd Plaintiff (and Direct Properties) and the 1^st Defendant (Locations Plus) on the one part as Party A entered into the said agreement with Cheng on the other part as Party B.  The 1^st Plaintiff executed the said agreement on his own behalf but not for and on behalf of Shanghai Consultants.  The 1^st Defendant executed the agreement on his own behalf but not for and on behalf of Loctions [sic] Plus.  In the premises, the 1^st Plaintiff, the 2^nd Plaintiff and 1^st Defendant had been dealt with as a partnership by Cheng and had dealt with one another on the basis of partners with one another.

5F. Clause 9 of the Supplemental Spin Off Agreement provides that Party A and Party B and the witnesses shall each hold an original of the Supplemental Spin Off Agreement.  In the premises, the 1^st Plaintiff, the 2^nd Plaintiff and the 1^st Defendant had been dealt with as a partnership by Cheng and had dealt with each other on the basis of partners with one another.

5G. In a Loan Agreement referred to below the 1^st Plaintiff, Shanghai Consultants, 2^nd Plaintiff, Direct Properties, 1^st Defendant and Locations Plus on the one parts as Party A and Cheng and Pakton on the other part as Party B, the 1^st Plaintiff executed the agreement on behalf of Party A.  In the premises the 1^st Plaintiff, the 2^nd Plaintiff and the 1^st Defendant had been dealt with as a partnership by Cheng and had dealt with one another on the basis of partners with one another.

5H.    Clause 6 of the said agreement provides that Party A, Party B and the witness shall each hold one original of the agreement.  In the premises, the 1^st Plaintiff, the 2^nd Plaintiff and the 1^st Defendant had been dealt with as a partnership by Cheng and had dealt with one another on the basis of partners with one another.

5I.  In the premises, it is averred that the 1^st Defendant and his privy are estopped by convention that the 1^st Plaintiff, the 2^nd Plaintiff and the 1^st Defendant were partners, notwithstanding the intervening companies of Smart Lot, Shanghai Consultants, Location Plus, Direct Properties, New Land Holdings Catford and Shanghai New Land used as corporate vehicles, owning 66% of New Land Plaza Project, Shanghai New Land and the New Land Plaza.

17A.  Further or in the alternative, it is averred that the 1^st Defendant and  his privy are estopped by convention that the 1^st Plaintiff, the 2^nd Plaintiff and the 1^st Defendant were partners, notwithstanding the intervening companies of Smart Lot, Shanghai Consultants, Location Plus, Direct Properties, New Land Holding, Catford and Shanghai New Land used as corporate vehicles, owing after the Spin-off Agreement the whole of New Land Plaza Project, the shareholding in Shanghai New Land and the New Land Plaza in the proportion of 26/66, 20/66 and 20/66 respectively.”

25.In relation to these amendments, I agree with Mr Mok’s submissions that they should not be allowed to support the 1^st and 2^nd Plaintiffs’ trust claims for the following reasons:

(1)   First, it is trite that a company is a legal entity separate from its members, and generally a company does not hold any property as agent or a trustee for its members.  See: Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL) at 626-627; Good Profit Development Ltd v Leung Hoi [1993] 2 HKLR 176 at 179-181.

(2)   The Statement of Claim (whether in its original form or the proposed amended form) does not plead any case of express trust, implied trust, resulting trust or constructive trust formed between Shanghai New Land (the alleged trustee) and the 1^st and 2^ndPlaintiffs (the alleged beneficiaries).   There is also no plea of any agreement that the New Land Plaza Project or the property thereunder is held by Shanghai New Land as a trustee for the individual shareholders.

(3)   Further, it is the Plaintiffs’ own plea that the individuals initially agreed to set up the corporate structure and agreed to have Shanghai New Land as the company in the corporate structure to “own” the property.

(4)   In the premises, the mere fact that the 1^st and 2^ndPlaintiffs were ultimate shareholders of the companies within the corporate structure, even if they had been dealing amongst themselves as quasi-partners as alleged, per se does not make them the direct beneficial owners of the New Land Plaza Project or the shares in any of the intervening companies through which the New Land Plaza Project was held.  These amendments are thus useless or bound to fail.

(5)   Secondly, under the principle against recovery of reflective loss, a shareholder is not entitled to recover a reflective loss, being a loss that can be made good if the company enforces its rights against the defendant.   The underlying rationale is that if a shareholder is permitted to recover such a loss, then either there will be double recovery at the expense of the defendant, or that the shareholder will recover at the expense of the company and its creditors: Landune International Ltd v Cheung Chung Leung [2006] 1 HKLRD 39 (CA) at 47B-D.

(6)   The 1^stand 2^nd Plaintiffs’ claim that they still acquired the direct beneficial ownership in the New Plaza Project despite the intervening companies simply because of their common understanding and dealings that they were partners of the project is against the underlying rationale of the principle against recovery of reflective loss.   The trust claims as pleaded as such are also bound to fail.

(7)   Finally, the 1^stand 2^nd Plaintiffs’ personal trust claims based on their alleged beneficial interest in the New Land Plaza Project are wholly inconsistent with the derivative claims now brought by the additional corporate plaintiffs, New Land Holdings and Catford. 

(8)   These two claims are mutually exclusive factually and legally, as the New Land Plaza Project can only be either held beneficially by the company under the corporate structure (where the derivative claims are premised upon) or on trust by the company for the 1^stand 2^nd Plaintiffs beneficially (where the personal trust claims are based).  It cannot be both.

(9)   Insofar as pleading inconsistent cases are concerned, they are now governed by the new O. 18 r. 12A^[2] under the Rules of High Court (Cap 4A), which provides as follows:

“…a party may in any pleading makes an allegation of fact which is inconsistent with another allegation of fact in the same pleading if–

(a)     a party has reasonable grounds for so doing, and

(b)     the allegations are made in the alternative.” (emphasis added)

(10)  One of the objectives of this rule is to prevent a party from pleading inconsistent cases in relation to a matter which is plainly within his knowledge, so that there could be no justification for him to put forward inconsistent factual alternatives^[3].  The party also simply could not properly verify the pleading as he is now required to do.

(11)  In my view, the above inconsistent claims do not satisfy this rule because:

(a) They are pleaded as a unified claim but not as an alternative in the pleading.

(b)    The 1^stand 2^nd Plaintiffs have not provided any reasonable grounds for advancing their inconsistent personal trust claims and the derivative claims, when the relevant facts must be within their personal knowledge.

(12)  The proposed amendments made in support of the inconsistent personal trust claims are therefore embarrassing and fall foul of O 18 r 12A. They should not be allowed to go in.

D.  Conclusion

26.For the above reasons, I make the following orders under the 1^st and 2^nd Plaintiffs’ Summons to amend:

(1)  Leave is granted to the 1^stand 2^nd Plaintiffs to amend the Writ and the Statement of Claim in the form of the draft Amended Writ of Summons and the Amended Statement of Claim as attached to the Summons, save and except those as set out at paragraphs 5A-5I, 17A, 23(d)(i), 23(e)(i) and 23(g)(iv) of the draft Amended Statement of Claim, and any ancillary proposed amendments in the draft which allege or assert beneficial interest in the project or the shareholding in Shanghai New Land and the New Land Plaza Project.  The parties should agree on the final form of the amendments in the Amended Statement of Claim, failing which, they should seek directions from the Court in writing.

(2)  The 1^stto 4^th Plaintiffs do have leave to issue a concurrent Amended Writ of Summons against the 3^rd and 4^thDefendants, namely Catford and New Land Holdings, and to serve a sealed copy of the Amended Writ of Summons on the 3^rdand 4^th Defendants at their respective registered addresses.

(3)  The time for acknowledgment of service in the action by the 3^rd and 4^thDefendants be 21 days after effective service of the said Amended Writ.

(4)  The costs of the application for leave to serve the Amended Writ of Summons out of jurisdiction be in the cause.

(5)  There be liberty to apply.

27.Given that the 1^st and 2^nd Defendants have substantially succeeded in opposing the 1^stand 2^nd Plaintiffs’ application, I make an order nisi that costs of the this application be to the 1^st and 2^nd Defendants to be taxed if not agreed, with certificate for two counsel.   Unless any of the parties applies to vary it, the costs order nisi shall be made absolute 14 days from today.

28.Finally, I thank counsel for being succinct in their submissions.

Mr. CHAN Chi Hung, S.C., instructed by Messrs Wilson Yeung & Co., for 1^st and 2^nd Plaintiffs

Mr. Johnny MOK, S.C. leading Mr. Anson WONG, instructed by Messrs Yuen & Partners, for 1^st and 2^nd Defendants

[1] At paragraphs 38 and 43 of Hui’s affirmation.

[2] Under the implementation of the Civil Justice Reform.

[3] See: CJR Final Report, para 263, at pp 127-128; Clarke v Marlborough Fine Art (London) Ltd [2002] 1 WLR 1731 at 1741- 1745, paras 18 to 28 per Patten J; Hong Kong Civil Procedure 2010, paras 18/12A/1 – 18/12A/6.