Global Bridge Assets Ltd and Others v. Sun Hung Kai Securities Ltd

HCA 317/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 317 OF 2008

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BETWEEN

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Before: Deputy High Court Judge Carlson in Chambers

Dates of Hearing: 9-10 February 2011

Date of Judgment (Handed Down): 12 May 2011

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J U D G M E N T

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Introduction

1.The background to this application to amend the Statement of Claim concerns a Chinese-Foreign Equity Joint Venture (“the JV”) to build a coal-fired power station for the supply of electricity to Suizhou City in Hubei Province.

2.The JV was established in May 1993. The parties to it comprised the Defendant in this action, which as its name suggests is part of the Sun Hung Kai group of companies, and a mainland partner.  The Defendant held 40% of the shares in the JV and the majority 60% by the mainland partner.

3.The JV company was called Hubei Changzhu Power Development Company Ltd.  Its Articles of Association are dated August 1993. Art. 3 names the Defendant as one of the parties that had signed the contract to establish the JV company.  Both the Articles and the contract set out the respective shareholdings.  The capital contributions by the two shareholders were to be paid in tranches representing their investment in the JV. The Defendant’s total contribution was to be US$ 10 million.

4.Before I embark on the subject matter of the application to amend the Statement of Claim it is necessary for me to provide a brief account of the dispute which has resulted in the three Plaintiffs suing the Defendant, and of how this action has proceeded so far.

Background

5.An application was made to strike out the statement of claim which was heard and dismissed by Suffiad J in April 2009. The Defendant appealed to the Court of Appeal [Rogers VP and Le Pichon JA] which allowed the appeal, struck out the statement of claim but gave the Plaintiffs liberty to file an amended-statement of claim, which by this summons, they now do.  So far as the3rd Plaintiff is concerned, its position before Suffiad J was that the statement of claim would require amendment in any event and this application is now also before me.

6.A convenient starting point is to record that despite its obligation to contribute US$ 10 million (Art. 9 of the JV Memorandum), the Defendant has only paid US$ 7 million.  This led to a dispute between the Defendant and its mainland JV partner resulting in an arbitration in 1999.  By its award on 19 July 2000 the Arbitration Commission on the mainland ordered the Defendant to pay the outstanding US$ 3 million, notwithstanding which the Defendant has not complied with the award.

7.I gratefully take the facts which have given rise to the action from the summary contained in the judgement of Suffiad J at paras.8-23.

8.In 2001 negotiations were taking place between the1st Plaintiff and a company called Whirlwind Holdings Ltd. (“Whirlwind”) for the sale by Whirlwind of its shares in a company called KPI, a Bermuda registered company whose shares were then listed on the Hong Kong Stock Exchange.  The negotiations for the sale were conducted by a Mr Chin, on behalf of the1st Plaintiff, and by a Mr Cheng and his wife Madam Cheung Lai Na for Whirlwind.  At this time Madam Cheung, was in possession, the significance of which I will return to presently, of a letter of authorisation dated 21 January 1999 giving her authority to deal with and in the Defendant’s 40% share in the JV.

9.A sale and purchase agreement dated 3 August 2010 was concluded on 28 September 2010 between the1st Plaintiff, Whirlwind and Mr Cheng by which Whirlwind sold 169,500,000 shares in KPI for HK$ 33,900,000.  Mr Cheng stood as guarantor for the affairs of KPI in favour of the1st Plaintiff.

10.In the course of negotiations leading to the Sale and Purchase Agreement, concerns were raised by the1st Plaintiff about what might happen in the event that Whirlwind and/or Mr Cheng failed to perform their obligations in respect of the sale of KPI’s shares to it.  In response to those concerns a Mr David Hui, a director of the Defendant, and Madam Cheung, both of them acting on behalf of the Defendant, gave an oral guarantee on the Defendant’s behalf to the1st Plaintiff that the Defendant would transfer its 40% holding in the JV to the1st Plaintiff or its nominee if Whirlwind and Mr Cheng failed to perform their obligations under the Sale and Purchase Agreement [para.17 Statement of Claim].

11.Pausing here, it should be observed that under Art.15 of the JV any party who wished to transfer its shareholding or any part of it must first obtain the other partner’s consent who is granted the pre-emptive right to purchase.

12.By Art.16, in the event of the transfer of the JV company’s registered capital, the resolution must be passed unanimously and then submitted to the examining and approving authority on the mainland for approval before it is passed to the national industrial and commercial administration department for registration.

13.Going on from there, para.18 of the statement of claim also asserts an oral collateral contract between the1st Plaintiff and the Defendant made in or around July to August 2001 by which the Defendant agreed that in consideration of the1st Plaintiff entering into the Sale and Purchase Agreement, the Defendant would transfer or procure to be transferred in favour of the1st Plaintiff or its nominee all of its 40% shareholding in the JV company in the event that Whirlwind and/or Mr Cheng failed to perform their obligations.

14.Para.19 of the statement of claim then goes on to plead that the Defendant warranted to the1st Plaintiff that it was in a position to transfer 40% of its shares in the JV to the1st Plaintiff pursuant to the guarantee and the collateral contract.  After the Sale and Purchase Agreement had been signed, Whirlwind and Mr Cheng failed to see to it that the Defendant performed its obligation to transfer its 40% shareholding to the1st Plaintiff.  By letter dated 13 September 2001 sent to Whirlwind and to the Defendant, the1st Plaintiff notified the Defendant that it would enforce the guarantee and the collateral contract.

15.There was then a board meeting of the JV at which the Defendant promised to pay the US$3 million which it still owed and that it would transfer its 40% shareholding in the JV to the1st Plaintiff.  At this meeting the Defendant repeated its representation that it had obtained the written consent of the mainland JV partner to transfer its shareholding in the JV to the1st Plaintiff.  As a direct result of this, on 12 October 2001, the Defendant entered into a Capital Transfer Contract (“CTC”) with the 2nd Plaintiff (it being the1st Plaintiff’s nominee) by which the Defendant agreed to transfer its 40% shareholding in the JV to the 2nd Plaintiff for the nominal sum of $1.

16.In May 2003, the Plaintiffs discovered that the Defendant had never obtained the written consent of the JV mainland partner to transfer its holding to the 2nd Plaintiff.

17.This gave rise to the following claims by the three Plaintiffs:  Firstly, by the1st Plaintiff against the Defendant that it was in breach of its guarantee, the collateral contract and the collateral warranty as described in para.15 above.  Secondly, by the 2nd Plaintiff, that the Defendant was in breach of the CTC by failing to transfer its 40% shareholding in the JV to it.  And, finally, by the 3rd Plaintiff that the Defendant had failed to pay the outstanding amount of US$ 3 million that it owed to the JV.

18.The Defendant, as I have already observed, applied to strike out the statement of claim on a number of bases which I need not go into here.  The application failed.

19.On appeal to the Court of Appeal, its judgment is item 2 in the Plaintiffs’ List of Authorities, the statement of claim was struck out.  It is necessary to understand why this was done.

20.Rogers VP, who gave the judgement of the court, drew attention to the terms of the CTC being the agreement for the transfer of the 40% shareholding of the Defendant in the JV company to the 2nd Plaintiff, together with the Deed of Waiver which was an integral part of the contractual arrangements.  Given the importance of both documents to the Vice-President’s reasoning I will need to set out, as he did, the important terms of the Contract and Deed, in his case at paras.8 and 9 of his judgment (the references to LPI and SHK are to the 2nd Plaintiff and the Defendant respectively):

“Recital

WHEREAS, LPI desires to acquire any and all interest which SHK may hold in the registered capital (the ‘Interest’) of Chang Zhou Power Development Company Limited (the ‘Joint Venture’), a Sino-foreign equity joint venture company established in Hubei Province, People’s Republic of China from SHK and SHK agrees to transfer to LPI any such interest upon and subject to the terms and conditions herein;

NOW, THEREFORE, the Parties agree as follows:

1. Transfer of Equity Interest

1.1 SHK hereby transfers to LPI and LPI hereby acquires from SHK the Interest at a price of one Hong Kong Dollar (HK$1.00) (the ‘Transfer Price’).

1.2 Within five (5) days from the date hereof, LPI shall pay the Transfer Price in full to SHK in cash.

1.3 LPI shall be responsible for arranging and obtaining any waivers, consents and approvals as may be required by LPI or as may be required under PRC law for the transfer of the Equity Interest from SHK to LPI.

1.4 LPI acknowledges and agrees that SHK hereby transfers the Interest to LPI without any representation, guaranty or warranty of any kind by SHK, express or implied, as to any title or right or otherwise or any other representation or warranty whatsoever, express or implied, with respect to the Interest or any part thereof.

1.5 LPI shall be responsible for any and all taxes, fees, charges, levies and costs in connection with or arising from the transfer of the Interest by SHK to LPI, including but not limited to, stamp tax, business tax, enterprise income tax and other governmental charges wherever arising.

2. Assumption of Rights, Duties, Obligations and Liabilities

From the date hereof, LPI hereby assumes all rights, duties, obligations, liabilities of SHK in relation to the Interest, the Joint Venture or any transaction related thereto, arising prior to or after the date hereof. From the date hereof, LPI hereby releases SHK from all of its duties, obligations and liabilities in relation to the Interest and the Joint Venture.

For the avoidance of doubt, and without limited the generality of the foregoing, from the date hereof, LPI shall be responsible for all claims (if any) against SHK by third parties and the Joint Venture in respect of its performance of any duties or obligations arising in relation to the Interest or the Joint Venture.”

21.So much for the contract.  The material terms of the Deed were as follows:

“Recital

WHEREAS, pursuant to the Contract for the Transfer of Registered Capital (the ‘Transfer Contract’) between SHK and LPI of even date, SHK has transferred to LPI and all interest (the ‘Interest’) which it may have in Chang Zhou Power Development Company Limited (the ‘Joint Venture’), a sino-foreign equity joint venture company established in Hubei Province, the People’s Republic of China;

WHEREAS, in consideration of SHK’s entering into the transfer Contract, LPI agrees to provide waivers and indemnities set forth herein to SHK:

1. Waiver

1.1 LPI hereby releases and forever discharges SHK and… (collectively the ‘Releasees’), and each of them separately and collectively, from any and all claims, liens, demands, causes of action, obligations, damages and liabilities of any nature whatsoever, known or unknown, that LPI ever had, now has or may hereafter claim to have in respect of any claims (the ‘Released Claims’) arising against any of the Releasees, including (but not limited to) claims relating to or arising from the Interest, the Joint Venture or any transaction related thereto.

1.2 LPI hereby agrees to cause each of its subsidiaries and affiliates to forbear from pursuing any Released Claims which they may have against SHK, its subsidiaries or affiliates, or their assets.

2. LPI’s Covenant Not to Sue”

LPI covenants and agrees that it will never, by itself or with any person or in any way, commence, aid in any way, except as required by due legal process, prosecute or cause or permit to be commenced or prosecuted, any action or other proceedings based upon any claim which is the subject of the releases set forth in Article I hereof.  This Deed shall be deemed breached by LPI and a cause of action shall be deemed to have accrued immediately upon LPI’s commencement or prosecution of any action or proceedings against any of the Releases contrary to this Deed.”

22.The Vice-President concluded [para.17 of his judgment] that the consideration specified, being that of the Defendant entering into the contract, was sufficient consideration for the various waivers and covenants set out in the Deed of Waiver.  In such circumstances, he held that the waiver would be effective in which case the Defendant would have a clear defence to the 2nd Plaintiff’s claim.  He then went on [para.19] to hold that the1st Plaintiff’s claims against the Defendant based on the oral guarantee and/or collateral contract and collateral warranty arose on the basis that the1st Plaintiff had nominated the 2nd Plaintiff to be the recipient of the Defendant’s share in the JV.  The 2nd Plaintiff was therefore the1st Plaintiff’s agent and as such equally bound by the Deed of Waiver.  This being so the statement of claim as drafted on the 1st and 2nd Plaintiffs’ behalf was bound to fail.  The appeal was allowed and the two Plaintiffs were given leave to apply to amend their claims.

The Proposed Amended Statement of Claim

23.I take the case of the 1st and 2nd Plaintiffs’ first.  The purpose of the amendments, which is to plead fraud and deceit by the Defendant, is to circumvent the now successful defence plea based on the Deed of Waiver.  A successfully maintained action based on fraud through deliberate and fundamental concealment of highly material facts will overcome any defence based on the Deed of Waiver.  At bottom is the allegation that when entering into the CTC for the sale of its 40% stake in the JV, the Defendant had already sold its 40% holding in the JV to a company called Tian An China Investment Company Limited (“TAC”) for HK$ 54 million, marginally less than the US$ 7 million which it had injected into the JV. 

24.This transfer of its shareholding to TAC was effected by an agreement dated 8 April 1998 and, as required, consented to by the mainland JV partner (para.22C(1) of the proposed amended statement of claim). The twist in the tail, as it were, was that the mainland JV partner refused to assist in the registration of the change of shareholder of the JV from the Defendant to TAC.  As a result, the Defendant remained the registered shareholder of the JV on the register of shareholders whilst holding the 40% shareholding for the benefit of TAC from the 8 April 1998 up to 8 December 1998.  On this latter date there was an agreement between TAC and Changijiang Power Development (HK) Company Limited (“CJP”), a company of which the previously referred to Mr Cheng was an 80% shareholder and director, by which TAC transferred its 40% shareholding in the JV for a 90% interest in a company called Wuhan Changfu Property Development Company Limited plus a cash component.  Therefore, after 8 December 1998 the Defendant held the bare legal title in the JV as the registered shareholder.

25.The effect of all of this was that although the Defendant appeared on the share register as the 40% shareholder of the JV, the beneficial interest in those shares by purchase for valuable consideration vested firstly, in TAC as from 8 April 1998 and in CJP as from 8 December 1998 [see para.22C(2) to (5)].

26.By para.22E, it is pleaded that neither the first nor the 2nd Plaintiff was aware of these transactions notwithstanding which, on 12 October 2001, over 3½years after the agreement of 8 April 1998 when the Defendant sold its 40% interest in the JV to TAC for HK$54 million, the Defendant purported to sell its 40% shareholding in the JV to the 2nd Plaintiff, as the1st Plaintiff’s nominee.  By para.22F(1) to (3) the following pleas are now applied to be made by amendment.  Given their importance I set them out here:

“22F. In the event SHK Securities’ allegations concerning the Alleged Prior Transfer are true, it is averred that:

(1) SHK Securities did not have, and knew that it did not have, any beneficial interests in the 40% shares in the JVC when it: (a) offered and agreed to provide the Guarantee and/or the Collateral Warranty; and/or (b) offered to and entered into the Collateral Contract;

(2) notwithstanding the aforesaid and notwithstanding the fact that a mere legal title over the 40% shares in the JVC was not of any value, SHK Securities offered the 40% shares in the JVC as a form of security as if it were the beneficial owner so as to induce Global Bridge to accept the Guarantee and/or Collateral Contract and/or Collateral Warranty;

(3) in the premises, SHK Securities had perpetuated a fraud or deceit on Global Bridge (and, insofar as may be necessary, Long Prosperity).

(3) No Consent from PRC JV Partner.”

27.And so, what is being said is that the Defendant purported to sell a shareholding which it had disposed of over three years beforehand, this in addition to the fact that the Defendant had represented that it had the consent of the mainland JV partner to effect this transfer to the 2nd Plaintiff knowing very well that it did not, in circumstances where in April 1998 it had obtained the mainland partner’s consent to sell its 40% shareholding to TAC.

28.The relief sought is for the CTC to be set aside for fraud and deceit and for damages.  In this regard the position of the 1st and 2nd Plaintiffs is identical.

29.By paras.27 and 30 of the proposed amendment, the 1st and 2nd Plaintiffs rely on section 26(1)(a) or (b) of the Limitation Ordinance which I will need to consider and discuss when I turn to the argument.

30.As to the 3rd Plaintiff, reliance is placed on the Defendant’s failure to carry out its promise to pay the outstanding US$3 million into the JV, this in addition to its obligation to do so following the Arbitration award entered against it.

31.As a result of the failure by the Defendant to do as it was contractually bound to do, it is pleaded in a series of proposed amendments (para.33 and the particulars thereto) that the operation of the JV, the viability of which depended on the injection of this further capital by the Defendant, foundered and the power station that it had been established to operate was closed down and demolished resulting in loss and damage to the 3rd Plaintiff.

The Argument

32.Mr McCoy SC, with his customary industry, has addressed very full argument supported by much authority, that amendments, particularly amendments relying on fraud should not be allowed just because (in this case) the Defendant might be compensated for in costs.  This he points out is a stale case, when one considers that the JV was established in May 1993, although it is right to say that the action itself is much more recent dating back to February 2008, just over three years ago.

33.Notwithstanding the force of Mr McCoy’s submissions on the modern approach to allowing amendments, particularly those carrying the stigma of fraud and deceit, it strikes me that this application really falls to be decided on whether at this stage, the Plaintiffs can validly take advantage of section 26(1)(a) or (b) of the Limitation Ordinance.

34.Before I turn to that section and its effect on these allegations it is fair to say that, relatively speaking, in the chronology of the action, the amendments sought, grave as they are, come early on in the piece.  These are not amendments on the eve of the trial.  No trial dates have been set.  Discovery is no doubt still on-going.  The amendments, if allowed, will change the focus of the action but there will still be ample time for the case to be “managed” on its way to the trial judge.  And so, this is not a difficulty that Mr Dawes, for the Plaintiff, is required to overcome on the application that he is making.

35.That said, it is necessary to look at the chronology, as it has been put by Mr McCoy.  The action having started in February 2008 progressed to a close of the pleadings on 21 November 2008, which was commendably quick given the weight and relative complexity of the action.  The strike out application came on 22 December 2008 which inevitably slowed up progress.  Suffiad J heard it and handed down his decision on 22 April 2009.  On 5 May 2009, the Plaintiffs applied to amend the statement of claim, mostly as it related to the 3rd Plaintiff — it now sought to cast the action as a derivative claim.  On 9 July 2009, the Court of Appeal gave leave to the Defendant to appeal the order of Suffiad J who had refused to strike out the statement of claim.  On 24 February 2010, the Court of Appeal allowed the Defendant’s appeal.  And so, about 15 months were taken up in obtaining a resolution of the issue of whether the statement of claim should be struck out [December 2008 to February 2010].  In the meantime, as Mr McCoy has pointed out, much affirmation evidence was exchanged on the question of the availability for the 3rd Plaintiff of a derivative action, the issue being whether the JV (now in liquidation in 2009 when this was being argued over) was under the control of the Defendant. This resulted in the 3rd Plaintiff having to abandon its derivative claim and substitute a claim for the Defendant to pay to it the outstanding US$3 million or, alternatively to the JV.

36.What this all amounts to, now that the statement of claim has been struck out by the Court of Appeal, is that the Plaintiffs wish to have, on Mr McCoy’s count, a fourth go at their pleaded case, as it were, and on this occasion to elevate the claim to one of fraud and/or deceit.

37.Unsurprisingly, Mr Dawes has relied on the Court of Appeal decision in Natamon Protpakorn v Citibank NA [2009] 1 HKLRD 455, in which it re-stated the position that an amendment will survive objection provided it cannot be demonstrated that it is bound to fail, in which case it would be pointless to allow it to go forward.  In effect the obverse of an application to strike out a pleading on the basis that it discloses no cause of action as provided for under RHC, O.18 r.19.

38.Mr McCoy says that this really is old law and practice since the advent of the CJR.  You cannot just come along three years after the start of the action and seek to introduce a claim based on fraud.  He has referred me to the decision of the High Court of Australia in Aon Risk Services Aust Ltd v ANU [2009] 239 CLR 175 (a full bench), which rejected the notion that it was sufficient that the party who now faced an amended pleading could be compensated in costs, even on an indemnity basis.  At para.111 of the judgment the court said this:

“An application for leave to amend a pleading should not be approached on the basis that a party is entitled to raise an arguable claim, subject to payment of costs by way of compensation. There is no such entitlement. All matters relevant to the exercise of the power to permit amendment should be weighed.”

The same sentiment is to be found in the judgment of Potter LJ (as he then was) in Clarke v Slay [2002] EWCA Civ 113 para.18:

“The overriding objective involves taking into account the situation of the defendants as well as the claimants. No longer are simple questions of costs regarded as sufficient compensation in various circumstances.”

And again in Sali v SPC Ltd [1993] 67, 841 at 843-844, the High Court of Australia, cited in Aon Risk Services Aust Ltd ibid., made an observation which is now completely consonant with the regime and ethos established in our own CJR:

“What might be perceived as an injustice to a party when considered only in the context of an action between the parties may not be so when considered in a context which includes the claims of other litigants and the public interest in achieving the most efficient use of court resources.”

39.And so a broad spectrum of considerations will need to be weighed including the fact that an amendment, as in this case, will inevitably delay the progress of an action and must result in other cases in the queue for a trial date having to wait even longer.

40.Particular reliance is placed by Mr McCoy on the fact that fraud was not raised earlier in circumstances where the original pleading has been struck out.  As a result the Plaintiffs’ case must stand or fall on an allegation of fraud.  As I will come to in a moment, Mr Dawes submits that this fraud was a particularly effective one because it lay well-hidden.  It was only after the Defendant had fully pleaded out its case that it came to the Plaintiffs’ attention that the Defendant had long ago disposed of its beneficial interest in the JV. 

41.Mr McCoy has referred to two 19th century cases which serve to demonstrate that the court will not lightly allow an amendment to plead fraud unless good reason is shown why such a grave allegation had not been made in the original pleading.  The first is Hendriks v Montague [1881] 17 ChD 638 per Jessel MR where he said:

“There is no Judge more liberal, if I may use the expression, in allowing amendments, in order to try the real case, than I am, at any stage of the case; but I make one exception, that is as to charges of fraud. I do not, as a rule, allow amendments to make a charge of fraud at a time when the case is launched, independently of fraud. I generally stop there. To allow such an amendment as this would be contravene that rule.”

42.In Lawrence v Lord Norreys [1888] 39 ChD 213 at 233, an allegation of concealed fraud was made after the Defendants had applied to strike out the claim.  On the facts of that particular case, Cotton LJ refused to allow that plea to be made.  He dismissed the action:

“Defects were pointed out in his proposed amendments, and those defects are now met by the introduction of allegations which are only the allegations of the pleader on instructions given to him by his client … In my opinion this improbable story about a fraud alleged to have been committed in 1816 is brought forward without any reasonable grounds. If that is the proper conclusion of fact to be drawn from the evidence before us, then in my opinion this action is vexatious, and we ought to stop it as being an abuse of the process of the Court.”

In the same case Fry LJ spoke of the court’s duty to enquire whether there are reasonable grounds on which the Plaintiff can expect to succeed on a plea of fraud and Bowen LJ (as he then was) said at page 235 that the court would expect the pleader to show, “some ground for the faith that was in him to satisfy [the court] that the case of fraud was not a simple creation of his own imagination.”  These general strictures were followed by Clough J in Hong Kong in Lo Ka Chun v Lo To [1985] HKLR 207 at 226G-228D, who disallowed pleas of undue influence involving constructive fraud and unconscionable conduct on the ground that no sufficient explanation had been given for not having raised this earlier.

43.What underlies these decisions is the notion that nobody should have an allegation of fraud levelled against him in a pleading unless it can be backed-up by credible material and, where that charge has not been made at the outset of the case that there must be reasonable grounds to explain why this had not been done earlier.

44.Counsel should not plead fraud “unless he has clear and sufficient evidence to support it”; per Denning MR in Associated Leisure v Associated Newspaper [1970] 2 QB 450 at 456E-F which was applied by Mortimer J (as he then was) in Waychong Enterprises v Chang Kwei Sheng, HCA 4298/1983, 14 October 1985 in disallowing a plea of fraud and dishonesty.  This duty also extends to solicitors who “must not allow themselves to be the instrument of their clients to settle a pleading containing groundless allegations [of a serious nature]”; (Fuad VP in CS Low Investment Ltd v Freshfields [1991] 1 HKLR 12 at 23D).

45.All of this is also recognised in the Bar’s Code of Conduct para.113, which prohibits such a plea unless counsel has before him reasonably credible material which establishes a prima facie case of fraud.

46.Mr McCoy has set out to show that the Plaintiffs had prior knowledge of the sale of the shareholding before September 2008 when the defence was served, in which case there can be no excuse for not having pleaded the allegations of fraud when the case was originally launched.

47.Mr McCoy refers to the fact that the transfer to TAC in April 1998 was mentioned in the arbitral award of 19 July 2000.  The 3rd Plaintiff was a party to that arbitration and therefore must be taken as having knowledge of this since the date of the award in July 2000.  The connecting features are Mr Chin and his father.  The 3rd Plaintiff became a subsidiary of Guangzhou Keen Lloyd Industrial Limited (of which Mr Chin’s father was a director) on 18 December 2002 and Mr Chin himself was also a director of the 3rd Plaintiff till 2004 (when he was disqualified), as was his elder brother.  The 3rd Plaintiff is a member of the Keen Lloyd group of companies which is under the control of the Chin family.  Mr Chin has throughout been represented by the same firm of solicitors, Messrs Waller, Ma Hung & Yeung, who also represented Mr Chin in his criminal prosecution in 2004-5 and in his subsequent bankruptcy.

48.Mr McCoy further submits that Mr Chin also acted for and made decisions on behalf of the 1st and 2nd Plaintiffs.  If one therefore pulls together these strands pointing to the 3rd Plaintiff’s knowledge of the 1998 transfers, this knowledge must have been passed on to the 1st and 2nd Plaintiffs by Mr Chin since at least 2002.

49.There is no doubting the 3rd Plaintiff’s knowledge of the transfers in 1998 and so much is confirmed by the General Endorsement of the writ in this action which recites and relies on the arbitral award of July 2000 (which referred to the transfers in 1998) in its claim for the outstanding $3 million.

50.In relation to the 1st and 2nd Plaintiffs, actual knowledge of this prior transfer of the Defendant’s beneficial interest of its 40% shareholding to TAC for $54 million, Mr McCoy says that if further confirmation were ever needed it is to be found in the recital to the CTC itself which is in these terms:

“Whereas [the 2nd Plaintiff] desires to acquire any and all interest which SHK may hold in the registered capital (the ‘Interest’) of Chang Zhou Power Development Company Limited (‘the Joint Venture’) …”

Two points arise on this.  Firstly, Mr McCoy asks rhetorically, why would a purchaser [the 2nd Plaintiff] express the interest that it was going to purchase, on its case a 40% shareholding in a joint venture such as this, as the acquisition “of any and all interest which [the Defendant as seller] may hold”?  This, submits Mr McCoy, is conclusive evidence that it knew that it was not purchasing the full beneficial interest and, if one was to hesitate in arriving at such a conclusion, then any doubts must be dispelled with the knowledge that the consideration for this transfer was just $1.

51.Even if it is still not possible to say that the 1st and 2nd Plaintiffs had actual knowledge, they certainly could have obtained knowledge of the 1998 transfers by making basic enquires as to precisely what interest they were purchasing from the Defendant for $1.

52.These features of the case are also material to the Limitation Ordinance objections taken by Mr McCoy, but on the purely amendment-based objections, Mr McCoy submits that these allegations of fraud were known to the 1st and 2nd Plaintiffs no later than 2002 and certainly, on any view, well before 2008 when the action was started and could and should have been pleaded then.  All the authorities to which I have been referred by him indicate that it is now much too late to seek to amend and plead fraud on both grounds.  Firstly, delay and, secondly, that on the face of the CTC agreement [para. 50 supra] the Plaintiffs must have known that for their $1 they were only buying such nominal interest as the Defendant then had in the JV following the sale of its beneficial interest in 1998 for $54 million.

53.Mr Dawes in reply has submitted that Mr McCoy has gone too far in describing the appropriate test to be applied by the court in deciding whether to allow the amendment of a pleading.  The position after the introduction of the CJR has not changed.  The rules of court in this regard have not been altered.  For my part, I am satisfied that subject to the underlying objectives of the CJR, the position remains as it was under the old regime.  It seems to me that the later the application to amend, by which I mean the closer to the fixed and known trial date, then, subject to the nature of the amendment that is being applied for, the more onerous will be the burden on the party seeking to amend.  If the amendment seeks to introduce for the first time a substantial shift in the way the case is to be put, which will result in an adjournment of the trial in order to allow the other party to prepare itself adequately to meet the new case, then it is more likely that the court will refuse the application. I have already observed that in this action a trial date has not been appointed and the litigation is still very much in its interlocutory stages. Essentially, provided this fraud-based plea is one that is not bound to fail (leaving aside for the moment the Limitation Ordinance objections) and that on the face of it there are good reasons for not having deployed earlier I would have thought that the amendments should be allowed.

54.Mr Dawes has pointed out that although the 1998 transfer was referred to in the arbitral award and the 3rd plaintiff was a party to that proceeding, when one considers the terms of the award the reference to it was very brief.  The facts that matter, namely the agreements between the Defendant and TAC and later between TAC and CJP, were not mentioned in the award.  Further, Mr Dawes also points out that the 3rd Plaintiff’s current management, who are now pursuing this action, was not aware of the arbitral award which was not included in the papers that it was provided with when it acquired the 3rd Plaintiff.

55.Further, although this goes largely to the limitation argument, the Plaintiffs could not with reasonable diligence have discovered the fraud.  This issue relates to, on an application to amend to plead fraud, the Plaintiffs’ explanation for not pleading fraud earlier.  The case of Peco Arts Inc. v Hazlitt Gallery Ltd [1983] 1 WLR 1315, makes clear that the Plaintiffs were not required to do everything possible to discover whether fraud had been committed but only what an ordinary prudent person would do in all the circumstances.  Given the express representation in the CTC, it was therefore not incumbent on a reasonable purchaser to look behind the agreement to discover whether the Defendant was still the beneficial owner of the shareholding when these parties entered into the CTC.

56.As to Mr McCoy’s analysis that a claim based on fraud/deceit is bound to fail because the evidence shows that the Plaintiffs, who were paying $1 for the shareholding, knew very well what the situation was and that they were not purchasing a full beneficial interest [see paras.50 and 51 above], Mr Dawes submits that the Defendant was offering the 40% shareholding to the 2nd Plaintiff, on the 1st Plaintiff’s behalf , as security as if the shareholding was a valuable security and that this transfer was made by the CTC to give effect to the guarantee, the collateral warranty and/or the collateral contract.

57.Mr McCoy has relied strongly on the fact that much of what is now proposed by these amendments is based on the word of Mr Chin, a convicted criminal, who is simply not to be relied on.  Whilst the force of this is not to be overlooked, I think it can also be said that the personalities behind the dealings on behalf of the Defendant may also not prove to be worthy  of the court’s affection if the matter is allowed to proceed to trial when the facts will be fully reviewed in the course of the trial.

58.There is alot about this matter which will put the trial judge on his guard,  as to whether either side has played its part with a completely straight bat.

59.Therefore I have decided, subject to limitation, which I will shortly turn to, that these amendments should be allowed and that the Plaintiffs’ case should be heard on the basis of the amendments.  The complaints that Mr McCoy has so strongly advanced will have to await the trial judge’s verdict once he has heard the evidence.  Where Mr McCoy has failed to persuade me that these pleas are bound to fail and where the Defendant will suffer no forensic disadvantage that cannot be compensated for in costs, as I have already observed this is not one of these eve of trial applications that one all too often encounters, the Defendant will have ample time to deal with them in its amended pleading and at the trial which still a long way off.

60.The position of the 3rd Plaintiff is also perfectly sustainable on the application to amend, being dependent as it is on the Defendant’s failure to comply with its obligation to inject the outstanding US$3 million, with the result, as is alleged, that the power station operated by the JV had to close down.  The 3rd Plaintiff, as a partner in the JV, in consequence sustained substantial loss and damage.  There is also the letter of 8 May 2003 by Mr Hui on behalf of the Defendant to the 3rd Plaintiff, the authenticity of which is at this stage contested, acknowledging the debt of US$3 million.  The genuineness of this letter can only be resolved at the trial.  The basis of the 3rd Plaintiff’s case has undoubtedly changed, the derivative nature of the claim having been abandoned but, again subject to the limitation argument, the proposed pleading as now framed is a viable one which can only be resolved at the trial.

Limitation

61.I take the case of the first two plaintiffs first.  For this, the Plaintiffs rely on section 26(1), Limitation Ordinance (Cap.347).  The period of limitation does not begin to run until the Plaintiff has discovered the fraud.  On the case as pleaded this was not discovered until 23 September 2008.  The question that arises really is whether the Plaintiffs could have discovered the fraud earlier with reasonable diligence.  In this regard, Mr McCoy has submitted that one does not even get that far because, he says, on any sensible view of the evidence the Plaintiffs knew precisely what was going on in 2001 when the CTC was signed.  I have already rehearsed the argument by Mr McCoy that when the 2nd Plaintiff purchased the Defendant’s interest in the JV for $1 it knew that it was buying a bare interest and nothing more.  The July 2000 arbitral award referred to the 1998 transfer.

62.The Peco Arts Inc case ibid is in point as to the extent of the enquiry expected of a party in the Plaintiffs’ situation. I have already held  in this case that reasonable purchasers would not have been required to go behind the agreement to ascertain whether the Plaintiffs still held the beneficial interest in the shareholding in the light of the express representations made on the Defendant’s behalf in the CTC. 

63.This point will therefore have to be pleaded out by the Defendant and contested at the trial.  The issue remain perfectly “live” at this stage and there is no basis for supporting a “summary execution” of the action on the current state of the evidence.  This therefore is sufficient to dispose of the argument, based on the amended pleading being time-barred with the result that all three Plaintiffs must be permitted to amend the statement of claim in the form attached to the summons.

64.For the sake of completeness, I propose to consider the further limb to the limitation argument based on section 35(6) of the Limitation Ordinance.  This is what Mr Dawes would have had to persuade me about had I found that the application to amend was being made after the expiry of the limitation period.  What Mr Dawes is suggesting is that even if the application had been time-barred the amendments should, in the exercise of the court’s discretion, be allowed to stand.  It is helpful to set out fully the basis upon which the court will exercise its discretion to allow an amendment to proceed in such circumstances.  I take this from the note to RHC O.20 r.5.  This is at 20/8/7, pages 439-440 of the current practice:

“The provisions of r.5 empower the court to grant leave to amend the writ or pleading in the particular circumstances mentioned in paras (3), (4) or (5) even though the application for such amendment is made after the expiry of any relevant period of limitation current at the date of the issue of the writ. These powers in no way affect or prejudice the substantive rights of the parties under the Limitation Ordinance; nor do they affect or alter the practice of the court in cases outside the scope of the circumstances mentioned in paras (3), (4) and (5). On the other hand, in the specified classes of cases mentioned in these paragraphs, r.5 regulates afresh the practice which the court may follow in exercising its unfettered discretion under r.8 to amend any document in the proceedings; in these cases r.5 regulates the practice of the court for curing the specified defects in an action after the relevant time limit has expired.

The principle underlying the powers of the court under r.5 is that if the proceedings had been, from the beginning, properly formulated or constituted in the circumstances specified in paras (3), (4) and (5) the defence of limitation would not have been available to the defendant; and accordingly, if in its discretion, the court thinks it just to grant leave to amend defects in the writ or pleading within the scope of the circumstances specified in these paragraphs, so that such defects in the proceedings are treated as having been cured ab initio, the defendant is not being deprived of the benefit of a defence which he would not have had if the proceedings had been so property formulated or constituted in the first place. To contend in the cases specified in these paras, that the defendant has an existing right which will be prejudiced by the amendment is to argue in a circle, since he only has an existing right if one presupposes that the court will not use its powers to amend under O.20 r.8, and O.15, rr.6, 7 and 8 (see, per Holroyd Pearce L.J. in Pontin v. Wood [1962] 1 Q.B.594 at 609; [1962] 1 All E.R. 294 at 298).”

The application of these provisions was considered by Saunders J in Terkildson & Mortenson v Barber Asia Ltd & Ors, HCA 1963/2003 [8 March 2007], with which I respectfully agree.  At para.13 he said this:

“The effect of those provisions is that where it is necessary to plead facts to support a whole new cause of action, or to plead new or additional facts to substantiate a cause of action against a defendant, already a party to the proceedings, and it is sought to plead those new or additional facts outside the limitation period, the amendment may not be permitted. If however the essential facts required to substantiate an un-pleaded cause of action, are pleaded against a defendant in relation to another cause of action, in the discretion of court, amendment may be made to introduce the up-pleaded cause of action.”

65.Mr McCoy submits that this is a case covered by the first part of Saunders J’s analysis.  What is sought to be done is to introduce new or additional facts outside the limitation period in which circumstances the amendment should not be allowed.  This point was covered in the judgment of Pill LJ in Paragon Finance v DB Thakerar & Co. [1999] 1 All ER 400 at 419H-420H.  The facts and conclusions appear sufficiently from the headnote to the report.  By the original action, the Plaintiffs had sued the Defendants for breach of contract, negligence and breach of fiduciary duty.  After the limitation period had elapsed, the Plaintiffs sought to amend their pleadings to allege fraud, conspiracy to defraud, fraudulent breach of trust, and intentional breach of fiduciary duty.  The headnote recites what followed:

“The plaintiffs applied for leave to make the amendments under RSC Ord 20, r 5(2)(5), which provided that leave could be given if the new cause of action arose out of the same facts, or substantially the same facts, as a cause of action in respect of which relief had already been claimed in the action and if the court though it just to grant leave to make the amendments. The application was refused in the first case but granted in the second. The plaintiffs in the first case and the defendant in the second appealed.

Held— For the purposes of Ord 20, r 5(2)(5), an amendment which sought to make a new allegation of intentional wrongdoing where previously no intentional wrongdoing had been alleged constituted the introduction of a new cause of action, since intentional and unintentional wrongdoing gave rise to distinct causes of action.  It followed that the amendment sought to be made by the plaintiffs introduced a new cause of action.  However, a claim based on allegation of fraud and dishonesty did not involve substantially the same facts as a claim based on allegations of negligence, and therefore leave to amend should be refused.”

66.It seems to me clear that assuming the claim of the first two plaintiffs is statute-barred — which I have already held is not the case, they would not have been able to take advantage of O.20 r.5(2)(5). The original pleaded claim was one for breach of the alleged oral guarantee, collateral contract and/or collateral warranty and the claim by the 2nd Plaintiff for breach of the CTC.  The claim for fraud would be a new cause of action based on new facts.  The Plaintiff could not in such circumstances have taken advantage of O.20 r.5 for the reasons given by the court in Paragon Finance supra.

67.In respect of the 3rd Plaintiff the claim that is now put forward in the proposed amended statement of claim is that by virtue of the Defendant’s failure to pay the outstanding US$3 million, the power station had to close down and the 3rd Plaintiff, as a partner in the JV, suffered loss and damage.  Paragraph 33B of the amended statement of claim pleads various acts carried out by the Defendant without the JV’s board of directors consent in breach of Art.19 of the JV contract and Art.18 of the JV contract Memorandum [C1/412 (26) and C1/412 (223-224)] respectively.  These acts all took place in 2007 and 2008 and so no question can arise as to the claim being time-barred.  Mr Dawes submits that the claim now being put forward is different to that which was struck out by the Court of Appeal.

68.In such circumstances, Mr Dawes submits that there is no need for the 3rd Plaintiff to seek the assistance of O.20 r.5 (2)(5) to pursue its amended claim.  For my part, I am satisfied that this is a correct submission.

Conclusions

69.As a result, the three Plaintiffs’ claims will be allowed to proceed as a matter of discretion under O.20 r.5(1).  I also hold that the claims are not statute-barred for the reasons that I have given. Further, in my judgment, there is no basis shown that the 3rd Plaintiff’s amended claim can be statute-barred.

70.In the case of the 1st and 2nd Plaintiffs, had it been shown that their amended claims were being made after the expiry of the limitation period then having regard to what I have said in para.66, these two Plaintiffs would not have been able to take advantage of O.20 r.5(2)(5) and no amendment would have been permissible on the basis sought on their behalf.

Costs

71.Costs are conceded by the Plaintiffs in their summons and so I make that order in the Defendant’s favour with certificate for two counsel.  The latter part of this order will be an order nisi.

Victor Dawes, instructed by Messrs Waller Ma Huang & Yeung, for the 1st, 2nd and 3rd Plaintiffs

Gerard McCoy, SC and Steven Kwan, instructed by Messrs Leland Chu & Co., for the Defendant

Please refer to CACV242/2011, CACV243/2011 & CACV275/2011 for the relevant appeal(s) to the Court of Appeal.