Akai Holdings Ltd (in Compulsory Liquidation) v. Everwin Dynasty Ltd and Others

HCMP 1469/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1469 OF 2011

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Before: Hon Hartmann JA and Barma J in Court

Date of Hearing: 20 December 2011

Date of Decision: 20 December 2011

Date of Handing Down Reasons for Decision: 22 March 2012

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REASONS FOR DECISION

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Hon Hartmann JA:

1.I agree with the judgment of Barma J.

Hon Barma J:

2.This was an application by the 4^th Defendant in these proceedings, Mr James Henry Ting (“Mr Ting”), by summons dated 3 August 2011, seeking leave to appeal against the order of Reyes J made on 24 June 2011 giving leave to the Plaintiff, Akai Holdings Limited (“Akai”), to amend its Points of Claim in these proceedings. At the conclusion of the hearing, the application was dismissed with costs to Akai, with reasons to be handed down later.  These are the reasons for our decision.

3.Akai was ordered to be wound up in Hong Kong on 23 August 2000, and its present liquidators were appointed as provisional liquidators on the same date.  They were subsequently appointed as liquidators on 24 May 2001.  The Akai liquidation has generated several very substantial pieces of liquidation, of which this is one.

4.These proceedings commenced on 8 December 2005, when Akai issued its writ in HCCL 42/2005 against the 1^st to 3^rd Defendants (the proceedings have since been discontinued as far as the 1^st Defendant is concerned).  Mr Ting was added as the 4^th Defendant on 14 March 2006.  On 16 March 2006, Akai filed and served its Points of Claim, in which it sought relief against Mr Ting in respect of two alleged defalcations by him, the first, said to have taken place on 22 October 1997, in the amount of HK$107,800,000, and the second, said to have taken place on 17 November 1997, in the amount of HK$300,000,000.  At this stage, therefore, the total claim against Mr Ting was some HK$407,800,000, or somewhat in excess of US$52,000,000.

5.Thereafter, the proceedings against Mr Ting were delayed as the result of attempts by Mr Ting to prevent them from continuing.  Mr Ting made an application in Hong Kong to have the proceedings stayed, alleging that Hong Kong was not the appropriate forum for the dispute, and also claiming that Akai was prevented from suing him by reason of a settlement agreement that he had entered into with the liquidators on 30 December 2002.  Mr Ting also brought proceedings in Bermuda (Akai’s place of incorporation) seeking an anti-suit injunction to the same effect this purpose.  The matter was eventually dealt with in Bermuda, Mr Ting’s application for an injunction being appealed up to the Privy Council, which, on 29 July 2010 declared that Mr Ting was not entitled to rely on the settlement agreement as a matter of Bermudan law.  While the Bermudan application and the appeals from it were dealt with, little progress was made in these proceedings.

6.Following the decision of the Privy Council, Akai issued a Notice of Intention to Proceed on 12 August 2010.  Eventually, on 22 June 2011, Akai took out a summons, returnable on 24 June 2001 seeking leave to amend its Points of Claim.  The amendments for which leave was sought were very substantial, resulting in the expansion of the Points of Claim to more than four times its previous length.  The Amended Points of Claim identified 163 additional alleged defalcations by Mr Ting, said to have taken place between 1 February 1997 and 30 June 1999, involving some 25 companies or persons, giving rise to additional claims (beyond the US$52-odd million initially claimed) of a further US$784,836,748.  The summons seeking leave to amend was served on Mr Ting’s former solicitors.  Mr Ting’s present solicitors were instructed to act for him in respect of these proceedings on 23 June 2011.

7.Although the parties had tentatively agreed directions with a view to enabling the application for leave to amend to be fully argued, when the matter came before Reyes J on 24 June 2011, the learned Judge dealt with the matter robustly, and simply gave leave to amend without hearing submissions from Mr Ting’s solicitors.

8.Dissatisfied with this outcome, Mr Ting applied to Reyes J for leave to appeal, by summons dated 8 July 2011.  This application was heard and dismissed on 20 July 2011.  It appears from the transcript of the hearing that has been placed before us that the learned Judge took the view that it was not necessary for him to give reasons for his decision on 24 June 2011, as he considered that the grant of leave did not preclude Mr Ting from arguing at a later stage (either in an application to strike out, or at trial) that the additional claims sought to be introduced were time barred by reason of the expiry of a limitation period applicable to them.  As (in the learned Judge’s view) nothing had been finally determined, there was no point in giving leave to appeal.

9.This led to the present application.

10.Before us, Mr Ting was represented by Mr Strachan SC and Mr Hew, while Mr Burns SC appeared for Akai. Mr Strachan submitted that leave to appeal should be granted, pursuant to section 14AA of the High Court Ordinance (Cap 4), on one or both of the grounds mentioned in section 14AA(4), which provides:-

“(4) Leave to appeal … shall not be granted unless the court hearing the application for leave is satisfied that:-

(a) the appeal has a reasonable prospect of success; or

(b) there is some other reason in the interests of justice why the appeal should be heard.”

11.Mr Strachan submitted that the appeal had a reasonable prospect of success for two reasons:-

(1) Leave to amend should not have been given as the effect of giving leave would be to deprive Mr Ting of an accrued limitation defence.  Contrary to the learned Judge’s view, such arguments as Mr Ting might have on limitation as a defence to the claims sought to be brought against him would not remain open to him, but would be lost once leave was granted as the result of the operation of section 35(1)(b) of the Limitation Ordinance (Cap 347).  In these circumstances, the correct approach was to refuse leave to amend unless Akai could show that Mr Ting had no reasonably arguable case on limitation, or that the new claims arose out of substantially the same facts as a cause of action in respect of which relief had already been claimed in the action.  For this proposition, Mr Strachan relied on the English Court of Appeal decision in Welsh Development Agency v Redpath Dorman Long Ltd [1994] 1 WLR 1409, and submitted that the approach adopted in that case should be preferred to that endorsed by our Court of Appeal in Extramoney Ltd v Chan, Lai, Pang & Co (a firm) [1992] 1 HKLR 244 (which the learned Judge may have had in mind when giving leave to amend), where it was held that where there was a triable issue as to limitation, leave to amend should be allowed, leaving the question of limitation to be argued at trial.

(2) Alternatively, leave to amend should not have been given because, having regard to the realistic amount of the compensation that could be claimed in respect of the alleged defalcations by Mr Ting, the true value of the claim was likely to be a little over US$400 million odd, and Akai had already recovered, in various proceedings against other parties, more than that amount.  Thus, the claim against Mr Ting would be barred by the principle against double recovery, and there was no point in giving leave to amend to pursue a claim which could result in no recovery for Akai.

12.In relation to the second limb of section 14AA(4), Mr Strachan submitted that leave to appeal should be granted because:-

(1) There was an important question of principle to be decided as to whether the correct approach to granting leave to amend in cases in which there might be a limitation defence engaged was that taken in the Welsh Development Agency case, or that adopted in the Extramoney decision.

(2) The procedural course adopted by the learned Judge was seriously flawed, in that he had failed to afford Mr Ting an opportunity to be heard, and had failed to give proper reasons for his decision.  It was suggested that it was important for this Court to provide guidance as to these matters.

13.Mr Burns, however, contended that leave should be refused because:-

(1) Mr Ting had no arguable limitation defence, as the claims of defalcation were claims to which no period of limitation applied, by virtue of section 20(1)(a) of the Limitation Ordinance.

(2) So far as double recovery was concerned, Akai would give appropriate credit for recoveries made by it in other proceedings in respect of the same losses.  Even after doing so, there would still remain a significant claim against Mr Ting.  In any event, whether or not this was the case was a matter which would depend on evidence, which was not yet before the court, and it could not be said that there was plainly and obviously no prospect of Akai being able to obtain a substantial recovery in these proceedings.

(3) Neither of the grounds relied upon in respect of the second limb of section 14AA(4) of the High Court Ordinance were good ones.  The first did not arise for decision here, as it was plain that Mr Ting had no arguable limitation defence.  The second was not a matter which required leave to be given.

14.Dealing first with Mr Strachan’s submission that Mr Ting’s position in relation to limitation would be prejudiced by the grant of leave to amend, section 35(1) of the Limitation Ordinance provides:-

“(1) For the purposes of this Ordinance, any new claim made in the course of any action shall be deemed to be a separate action and to have been commenced:-

(a) in the case of a new claim made in or by way of third party proceedings, on the date on which those proceedings were commenced; and

(b) in the case of any other new claim, on the same date as the original action.”

15.Sections 35(3), (5) and (6) are also relevant. They provide:-

“(3) Except as provided by section 30 or by rules of court, the court shall not allow a new claim within subsection (1)(b), other than an original set-off or counterclaim, to be made in the course of any action after the expiry of any time limit under this Ordinance which would affect a new action to enforce that claim.

...

(5) Rules of court may provide for allowing a new claim to which subsection (3) applies to be made as there mentioned, but only if the conditions specified in subsection (6) are satisfied, and subject to any further restrictions the rules may impose.

(6) The conditions referred to in subsection (5) are:-

(a) in the case of a claim involving a new cause of action, if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment; and

(b) in the case of a claim involving a new party, if the addition or substitution of the new party is necessary for the determination of the original action.”

16.The conditions mentioned in section 35(6) are reflected by the terms of RHC Order 20 rule 5(5).

17.In this case, it cannot be said that the new causes of action that Akai seeks to raise in respect of the additional defalcations arise out of the same facts or substantially the same facts as have already been pleaded in support of the existing claims.  They quite clearly do not, requiring as they do the pleading of substantial additional allegations of separate defalcations which have not previously been raised. Akai therefore cannot bring itself within the scope of section 35(6)(a) of the Limitation Ordinance or RHC Order 20 rule 5(5), and Mr Burns did not seriously suggest that it could.

18.The operation of section 35(1)(b), known as the “relation back rule”, can operate to the prejudice of a defendant so as to deprive him of an accrued limitation defence if a new claim is permitted to be added by amendment after the expiry of the relevant limitation period.  It is for this reason that the power of the court to allow such an amendment is circumscribed by the sections 35(3), (5) and (6).

19.In the present case, if the new claims Akai seeks to add (which are not made in or by way of third party proceedings) are permitted to be added by amendment, they will be deemed to have been made on the same date as these proceedings commenced – ie, on 8 December 2005.  If the relevant limitation period applicable to the claims against Mr Ting is six years, the limitation period against him would, according to Mr Ting, have expired on either 31 July 2005 (being the date six years after the last of the alleged defalcations), or on 21 December 2008 (being the date six years after, on Mr Ting’s case, Akai’s Liquidators could, with reasonable diligence, have discovered the facts giving rise to the alleged claims against Mr Ting).  If the latter of those dates is the relevant one for limitation purposes, the effect of the relation back rule embodied in section 35(1)(b) of the Limitation Ordinance will be that, if leave to amend is given, Mr Ting will be deprived of the ability to plead a limitation defence to the very substantial claims against him.

20.The injustice of such a situation was recognised in the Welsh Development Agency case.  It was for this reason that Glidewell LJ said, at p 1425 G-H:

“… where section 35(1) [of the Limitation Act 1980] does, or may well, give the plaintiff an advantage … leave to amend by adding a new claim should not be given unless the plaintiff can show that the defendant does not have a reasonably arguable case on limitation which will be prejudiced by the new claim, or can bring himself within RSC, Order 20 r.5.”

(Section 35(1) of the Limitation Act 1980 and RSC Order 20 rule 5 are in materially the same terms as section 35(1) of the Limitation Ordinance and RHC Order 20 rule 5).

21.This approach was endorsed by Millett LJ in Paragon Finance plc v D B Thakerar & Co (a firm) [1999] 1 All ER 400, where he said, at p 404 f-g:

“… By this means the injustice to the defendant of depriving him of an arguable limitation defence is avoided without denying the plaintiff the right to bring a fresh action to which, if he is correct, there is no limitation defence.”

22.It is, however, different from the approach taken by our Court of Appeal in the Extramoney case.  There, it was said (at p 253) that:-

“… The general principle is that an amendment to a pleading should be allowed unless it be shown to be useless or is such as will cause prejudice to the other party which cannot be compensated for in costs. We do not consider that, at this interlocutory stage, we can say that the amendments would be useless or that it would be more appropriate for the plaintiffs to be required to issue a new writ incorporating the amendments now requested and to then apply to consolidate. That would lead to needless additional costs.

… it seems to us that if the new claim is not statute barred, and clearly there is at the very least a triable issue that it is not, Order 20, rule 5(5) does not apply. A new cause of action can be added to a claim if it is not statute barred, will not cause prejudice and is necessary for the purpose of determining the real question in controversy between the parties. …

There are clearly arguments on both sides as to whether or not the plaintiff’s new claim is statute-barred which we consider are matters for the trial judge and not for us, at least at this juncture, to decide.  In our view, the amendments should have been allowed and the question of limitation can then be argued at the trial.”

23.The difference between the approaches is this – the English approach is to refuse an amendment where there is an arguable limitation defence, unless the new cause(s) of action arise out of the same or substantially the same facts as those on which existing causes of action are based, whereas the approach apparently taken in Extramoney is to allow the amendment where the limitation defence is arguable.

24.Mr Burns submits, however, that it is not necessary for the court to grapple with the question of which of these approaches is correct, because in this case, there is no arguable limitation defence available to Mr Ting.  This is because section 20(1) of the Limitation Ordinance provides that:-

“(1) No period of limitation prescribed by this Ordinance shall apply to an action by a beneficiary under a trust, being an action:-

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

(b) to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.”

25.Mr Burns says that it is clear beyond argument that Mr Ting stood in the position of a trustee vis-à-vis Akai’s property, and that as the proposed amendments plead (at paragraph 26 of the Amended Statement of Claim) that the defalcations alleged against Mr Ting constituted fraudulent misappropriations of Akai’s funds in breach of trust, the case falls squarely within section 20(1)(a) of the Limitation Ordinance, so that no limitation period applies, and Mr Ting would not, therefore be deprived of any arguable limitation defence if the amendments are allowed to be made.

26.In support of this proposition, Mr Burns drew our attention to a number of cases, which in my view demonstrate that it is well settled that directors are to be regarded, for the purposes of section 20(1) of the Limitation Ordinance as trustees in respect of the property of the companies of which they are directors, and as such, claims against them by the company for fraud or fraudulent breach of trust are not subject to any limitation period.

27.Thus, in Peconic Industrial Development Ltd v Lau Kwok Fai (2009) 12 HKCFAR 139, Lord Hoffman NPJ said, at paragraphs 18 and 19 of his judgment:-

“18. The terms “trust” and “trustee” are defined to extend to constructive trusts: s.2(1) and s.2 of the Trustee Ordinance (Cap. 29). It is accepted that, within this extended definition, a director of a company is a trustee in relation to its assets. So the action against Chio was an action by a beneficiary in respect of his fraudulent breach of trust and no limitation period applied. …

19. … For the purposes of limitation … there are two kinds of constructive trustees.  The distinction between them has been explained by judges on numerous occasions, from Sir William Grant in Beckford v Wade (1805) 17 Ves Jr 87, p.95-96, to Mr Richard Sheldon QC (sitting as a deputy High Court judge) in Cattley v Pollard [2007] Ch 353, p.360-376.  First, there are persons who, without any express trust, have assumed fiduciary obligations in relation to the trust property; for example as purchaser on behalf of another, trustee de son tort, company director or agent holding the property for a trustee. …”

28.In Paragon Finance (supra), in the course of explaining why, historically, trustees were not able to assert any period of limitation against their beneficiaries, Lord Millett pointed out, at p 408 h-j that:-

“The rule did not depend upon the nature of the trustee’s appointment, and it was applied to trustees de son tort and to directors and other fiduciaries who, though not strictly trustees, were in an analogous position and who abused the trust and confidence reposed in them to obtain their principal’s property for themselves. Such persons are properly described as constructive trustees.”

29.Although Mr Strachan suggested that the passage that I have quoted above from Lord Hoffman’s judgment in Peconic was, strictly speaking, obiter since the case concerned the position, not of the director Chio, but of the company’s solicitor for assisting in Chio’s fraudulent and dishonest breach of trust, it is clear from the judgment, and from many other authorities such as the Paragon Finance case, Cattley v Pollard and JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162 (see paragraph 29 of the judgment, at p 175) that the proposition is well‑established and not open to doubt.

30.Mr Strachan also suggested that there was some uncertainty as to the exact ambit of section 20(1)(a) of the Limitation Ordinance.  However, it seems to me that so far as the position of a director who is accused of a fraudulent misappropriation or misapplication of the assets of the company of which he is a director, in respect of which he stands in the position of a trustee, is concerned, the claim against him falls squarely within the section, and it is not seriously arguable that any period of limitation applies to the claim.

31.I am therefore satisfied that giving leave to amend in the terms sought by Akai would not involve any risk of depriving Mr Ting of an arguable accrued limitation defence, since there is none open to him.  That being so, subject to Mr Strachan’s second point in relation to alleged double recovery, leave to amend should be given.

32.It follows from this that it is not necessary to express a view as to whether the Extramoney approach, or that taken in Welsh Development Agency, is to be preferred.  For my part, however, I would say that my provisional view is that the latter approach is the preferable one, and would observe that the Court of Appeal in Extramoney does not appear to have considered the effect of the relation back rule embodied in section 35(1)(b) of the Limitation Ordinance and its impact on the question of prejudice being caused to a defendant by allowing an amendment to plead an arguably time barred claim.

33.Turning to Mr Strachan’s point on double recovery, this can be disposed of quite briefly. The argument runs as follows:-

(1) The total amount of the defalcations was US$837,118,799 (paragraph 20 of the Amended Statement of Claim).

(2) However, Akai recognises that while this represents the maximum amount of its claim, it also recognises that it is arguable that this amount should be reduced to take account of payments that Akai subsequently received from recipients of the defalcations (paragraphs 28 to 31 of the Amended Statement of Claim).  Depending on which of such receipts are taken into account, the claim could be reduced to a figure ranging from US$634,051,304 at the higher end, to US$406,115,559 at the lower end.

(3) Mr Ting contends that a figure towards the lower end of the range represents the likely level of recovery.

(4) Akai has recovered substantial sums (believed by Mr Ting to be about US$560,000,000) as a result of the legal proceedings it has already taken against other parties, namely Ernst & Young, Grande Holdings/Christopher Ho and a Thai bank, Kasikombank (formerly known as Thai Farmers Bank).

(5) On this basis, the recoveries in these other proceedings will exceed the maximum amount of the defalcations that Akai is likely to be able to establish it is entitled to recover, and there is therefore no point in permitting the amendments to be made, since Akai cannot be permitted to recover for the same loss twice.

34.In response, one of the liquidators of Akai, Mr Borrelli, has filed an affidavit to explain that the recovery from Kasikombank represents recovery of losses unrelated to the claims in these proceedings, and that the same is the case in respect of recoveries from Grande Holdings/ Christopher Ho.  He accepts that credit will have to be given for recoveries from Ernst & Young, but says that owing to confidentiality issues, information as to these will be disclosed in the course of discovery (when it will be subject to the restriction that it can only be used for the purposes of these proceedings).  Mr Borrelli says that the liquidators have considered this point, and remain of the view that substantial recoveries are still likely as against Mr Ting, even after appropriate credit is given.

35.It does not seem to me that this is a matter that can be resolved at this stage.  The determination of this aspect of the matter will require substantial argument as to which of the various bases of quantification of the net amount of the defalcations is the correct one to adopt, information to be obtained as to the actual recoveries made by Akai in other proceedings, and consideration to be given as to whether such recoveries are in respect of the same losses as arose by reason of the defalcations so that credit should be given for them.

36.Mr Strachan recognised that this was so, and suggested that this court could allow the appeal and remit the matter back to the Judge for consideration of this point.  However, I do not think that this would be the appropriate course to take.  The argument in relation to this point will almost inevitably be a complex one, and it seems to me that the better approach would be to allow the amendments to be made, and to leave it to Mr Ting to make an application for this aspect of the matter to be dealt with as a preliminary issue if he wishes to do so.  The judge dealing with the litigation can then decide, as a matter of case management, whether this would be sensible, or whether the better course would be to leave this issue to be decided at trial.

37.I therefore do not think that this point assists Mr Ting either.  It follows that, in my view, Mr Ting’s appeal has no reasonable prospects of success, so that unless there is some other reason in the interests of justice why the appeal should be heard, his application for leave to appeal should be dismissed.

38.Nor do I think that there is, in this case, such other reason for the appeal to be heard.

39.Although I would accept that the difference of approach between the English and Hong Kong Courts of Appeal in relation to permitting amendments to be made is a matter of some importance, for the reasons which I have already given, the question does not need to be determined in the present case.  Any views that the court might express as to it (as I have done on a provisional basis above) would not be binding.  That being so, I think it better to leave this point to be finally determined in a case in which it arises squarely for consideration.

40.As to the complaint in relation to the course that was taken by the learned Judge in dealing with the application, it is well established that litigants are entitled to a fair hearing, and to expect reasons for decisions to be given.  In this case, it is fair to say that the learned Judge dealt with the applications before him robustly.  With hindsight, it would, I think, have been preferable for the learned Judge to have afforded Mr Ting’s legal representatives the opportunity to develop their points at slightly greater length.  Had this been done, the controversy in relation to the approach to granting of leave to amend in cases in which there are arguable limitation defences engaged, and the question of possible double recovery, would no doubt have emerged, as would Akai’s answers to the point.  While the outcome would have been the same, it is quite possible that Mr Ting may not have thought it worthwhile to seek leave to appeal, thereby saving the time and costs involved in dealing with this application. Nonetheless, I do not think that this aspect of the matter is one on which guidance is required, and do not think that it justifies allowing the matter to go forward to a full appeal which has no reasonable prospects of success.

41.For all of these reasons, leave to appeal was refused.

Mr Ashley Burns SC, instructed by Hogan Lovells, for the Plaintiff

2^nd Defendant : Ferbury Limited (Absent)

Wong & Co, for the 3^rd Defendant (Absent)

Mr Mark Strachan & Mr Yang Wahn Hew, instructed by Robertsons, for the 4^th Defendant