William Thomson v. Roland John Jeans and Another

DCCJ 3388 & 3389/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3388 OF 2005

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IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3389 OF 2005

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Coram: Deputy District Judge Norman Hui in Chambers (Open to Public)

Date of Hearing: 30 July 2012

Date of Judgment: 28 November 2012

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DECISION

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Introduction

1.Amended summonses were issued on 13 July 2012 (“the Amended Summonses”) but in their original form were issued on 12 March 2012, by Messrs Tanner De Witt, the 2^nddefendant in both actions, namely, DCCJ 3388/2005 and DCCJ3389/2005.  The Amended Summonses seek to strike out the endorsement of claim and re-amended statement of claim in both actions (collectively “the Actions”). 

2.The basis of the Amended Summonses upon which the 2^nddefendant seeks to strike out the Actions are founded upon Order 18, Rules 19(1)(a) and (b) of the Rules of the District Court, Cap 336H (“RDC”) and the inherent jurisdiction of the court on the grounds that the re-amended statement of claim(s) in the Actions disclose no reasonable cause of action against the 2^nddefendant and that they are frivolous or vexatious.

3.The facts pertaining to the Amended Summonses are nearly identical in both cases and this was confirmed and agreed by Miss Elizabeth Cheung for the 2^nddefendant and Mr Isaac Chan for both plaintiffs in the Actions. It was also confirmed and agreed that the legal bases upon which the Amended Summonses are brought are also nearly identical in both cases.  The parties relied upon and focused on the pleadings, facts and evidence in DCCJ 3388/2005.Save where it is necessary to do so, all references in this decision are in relation to DCCJ 3388/2005 and are applicable to DCCJ 3389/2005.  

Background

4.In the documents filed in relation to the Amended Summonses and in particular during the delivery of submissions in the Amended Summonses, an issue arose as to whether particular findings in previous decisions relating to the Actions should have a bearing on my decision.  It is evident that the parties to the Actions have shared a rather long and chequered history of contested interlocutory applications between them.

5.I remind myself that despite there being previous decisions in other interlocutory applications relating to the Actions, those previous decisions were for other forms of relief and based on the particular findings by other judges of coordinate jurisdiction.  The parties have chosen to include previous decisions in other interlocutory applications relating to the Actions as exhibits, but given my foregoing reasons, I consider them as general references as to past events only. 

6.Mr Roland John Jeans, the 1^st defendant, was a director and shareholder of Wanchai Bierkeller Limited (“the Company”) andits main business was a restaurant and a bar.  The 2^nd defendant was the solicitor firm of the 1^st defendant and the Company.

7.In late 2003 and early 2004, the 1^st defendant met Mr William Thomson (“Thomson”), the plaintiff in DCCJ 3388/2005 and Mr Hans-Juergen Boewe (“Boewe”), the plaintiff in DCCJ 3389/2005 (collectively “the plaintiffs”) on separate occasions and invited them to invest into the Company.  It was alleged that the 1^st defendant made certain representations to the plaintiffs, as a result of which Thomson and Boewe, at the oral request and direction of the 1^st defendant, respectively paid $500,000 and $250,000 to the 2^nd defendant for subscription of shares of the Company.

8.The plaintiffs allege that the shares of the Company were never allotted to them and a shareholder agreement was never signed.  Furthermore, on or about 4 January 2005 there was a purported EGM of the Company, where it was resolved and the Company did go into voluntary winding-up.

9.The plaintiffsrespectively commenced the Actions against both defendants on 16 July 2005 for return of the monies paid by them on the grounds of money had and received because of a total failure of consideration, and further or alternatively, wrongful conversion or misappropriation of the said monies.  The defences of the 2^nd defendant were filed on 20 September 2005, the replies were filed on 4 October 2005 and the answers to the plaintiffs’ request for particulars of the defences of the 2^nddefendant were filed on 26 January 2006.

10.The plaintiffs on 9 July 2012 were given leave to file its re-amended statement of claim where the additional cause of action that the 2^nddefendant was a constructive trustee of the said subscription monies was additionally pleaded.

The principles of striking out

11.Miss Cheung contends that the principles of striking out are that if the court comes to the view that the claim is “obviously unsustainable” then there is no reason why a defendant should be put to the time and expense associated with defending an action and referred to Attorney-General of the Duchy of Lancaster v London and North Western Railway Company [1892] 3 Ch 274 as per Lindley LJ.  Miss Cheung also helpfully cited Jacob and Goldrein, Pleadings Principles and Practice (1990), 222-224 and 227, which provide well-established general criteria on matters pertaining to striking out. 

12.In relation to the timing of the Amended Summonses, Miss Cheung also referred to Tang Woung Shiu v Tang Kun Yeung & Anor [2002] 3 HKLRD 627, where it was held that an application to strike out can be made “at any stage of the proceedings” as per Order 18, Rule 19 where a successful application to strike out was made by the defendants after the commencement of trial.  The point on timing was mentioned in the 2^nddefendant’s skeleton submissions although it was only briefly mentioned in the oral submissions at the hearing to begin with since the focus was on the actual striking out of the Actions as opposed to the timing of the Amended Summonses themselves.

13.I would add that it is useful to note that at Hong Kong Civil Procedure 2012 at paragraph 18/19/3 where Tang Woung Shiu is referred also has reference to Poon Lai Bing v Gold Dragon Limited t/a as Club Paris & Anor, CACV 136/2007.  In Poon Lai Bing it was held that late applications for striking out, in that case it was on the first day of trial, should only be acceded to in the clearest of circumstances only where “the particulars were totally lacking and the allegations were clearly unsustainable.”  These matters shall be discussed later in this decision but it will be noted as per Stone J:-

“48. It strikes me that all that was required in this case was the application of modicum of common sense to process in timely and cost‑efficient manner a dispute which was far from forensically challenging; instead, that which transpired is highly regrettable, and a course of events was set in train which in the event cannot have redounded to the advantage of either party to this litigation.”

14.Mr Chan did not dispute the general principles of striking out as submitted by Miss Cheung but further expanded on the point to also refer to Hong Kong Civil Procedure 2012 at paragraph 18/19/6 where it states:-

“A reasonable cause of action means a cause of action with some chance of success when only the allegations in the pleading are considered (per Lord Pearson in Drummond-Jackson v British Medical Association [1970] 1 W.L.R. 688, CA). So long as the statement of claim or the particulars (Davey v Bentinck [1893] 1 Q.B. 185) disclose some cause of action, or raise some question fit to be decided by a judge or jury, the mere fact that the case is weak, and not likely to succeed, is no ground for striking it out (Moore v Lawson (1915) 31 T.L.R. 418)…”

15.In addition to the foregoing, I would also add that the final paragraph of Hong Kong Civil Procedure 2012 at paragraph 18/19/6 is also relevant where it states:-

“Where a pleading is defective only in not containing particulars to which the other side is entitled, application should be made for particulars under r.12, and not for an order to strike out the pleading under this rule. Even a serious want of particularity in a pleading may not justify striking-out if (1) the defect can be remedied, and (2) the defect is not the result of a blatant disregard of court orders (British Airways Pension Trustees Ltd v Sir Robert McAlpine [1994] 72 B.L.R. 26).”

(emphasis added)

16.When the court is considering the evidence in an application for striking out, the disputed facts are to be taken in favour of the party sought to be struck out.  It was held by Silke JA in Ha Francesca v Tsai Kut Kan & Ors(1) [1982] HKC 382, at 392G‑H:-

“My attention has been directed by counsel to the principles upon which the court acts on striking out applications. If I may encapsulate them, striking out should only be done in plain and obvious cases, there should be no trial upon affidavit. Disputed facts are to be taken in favour of the party sought to be struck out. The claim must be obviously unsustainable, the pleadings unarguably bad and that it be impossible, not just improbable, for the case to succeed before a court will strike out. If the court does not think the matter to be clear beyond doubt or if it fails to be satisfied that there is no reasonable cause of action or that the proceedings are frivolous or vexatious, then, there should be no striking out. One must be careful not to drive a plaintiff from the judgment seat nor should the court decide difficult points of law in proceedings such as this.”

(emphasis added)

17.For the purposes of deciding the outcome of the Amended Summonses it is important to consider the bases for the Amended Summonses.  Additionally, it was not in dispute between the parties the general approach on how the court should decide whether to strike out the Actions.

18.Firstly, where applicable, the court should consider the re-amended statement of claim in the Actions alone to determine whether they have disclosed any reasonable cause(s) of action which would satisfy the threshold for striking out under Order 18, Rule 19(a). Secondly, where applicable, if after considering the re-amended statement of claim in the Actions and not meeting the threshold for striking out under Order 18, Rule 19(a), the court should then determine whether there are grounds to show that the Plaintiffs’ claims are frivolous or vexatious to satisfy the threshold for striking out under Order 18, Rule 19(b) or should be struck out by the court’s inherent jurisdiction.  The reason for my indicating that the proposed method to be applied in determining the Amended Summonses is becausethe causes of action were challenged on different criteria and principles relating to striking out. 

The Re-Amended Statement of Claim

19.As previously discussed, the re-amended statement of claim pleads three causes of action and for ease of reference I refer to the re-amended statement of claim in DCCJ 3388/2005. 

20.The first cause of action is the return of money had and received because of a total failure of consideration.

21.The second cause of action is, further and alternatively to the first cause of action, that there was wrongful conversion or misappropriation of the subscription monies for shares in the Company.  At the hearing it was Mr Chan’s position that the second cause of action of wrongful conversion or misappropriation cause of action did not stand alone but rather it was part of and/or related to the first cause of action for total failure of consideration.  Miss Cheung understood this to be Mr Chan’s position in relation to the second cause of action although she did not agree with the Mr Chan’s position on the matter.

22.The third cause of action is, further or alternatively to the first and or second cause of action, that the 2^nddefendant was a constructive trustee of the said subscription monies.

23.The first and third causes of action refer specifically to the re-amended statement of claim at paragraph 3(b) but which is to be read together with 3(a):-

“In reliance on the said representations made by the 1^st defendant and in the belief that the same were true, the plaintiff at the oral request of the 1^st defendant:-

(a) called, with the 1^st defendant, around 6 January 2004, at the office of the 2^nd defendant where they were attended by Mr Ian de Witt, a solicitor of the 2^nd defendant who showed the plaintiff a draft prepared by the 2^nd defendant on the 1^st defendant’s instructions of a proposed shareholders’ agreement relating to the Company (“shareholders agreement”) intended to be made between the 1^st defendant and the group, for his approval, and told me that after the group had approved the said draft, the shareholders agreement would be finalized by the 2^nd defendant for their signature and implemented by the 1^st defendant shortly;

(b) paid the 2^nd defendant on the basis and understanding that the shareholders’ agreement would be so approved, signed and implemented a subscription sum of $500,000 (“subscription”) being his intended investment in the Company for the purpose and in anticipation of an intended allotment of shares to be procured by the 1^st defendant from the Company and the finalization, signature and implementation of the shareholders’ agreement.”

24.The re-amended statement of claim, in relation to the first cause of action of money had and received because of a total failure of consideration is found at paragraph 11(a):-

“In the premises, and by reason of the foregoing facts and the total failure of any consideration for the subscription of $500,000.00 paid by the plaintiff, the 1^st and 2^nd defendants are jointly and severally liable to the plaintiff for moneys had and received (in the sum of $500,000) to the use of the plaintiff for the said purpose stated in paragraph 3(b) above only, and for return thereof to the plaintiff.”

25.The re-amended statement of claim, in relation to the second cause of action of wrongful conversion or misappropriation of the subscription monies for shares in the Company is found at paragraph 11(b):-

“Further and alternatively, the 1^st and 2^nd defendants have jointly or severally wrongfully converted or misappropriated the subscription of $500,000.00 and are jointly and severally liable for the return thereof to him.”

26.The second cause of action of wrongful conversion or misappropriation of the subscription monies for shares in the Company is simply drafted to be read in continuation of paragraph 11(a) as the further and alternative cause of action to total failure of consideration.

27.The re-amended statement of claim, in relation to the third cause of action of the 2^nddefendant being a constructive trustee of the said subscription monies is found at paragraph 12:-

“Further or alternatively and by reason of the foregoing facts, the 2^nd defendant was a constructive trustee in respect of the subscription of $500,000.00 received from the plaintiff for the aforesaid purpose stated in paragraph 3(b) above and is accountable to the plaintiff therefore on the ground that the 2^nd defendant knowingly participated or acted in the misapplication of the said sum by payments thereof to or on behalf of the 1^st defendant, in breach of the constructive trust. Particulars of the said receipt and the said payments are shown and disclosed in the ledger account of the 2^nd defendant, copy of which was discovered by them during discovery in this Action.”

The first cause of action: total failure of consideration

28.The 2^nddefendant seeks to strike out the plaintiffs’ first cause of action for total failure of consideration based on the plaintiffs’ claims are frivolous or under Order 18, Rule 19(b) or should be struck out by the court’s inherent jurisdiction.

29.It is trite law and agreed by the parties that a total failure of consideration occurs where there has been a complete failure of the performance for which the payer has bargained and the failure has to be total because the consideration is “whole and indivisible” as per Chitty on Contracts (30^th ed), Vol1, paragraph 29-054.

“Where money has been paid under a transaction that is or becomes ineffective the payer may recover the value of the money provided that the consideration for the payment has totally failed. Although the principle is not confined to contracts most of the cases are concerned with failed contracts. In that context failure of consideration occurs where there has been a complete failure of the performance for which the payer had bargained. Thus, the failure is judged from the payer’s point of view and:

“…… when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is generally speaking, not the promise which is referred to as the consideration, but the performance of the promise.”

30.The 2^nddefendant’s position is that, taking the plaintiffs’ case at its highest as per paragraph 3(b) of the re-amended statement of claim read together with paragraph 11(a), there has been no total failure of consideration and this is “undeniable” since the plaintiffs have advanced monies and the liquidators of the Company have recognized the plaintiffs as shareholders in the Company.

31.Whether there was an actual issue of shares to the plaintiffs is an important point argued by both parties.  Nonetheless, it is necessary to consider the overall evidence in relation to this aspect of the case as tested against the 2^nddefendant’s assertions as with reference also to, inter alia, Ha Francesca (supra).

32.The 2^nddefendant places its main reliance on a letter from the liquidator of the Company to the 2^nddefendant dated 18 October 2011 (“the Liquidator’s Letter”) where the relevant part states:-

“We refer to recent correspondence regarding the Company for which we acted as Liquidators.

According to our records, the shareholders of the Company as of the date of the winding-up special resolution were as follows: ...”

Immediately thereafter in the same letter there are the names of three unrelated parties followed by Boewe, Thomson (i.e. the plaintiffs) and the 1^stdefendant.

33.I was also referred to a letter of 13 February 2006 from the plaintiffs’ solicitors responding to a letter from the solicitor firm of Baker Tilly (“the Plaintiff’s Letter”).  The Plaintiff’s Letter stated that the plaintiff (Thomson, as per DCCJ 3388/2005) received a letter on 1 February 2009 where it was post-marked 27 January 2006 with two enclosed documents stating that on 27 January 2006 the Company was in voluntary liquidation with a final members meeting and that there was a notice of final meeting of members and creditors.

34.From the foregoing documents, the 2^nddefendant invited me to find that the liquidators of the Company have recognized the plaintiff in DCCJ 3388/2005 (Thomson) to be a shareholder as per the Liquidator’s Letter and there is nothing to suggest the liquidators are incorrect.  I was also invited to find that the plaintiff in DCCJ 3388/2005 (Thomson) knew he was, and in fact was, a shareholder by virtue of the fact that he received the documents at all as evidenced by the Plaintiff’s Letter.  The 2^nddefendant’s stance is that there is no need to go behind the Liquidator’s Letter and that this is the best evidence available whether now or at trial as to positively proving the plaintiff’s position as a shareholder in the Company.

35.As previously mentioned, the Plaintiff’s Letter was responding to a letter from the solicitor firm of Baker Tilly and the said enclosed documents thereof, the Plaintiff’s Letter stating:-

“Our client is very surprised to receive the envelope and the said documents enclosed therein, as this is the first time that he has ever received any communication from you and he had no dealings with you whatever hitherto. Nor has our client been a member of Wanchai Bierkeller Ltd at any time. The said documents sent by you are therefore of no concern to our client at all.”

36.It is clear that the issue of whether the plaintiffs were in fact shareholders of the Company was put in issue some six years ago even before the Amended Summons was issued and even before it became amended as such in its original form and after the Actions were commenced.

37.From the papers before me, there are no copies of the notice of the purported EGM that was to be held on 4 January 2005, there are no copies of the purported EGM’s special resolution of the Company that was supposedly passed and signed by the 1^st defendant as the chairman of the Company that the Company be wound up voluntarily.

38.In any event, the defences of the 2^nd defendant plead that the Plaintiffs did have a beneficial interest in the Company and they were served with notice of the purported EGM but that the plaintiffs chose not to attend.  I find that this allegation raised in the defences of the 2^nddefendant is based on an inference only and not by way of direct evidence.  

39.I have already referred to the Liquidator’s Letter but it must be remembered that it was preceded by the Plaintiff’s Letter and by virtue of the Actions already being commenced that have put matters in issue.  What has not been presented to me are the “records” of the liquidators “as of the date of the winding-up special resolution” where the liquidators have come to the conclusion that the plaintiffs are shareholders of the Company, whatever such “records” might be. 

40.The most recent annual return of the Company that was produced at the hearing for the Amended Summonses is dated 16 July 2004 and nowhere in that annual return is it shown that the plaintiffs have any interest or are involvedin any capacity whatsoever.  I have not been provided with a more recent copy of an annual return of the Company nor has this been explained to me why there is such an absence of evidence where in particular such evidence (if available) is a public and primary document.

41.It is also relevant that it is not disputed that the annual return of the Company is dated 16 July 2004, some six months after the meeting by the plaintiffs and defendants on 6 January 2004, but it still shows that no shares were issued to the plaintiffs or that they had any interest or involvement in the Company in any capacity.

42.In relation to whether there was any issue of shares to the plaintiffs, the evidence is based on, inter alia, the affidavits of the plaintiffs and the Plaintiff’s Letter, both directly denying and disputing that any shares were issued to the plaintiffs.

43.It is therefore my finding at this stage of the proceedings and for the purpose of resolving this aspect of the Amended Summonses that prima facie the plaintiffs were not shareholders of the Company, the plaintiffs did not exercise their rights as shareholders or in any capacity reflecting their having any interest thereof. 

44.My aforesaid findings can be related to the factual matrix in Yan Kwok Kin, Julian v Yan Kwok Kee Gay & Ors, [1997] HKLRD 1199 where it was held by LePichon J (as she then was) that:-

“13. When one looks at the provisions of the Companies Ordinance, as regards the obligation to maintain a register of members under s. 95 and who is considered a member of the Company under the provisions of s.28, it is quite clear that only those persons whose names appear on the register can be so treated.  Pender v Lushington (1877) 6 Ch.D.70 is authority for the view that the register is the only evidence by which the rights of members to vote at a general meeting could be ascertained.

14.  Counsel for the Defendants conceded that there is no authority for the proposition that the court has power to treat someone as a member who is not on its register.  He relied on Cane v. Jones [1980] 1 WLR 1451.  But that case dealt with a different point, that is to say, the amendment of the company's articles through the agreement of all the shareholders.  Here there is no evidence of any agreement between the parties.  The court was asked to infer that there was such an agreement.  So in fact the Defendants are going one step beyond Cane v. Jones.  But what is the ambit of the agreement that is to be inferred?  What are its terms?  Who were the parties to it? All that is at large.

15.  The fact that the administratrix had been invited to attend meetings of the Company, although she was not a member, and had voted at those meetings does not mean that she is forever more entitled to attend and vote at meetings of the Company.  Here we are not concerned with the validity or otherwise of decisions taken at the meetings referred to above, assuming that the administratrix attended them as described.  It may well be that decisions taken at those meetings cannot now be challenged or questioned as a result of the administratrix having been present.  But that is a different issue altogether and different from the proposition that I should infer, from conduct, the existence of some agreement that would confer a right on the administratrix that she does not have at law.

16.  So, on the first issue, I conclude that the administratrix, not having been registered on the Register of Members, is not entitled to vote at meetings of the Company.”

45.Given the foregoing state of the evidence (and absence thereof), my findings on the said evidence, I do not find that the 2^nd defendant has been able to reach the threshold that there should be striking out of the Actions for the first cause of action of total failure of consideration under Order 18, rule 19(b) and the inherent jurisdiction of the court.  For avoidance of doubt, I have also considered and applied the principles in Ha Francesca and Yan Kwok Kin, Julian (supra).

46.I would add that it is clear to me that based on the state of the facts and evidence (and absence thereof) as before me at the hearing of the Amended Summonses, there is disputed evidence in the Actions that could have been further explored and considered.  In fact, such matters were raised and put in issue some six years ago without any substantive answer by the 2^nd defendant save for the Liquidator’s Letter but I repeat the matters at paragraphs 35 to 43 hereinabove in finding that this matter was apparent and unresolved by the 2^nd defendant.

47.Were it necessary for me to consider whether the first cause of action of total failure of consideration should be struck out under Order 18, rule 19(a), I would have found that it does not.

48.At the beginning of the hearing, I queried Miss Cheung about the way in which the Amended Summonses were formulated.  Miss Cheung confirmed that the Amended Summonses were formulated in such a way that the 2^nd defendant sought to strike out all causes of action in the Actions.  Miss Cheung’s fallback position was that the 2^nd defendant nonetheless was seeking to strike out any cause of action(s) independently in any event. 

49.Given the position of the 2^nd defendant, this decision considers the arguments of the parties in relation to the other two causes of action.

The second cause of action: wrongful conversion or misappropriation

50.The second cause of action is, further and alternatively to the first cause of action, that there was wrongful conversion or misappropriation of the subscription monies for shares in the Company.  The second cause of action is drafted to be read in continuation of paragraph 11(a) as the further and alternative cause of action to total failure of consideration.

51.Miss Cheung’s argument is rather straightforward in striking out the second cause of action on wrongful conversion or misappropriation of the subscription monies for shares in the Company by the defendants jointly and severally.

52.The complaint of the 2^nd defendant is that there-amended statement of claim only states bald allegations and there is no plea that, even on the plaintiffs’ case, that the 2^nd defendant had used the subscription monies received other than in accordance with the instructions given to it by the 1^st defendant.  Initially it appeared that the 2^nd defendant was moving to strike out the second cause of action based on the plaintiffs failing to disclose any reasonable cause of action which would satisfy the threshold for striking out under Order 18, Rule 19(a).

53.The plaintiffs’ position is that the claim for wrongful conversion or misappropriation of the subscription monies for shares in the Company is sufficiently pleaded.  Given that the second cause of action of wrongful conversion or misappropriation of the subscription monies for shares in the Company is simply drafted to be read in continuation of paragraph 11(a), therefore the particulars mentioned at paragraph 3 of the re-amended statement of claim also apply.

54.Neither of the parties saw fit to truly argue the merits or demerits of the second cause of action in any detail (save for a later reference to a retainer letter issued from the 2^nddefendant to the 1^stdefendant dated 17 December 2002), nor were any authorities cited to me.  As such, I was left to primarily consider the pleading as it stood with de minimis analysis or elaboration from the parties.  

55.As was put by Mr Chan, when the second cause of action is read in the context that the 2^nddefendant had an obligation to hold on to the subscription monies and to repay the plaintiffs should the purpose of issuing shares in the Company to the plaintiffs failed, the 2^nddefendant disregarded that said purpose and dissipated the subscription monies.

56.Paragraph 3 of the re-amended statement of claim has been reproduced at paragraph 23 hereinabove.  I find that the plaintiffs have sufficiently pleaded that 2^nd defendant did use the subscription monies other than in accordance with the instructions of the 1^st defendant as described and pleaded at paragraph 3 of the re-amended statement of claim since no shares of the Company were issued to the plaintiffs, the subscription monies were not returned to the plaintiffs and that is the plaintiffs’ pleaded case and sufficiently so. 

57.Additionally, my findings on the second cause of action are also reinforced by my positive findings for the plaintiffs in relation to the first cause of action where based on Order 18, Rule 19(b), the inherent jurisdiction of the court (on the evidence) and based on Order 19, Rule 19(a) (on the pleading itself), I found that the plaintiffs were not issued shares in the Company.

58.Although not strictly required, I have found that the cases of 深圳市量子景順投資管理有限公司v Huang Binghuang & Anor, HCA 1093/2009, 9 February 2011 at paragraphs 98 to 103 and Libertarian Investments Ltd v Thomas Alexej Hall, HCA 2533/2066, 25 February 2011 at paragraphs 144 to 154 (which was appealed by the defendants but dismissed as per CACV 54/2011, 6 February 2012) were of assistance to me when considering the legal elements of wrongful conversion and misappropriation, respectively.  I would add that in both of the said cases of 深圳市量子景順投資管理有限公司 (supra) and Libertarian Investments Ltd (supra) as applied against the second cause of action found in the re-amended statement of claim stands near “juridical constraints” but nonetheless are sufficient for the purposes of resisting striking out. 

59.Given the foregoing, when considering the construction of the second cause of action of wrongful conversion or misappropriation as pleaded in the re-amended statement of claim, I find that it is sufficient to avoid being struck out.

60.Miss Cheung initially appeared to be moving only under Order 18, Rule 19(a) to strike out the second cause of action butfor the actual manner in which the 2^nd defendant (and as per the 2^nddefendant’s skeleton submissions) also placed reliance on the evidence found in a retainer letter issued from the 2^nddefendant to the 1^stdefendant dated 17 December 2002 (“the retainer letter”).  As a result, I find that the 2^nd defendant was also moving under Order 18, Rule 19(b) and the inherent jurisdiction of the court to strike out the second cause of action.

61.The 2^nd defendant makes the further complaints that there was no conversion or misappropriation of the subscription monies since the 2^nd defendant had not “gone on a foray of its own in breach of any obligations imposed on it”.  The 2^nddefendant also asserts that since the subscription monies had been placed in the 2^nd defendant’s account, it was merely the conduit for the monies from the Plaintiffs to the 1^st defendant for the 1^st defendant’s use as per the retainer letter and thus there was no conversion or misappropriation. 

62.The relevant parts of the retainer letter that the 2^nd defendant puts reliance on are found at the beginning of the retainer letter and it states:-

“I understand that you (ie the 1^st defendant and another) would like to form a company called “The Wanchai Bierkeller” (the “Company”) to own and operate a new wine bar in Wanchai that you intend to set up. To this end you are collecting together a group of investors to raise capital in order to set up and run this establishment.

You have asked that this firm form the Company and provide secretarial services to it.  You have also asked that, once the Company is formed, we act for the Company in preparing a shareholders agreement, reviewing the lease and any other company documentation that may arise. That however is the extent of your instructions.  In this matter we do not act for any of the proposed shareholders.  Each shareholder (ourselves included) must obtain separate legal advice.”

(emphasis added)

63.I also noted how the following parts of the retainer letter was drafted which appears to be designed to protect the interests of the investors before the Company is formed and that the subscription monies placed in the 2^nddefendant’s account was not “merely the conduit for the money from the plaintiff to the 1^stdefendant for the latter’s use”.  The relevant part reads as follows:-

“I appreciate that you do not want to incur costs unnecessarily. Also there may be a delay from the time the investors wish to pay in their money, to the opening of a bank account for the Company. In this regard, and also to provide some security for the investors in the initial stage at least, the investors will be paying the money for their investment into this firm’s client account, where it will remain until a pool of money has been collected which would enable you to enter into a lease, carry out construction works and open the establishment. You have informed me that you are looking for HK$3,000,000.00 in cash/goods in lieu in order to set up the operation. I have not advised you on this. You have, however, concluded that this is the absolute best-case scenario and leave a large margin. You have told me that the absolute minimum that is actually required to proceed and set up the operation is HK$2,000,000.00. In this regard you have given me irrevocable instructions that any and all money placed into this firm’s client account by proposed investors will remain in that account (to their order) until such time as the total amount of cash in the account reaches HK$2,000,000.00. The investors will agree that once this happens the money can be released to the Company and be placed into its bank account. I understand that this HK$2,000,000 may change once you have obtained further details on the construction/decoration costs. Thereafter, our involvement will be over.”

(emphasis added)

The retainer letter, under the heading of “Conclusion” indicates that an undated draft shareholders agreement (“the draft shareholders agreement”) had already been prepared of which will be later discussed in relation to the third cause of action.

64.After considering the retainer letter, I find that prima facie the 2^nddefendant did depart from the obligations imposed on it despite the 2^nddefendant not acting expressly for the investors (inclusive of the plaintiffs).

65.The 2^nddefendant was to provide security to the investors while awaiting the total cash accumulated from the investors to reach $2,000,000 before entering into a lease, carrying out construction works and opening the establishment.  However, there is no evidence to show that the total cash did accumulate to the amount of $2,000,000 (or that this amount was varied) and therefore none of the said events such as entering into a lease or other works should have commenced.  I have found that, prima facie, the subscription monies were used without the plaintiffs’ knowledge and/or without any shares in the Company being issued to them.

66.Once the Company was formed, whether after reaching $2,000,000 or otherwise, the 2^nddefendant was to act for the Company (not the 1^stdefendant) in preparing a shareholders agreement.  No shareholders agreement has been provided in the evidence but only the draft shareholders agreement.  Furthermore, my findings in relation to the first cause of action establishes that no shares were actually issued to the plaintiffs and,in combination with my findings on the second cause of action hereinabove, there has been a misappropriation of the subscription monies of the plaintiffs.   

67.Were it necessary for me to consider whether the second cause of action of wrongful conversion or misappropriation of the subscription monies for shares in the Company should be struck out under Order 18, rule 19(b) or the inherent jurisdiction of the court, I would have found that it does not.

The third cause of action: constructive trust

68.The 2^nddefendant seeks to strike out the plaintiffs’ third cause of action that the 2^nddefendant was a constructive trustee of the said subscription monies based on striking out under Order 18, Rule 19(a).

69.Miss Cheung’s argument to strike out the third cause of action is that a plea of constructive trust cannot in itself remedy an otherwise defective and deficient pleading.  It was also submitted that the plaintiffs pleading a legal “consequence” without the proper basis cannot assist a fundamentally defective and deficient action.

70.In addition to the general principles relating to striking out as already referred to at paragraphs 11 and 12 hereinabove, Miss Cheung also drew my attention to Caswell v Powell Duffryn Associated Collieries Ltd [1940] A.C. 152 HL at 169 where Lord Wright stated:-

“Inference must be carefully distinguished from conjecture or speculation. There can be no inference unless there are objective facts from which to infer the other facts which it is sought to establish. In some cases the other facts can be inferred with as much practical certainty as if they had been actually observed. In other cases the inference does not go beyond reasonable probability. But if there are no positive proved facts from which the inference can be made, the method of inference fails and what is left is mere speculation or conjecture.”

71.Miss Cheung did not object to the principles of trusts, as to be referred to by Mr Chan hereinbelow, but Miss Cheung did take issue that it was necessary for the plaintiffs to properly plead its cause of action and that it also did make a material difference how the plaintiffs termed its third cause of action.  This is a matter that I shall return to later in this decision.

72.Miss Cheung’s main complaint was based on the fact that where a resulting trust is alleged to arise there must be a clear plea of knowledge and without it the plaintiffs’ third cause of action must fail. 

73.Miss Cheung’s argument is that there is not even an allegation or plea of how the 2^nddefendant had knowingly participated in a breach of trust or that the 2^nddefendant was privy to or had knowledge of the representations made by the 1^stdefendant as pleaded in paragraph 3 and onwards in the re-amended statement of claim.

74.Given that when Caswell (supra) is applied to the re-amended statement of claim on the third cause of action, Miss Cheung submits that the plaintiffs fail to plead a sustainable cause of action.

75.To begin with, Mr Chan referred me to the re-amended statement of claim at paragraph 4 when considering the third cause of action:

“In the circumstances aforesaid and by and upon receipt of the subscription of $500,000.00 paid by the plaintiff, it was impliedly agreed and accepted by the 2^nd defendant that the subscription, the property of the plaintiff would be held by the 2^nd defendant to the use of the plaintiff and for the purposes stated in paragraph 3(b) above, only and not otherwise.”

76.Mr Chan also agreed on the principles as cited by Miss Cheung in relation to the requirement of sufficient particulars.  However, Mr Chan made further reference to the principles as specifically relating to that of a constructive trust. 

77.Mr Chan stated that there was certain judicial opinion that a Quistclose trust should be categorized as a constructive trust but that it has now been settled that a Quistclose trust should be categorized as a resulting trust as per Lewin On Trusts, 18^th edition, at paragraph 8-49. 

78.Despite the “difference in labels”, it was submitted by Mr Chan that the material facts giving rise to a Quistclose trust have already been sufficiently pleaded and the labels of either constructive or resulting trust do not have any material impact on the validity of the cause of action. 

79.In order to support his argument that a Quistclose trust was pleaded in the re-amended statement of claim, in the Actions, Mr Chan referred to the case of Typhoon 8 Research Ltd v Seapower Resources International Ltd & Anor [2002] 2 HKLRD 660 where it was held by Le Pichon JA that:-

“18.     Where a loan is made to a borrower for a specific purpose and the borrower is not free to apply the money for any other purpose, that arrangement gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce.  See Quistclose Investments Ltd v Rolls Razor Ltd[1970] AC 567.  The nature of a Quistclose trust was the subject of detailed analysis by the House of Lords in the recent decision of Twinsectra Ltd v Yardley [2002] 2 WLR 802.  For such a trust to arise, a settlor must possess the necessary intention to create the trust but his subjective intentions are irrelevant.  If he entered into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them.  As Lord Millett explained at [74]:-

"The question in every case is whether the parties intended the money to be at the free disposal of the recipient: In re Goldcorp Exchange Ltd [1995] 1 AC 74, 100 per Lord Mustill.  His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose, for as Lord Wilberforce observed in the Quistclose case [1970] AC 567, 580:-

'A necessary consequence from this, by a process simply of interpretation, must be that if, for any reason, [the purpose could not be carried out,] the money was to be returned to [the lender]: the word "only" or "exclusively" can have no other meaning or effect.'"

He went on to explain at [76]:

"The duty is fiduciary in character because a person who makes money available on terms that it is to be used for a particular purpose only and not for any other purpose thereby places his trust and confidence in the recipient to ensure that it is properly applied.  This is a classic situation in which a fiduciary relationship arises, and since it arises in respect of a specific fund it gives rise to a trust."

80.The Court of Appeal went on to conclude on the matter of whether a Quistclose trust arose as per Le Pichon JA:

“20.     In the present case, there was no loan but the deposit was paid over for a specific purpose and the landlord covenanted to "hold" the same "throughout the currency" of the lease, to deduct therefrom for specific purposes only and subject thereto, to refund the deposit to the plaintiff.  These are all the hallmarks of a Quistclose trust.  For my part, the fact that the present case involved a deposit under a lease as distinct from a loan would not prevent the Quistclose principles from applying.  As Lord Millett observed (at [99]):-

"I do not think that subtle distinctions should be made between 'true' Quistclose trusts and trusts which are merely analogous to them.  It depends on how widely or narrowly you choose to define the Quistclose trust.  There is clearly a wide range of situations in which the parties enter into a commercial arrangement which permits one party to have a limited use of the other's money for a stated purpose, is not free to apply it for any other purpose, and must return it if for any reason the purpose cannot be carried out.  The arrangement between the purchaser's solicitor and the purchaser's mortgagee is an example of just such an arrangement.  All such arrangements should if possible be susceptible to the same analysis."

21.  If a Quistclose trust would have arisen had the monies been paid to the 2nd defendant as landlord, does it make any difference that the recipient was Seapower?  I think not.  Assuming that the judge was correct in his finding that Seapower was an agent for the 2nd defendant, the particular circumstances of this case are such that it would not be open to Seapower to contend that as agent, it was not subject to the same trust.  This is because having negotiated the lease, it cannot deny knowledge of the terms upon which the deposit was to be held.”

(emphasis added)

81.Mr Chan also referred to Fu Kong, Inc. v Hua Yun Da Group Ltd [2004] 3 HKLRD 87 which applied Typhoon 8 (supra).  A Cheung J (as he then was) held that the principle when applied was as follows:-

“54. In any event, certainty of the purpose of advancement is non-essential. In my view, if it cannot be established to the satisfaction of the court that when the money was advanced, the parties' intention was such that the money could only be used for a specific purpose, then no Quistclose trust would arise at all; the money, once advanced, would simply become the property of the recipient beneficially, and depending on the parties' agreement, the right of the payer of the money to recover it from the recipient would well be a personal or contractual one only.

55.  However, if such an intention can be established to the satisfaction of the court, a Quistclose trust would arise, and this would be so even though the specific purpose in question was ambiguous or uncertain.

56.  As was pointed out by Lord Millett in Twinsectra (at para. 101), if the purpose was stated with sufficient clarity, the court would enforce it; if it was uncertain, the result would be that the recipient would have no authority whatsoever to make use of the money and must return it to the payer under the resulting trust.  As Lord Millett put it, "uncertainty works in favour of the lender, not the borrower" (at p 193E).

57.  In the present action, of course, the plaintiff is not suing Jingmao (who happened to be the other contracting party in the Fu Kong, Inc case) under the Quistclose trust.  Rather, it seeks repayment from the defendant - Jingmao's receiving agent of the money.  But this does not make any difference: in Typhoon 8Research Ltd, the Court of Appeal held that the receiving agent with whom the rental deposit still remained, was liable to repay the money to the plaintiff, upon the termination of the tenancy agreement in question, because the agent was affected by the Quistclosetrust, given its knowledge of the rental deposit arrangement: see p 670 F/G to H (para 21).”

(emphasis added)

82.When considering paragraphs 3 and 12 of the re-amended statement of claim and applying Typhoon 8 (supra), I find that the specific purpose for the payment of the subscription monies is made sufficiently clear on the pleadings.  I also refer to my findings in relation to the first and second causes of action that were previously discussed which confirm that the plaintiffs have sufficiently pleaded that 2^nd defendant did use the subscription monies other than in accordance with the instructions of the 1^st defendant as described and pleaded at paragraph 3 of the re-amended statement of claim.

83.When considering paragraphs 3, 4 and 12 of the re-amended statement of claim and applying Typhoon 8 (supra) and in particular Fu Kong, Inc (supra), I find that the 2^nddefendant did have knowledge that the specific purpose for the payment of the subscription monies is made sufficiently clear on the pleadings.  I again refer to my findings in relation to the first and second causes of action that were previously discussed and applied in the foregoing paragraph relating to the issue of specific purpose, which also apply on the issue of knowledge.

84.Mr Chan invited me to consider certain factors that have been made clear on the pleadings relating to the point of knowledge such as it has been pleaded that the parties were not strangers to the dealings between the parties relating to the setting up of the Company and that the draft shareholders agreement was prepared and shown to the parties.  These said facts I also accept as imparting knowledge on the 2^nddefendant, whether directly or by inference, and were sufficiently clear on the re-amended statement of claim.

85.Miss Cheung disagreed with the foregoing analysis submitted by Mr Chan and also made reference to the retainer letter as per the parts quoted and reproduced at paragraph 62 hereinabove.  Miss Cheung made an additional reference to the draft shareholders agreement as earlier averted to.

86.Given this stance and approach taken (and as per the 2^nddefendant’s skeleton submissions), I again queried Miss Cheung whether she was advancing a striking out application based on Order 18, Rule 19(b) and the inherent jurisdiction of the court on the third cause of action and she replied that she was not.

87.However, as a result of the following matters which were argued by the parties, I find that the 2^nd defendant was also moving under Order 18, Rule 19(b) and the inherent jurisdiction of the court to strike out the third cause of action.

88.Miss Cheung again referred to the purpose and essence of the retainer letter show that the subscription monies had been placed in the 2^nd defendant’s account and it was merely the conduit for the monies from the plaintiffs to the 1^st defendant for the 1^st defendant’s use.  In attacking the third cause of action, it was also said that the retainer letter also shows the extent of the 2^nddefendant’s instructions and this was envisaged by all parties.  As such, the specific purpose was clearly not for the plaintiffs and that knowledge is not imparted on the 2^nddefendant.

89.Miss Cheung also stated that the draft shareholders agreement at clause 12.4 reinforces the retainer letter’s intent since it reads:

“12.4 The parties to this Agreement acknowledge that Tanner De Witt, Solicitors Hong Kong is acting on behalf of Roland John Jeans only and not on behalf of the any other party to this Agreement. The other parties to this Agreement hereby acknowledge that they have each been advised to seek independent legal advice and have had the opportunity of doing so.”

90.When applying Ha Francesca whereby “disputed facts are to be taken in favour of the party sought to be struck out” and applying the principles relating to a Quistclose trust as stated at paragraphs 79 to 81 hereinabove, I nonetheless find that the retainer letter, even when read together with the draft shareholders agreement, is insufficient to establish that the third cause of action should be struck out when also considering my findings on the retainer letter stated at paragraphs 63 to 66 hereinabove.

91.Were it necessary for me to consider whether the third cause of action that the 2^nddefendant was a constructive trustee of the said subscription monies should be struck out under Order 18, rule 19(b) or the inherent jurisdiction of the court, I would have found that it does not.

92.Although Miss Cheung maintained that the re-amended statement of claim was wrongly categorized as a “constructive trust”, this does not mean the third cause of action should be struck out since, as per Hong Kong Civil Procedure 2012 at paragraph 18/19/6 the defect can be remedied and is not the result of a blatant disregard of court orders. 

93.There was no misunderstanding per se on the part of the 2^nddefendant regarding the third cause of action as found in the re-amended statement of claim.  Although the third cause of action is more properly characterized as a “resulting trust”, nonetheless in Jackson & Powell on Professional Liability, 17^th edition, at paragraph 11-039 characterizes “constructive trusts” in a manner which prima facie resembles the third cause of action found in the re-amended statement of claim.

Conclusion

94.Pursuant to my findings being in favour of the plaintiffs on all three causes of action as pleaded in the re-amended statement of claim and related evidence, I dismiss the Amended Summonses.

95.The Actions commenced nearly some 7 years before the issue of the Amended Summonses as originally issued on 12 March 2012.  I have already provided a short summary of the relevant pleadings in the Actions and there was no further and better particulars issued by the 2^nddefendant against the plaintiffs on their pleadings.

96.When applying the comments as held by Stone J in Poon Lai Bingin the present proceedings, there does not appear to have been a common sense approach in processing these disputes in a timely or cost-efficient manner.  The parties should sensibly cooperate so that the Actions can be properly prepared for trial as soon as possible.

97.I thank counsel for their industrious efforts in ventilating the issues in a fair and orderly fashion which is most appreciated by the court but nonetheless it must also be noted that these Amended Summonses have been dismissed entirely.  

98.I make a costs order nisi that costs of and incidental to the Amended Summonses be to the plaintiffs forthwith with a certificate for counsel.

Mr Isaac Chan instructed by John Ip & Co for the plaintiffs

Miss Elizabeth Cheung instructed by Tanner De Witt for the 2^nd defendant