Li Shiu To v. Cheung Pik Ng and Others

HCA 416/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 416 OF 2003

____________

____________

_____________

D E C I S I O N

_____________

1.This is an application by the third party (“LSK”) to strike out the third party notice.

Background

2.The plaintiff, D1 and the third party (“LSK”) were beneficiaries to the estate of their father, Mr Li Po Chun, who died intestate in 1963.  D1 was the sole surviving administrator of the father’s estate.  Since 1970, D1 and LSK had been the only directors of D3 (“the Company”) which was set up by their father.

3.The plaintiff’s case is that 801 ordinary shares in the Company (“the Shares”) were registered in the names of 3 fictitious persons.  The Shares belonged to the father’s estate.  D1 breached his duty as administrator in failing to claim them for the estate.  D1 and LSK, as directors of the Company, and with knowledge that the Shares would revert to the father’s estate, procured the Company to pass certain purported resolutions in 1989 and made some purported allotments that had the effect of stripping the Company of assets and depleting the value of its shares. 

4.The plaintiff had sold out his interests in the Company to D1 and LSK pursuant to a 1971 Agreement and entered into a deed with D1 and LSK regarding distribution of the remaining assets of the estate in 1984.  Despite these settlements, the plaintiff claims that he is entitled to further distribution from the estate, being 228 of the 801 shares.

5.The action was commenced in 2003.  LSK was initially named as D2 but by consent, the plaintiff discontinued his claim against LSK on 1 June 2005.

6.Thereafter the action remained dormant until 2011.  The plaintiff narrowly escaped an order of striking out for want of prosecution.

7.On 21 June 2012, the statement of claim was re-re-amended alleging that D1 was liable on the ground of wilful default.  It also relied on purported dispositions of the Company’s assets to 2 entities allegedly related to LSK and D1.

8.On 27 December 2012, D1 passed away.

9.On 9 July 2013, with leave of this court, D1 commenced third party proceedings for contribution under section 3(1) of the Civil Liability (Contribution) Ordinance, Cap 377 (“CLCO”).  D1 asserts that LSK is liable to the plaintiff on the basis of dishonest assistance as a director in procuring the Company to carry out the impugned acts.

10.The decision in granting leave to commence third party proceedings contained comments on the case but that did not bind LSK who was not a party then.

The application to strike out

11.LSK now seeks to have the third party notice struck out on the ground that it is frivolous, vexatious or an abuse of the process of the court.  He relies on 2 matters:

A. That D1 cannot claim against him based on section 3(1) of CLCO since the plaintiff’s claim against LSK would have been time-barred under the equitable doctrine of laches; and

B. LSK would suffer prejudice if the third party proceedings were to proceed.

12.D1 submits that ground A is wrong as a matter of law and ground B is not made out on the evidence.

The legal principles

13.Section 3 of CLCO provides as follows:

“(1) Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise).

(2) A person shall be entitled to recover contribution by virtue of subsection (1) notwithstanding that he has ceased to be liable in respect of the damage in question since the time when the damage occurred, provided that he was so liable immediately before he made or was ordered or agreed to make the payment in respect of which the contribution is sought.

(3) A person shall be liable to make contribution by virtue of subsection (1) notwithstanding that he has ceased to be liable in respect of the damage in question since the time when the damage occurred, unless he ceased to be liable by virtue of the expiry of a period of limitation or prescription which extinguished the right (and did not merely bar a remedy) on which the claim against him in respect of the damage was based.
…

(7) In this section-

(a) references to a person's liability in respect of any damage are references to any such liability which has been or could be established in an action brought by or on behalf of the person who suffered the damage; …”

(emphasis added)

14.For the purpose of liability under section 3(1) of CLCO, it is not necessary for the plaintiff to have actually sued the third party.  It is sufficient if he is entitled to sue the third party and will be able to claim compensation “in respect of the same damage” as the plaintiff seeks against D1.  “Damage” does not mean damages: Annotated Ordinance of HK: Civil Liability (Contribution) Ordinance (Cap 377), para 3.06.

15.The time at which it is to be determined that the third party is liable to the plaintiff in respect of the same damage is the time when contribution is being sought: Co-operative Retail Services Ltd v Taylor Young Partnership Ltd and others [2002] 1 WLR 1419, at para 58.

16.Sub-section 3(1) is subject to sub-section 3(3).  The fact that the plaintiff’s claim against the third party is barred by limitation is irrelevant unless the expiry of the limitation period has extinguished the underlying rightof the plaintiff to claim against the third party: Nottingham Health Authority v Nottingham City Council [1988] 1 WLR 903, 906 D-H, per Balcombe LJ.  The effect of section 3(3) has been explained in Mitchell, The Law of Contribution and Reimbursement (2003 ed) para 12.32.

“Thus a defendant cannot escape liability for contribution on the ground that the creditor’s remedy against him has become barred by the expiry of a limitation period by the time of the contribution claim. However, he can escape liability for contribution if the expiry of a limitation period has extinguished the underlying right upon which the creditor’s claim against him is based.”

17.Examples of where the right to sue is barred can be found in section 17 of the Limitation Ordinance Cap 347 which extinguishes the title to land so as to bar an action to recover land; or section 32(2) which bars the right to make a claim in negligence not involving personal injuries 15 years after the date of the negligent act.

Application of the legal principles

18.The limitation period for a claim in dishonest assistance is 6 years: sections 4(7) or 20(2) of the Limitation Ordinance; Peconic Industrial Development Ltd v Lau Kwok Fai & ors [2009] 5 HKC 135, paras 19-24; Hotung Investment (China) Ltd v Ernst & Young (a firm) [2012] 5 HKLRD 421, para 15, Kwan JA.

19.Sections 4(7) and 20(2) of the Limitation Ordinance merely bar the remedy but not the right: McGee, Limitation Period (6^th ed) para 2.019. The claim which the plaintiff could have made against LSK was barred by limitation but did not extinguish the right.  Mr Hunsworth does not argue against it.

20.Nor does Mr Hunsworth dispute the fact that D1 and LSK (if sued) by the plaintiff would have been liable in respect of the same damage.

21.In principle, LSK remains liable as a contributor under section 3(1) of CLCO.

22.However, Mr Hunsworth prays in aid Section 36 of the Limitation Ordinance, which provides that “nothing in this Ordinance shall affect any equitable jurisdiction to refuse relief on the ground of acquiescence or otherwise”.  Acquiescence is assent after the violation has been completed and the claimant has become aware of it.  It is unjust to give the claimant a remedy where, by his conduct, he has done that which might fairly be regarded as equivalent to a waiver of it: Halsbury’s Laws of England, Vol 16(2), at para 911.

23.Section 36 includes within its scope the equitable defence of laches: Re Loftus [2006] 4 All ER 1110, at para 41.  Laches may bar a claim to equitable relief: Snell’s Equity, para 5-019:

“Laches essentially consists of a substantial lapse of time coupled with the existence of circumstances which make it inequitable to enforce the claim in equity. The first of these circumstances is a reasonable, and detrimental, reliance by the defendant upon the claimant’s delay. Lord Neuberger has recently held that ‘some sort of detrimental reliance is usually an essential ingredient of laches’. Alternatively, it is necessary for there to be some clear act of the claimant which amounts to an acquiescence or waiver of his rights.

Delay will accordingly be fatal to a claim for equitable relief if it is evidence of an agreement by the claimant to abandon or release his right, or if it has resulted in the destruction or loss of evidence by which the claim might have been rebutted, or if the claim is to a business (for the claimant should not be allowed to wait and see if it prospers), or if the claimant has so acted as to induce the defendant to alter his position on the reasonable faith that the claim has been released or abandoned.  But apart from such circumstances delay will be immaterial.  There can be no abandonment of a right without full knowledge, legal capacity and free will, …”

24.Mr Hunsworth points out that the plaintiff has suspected that the 3 shareholders were fictitious as early as December 1963.  Nevertheless, he took no steps to seek the transfer of the Shares into the estate until August 1987 for personal reasons.  (See paras 32-33 of his witness statement.)  The plaintiff was aware of the purported resolutions and purported allotments by May 2001 at the latest.  In any event, by exercising due diligence, he could or should have become aware of them in about 1989/1990 by a company search. Despite such knowledge, the Plaintiff did not commence the present action until 30 January 2003.

25.For present purposes, I accept that the plaintiff acquiesced in LSK’s alleged wrongdoing and that LSK would have an unassailable defence in laches if the plaintiff were to bring an action in dishonest assistance against him in 2013.

26.However section 3(3) CLCO only provides for one exception to liability in contribution and a defence in laches to the plaintiff’s claim does not fall within it.  Mr Hunsworth relies on the case of The Estate of Yang Sen-hui (deceased) and others v Pao Yuen Tung Hsing Yieh Co Ltd [1983] HKLR 124, wherein the Court of Appeal struck out a claim for equitable relief for breach of fiduciary duty on the ground of delay.  However, it does not help LSK, as it only deals with the situation between a plaintiff and a defendant, and not between a plaintiff and a third party under CLCO.

27.The plaintiff’s withdrawal of the action against LSK does not change the position on liability under CLCO.

28.The first ground relied on by LSK is not substantiated as a matter of law.  LSK has met the requirements of section  3(1) CLCO.

Prejudice

29.D1 has passed away.  LSK is deprived of an opportunity to cross-examine the very person who is alleged to have been dishonestly assisted by LSK in breach of his duty as administrator of the estate. 

30.Even D1 himself asserted that the plaintiff has “wholly and unreasonably delayed in progressing his claims” and that “due to the long passage of time, aging of the remaining witnesses … and fading memory, … [D1] verily believed that it is no longer possible or feasible for there to be a fair trial of the issues in these proceedings”.  (See paras 46-48 of D1’s affirmation filed on 24 August 2011 in support of his application for striking out of the plaintiff’s claim.)  The third party proceedings will involve the same factual matrix and LSK agrees with D1 that it is no longer possible for there to be a fair trial.

31.On the other hand, Mr Chow SC submits that dishonest assistance is established where there is (i) a breach of trust or fiduciary duty by someone other than the third party; (ii) in which the third party assisted; (iii) dishonesty; (iv) resulting in loss: Snell’s Equity, 32^nd ed, paras 30-076 to 081.  He says these matters were based on objective, documentary evidence, or the oral testimony of LSK himself (on knowledge). None of that depended on the oral testimony of D1.

32.I accept Mr Chow SC’s propositions on law.  However, as D1 himself denies the plaintiff’s claim, at least in relation to propositions (i) and (ii), D1 can provide evidence to support or attack LSK.  D1 might tell whether he himself knew or at least suspected that the 3 shareholders were fictitious. D1’s absence as a key witness will cause real prejudice to LSK.

33.Mr Chow SC submits that the prejudice stated in para 30 was no more than a bald assertion and is in any event refuted by the fact that LSK (being formerly D2) already filed a defence, a list of documents and a detailed 15-page witness statement on 17 November 2003.  He would be able to refresh his memory against his witness statement and the documents disclosed.  I will add that LSK has been conducting the case on behalf of the Company and might have continued knowledge about progress of this case.

34.However, LSK’s witness statement was made 10 years ago.  Since then, the statement of claim has been re-re-amended.  The material amendments included the purported dispositions to related companies of LSK of D1, which the plaintiff impugns, but the plaintiff has not alleged dishonesty against LSK. D1 has to prove dishonesty against LSK.  It is not even clear if D1 has filed a supplemental witness statement to prove those re-re-amendments before he died. These reinforce my view that the absence of D1 will be prejudicial to LSK.

Striking out

35.Striking out is only employed in clear and obvious cases. Notwithstanding that LSK was joined properly as a matter of law, the fact that D1 himself considered it impossible to have a fair trial of the plaintiff’s stale claim against him, and the fact that D1 (a key witness) has died, make it an abuse of process for the third party proceedings to continue.  I therefore strike out the third party notice and dismiss the claim for contribution.

36.I make an order nisi that the third party is to have his costs of the third party proceedings, including the summons to strike out, assessed at $160,000, to be paid by D1.

37.I thank Mr Chow SC and Mr Hunsworth for their assistance.

Mr Anderson Chow SC, instructed by Iu, Lai & Li, for the 1^st defendant

Mr Nicholas Hunsworth of Mayer Brown JSM, for the third party

Please refer to CACV66/2014 for the relevant appeal(s) to the Court of Appeal.