Cil Holdings Ltd v. Kwok Han Qiao Formerly Known As Kwok Wai Tak Edward
Read the full judgment text of CACV 90/2013 on BabelCite. This Court of Appeal judgment was delivered on 20 March 2014.
1. This is the defendant’s appeal from a judgment of Chung J given on 11 December 2012 dismissing the defendant’s application to strike out the action on the grounds that there has been (i) intentional and contumelious default on the part of the plaintiff and/or its solicitors; (ii) inordinate and inexcusable delay by the same persons causing serious prejudice to the defendant; and/or (iii) non-compliance with the underlying objectives of Order 1A Rule 1 RHC amounting to abuse of process.
Cited by 3 cases · Cites 4 cases
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CACV 90/2013 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 90 OF 2013 (ON APPEAL FROM HCA NO 2725 OF 2001) ____________
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______________ JUDGMENT ______________ Hon Yuen JA: 1.This is the defendant’s appeal from a judgment of Chung J given on 11 December 2012 dismissing the defendant’s application to strike out the action on the grounds that there has been (i) intentional and contumelious default on the part of the plaintiff and/or its solicitors; (ii) inordinate and inexcusable delay by the same persons causing serious prejudice to the defendant; and/or (iii) non-compliance with the underlying objectives of Order 1A Rule 1 RHC amounting to abuse of process. 2.Leave to appeal was refused by the learned judge on 14 March 2013 but was given by the Chief Judge on 25 April 2013. 3.As the background is fairly complex involving a number of actions with different parties, I shall refer to HCA2725/2001 as “the present action”, the plaintiff as “CIL” and the defendant as “Mr Kwok”. CIL’s claim in the present action 4.The present action was commenced on 16 June 2001. 5.1CIL, a listed company, alleged that Mr Kwok was its shareholder and that he represented CIL in liaising with PRC parties with a view to CIL investing in 2 projects in the PRC, viz a hotel and an aluminium pipe factory. 5.2CIL alleged that for the purpose of making those 2 investments, on 12 July 1999 a total sum of $98m was transferred to Mr Kwok and his sister Kwok Wai Ling (“Ms Kwok”) on trust for CIL. 5.3CIL alleged that in breach of trust, Mr Kwok did not invest the sum in either project and did not return the money. 5.4The relief sought by CIL was for an account, and payment of such moneys as may be found due upon the taking of the account. Mr Kwok’s case 6.1Mr Kwok’s case is more complex. His case is that in 1997, he operated a business consultancy company called Asia Glory Holdings Ltd (“AG”). 6.2Through the introduction of James Lau (“Mr Lau”), he met Joseph Szeto (“Mr Szeto”) and Peter Ho (“Mr Ho”), respectively the Chairman and Vice-Chairman of CIL. 6.3In due course CIL retained AG’s services to target investment opportunities in the PRC. - The CRED Agreement 7.1Through AG’s introduction, CIL entered into an agreement in 1997 to acquire from China Real Estate Development Group Huadong Properties Co Ltd, a subsidiary of China National Real Estate Development Group Corp (“CRED”) a number of properties to be constructed in Shanghai. Payment for the properties was made partly in cash and partly by the allotment of CIL shares to CRED. 7.2As CRED was concerned that CIL shares might diminish in value after the transaction, in mid-1997 Mr Kwok on behalf of AG procured an agreement from Mr Szeto and Mr Ho that they, and other major shareholders of CIL, would not dispose of their shares in CIL until 28 February 1998 (the period between the transaction and this date has been called the “Restriction/Stabilization Period”), and that during this period should the share price fall below the price at which CIL’s shares were allotted to CRED, they would compensate CRED for the difference. This oral agreement has been referred to as “the CRED Agreement”. According to Mr Kwok, Mr Lau (who had introduced CIL to AG) was present at the discussions and had knowledge of the CRED Agreement. - The Share Deposit Agreement 7.3Mr Kwok’s case is that, in accordance with prevalent practice in the PRC, AG (as the middleman in the deal) would also be liable to CRED for any losses suffered by CRED should CIL fail to maintain its share price. 7.4To protect AG against such liability to CRED, shortly after the CRED Agreement, Mr Szeto and Mr Ho agreed to, and did, procure 60m CIL shares to be deposited with AG (“the Share Deposit Agreement”). It turned out that these shares were owned by a company called Silver Stone Development Ltd (“the Silver Stone shares”). This company will be referred to later. - Drop in CIL share price 8.After the allotment of shares to CRED, the price of CIL shares dropped, and the Restriction/Stabilization Period - which would originally have expired on 28 February 1998 - was extended on a number of occasions (first, to 30 March 1999 and later to 1 October 2000). By early 1999, the drop in price of the shares allotted to CRED had reached about $60m. 9.Meanwhile, CIL was looking for other investment opportunities and needed funds, and AG was consulted to find opportunities and to procure loans for CIL. - The Well Match loan 10.Through AG’s introduction, on 11 December 1998 a company called Well Match Associates Ltd (“Well Match”) lent $6m to CIL for a term of 2 months at an interest rate of 2% per month and a default rate of 3% per month, as evidenced by a Promissory Note. - The China Gold loan 11.Further, by an agreement dated 30 April 1999, China Gold Finance Ltd (“China Gold”), a company of Ms Kwok’s husband, agreed to lend CIL a sum of $40m for a term of 3 months at an interest rate of Prime + 3% pa and a default rate of 3% per month. Mr Szeto and Mr Ho signed the loan agreement on behalf of CIL, and also executed personal guarantees. The loan was drawndown on 3 May 1999. 12.Meanwhile, AG was negotiating on behalf of CIL to acquire interests in the hotel and the aluminium pipe factory in the PRC. - Transfer of $98m 13.It is common ground that on 12 July 1999, a total sum of $98m was transferred from CIL to Mr Kwok and Ms Kwok. 14.CIL’s case is that it was solely for the purpose of investing in the hotel and aluminium pipe factory. - Mr Kwok’s allegation of “the Security Agreement” 15.1Mr Kwok’s case however is that by then (July 1999) he, together with Mr Szeto and Mr Ho (with Mr Lau attending) had estimated that $100m was required for the following purposes:
15.2CIL then came up with the sum of $98m to be used for these purposes. This oral agreement has been referred to as “the Security Agreement”. 16.Pausing there, I note the following:
- Failure of negotiations for the hotel and pipe factory 17.1It is common ground that the proposed investments in the hotel and the aluminium pipe factory did not materialize. There is evidence that it became apparent by the end of 1999 that the negotiations for those investments would not be successful. In other words, on CIL’s case, the purpose for which the sum was held by Mr Kwok had failed. 17.2It would be noted however that no demand was made by CIL at the time, either to the Kwoks or to AG, for the return of the $98m, notwithstanding that by that time CIL was already defaulting on repayment of the loans from Well Match and China Gold and was incurring default interest. - The Mayson loan 18.Instead, again through AG’s introduction, on 29 February 2000 a company called Mayson Associates Ltd (“Mayson”) lent $3m to CIL for a term of 1 month at an interest rate of 1.5% per month and a default rate of 2% per month, as evidenced by a Promissory Note. - CIL’s letter to solicitors and consequence 19.1Meanwhile, the CIL group was undergoing an audit andon 7 August 2000, Mr Szeto wrote to CIL’s solicitors referring to the hotel and aluminium pipe factory deals which had fallen through and said that CIL suspected that Mr Kwok “had no intention to repay the money back to CIL”. Mr Szeto asked for advice as to how to proceed with the case. 19.2This was followed by a letter dated 14 November 2000 from CIL’s solicitors to Mr Kwok demanding the return of the money. 19.3There was no reply to this letter, but CIL’s demand was not followed up. - Mr Kwok’s allegation of “Adjusted Security Agreement” 20.1According to Mr Kwok, at about this time (late 2000), AG ceased to be CIL’s investment consultant. He says the parties then met to discuss how the Security Agreement should be adjusted in view of the termination of the relationship between CIL and AG. 20.2Mr Kwok says Mr Szeto and Mr Ho (on behalf of CIL) orally agreed to vary the Security Agreement – whereby the sum of $98m would continue to be held by AG, but now, only as security for the purposes described at (2) and (3) in para. 15.1 above, i.e. to secure AG’s liability to CRED and to secure repayment of the sums owed to Well Match, China Gold and Mayson, which loans had all been procured by AG (“the Adjusted Security Agreement”). 20.3According to Mr Kwok, AG had been receiving demands from CRED to compensate it for the drop in CIL’s share value; from October 2000 to the end of 2003, AG paid a total of $70m to CRED in compensation. The Silver Stone action (HCA2206/2000) 21.1Meanwhile, Silver Stone, the owner of the 60m CIL shares which had been deposited with AG, had claimed the return of the shares. In HCA2206/2000 Silver Stone instituted proceedings alleging conversion by (amongst others) Mr Szeto, Mr Ho, Mr Kwok, AG and Mr Lau. Silver Stone claimed that it had only placed the shares in the hands of Mr Ho as he had offered to sell them on its behalf. However the shares ended up with Mr Kwok and AG, who said the shares had been placed with them pursuant to the Share Deposit Agreement, an arrangement to which Silver Stone said it had not agreed. 21.2Mr Kwok and AG then issued Third Party proceedings, claiming an indemnity against Mr Szeto and Mr Ho on the basis of the Share Deposit Agreement. 21.3Judgment was entered in favour of Silver Stone against the defendants in the main action. Mr Kwok’s appeal, which was based on some technicalities in the law of conversion, was dismissed by this court (Le Pichon and Cheung JJA and Yam J) in CACV 251/2006 on 27 April 2007. 21.4As for the Third Party proceedings, Mr Szeto settled with Mr Kwok and AG. It is important to note that Mr Ho did not contest the Third Party proceedings and an order was made against him in favour of Mr Kwok and AG. Apparently Mr Kwok and AG have instituted bankruptcy proceedings against Mr Ho. 21.5It is important for present purposes to note that on 9 July 2001, Mr Lau (who identified himself as a director of CIL) made a witness statement in the Silver Stone action, confirming the existence of the CRED Agreement and the Share Deposit Agreement. The present action 22.On 16 June 2001, CIL commenced the present action against Mr Kwok. Claims against CIL 23.Within the next couple of weeks,
CIL’s claims of set-off - Against statutory demands of Mayson and Well Match 24.1It is important to note that on 24 July 2001, CIL’s solicitors asserted a set-off of the sum of $98m against the statutory demands of Mayson and Well Match. 24.2Further, CIL pleaded in its Defence filed on 9 August 2001 in the China Gold action that there was a “global set-off agreement” whereby the sum of $98m owed by Mr Kwok (the subject-matter of the present action) was set-off against the sum of $40m CIL owed China Gold (the subject-matter of the China Gold action). CIL pleaded:
- Set-off pleadings in the present action 24.3Consequently, CIL’s set-off of the $98m was one of the alternative defences pleaded by Mr Kwok in his Defence filed on 24 August 2001 in the present action as follows:
24.4On 28 September 2001 CIL pleaded in its Reply to this defence:
24.5In other words, CIL’s position then was consistent with its stand in the China Gold action, viz. there was a “global set-off agreement” which included the $98m claimed from Mr Kwok in the present action. Mr Kwok’s position was that the “global set-off agreement” was only CIL’s verison of the Adjusted Security Agreement, but that even on CIL’s own case, it would still not be entitled to claim $98m from him. 25.The last step taken in the present action was in December 2001, when Mr Kwok filed his list of documents. CIL did not progress the action thereafter. Winding up proceedings against CIL in 2001 and 2006 26.1A petition was presented to wind up CIL in HCCW432/2001. A scheme of arrangement was sanctioned by the court on 2 April 2003 in HCMP2799/2002. However no further action was taken by CIL in the present action. 26.2Another petition was presented against CIL in HCCW702/2005, and on 2 August 2006 it was wound up. The order was however rescinded on 12 September 2006. Notices of Intention to proceed 27.1Shortly thereafter, on 25 September 2006, CIL filed a Notice of intention to proceed (“the 1st NIP”) in the present action. However no steps were taken thereafter. 27.2On 24 June 2008, CIL filed another Notice of intention to proceed (“the 2nd NIP”) in the present action, but again no steps were taken thereafter. 27.3On 4 May 2011, CIL filed yet another Notice of intention to proceed (“the 3rd NIP”) in the present action. Four months later, it filed a summons for case management directions. This was nearly 10 years after the last step taken in the action in 2001. 28.It should be noted that soon after the 3rd NIP, CIL amended its Defence in the China Gold action to delete its previous assertion that there had been a global set-off agreement. Defendant’s application to strike-out 29.On 3 March 2012, Mr Kwok applied to strike-out the present action on the grounds that there has been (i) intentional and contumelious default on the part of CIL and/or its solicitors; (ii) inordinate and inexcusable delay by it/them causing serious prejudice to him; and/or (iii) non-compliance with the underlying objectives of Order 1A Rule 1 RHC amounting to abuse of process. 30.As noted earlier, no steps had been taken to progress the present action in the nearly 10 years between 2001 and 2011. Mr Kwok says that he assumed that CIL was no longer pursuing its claim due to the long period of inaction. Indeed, in CIL’s Annual Report published on 4 September 2003, its auditors reported, in relation to two “receivables” including the sum of $98m, that “there was no sufficient evidence for us to verify and confirm the existence of the balance” (emphasis added). In subsequent Annual Reports, the auditors reported that no provision for the sum had been made in the financial statements but, apart from the management’s representation, they had been unable to carry out necessary procedures to confirm whether the sum could be recovered. 31.Further Mr Kwok says he has suffered prejudice as a result of the delay because two important witnesses have died: Mr Szeto on 30 September 2010 and Mr Lau on 30 December 2011. He said Mr Szeto had told him that (a) CIL had not even asked him (Mr Szeto) to make a witness statement and (b) CIL would not proceed with the present action. For that reason Mr Kwok did not ask Mr Szeto or Mr Lau to make witness statements, and in 2007, he no longer retained solicitors in the present action. 32.1In opposition to the strike-out application, CIL’s case is that it was not able to progress the action because of lack of funding. Trading in its shares was suspended between April 2004 and January 2011. CIL also referred to the winding-up proceedings. 32.2However there was no explanation for the lack of action for more than 2 years between December 2001 and April 2004. Even if the first set of winding-up proceedings are taken into account, there was no action taken after the scheme of arrangement was approved. 33.Moreover it would be noted that throughout this period, CIL utilized the claim in the present action as a set-off in the China Gold action in which it was the defendant. Therefore it suited CIL to delay the progress of the present action. 34.Mr Ho, in a brief affirmation in opposition to the strike-out application, denied that the sum of $98m was paid to Mr Kwok for any purpose other than for the potential investment in the hotel and the aluminium pipe factory, and denied making any oral agreement. Surprisingly however he did not deal with the specific allegations in Mr Kwok’s case, eg he did not explain why the Silver Stone shares had been placed with Mr Kwok and AG, and why he did not contest the Third Party proceedings they issued against him. 35.On 13 September 2012 Master Ho struck-out the action. 36.CIL appealed. On 11 December 2012 Chung J allowed CIL’s appeal from Master Ho’s order. He held that there had indeed been inordinate and inexcusable delay on CIL’s part, but found that there was no prejudice because, although Mr Szeto and Mr Lau had died, Mr Ho was still available to give evidence. He also declined to find there was abuse of process on the part of CIL. 37.Mr Kwok applied for leave to appeal but his application was refused by Chung J. As mentioned earlier, Mr Kwok subsequently obtained leave from A. Cheung CJHC on 25 April 2013. Principles 38.This is a “straddle” case, ie a case where the proceedings were begun before the Civil Justice Reforms (CJR) took place. It has been held that nevertheless, in an application to strike out for delay, the court’s approach to the application must take into account the Reform that has taken place, whilst also taking into account the contemporaneous circumstances when evaluating the conduct of the parties (Wing Fai Construction Co Ltd (in liq) v Yip Kwong Robert [2012] 1 HKLRD 589 at para.29). 39.The principles that now guide the court in determining applications to strike out for delay have been set out extensively in Wing Fai at para. 75 which will not be replicated here. In the present case, Mr Kwok has sought to strike out the present action for delay on all three grounds set out in para. 61 of that judgment, viz (1) the second limb of Birkett v James (inordinate and inexcusable delay, coupled with prejudice, which includes a substantial risk that a fair trial is not possible); (2) abuse of process; and (3) breach of O.1A r.1(b) of the Rules of the High Court (proceedings to be dealt with expeditiously). Abuse of the process of the court is the common feature connecting all three grounds (paras. 66, 68). 40.I recognize that striking out should only be used in plain and obvious cases (para. 65) and is a remedy of last resort (para. 75(1)). It is also well-established that an appellate court should think long and hard before it can disturb a judge’s decision in a striking-out application as it is made in the exercise of his discretion and we should interfere only if the decision is “plainly wrong”. Nevertheless, with all due respect to the judge, I believe this is a clear case for the application of a strike-out on the basis of the second limb of Birkett v James and for abuse. Discussion 41.1The judge concluded that there has been inordinate and inexcusable delay on CIL’s part (para. 12). There is no respondent’s notice from CIL to challenge that. 41.2The inordinate delay is one of nearly 10 years between the last step taken in the action (2001) and CIL’s summons for case management (2011). Winding-up proceedings against CIL can only account for a total period of 3 years of inaction (a 2-year period between 2001 and 2003, and a 1-year period between 2005 and 2006). That leaves a balance of nearly 7 years. 41.3As for whether the delay was inexcusable, whilst the court can take into account lack of funds, that must be balanced against the prejudice suffered by the defendant (Nathaniel Hymer v The Mass Transit Railway Corporation [2000] 2 HKLRD 589, at 607). It would be noted that CIL chose to deploy its financial resources in re-activating trading in its stocks. Moreover it was in sufficient funds to participate in other legal proceedings (the China Gold action) during this period. 42.1As for prejudice, with respect to the judge, it is clear that the delay has caused prejudice to the defendant with a significant risk that there could not be a fair trial. This action turns crucially on oral agreements (the CRED Agreement, the Share Deposit Agreement, the Security Agreement and the Adjusted Security Agreement) which were allegedly made between Mr Kwok (on behalf of AG) of the one part and Mr Szeto and Mr Ho (on behalf of CIL) of the other part, to which Mr Lau was an independent witness. Indeed CIL’s own pleaded case (until the last amendment) also involved an oral agreement (the global set-off agreement). Without contemporaneous documentation, viva voce evidence of these principal witnesses becomes all-important. 42.2It is indisputable that with the passing of time, there would be a diminution of memory of witnesses at trial. In the present action, the events occurred in 1998-1999, 13-12 years before CIL revived the action in 2011. 42.3More importantly, of the 3 witnesses (other than Mr Kwok) whose words and acts would be scrutinized at trial, 2 have died. Had the action progressed at a normal pace, it would have finished long before Mr Szeto died in 2010 and Mr Lau died in 2011. As it is now, no peremptory orders can possibly secure the attendance of these two important witnesses at trial. I regard this as serious prejudice to Mr Kwok which involves a substantial risk that a fair trial would not be possible. 42.4Whilst Mr Ho is still available, his evidence could not now be tested against that of Mr Szeto and Mr Lau. And events have shown that Mr Szeto and Mr Lau have not previously spoken in one voice with Mr Ho.
The above shows that even if Mr Szeto and Mr Lau might not have given evidence in favour of Mr Kwok at the trial, counsel would have been able to expose differences in their evidence through cross-examination in order to weaken CIL’s case. In a case turning on oral evidence alone, this is an extremely valuable tool in a litigant’s armoury. This has now been lost to Mr Kwok through CIL’s delay. 42.5Of course Mr Kwok could have protected himself by seeking out Mr Szeto and Mr Lau and asking them for witness statements as there is no property in witnesses, but this begs the question why Mr Kwok should have to do that when the signal he got from CIL was that it was no longer pursuing him in the present action. 43.Leading counsel for CIL says that it would be unjust to “let Mr Kwok off” after receiving a vast sum from a listed company. With respect, if Mr Kwok is truly liable, then it is CIL itself that has let him off. The truth of the events that occurred in the last century would have been discovered if CIL had brought the action to trial timeously, so that the oral evidence of the 4 main witnesses could be assessed at trial in the usual way, and the merits of the case determined by a court. 44.I do not think any procedural blame should be laid at Mr Kwok’s door for the delay. After years and years of inactivity by CIL, Mr Kwok discharged his solicitors in 2007, before the commencement of the CJR. He did not instruct solicitors again until after CIL sought to revive the proceedings. A lay person cannot be expected to understand the nuances of the post-CJR duty of a defendant not to “let sleeping dogs lie”. Accordingly the plaintiff’s fault of delay in the present action cannot be shared with the defendant. 45.Finally, as to the argument that Mr Kwok had “consented” to the further progress of the action since its revival in December 2011, the judge did not have to deal with it as he declined to strike-out the action for delay. It is clear from Hymer that a defendant’s acts following revival of long-delayed proceedings would not be an automatic bar to obtaining a striking-out order. Such conduct would only be a relevant factor to be taken into consideration. As the House of Lords stated in Roebuck v Mungovin [1994] 2 AC 224 at 236, quoted in Hymer (p.602),
This was the situation with the present action and I do not see how that would disentitle the defendant from a strike-out order. 46.Moreover, as noted earlier, CIL was benefitting in the China Gold action from its delay in pursuing the present action because of its “global set-off agreement” defence which it has now abandoned. In the China Gold action, the claim for principal and interest had risen to nearly HK$214m by April 2011. In these circumstances, this adds an abuse element to CIL’s inaction which, with respect, the judge seems not to have appreciated. Order 47.For the reasons set out above, I would allow the appeal with an order nisi that the plaintiff should pay the defendant’s costs here and below. Hon Kwan JA: 48.I agree with the judgment of Yuen JA. Hon Godfrey Lam J: 49.I also agree.
Mr Jason Pow, SC, instructed by Liu, Chan & Lam, for the Defendant (Appellant) Mr Alan Leong, SC and Mr Martin Wong, instructed by Chong & Partners, for the Plaintiff (Respondent) | |||||||||||||||||||||
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