China Metal Recycling (Holdings) Ltd (in Provisional Liquidation) and Another v. Chun Chi Wai and Others

HCA 1412/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1412 OF 2013

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REASONS FOR DECISION

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The application

1.On 25 June 2014, on application by summons (the sanctions summons) by the plaintiffs (collectively “China Metal”) I made an order striking out the defence and counterclaim of the 5^th defendant (“Cheung Fat”), and an order that Cheung Fat be debarred from defending the proceedings.

2.Cheung Fat had countered China Metal’s application with an application to strike out certain paragraphs of the statement of claim, and certain paragraphs of China Metal’s reply that related to Cheung Fat (“the strikeout summons”), on the grounds that those paragraphs disclosed no reasonable cause of action against Cheung Fat, and alternatively that the allegations made against Cheung Fat in those paragraphs were frivolous and vexatious, and amounted to an abuse of process of the court.

3.I made an order dismissing the strikeout summons.

4.I made a costs order nisi in favour of China Metal that Cheung Fat must pay China Metal’s costs on both summonses, on an indemnity basis.  No application was made to vary the costs order which was to become absolute on 9 July 2014.

5.There has been no application for leave to appeal by Cheung Fat against its defence being struck out or the order debarring it from defending the proceedings.

6.On 9 July 2014, Cheung Fat filed a summons seeking leave to appeal my decision to dismiss the strikeout summons, and for leave to appeal the costs order.  I heard counsel on the application for leave to appeal on 29 July 2014, and refused to leave, with reasons to follow.  These are my reasons.

The grounds of appeal proposed by Cheung Fat

7.The grounds upon which it is said leave should be given to appeal the dismissal of the strikeout summons by Cheung Fat are twofold. 

8.First, it is said that in the course of the hearing on 17 June 2014, counsel for Cheung Fat informed the court that he would be making substantive arguments to the court to the point that a plea of fraud and forgery made against Cheung Fat was grossly lacking in particulars.  It would be necessary, counsel said, for directions to be given on the strikeout summons.  Notwithstanding that information the strikeout summons was dismissed out of hand, thereby denying Cheung Fat the right to be heard as a matter of procedural fairness.

9.Second, it is argued that in any event, the plea of fraud and forgery by China Metal is not supported by adequate particulars, and was accordingly frivolous and vexatious and an abuse of the procedure of the court, and should be struck out.

The test to be applied

10.Mr Hui relies upon Wing Fai Construction Company Ltd (in Compulsory Liquidation) (unreported, 8 December 2009, HCCW 735/2002) and says that the test for granting leave is that an appeal must have a reasonable prospect of success: see ss 14AA of the High Court Ordinance, Cap 4 (“HCO”). 

11.Mr Hui says this means that an applicant is required to show more than just an arguable case, but an appeal that has merits and ought to be heard, although he does not have to demonstrate that the appeal will probably succeed.  Further, leave to appeal should be granted if it is in the interests of justice to do so: see s 14AA(4)(b) of the HCO.

12.Ms Sit relies upon SMSE v KL [2009] 4 HKLRD 125 per Le Pichon JA at §17:

“Leave to appeal is not lightly granted. …. The section requires that the court be satisfied that the appeal has a reasonable prospect of success or there is some other reason in the interests of justice why the appeal should be heard before granting leave. Reasonable prospects of success involves the notion that the prospect of succeeding must be ‘reasonable’ and therefore more than ‘fanciful’, without having to be ‘probable’.”

13.There is no real dispute between counsel as to the test to be applied, although they rely upon different authorities.

China Metal’s argument

14.Ms Sit makes three points:

(1) She says that the debarring order means that the proposed appeal is futile.  Her submission is that as Cheung Fat is debarred from defending the proceedings, it is barred from taking any step in the proceedings which, if successful, would dispose of China Metal’s claims, in whole or in part.  Such a step is an application for leave to appeal the dismissal of the strikeout summons.

(2) She says that there is no basis for Cheung Fat’s allegation that it had no opportunity to be heard before the strikeout summons was dismissed.

(3) She says that in any event, there is no substance to Cheung Fat’s allegation that the pleading is deficient.

Discussion

15.Mr Hui sought to argue that while the debarring order prevented Cheung Fat from raising a positive defence at a trial, nevertheless Cheung Fat was still entitled to pursue procedural steps, and even at trial to test the credibility of witnesses or the accuracy of documents.  Mr Hui was unable to cite any authority for this proposition, and said that that issue alone, the extent to which a debarring order might operate, was a matter which ought to go before the Court of Appeal.

16.The submission made by Mr Hui is quite untenable.  It would mean that a defendant, as this defendant is, seriously in default in procedural steps in the action, could continue to raise procedural barriers to a plaintiff, unreasonably delaying the timely dispatch of the action, being only required to remain silent and inactive when the matter ultimately came on for trial.  To so hold would entirely defeat the purpose of an unless order that has the consequence of debarring a defendant from defending.

17.Ms Sit referred me to the decision in Maes Finance Ltd v Shriskantharaja & Anor (unreported, 18 March 1998, CA, UK).  In that case the second defendant had failed to comply with four orders for discovery, and finally, on 12 November 1996, an unless order was made that she must produce the documents within 14 days, or be debarred altogether from defending the action.  The court correctly identified that the debarring order took effect without any further order of the court upon the second defendant’s failure to disclose the documents.  Judgment was entered following formal proof by affidavit and the second defendant appealed that order, first to the High Court.  When the matter came before the Court of Appeal, Hutchison LJ, in whose judgment Thorpe LJ agreed, said this:

“What is plain in my judgment is that so long as the second defendant remained debarred from defending, that is to say, so long as the order of 12 November 1996 remains in force, there was no effective action which is the second defendant could take. This appeal, as constituted, was bound to fail.”

18.I respectfully agree with Court of Appeal.  It is plain from the decision that once an order of debarring a defendant from defending proceedings has been made it is no longer open to that defendant to take any step in the course of defending the proceedings.  Mr Hui was unable to persuade me to hold against the proposition that a summons to strike out proceedings under Order 18, rule 19, is a step taken in the course of defending the proceedings.  Thus, Cheung Fat is not, by reason of the debarring order, permitted to pursue the strikeout summons.

19.I recognise that in Maes Finance the order was an order “debarring the second defendant altogether from defending the action”, (my emphasis), where is the order made in the present case is simply an order debarring Cheung Fat from defending the action.  I am satisfied that the word “altogether” adds nothing to the scope of the debarring order.

20.I accept Ms Sit’s submission that the debarring order means that any appeal against the decision on the strikeout summons is futile. Even if I was wrong to deal with the strikeout summons in the manner in which I did, and it was restored, Cheung Fat could not proceed in the face of the debarring order.

21.In so holding I am conscious of the fact that it is not open to China Metal simply to proceed to enter either judgment by default or to apply for summary judgment.  A judgment by default will not be open, because Cheung Fat is not in default of giving notice of intention to defend.  As an issue of forgery or fraud has been raised (albeit, as will be seen, in China Metal’s Reply), summary judgment will not be open: see Pacific Electric Wire & Cable Co v Harmutty & Ors [2009] 3 HKLRD 94 CA.  It will be necessary for China Metal, in due course, to prove its claim against Cheung Fat, although that proof may only need to be a formal proof.

22.It is of note that the Court of Appeal in Maes Finance left open the opportunity to the 2^nd defendant to take steps to challenge the debarring order (even though the 2^nd defendant was by that time technically out of time to challenge the debarring order).  It must be right that a debarring order itself can be subject to appeal if appropriate grounds can be established entitling the party subject to the debarring order to leave to appeal. 

23.But in the absence of an appeal against that order, the order debarring Cheung Fat from defending must itself operate to debar it from seeking leave to appeal any other, quite separate, orders that may have been made.  It is significant that it is not the debarring order made on China Metal’s application, but a quite separate order, made on Cheung Fat’s application, for which leave to appeal is sought.

24.Ms Sit’s first submission alone is sufficient to dispose of the application for leave to appeal.  I shall deal with the other grounds out of courtesy to Mr Hui’s argument.

Failure to allow Cheung Fat to be heard

25.The decision in respect of which leave to appeal is sought was a decision made as a result of the exercise of the court’s discretion.  It is trite law that it is only where a decision exceeds the generous ambit within which reasonable disagreement is possible and is in fact plainly wrong that an appeal court will interfere in the exercise of discretion: see e.g. RK v YS (unreported, 1 November 2012, HCMP 1969/2012, CA, per Kwan JA).

26.Cheung Fat’s strikeout summons was based upon two grounds.  The first was that no reasonable cause of action was disclosed by the statement of claim.  The second was that the allegations in the statement of claim, being lacking in particulars, were frivolous, vexatious and an abuse of process. 

27.The strikeout summons was filed on 12 June 2014, at the same time as an affidavit, described in my decision of 25 June 2014 as Ou 3^rd, was filed.  The strikeout summons was listed for hearing on the same day as China Metal’s sanctions summons.  The strikeout summons was marked for 15 minutes.

28.I accept Ms Sit’s submission that it does not necessarily follow that the first hearing of a summons, even one marked for only 15 minutes, is merely a directions hearing, and that the substantive hearing will necessarily be deferred for a later hearing. 

29.She correctly says that the ethos of CJR, underscored by the express duty of the court to actively manage cases and decide promptly which issues need full investigation and trial and accordingly dispose summarily of others; see Order 1A, rule 4(2)(c) of the Rules of the High Court, entitles the court in appropriate situations to deal with issues summarily, particularly interlocutory issues.

30.It is not necessary for me to set out here the sorry tale of extensive procedural delay on the part of Cheung Fat in this action.  The procedural history is set out at §§14‑43 of my decision of 25 June 2014.  It is now argued that the hearing of the strikeout summons on 17 June 2014, should have been treated as a directions hearing, thereby enabling Cheung Fat to file appropriate affidavits in support of the contention that the allegations in the statement of claim were frivolous and vexatious and amounted to an abuse of process. 

31.The statement of claim is dated 4 October 2013.  There is no evidence before me as to the date of service, but Cheung Fat had been able to file a defence and counterclaim as long ago as 20 December 2013.  But it waited until 9 June 2014 to file the strikeout summons.

32.Cheung Fat has had nearly 6 months in which to prepare the strikeout summons and any affidavits that might be needed in support, There was simply no need to give any further time to the hearing of the summons.  Three affirmations had been filed by Mr Ou over that 6 month period, and any one of them could have contained any information that was intended to be relied upon in support of the strikeout application.

33.In the whole of the circumstances I am driven to the conclusion that the late filing of the strikeout application, unsupported by any affirmation, accompanied by a desire to delay the hearing of the strikeout summons for the filing of yet more affirmations, was yet another carefully considered step in the process by which Cheung Fat intended to further delay the progress of these proceedings.

34.In those circumstances I am satisfied that it cannot be contended that the exercise of the discretion undertaken by the court in managing the proceedings and summarily disposing of the strikeout application can be argued to be so wrong that it might meet the test set out in §25 above.

Is China Metal’s plea arguably deficient

35.The argument advanced is that China Metal’s plea of fraud and forgery is not supported by adequate particulars and evidence.  Mr Hui correctly sets out in his skeleton the principles laid down by Lord Millett in Three Rivers DC v Bank of England (No 3) [2003] 2 AC 1 at §§183‑190. 

36.However, in fact, the plea in the statement of claim is not one of fraud and forgery against Cheung Fat, a fact that was accepted by Mr Hui in oral submissions.  Instead, China Metal’s claim against Cheung Fat is based upon receipt of money by Cheung Fat, knowing of the 1^st defendant’s (Mr Chan’s) breach of fiduciary duty. 

37.The case pleaded against Mr Chan is that he procured Central Steel to pay large sums to Cheung Fat without any genuine or commercial purpose to the benefit of China Metal.  The plea is one of breach of fiduciary duty, not a plea of forgery or fraud. 

38.Cheung Fat does not dispute that it was in beneficial receipt of the sums so paid.  If Cheung Fat had sufficient knowledge of the facts surrounding the misapplication of China Metal’s property, to be inferred, Ms Sit submits, by reason of the matters pleaded in the statement of claim, section C, then Cheung Fat would be liable for knowing receipt.  I accept Ms Sit’s submission that all the necessary constituents of the cause of action against Cheung Fat have been pleaded.

39.There was no plea by China Metal in the statement of claim of fraud or forgery.  The issue of fraud or forgery is an issue that was raised by Cheung Fat’s allegation in the defence that the transactions were genuine.  That necessitated a Reply by China Metal, and in that Reply (§§24‑26) China Metal set out the particulars, identifying invoices relied upon by Cheung Fat, as false.

40.I accept Ms Sit’s submission that the issue of fraud or forgery concerning the agreements and invoices relied upon by Cheung Fat arises only from the defence and counterclaim filed by Cheung Fat, and that the Reply by China Metal is sufficiently clear and has a proper factual basis.

41.I am accordingly satisfied that there is no reasonable prospect of an appeal against the dismissal of the strikeout application.  Even if Cheung Fat were not barred from defending, I would have declined leave to appeal against the dismissal of the strikeout application.

The costs order on the dismissal of the strikeout summons

42.Mr Hui accepted that if there was no basis upon which leave to appeal the dismissal of the strikeout summons could be given, then there was no basis upon which he could argue that the indemnity costs order nisi made could be challenged.  The order is accordingly made absolute.

Costs

43.I heard counsel as to costs.  Mr Hui sought to argue that the debarring point was an obscure point which was not obvious and hence the application was made.  I reject that proposition.  It was immediately plain to me as soon as I received the summons for leave to appeal that the order debarring Cheung Fat from defending the proceedings would stand in its way. Quite sensibly, Ms Sit made it her best and first point. 

44.Cheung Fat, having been debarred from defending, ought not to have made this application.  It was doomed to failure from the start.  This is not the ordinary situation of an unsuccessful application which would attract costs on a party and party basis. 

45.There will be an order absolute that Cheung Fat must pay China Metal’s costs of the application for leave to appeal on an indemnity basis.

Ms Eva Sit, instructed by Hogan Lovells, for the 1^st and 2^nd plaintiffs

Mr John Hui, instructed by Laracy & Co, for the 5^th defendant