Civil Procedure — Pleading — Statement of claim — Striking out — Security for costs — Corporate plaintiff

Mr Kenneth C.L. Chan, instructed by Messrs Tam, Pun & Yipp, for the Plaintiff

Mr Calvin Cheuk, instructed by Messrs Tai, Tang & Chong, for the 1^st and 2^nd Defendants

Mr Recorder Shieh, SC 


[1] There are two summonses before me today. Both are issued by the defendants. The first one is a summons for security for costs, dated 2 June 2009 and the second one is an amended summons to strike out the plaintiff’s Amended Statement of Claim. The summons to strike out was originally dated 10 July 2009 and it was amended on 16 July 2009.

[2] At the conclusion of the hearing I have decided that I should give an ex tempore judgment instead of reserving because I think it is in the best interests of all parties that a speedy decision be given so that the matter can move on instead of for me to try to work on a reserved judgment. So with the shortness of time, if there is any infelicity in expression, the fault is entirely mine.

[3] The Statement of Claim in this action was dated 16 March 2007. It was amended on 18 January 2008. I shall set out the entirety of the Amended Statement of Claim in an annexure to this judgment with the additions and deletions all marked up for ease of reference.

[4] In the original summons to strike out, the defendants only sought to strike out paragraphs 10 to 18 and paragraphs 21 to 27 of the Amended Statement of Claim. Then by amendment, the summons was amended to seek to strike out the entire Amended Statement of Claim with an alternative prayer to strike out paragraphs 10 to 18 and 21 to 27. All grounds under Order 18, rule 19, as well as the inherent jurisdiction, are relied on.

[5] The Amended Statement of Claim is not an entirely easy document to read. Evidence and immaterial averments were liberally pleaded. One blatant example can be found in paragraphs 23 to 27 of the Amended Statement of Claim where matters relating to an investigation by a PRC lawyer retained by the plaintiff were pleaded and also matters relating to a report by the plaintiff to the relevant PRC law-enforcement departments were pleaded. For my part, I can see no relevance or materiality to these matters because I cannot think of any cause of action to which the fact of a report to a foreign law-enforcement agency could be relevant; certainly not in the present context.

[6] Mr Chan, in fairness, did not positively seek to uphold the materiality of the matters pleaded in these paragraphs. He suggested, for example, that insofar as the investigation by the Mainland authorities result in conviction, that it could well be that the convictions would be relevant. But the immediate answer to that is that this does not justify pleading the fact that the matter has been reported to the relevant departments. If and when any convictions are to materialise, and subject to whether any foreign conviction can be relied upon in the Hong Kong courts, the pleading can then be amended accordingly. I am expressing no views on whether or not any foreign conviction is a matter that can properly be relied on in the courts of Hong Kong because I have not heard any submissions on this. This point was really floated by way of exchange between the Bar and the Bench and I doubt whether or not any mature thought has come into it when Mr Chan put forward the suggestion.

[7] Another example of evidence and immaterial matters being pleaded can be found in paragraph 15 of the Amended Statement of Claim when certain results of a search conducted in the Shanghai City Industrial and Commercial Administration Management Department were pleaded. The plaintiffs may wish to rely on the content of certain search results to prove certain material facts which it wishes to rely on but it is certainly not good pleading practice to plead that a search has been conducted and, according to the search result, it showed this, that and the other. The fact that they seek to prove should be pleaded but not the way or the underlying materials by which the plaintiff wishes to prove it.

[8] The above "defects" in the Amended Statement of Claim, however, fade into insignificance when one addresses the more fundamental problem of the Amended Statement of Claim, which is that it does not fairly tell the reader the nature of the plaintiff’s claim. In paragraph 3 of the Amended Statement of Claim, the pleader pleaded a Partnership Agreement and then defined it as such using capital letters "P" and "A".

[9] Now, under the law of Hong Kong when one refers to a partnership, the immediate reaction is that one is referring to a partnership in the technical and legal sense. In paragraph 3(c) of the Amended Statement of Claim, the pleader pleaded that it was agreed as part of the Partnership Agreement that the plaintiff and the 1^st and 2^nd defendants would enter into a joint venture agreement with a Shanghai company and they would form a company in China, which was referred to as the Joint Venture Company.

[10] However, Mr Chan informed me during the course of his submissions that it is not the plaintiff’s case that it and the two defendants had entered into a partnership in the technical sense of the word and he asked me to disregard the "label" attached to the relationship. He further submitted that one could regard the relationship pleaded in the Amended Statement of Claim as being one of an investment agreement or something of that nature. Mr Chan further informed me, and submitted, that the nature of the plaintiff’s case is that the plaintiff was not intending to be a shareholder in the Joint Venture Company and it was simply relying on a contract, in personam , with D1 and D2 to the effect that, upon injection of monies by the plaintiff, D1 and D2 would, in their personal capacity, pay to the plaintiff its return based on the percentage share of the plaintiff in the whole project worked out by reference to the amount of money the plaintiff has paid.

[11] In fact, Mr Chan further submitted that it is not the plaintiff’s case that it intended to be a shareholder of a company called Master Kingdom either. Now, at this juncture, I should explain the significance of Master Kingdom. The corporate structure of the various entities in this case show that the Joint Venture Company had two shareholders—one was the Shanghai company and the other one is a company called Master Kingdom. Master Kingdom, in turn, had a number of different shareholders, one of which was the plaintiff itself. This prompted Mr Calvin Cheuk, for the defendants, to mount a series of arguments based on reflective loss.

[12] However, as I said earlier, it is the plaintiff’s case, as relayed to me by Mr Kenneth Chan, that the plaintiff did not intend or expect to become a shareholder of Master Kingdom. He prayed in aid the fact that there was no documentation showing that the plaintiff had even got any share certificates of Master Kingdom. All in all, the plaintiff’s case was that its role in the investment was that of a contracting counterparty with D1 and D2. Certainly, as the pleading now stands, he is not suggesting or asserting any entitlement to become a shareholder in either Master Kingdom or the Joint Venture Company.

[13] This is one area where, on counsel’s own acknowledgment, the Amended Statement of Claim does not truly reflect the nature of the plaintiff’s case. What is pleaded as a Partnership Agreement is not really a Partnership Agreement in the legal sense of the term.

[14] Another area where the Statement of Claim is problematic is the plea of misrepresentation. Paragraph 10 of the Statement of Claim pleaded in no uncertain terms a representation made by the 2^nd defendant to the plaintiff that the Joint Venture Company had operated at a loss of a particular figure. It was even defined as "the said Representation". It gives the impression to the reader that the claim is based on the content of the representation, leading onto a plea that the representation is false. That is, indeed, the case because if one reads on in paragraph 13 of the Amended Statement of Claim, the pleader pleaded that they did discover, later, that the representation was false and untrue and then a number of particulars of falsity were pleaded.

[15] Then in paragraph 16 the pleader went further and put it beyond doubt that he is, indeed, pleading a misrepresentation, in the legal sense of the word, because it went on to actually plead that the representation was made fraudulently, either well knowing that they were false and untrue or recklessly not caring whether they were true or false, which are standard phrases utilised by pleaders to indicate that a fraudulent misrepresentation is being relied upon. Then at paragraph 21, the pleader went on to plead, "By reason of the said representation the plaintiff has suffered loss and damage," in a particular amount.

[16] Reading the plea of misrepresentation, the clear message sent by the pleader is that he is relying on the fact that a representation has been made, that it was incorrect and that loss and damage has been caused by the making of the misrepresentation. Curiously, there is no express plea that the plaintiff has done anything in reliance upon the alleged misrepresentation. The only act of reliance that was pleaded in the pleading was an act of reliance by the 2^nd defendant, which is found in paragraph 12.

[17] When one reads the particulars of loss and damage caused by the misrepresentation, one could not conceivably link those particulars to anything which could be caused by anyone acting in reliance on the representation that was pleaded in the Amended Statement of Claim. One could well understand their claim for misrepresentation if it is pleaded as the plaintiff having done something in reliance on the representation, for example, having paid money or having done something and then going on to plead that had the truth been known he would not have acted in the way he did or he would not have paid the money that he has been asked to pay and therefore he had suffered loss and damage; loss and damage being the difference between (i) the position that he was in, having acted in reliance on the representation, and (ii) the position that he would have been in had he not acted in reliance on the misrepresentation.

[18] But the Statement of Claim, as I said, reflected nothing of this sought. Therefore, on its face, there is a complete mismatch between the plea of misrepresentation and the plea of loss and damage contained in paragraph 21 and the pleading is bad insofar as it attempts to plead a claim for misrepresentation.

[19] However, before me, Mr Kenneth Chan said that the plaintiff’s real case is not misrepresentation and, again, I could disregard the "label" of misrepresentation. What the plaintiff’s real case is, according to Mr Chan, is that the plaintiff is relying on his right, in personam , against the two defendants to be distributed or paid his due share of his returns by looking at the figures and by looking at the amount of profits that had been made by the development, multiplied by the relevant percentage of his share as a "partner" in the venture. On this basis, all the averments in the Amended Statement of Claim about the conflicting contents of the reports, which initially formed a prominent part of the plea of misrepresentation, simply became matters of evidence as to how the accounts of the joint venture company might not have been entirely accurate and that the plaintiff might not have received its due share of its returns under the joint venture.

[20] In this regard, I should pause and observe there is a degree of cherry-picking, at least on the face of the pleading, by the plaintiff because the plaintiff has pleaded, among other things, two accountants’ reports. One is known as the Xing Zhong Report and the other known as the Haijia Report. Sometimes the plaintiff relied on the contents of the Xing Zhong Report in support of his case. For example, at paragraph 15(d) of the Amended Statement of Claim, the plaintiff relied on a figure of 35.26 million, which, I believe, was taken from the Xing Zhong Report as representing the total construction cost, including the land price, for the project.

[21] But on the other hand, on some other occasions, the plaintiff positively pleaded that the contents of the Xing Zhong Report were incorrect. For example, in paragraph 15(c) of the Amended Statement of Claim the plaintiff referred to the Xing Zhong Report’s content to the effect that a sum of Renminbi 22 million-odd has been lent to a company called Macho Company Limited, but then immediately in the next paragraph it pleaded that the joint venture company had in fact not lent the sum of 20-odd million Renminbi to Macho.

[22] Be that as it may, that is the nature of the plaintiff’s case as relayed to me by Mr Kenneth Chan.

[23] Also on the above basis, paragraph 19 of the Amended Statement of Claim, which claims the making of secret commission by various individuals, is no longer a self-standing claim for relief by the plaintiff, which, as the pleading now stands, is a self-standing prayer for relief, at paragraph 2 of the prayer together with paragraph 3. According to Mr Chan, he accepts that the significance of paragraph 19 is simply that certain expenditure contained in the accountants’ reports were not legitimate items of expenditure that could be properly deducted as part of the expenses of the project. In other words, paragraph 19 simply serves the purpose of negating any suggestion that a sum of 12 million-odd has to be deducted as part of the expenditure of the project. It is not a self-standing claim for account of secret profits.

[24] Mr Chan submitted to me that I should disregard the labels of misrepresentation and partnership and I should also overlook all the immaterial averments contained in the Amended Statement of Claim and that as long as there are references to some material facts in the pleading, which, if true, could sustain a legal cause of action, then I should not strike out the Amended Statement of Claim, especially given the late stage in the proceedings.

[25] I have thought long and hard about this matter. The application was no doubt taken out late but, in my judgment, although lateness of an application is always frowned upon by the court, in terms of an application to strike out I do not believe that the delay is a self-standing ground for denying a striking-out order if the grounds for strike out are otherwise established. This is because if a pleading is susceptible to be struck out, it should be struck out. The fact that the application was made late does not mean that the pleading is not defective. Certainly, it makes no sense to proceed a case to trial on the basis of a defective pleading which is known to all parties to be defective, simply on the ground that the application to strike out has not been made early enough.

[26] On the facts of this case, I had considered whether or not there remain enough references to some substratum of material facts so that one could effectively apply a blue pencil to delete or remove any offending words or phrases and retain just enough words or phrases or sentences or paragraphs to proceed to trial. I note, in this regard, that although Mr Chan has told me that there is an intention, in any event, to amend the Statement of Claim in due course, he was not able to give me any undertaking; nor was I able to order any amendment summons be taken out.

[27] At the end of the day, I do not think that the pleading can be saved by applying a blue pencil or by salvaging enough material facts from the mass of words that had been used in the pleading. As I said earlier, there is a complete mismatch between the plea of misrepresentation in the body of the Amended Statement of Claim, on the one hand, and the particulars of loss and damage alleged in paragraph 21. Those particulars proceed not on the basis of anything done or incurred by the plaintiff in reliance on the correctness of the misrepresentation. Those particulars proceeded on the assumption that profits had been distributed correctly, as per some of the terms of the Partnership Agreement, as pleaded.

[28] Mr Chan urged upon me the fact that the Partnership Agreement was pleaded, the contents were pleaded and that there was a plea that the profit and loss of the joint venture company would be shared by the plaintiff and the 1^st and 2^nd defendants in accordance with their respective share mentioned above. This, together with the contents of paragraph 21, he submitted, would be enough to sustain a plea based on a breach of an obligation under the Partnership Agreement to distribute to the plaintiff his due share of returns. I have considered this point with care and in my judgment I do not believe that one could salvage the pleading in this way.

[29] Sometimes it may be possible to salvage a pleading by applying a blue pencil, for example, by sensibly removing offensive paragraphs insofar as they could be readily isolated from permissible parts. It is all a matter of degree. But on the facts of the present case, the impermissible words and pleas are inextricably linked with matters which could conceivably be relevant and permissible in a pleading. For example, in paragraph 21, the particulars under that paragraph are plainly pleaded as matters of loss and damage caused by reason of a misrepresentation. It is not my task to insert new words for the plaintiff, the plaintiff has not proffered any new words, and I cannot see how paragraph 21 can be said to be reflective of the plaintiff’s case as Mr Chan has informed me.

[30] More importantly, the reader is supposed to disregard the label and look at what Mr Chan tells me to be the real case. As things now stand this is only a matter of counsel’s say-so in front of me. Cases are dealt with by reference to pleadings. No one knows how a case is going to develop in future. Legal representation may change. Pleadings will not change and will remain on record. The only way where a future court and the trial court is able to identify the real issues in the case is by looking at the pleadings, not by calling up the digital recording system and looking at what Mr Chan had said on 5 October to me. One wonders if the true case is not really reflected by the pleadings, why there is a reluctance to immediately seek leave to amend the pleadings to bring it in line with what the true case is.

[31] We are not concerned with a pleading by a lay person who has pleaded a mass of underlying facts, which, with some intelligence, could be picked upon to form a legible cause of action. In this case, the pleading is pleaded by legal advisers who had utilised legal terms of art carrying a particular and specific connotation in the eyes of lawyers. Read in this way, to allow a pleading containing particular legal terminologies to remain on record when the party has explicitly abandoned that particular meaning, in my judgment, simply leads to embarrassment and would delay the fair trial of the action.

[32] The question, then, is whether or not the pleading should be struck out and the action dismissed or whether or not the plaintiff should be given a chance to salvage the matter by being given a chance to file an amended pleading or to apply for leave to file an amended pleading.

[33] It is well known that from time to time the courts strike out a pleading without dismissing the action because from the mass of materials filed the court can see that although the original pleading did not perhaps disclose a reasonable cause of action, there could just be enough underlying facts disclosed in the evidence to enable a pleader to plead a proper pleading. If that is the case in our present action, then the proper course to take would be to strike out the action, not to dismiss the claim, but to give a short timeframe for the plaintiff to apply to amend the Statement of Claim again. Mr Calvin Cheuk, for the defendants, submitted that the pleading is so bad inherently that it is bound to fail, that I should not even allow the plaintiff any further chance. He submitted first that the action is covered by the rule against claiming reflective loss, as laid down by cases such as Prudential Insurance and Johnson v Gore Wood . In my judgment, because of the way Mr Chan has now reformulated his case, and because of the way in which the plaintiff actually disclaims any intention of being a shareholder and the fact that it is in fact not suing as a shareholder, I do not believe that the point about reflective loss has much force.

[34] Next, Mr Cheuk submitted that the plaintiff’s claim is incredible and is contrary to the contemporaneous documents. He referred me to a number of documents in the hearing bundle. For example, he referred me to a document which showed that the plaintiff’s plea, at paragraph 15(d) to the effect that the total construction cost, including the price to purchase the land, was 35,260,000 Renminbi as being based on a distorted reading of a document. He also referred me to a number of documents sent to or emanating from Mr Tang, of the plaintiff, with a view to showing that Mr Tang knew full well that he was participating as a shareholder in either Master Kingdom or the joint venture company. While all these matters could well be legitimate matters of comment when the matter comes to trial, I do not believe that they are so conclusive as to drive a plaintiff from the judgment seat. Thirdly, Mr Cheuk submitted that there is a lack of particulars in the pleading but, in my judgment, it is trite that lack of particulars is not a ground for applying to strike out. If need be, particulars can be sought and supplied.

[35] The Statement of Claim in its entirety is, therefore, struck out but I am not dismissing the action. I will give the plaintiff one opportunity to cure the defect in the Statement of Claim. As discussed with counsel during the course of the argument there is going to be a case management conference on 5 November this year. The Order that I propose to make on the application to strike-out is that the Amended Statement of Claim be struck out in its entirety. Then unless the plaintiff issues a summons for leave to file a fresh Statement of Claim within 14 days from the date hereof, the action shall stand dismissed with costs. The rationale of this course of action is that the matter can then be allowed to take its own course.

[36] The plaintiff would be expected to issue a summons with a draft fresh Statement of Claim attached with, hopefully, enough time for the defendants to consider the content and to consider whether or not, in the light of what I have said earlier and in the light of the redrafted pleading, whether or not the defendants wished to oppose the filing of the fresh Statement of Claim under the summons, which, for the benefit of the tribunal hearing the application, should be treated as an attempt to amend. So amendment principles would apply to whether or not leave should be granted to file the fresh Statement of Claim. If the defendants do not wish to resist the filing of that fresh Statement of Claim, then the matter can proceed swiftly with the filing of defence and reply. If the defendants wish to resist leave being granted for the filing of that pleading, then the matter can be argued out and the matter can then take its own course.

[37] Technically, there is then no need for me to deal with the security for costs summons and any new pleading filed would probably attract a fresh security for costs application, which would be dealt with as and when that arises. However, I would go on to deal with the security for costs summons for three reasons: one, obviously, is that in case I am wrong and the matter is taken further the Court of Appeal should have the benefit of my reasons on the security for costs application; secondly, there are matters of principle, such as stifling of the action, which would be of relevance in this case even in the case of a fresh security for costs application based on the fresh Statement of Claim; thirdly, some of the work done in this case could well be of use even when the Statement of Claim is being revamped and therefore any ruling on my part on the question of quantum could well be of some assistance in the event of a new application for security for costs based on the new pleading.

[38] In the present case, the application is based on section 357 of the Companies Ordinance. Impecuniosity of the plaintiff is not in issue. Several grounds are relied upon in resisting security for costs. First, it is said that an order for security would stifle the action. I do not propose to rehearse the well-known authorities in this regard, including the case of Keary and the Hong Kong Court of Appeal decision of Wing Hing v Hanjin .

[39] To cut a very long argument short, in the present case the action is obviously funded by backers behind the plaintiff. There is no evidence as to who those backers are or as to the financial resources of those backers or as to whether or not those backers are prepared to fund the provision of any security for costs to be provided for the defendants’ costs and if not, why not. Therefore, on this basis, in my judgment, I would not refuse to make an order for security for costs on the ground that to do so would stifle the plaintiff’s action.

[40] Next, it is said that the plaintiff’s impecuniosity is caused by the defendants’ conduct. In this regard, I propose to follow the Court of Appeal’s decision in Sunchase International Group (China) Ltd & Ors v Vincor Group of Companies (Investment) Limited & Ors [2004] 1 HKLRD 731 , to the effect that usually argument to this effect would be circular because it would involve a finding that the plaintiff’s impecuniosity was caused by the defendants’ conduct.

[41] The plaintiff relied on Burrell J’s judgment in the case of Tri-Tech Metals Company Limited v YKK AP Hong Kong Limited HCCT60/2004. Mr Chan submitted that in applying the concept of "Plaintiff’s impecuniosity caused by the Defendants’ conduct," one should simply apply the causal test without regard to any question of blame. However, in my judgment, the case of Tri-Tech was concerned with a rather different set of facts and one cannot extrapolate a universal rule out of that judgment. In that case, the plaintiff was a subcontractor of the defendant. The plaintiff was not paid. As Burrell J found in that case, in paragraph 15 of the judgment, all the plaintiff’s eggs were in one basket, so one has the stark fact that the plaintiff relied upon the defendants’ payment as its life blood. One is confronted with the stark fact that the plaintiff has, in fact, not been paid and therefore one could see that, in fact, the plaintiff’s impecuniosity was caused by the fact of the defendants’ non-payment without having to go down the route of assessing who was in the right and who was in the wrong.

[42] However, on the facts of our case, one cannot readily apply this causal test because if one were to find that the plaintiff’s impecuniosity was caused by the defendants’ conduct, one would necessarily have to find what conduct and one would necessarily have to go on to make findings that the defendant has been guilty of the alleged misconduct complained of by the plaintiff. Therefore, the present case is more in the Sunchase territory than in the Tri-Tech territory.

[43] In any event, even if there could be said to be two parallel rules about refusing security for costs in operation; one about preventing the stifling of the plaintiff’s claim and the other one concerning with whether or not the plaintiff’s impecuniosity is caused by the defendants’ conduct, I do not regard these as mechanical rules which one should apply so that if one factor is found to exist, it should invariably lead to a refusal of security. Therefore, even if I am wrong in my analysis of the Tri-Tech case and even if one could say that on the facts of this case the plaintiff’s impecuniosity was factually caused by the defendants’ conduct, I do not regard that as pointing invariably to a dismissal of the security for costs application. The fact remains that there are backers behind the plaintiff. Those backers would be able to take the benefit of a successful action and they should not be able to take the benefit of a successful action without at the same time "putting their money where their mouth is" by putting up security. Therefore, even if the plaintiff’s impecuniosity is caused by the defendants’ conduct, in the exercise of my discretion I do not regard that as sufficiently weighty, on the facts of the present case, to persuade me to decline an order for security.

[44] Lastly, there is an argument that the application was made late. I can deal with it very briefly. It was not made most promptly immediately after the filing of defence or immediately upon close of discovery. On the other hand, there is evidence that the defendants’ legal advisers have been writing to the plaintiff to ask for security for costs on 14 December 2007. That was after the close of the original pleadings and after discovery but before witness statements were exchanged and before the Statement of Claim has been amended. Therefore, although it was not made at the earliest possible opportunity, such as after close of pleadings, any lapse of time was not too great. The plaintiff was certainly put on notice that the defendant intends to raise an issue of security for costs in December 2007. In any event, Mr Chan does not press the point that lateness amounts to a reason for refusing completely to order security. He only said that it is a factor to be taken into account in deciding upon quantum and the period to be covered by any order for security for costs. I have taken that into account in the exercise of my discretion.

[45] As usual, in terms of quantum, figures are put forward by way of skeleton bill of costs, arguments are raised as to the excessive nature, or otherwise, of various items and one just has a particularly broad-brush view of the quantum. The defendant asked for $1.624 million as security for costs from commencement of action up to judgment. Having considered the bill of costs and the plaintiff’s objection and in the exercise of my discretion, having taken into account the timing of the application, I would have ordered security in the amount of HK$1.1 million had I not decided to strike out the Amended Statement of Claim.

[Submissions re costs ]

[46] Having considered the arguments of counsel on costs, in the exercise of my discretion in costs I make the following cost orders: First, the cost of and occasioned by the application to strike out be to the defendants, to be taxed if not agreed. In relation to the security for costs summons, in the exercise of my discretion I order that to be the defendants’ costs in the cause. All other costs of and occasioned by the Statement of Claim and the Amended Statement of Claim be reserved to the trial judge if the action is not otherwise dismissed pursuant to my earlier order.

Annexure

AMENDED STATEMENT OF CLAIM

1. The Plaintiff is and was at all material times a company incorporated with limited liability under the laws of Hong Kong.

2. At all material times, the 1^st and 2^nd Defendants were the property developers in Mainland China.

3. In the month of November 1992, the 1^st and 2^nd Defendant requested Mr. Tang Ngai Piu to join their partnership business in Shanghai, China. On the 24^th of November 1992, the 2^nd Defendant sent a draft Joint venture agreement made between Shanghai Kong Tung Cheong Company ( 上海港東昌裝卸公司) ("Kong Tung Cheong Company") and Master Kingdom Company Limited ("Master") together with Master’s bank account number to Mr. Tang Ngai Piu. The 2^nd Defendant asked Mr. Tang to pay HK$1,500,000 being partial contribution of Mr. Tang Ngai Piu’s share. Mr. Tang Ngai Piu had no interest to admit as a shareholder of Master. Until In or about June 1993, the 1^st and 2^nd Defendants entered into a partnership agreement with Mr. Tang Ngai Piu on behalf of the Plaintiff on the following terms ("the Partnership Agreement"). The Plaintiff, the 1^st and 2^nd Defendants agreed that :-

(a) The purpose of the partnership was for purchasing a piece of land situate at No. 5 Yeung Ka To Road, Po Tung New District Shanghai, China (中國浦東新區楊家渡路5 號) ("the land") ("the Shanghai Project" ) and erecting a building thereon known as Donggao Building (東高大廈) ("the Property").

(b) After completion of the "Building", the 1^st and 2^nd Defendants would sell the Property in China.

(c) The Plaintiff, the 1^st and 2^nd Defendants would enter into a joint venture agreement with one Shanghai Kong Tung Cheong Company (上海港東昌裝卸公司)("Kong Tung Cheong Company") by forming a company in China known as Shanghai Donggao Real Estate Development Company Limited (上海東高房地產發展有限公司)("the Joint Venture Company").

(d) The paid up capital of the Joint Venture Company was US$5,200,000. Tung Cheong Company would contribute the sum of US$2,080,000 to the Joint Venture Company and the Plaintiff, 1^st and 2^nd Defendant would contribute US$3,120,000 to the Joint Venture Company.

(e) Of the US$3,120,000, the 1^st Defendant would contribute a sum of US$1,560,000 amounting to 50% share in the partnership business and the 2^nd Defendant together with other investors would contribute a sum of US$1,248,000 representing 40% share in the partnership business.

(f) The Plaintiff would made a contribution in the sum of US$312,000 representing 10% share in the partnership business.

(g) The profit and loss of the Joint Venture Company would be shared by the Plaintiff, the 1^st and 2^nd Defendants in accordance with their respective share mentioned above.

(h) The 1^st and 2^nd Defendant would appoint their Company known as Master Kingdom Company Limited as Project Manager of the "Shanghai Project".

4. Pursuant to the Partnership Agreement and in or about July 1993, the 1^st Defendant requested the Plaintiff to pay a sum of HK$1,500,000 being partial contribution of the Plaintiff’s share in the partnership business into a bank account designated by the 1^st Defendant.

5. Thereafter, the Plaintiff paid a total sum of HK$3,633,600 into various bank accounts given by the 1^st Defendant as particularized hereunder. The Plaintiff’s share in the partnership business was increased to 15%.

PARTICULARS

Date Amount (HK$)

1. 12-7-1993 $1,500,000

2. 18-8-1993 500,000

3. 30-5-1994 216,800

4. 16-6-1994 150,000

5. 26-11-1994 216,800

6. 28-11-1994 150,000

7. 1-5-1995 450,000

8. 12-9-1995 25-5-95 450,000

____________

Total: $3,633,600

6. Sometimes in or about January, 2000, the 1^st and 2^nd Defendants informed Mr. Tang Ngai Piu of the Plaintiff that :-

(a) The Joint Venture Company had used Property as security to obtain several loans from several banks in Shanghai ("the Loan"), and

(b) Due to the failure of the Joint Venture Company to repay the Loan, the Lender of the Joint Venture Company had applied to the court in Shanghai for the sale of the Property.

7. On 1^st March, 2000, the 1^st and 2^nd Defendant together with another director, Mr. Kwong Piu Pui (鄺沛) authorized Mr. Tang Ngai Piu of the Plaintiff to sell the Property.

8. The intended sale of the Property was unsuccessful.

9. In or about December, 2002, the 1^st Defendant informed the Plaintiff that the Property was sold at the price of RMB115,000,000.

10. In or about February, 2003, the 2^nd Defendant represented to the Plaintiff that the Joint Venture Company was operated at a loss of HK$20,220,907 ("the said Representation").

11. The said Representation was to be inferred from a profit and loss account of the Joint Venture Company prepared by the 2^nd Defendant ("the 2^nd Defendant’s Account"). In addition the 2^nd Defendant Account, the 2^nd Defendant delivered an accountant’s report prepared by Shanghai Haijia Certified Public Accountants Co., Ltd. to the Plaintiff ("The Haijia’s Report"). The Haijia’s Report revealed that the Joint Venture Company was also operated at a loss.

12. In reliance upon the Representation, the 2^nd Defendant on 17^th March, 2003 drew two cheques in favour of Shih Jar Lung, Cheung Siu Sum and Yau Kwong Chun for the total sum of HK$1,596,670 for part payment of the distribution of the partnership business investment.

13. In or about 2003, the Plaintiff discovered that the said Representation were false and untrue in that :-

(a) The Joint Venture Company was not operated at a loss of HK$20,220,907.

(b) In an accountant’s report prepared by Shanghai Xing Zhong Certified Public Accountants Co., Ltd ("Xing Zhong’s Report"), it revealed that the expenses of the Joint Venture Company were entirely different from the 2^nd Defendant’s Report and the Haijia’s Report.

(c) At the request of the plaintiff and with the consent of the 1^st and 2^nd Defendant, Tang Ngai Piu on behalf of the Plaintiff attended the office of the Joint Venture Company in Shanghai, China to inspect the account books of the Joint Venture Company on two occasions. On the first occasion in the middle of May 2003, Mr. Tang was not allowed to inspect the account books by the persons in the office of the Joint Venture Company; namely ; Liu Leung ( 廖亮 ) who is the nephew of the 2^nd Defendant, Tsui Wing Ching ( 徐永青 ) and Ng Sun Po ( 吳申寶 ) . On the second occasion, Mr. Tang managed to inspect 3 boxes of the account books out of 24 boxes on the 8^th of August 2003.

(d) On 8^th August 2003, Mr. Liu Leung ( 廖亮 ) and Ng Sun Po ( 吳申寶 ) informed Mr. Tang that the content of one set of the account books was false and inaccurate but the other set of the account book was genuine and correct. The genuine set was used by the Joint Venture Company and the false set was used submitted to the Shanghai City Government. The three boxes of account books inspected by Mr. Tang were true.

(e) In the course of inspection of the 3 boxes of account books referred to above, Mr. Tang discovered that the 1^st and 2^nd Defendant used the money of the Joint Venture Company for their own use. Mr. Tang did make an enquiry on this matter.

(f) As instructed by the 1^st and 2^nd Defendant, Mr. Liu Leung subsequently did not allow Mr. Tang to inspect the account books of the Joint Venture Company.

14. By reason of the aforesaid, the Plaintiff in or about April, 2004 instructed Messrs Jiang Shan Hong Law Office (江山宏律師事務所)("Jiang Shan Hong"), a Chinese law firm in Shanghai to investigate the this matter as pleaded in paragraph 10 to 13 above.

15. Jiang Shan Hong caused a search to be conducted at the Shanghai City Industrial and Commercial Administration Management Development (上海巿工商行政管理局浦東新區分局)("the I & C Department") in relation to the Joint Venture Company and obtained a bundle of documents . The search result revealed that :-

(a) On 18^th June, 2003, the 1^st and 2^nd Defendants applied to the I & C Department for dissolution of the Joint Venture Company.

(b) The application was approved by the I & C Department on 18^th March, 2004.

(c) According to the Xing Zhong’s Report submitted to the I & C Department, a sum of RMB22,410,842.75 was lent to W M acho Company Limited.

(d) The total construction costs including the price to purchase the land was amounting to RMB35,260,000.

16. The 1^st and 2^nd Defendants made the said Representation fraudulently and either well knowing that they were false and untrue or recklessly not caring whether they were true or false.

Particulars

(a) The Plaintiff repeats paragraphs 10 to 14 hereof.

(b) The content of the Xing Zhong Report submitted by the 1^st and 2^nd Defendants to the I & C Department for dissolution of the Joint Venture Company was different from the 2^nd Defendant’s Report and the Haijia’s Report.

(c) The Joint Venture Company had not lent the sum of RMB22,110,842.75 to W M acho Company Limited.

17. The 1^st and 2^nd Defendants are and were at all material times directors and shareholders of the Joint Venture Company and accordingly must have known or ought to have known of the 2^nd Defendant’s Report and the Haijia’s Report were false and untrue.

18. In or about 2003, Fuk Hei Investment Holding Co., Ltd. (福禧投資控股有限公司)("Fuk Hei") purchased the Property by embezzlement of public funds.

19. The Plaintiff found that without the knowledge of the Plaintiff, a sum of RMB12,375,863 contained in the 2^nd Defendant’s Report and the Haijia’s Report were secret commissions paid by the 2^nd Defendant to the following parties as secret commissions in the selling sale of the Property :-

(a) Fuk Hei;

(b) Head of the Strategic Planning Po Tung Shanghai (上海浦東統戰部);

(c) Mr. Kwong Pui (鄺沛)member of the Policy Consultation Committee of Po Tung New District Shanghai (上海浦東新區政協) and

(d) the 1^st and 2^nd Defendants.

20. By reason of the matters pleaded in paragraph 18 19 hereof, the 1^st and 2^nd Defendants has made secret profits therefrom . in the said sum of RMB12,375,863.

21. By reason of the said Representation, the Plaintiff has suffered loss and damage in the sum of HK$15,684,330 . RMB16,790,998.30

Particulars

Selling price of the Property : RMB115 ,000,000

The Plaintiff’s 15% share in the selling price HK$17,250,000

Less : part payment as mentioned in paragraph 12 above 1,565,670

Balance due to the Plaintiff :- HK$15,684,330

Paid up capital as stated in the dissolution report RMB33,330,675.58

Add selling price RMB115,000,000.00

Total RMB148,330,675,58

Less total expenses as stated in the dissolution report RMB35,260,000.00

Net profit RMB113,070,675.58

The Plaintiff is entitled to have 15% RMB16,960,601.30

Less payment HK$1,596,670.00 equivalent to RMB1,698,603.00

(at the rate of 100:102)

Balance due to the Plaintiff RMB16,790,998.30

22. Despite repeated requests and demands from the Plaintiff, the 1^st and 2^nd Defendants has failed and refused to pay the said sum of HK$15,684.330 RMB16,790,998.30 or any part thereof to the Plaintiff.

23. In the month of September 2007, the Defendants solicitors provided the Plaintiff’s solicitors with a bundle of documents referred to the 1^st and 2^nd Defendant List of documents of the 1^st and 2^nd Defendant filed herein on the 15^th day of August 2007.

24. The Plaintiff delivered the aforesaid documents together with the documents obtained from the I & C Department by "Jiang Shan Hong" to its Chinese lawyer Mr. Lee Wai Sun (李衛新) of (廣東金陽律師事務所 ) for his legal advice.

25. From the aforesaid documents provided, the Chinese lawyer of the Plaintiff advised the Plaintiff that the 1^st Defendant’s act amounted to a deceptive to the Plaintiff and the Shanghai city Government as follow :-

(a) The total floor area of the Property was increased from 12,200 sq. m. to 13,720.33 sq. m. contained in the supplemental agreement dated the 19^th August 2002 made between Joint Venture Company and Fuk Hei was not true.

(b) The sale and purchase of the Property was completed on the 13^th day of January 2003. Fuk Hei used the Property to apply for a loan of RMB1,700,000,000 from the bank. The said loan was approved on the 15^th day of January 2003.

(c) By reason of the aforesaid, the value of the Property was over RMB1,700,000,000.00 the 1^st Defendant sold the Property to Fuk Hei at the price of RMB115,000,000.00.

(d) The 1^st Defendant and Kwong Pui ( 鄺沛 ) further alleged that the sum of RMB22,410,842.75 was lent to Macho Company Limited.

(e) It was resolved in a directors’ meeting of the Master dated the 20^th February 2004, that the 1^st and 2^nd Defendant and Kwong Pui ( 鄺沛 ) were authorized to received the said loans.

(f) The aforesaid arrangement was made for the purpose of evading the tax liability of the Joint Venture Company to the Government of Shanghai City.

(g) It was falsely alleged that a sum of RMB11,417,018.40 was paid to Master Kingdom Company Limited being management fee

26. The Chinese lawyers further advised the Plaintiff that it was the Plaintiff’s duty to report the said deception to the following departments;

(a) CPC (Central Committee of the Communist Party of China) Central Commission for Discipline Inspection. (中央紀律檢查委員會)

(b) Shanghai Commission for Discipline Inspection (上海紀律檢查委員會);

(c) Shanghai Municipal People’s Prosecution Service ( 上海巿人民檢查院).

27. On the 22^nd day of September 2007, the Plaintiff reported the said deception to the above departments.

28. Further, the Plaintiff claims interest pursuant to Section 48 and 49 of the High Court Ordinance, Cap.4 on the sums respectively found due to them at such rate and for such period as the Court think fit.

And the Plaintiff claims :-

(1) The said sum of HK$15,684,330.00 RMB16,790,998.30 under paragraph 21 herein;

(2) An account of all profits or benefits which have been derived by the 1^st and 2^nd Defendants;

(3) Payment to the Plaintiff of what is found due upon taking of such account;

(4) Interest;

(5) Further or other relief; and

(6) Costs.

Dated the 16^th day of March, 2007.

Dated the 18^th day of January 2008.

Tam, Pun & Yipp.

Solicitors for the Plaintiff.

Tam Pun & Yipp

Solicitors for the Plaintiff

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