Sap Products Ltd v Xena Security Ltd And Another

DCCJ 2014/2015

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2014 OF 2015

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DECISION

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INTRODUCTION

1. This is the 2^nd defendant’s (“D2”) application by way of summons dated 11 April 2016 (“the Summons”) to strike out the plaintiff’s (“P”) claim against D2, contained in §§11-14 of P’s statement of claim (“SoC”).

2. P commenced this action to recover a sum of US$36,575.80 (“the Sum”), which P alleges to be the outstanding balance for goods sold and/or delivered to the 1^st defendant (“D1”).

3. D1 is a limited company incorporated in Hong Kong. D2 is a shareholder and director of D1.

4. In around October to November 2013, D1 through D2 negotiated with P for the sale and purchase of a product known as “Hotcoils”. The history of the transaction is immaterial for the present purpose except it is common ground that D1 paid the sum of US$13,885.85 as deposit for the Hotcoils to P on 19 November 2013 (“the Deposit”).

5. P’s claim against D2 is on the basis that the corporate veil between D1 and D2 should be pierced.

6. D2 says that the claim is plainly and obviously bad and should be struck out for the following reasons:-

(1) they disclose no reasonable cause of action against D2;

(2) they are frivolous or vexatious; and/or

(3) they are an abuse of process of the court.

DISCUSSION

A1. Applicable legal principles

7. The applicable principles are trite. The applicant bears the burden to show it is plain and obvious that the court should strike out a pleading. The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible for the claim to succeed. Disputed facts are to be taken in favour of the party sought to be struck out: Hong Kong Civil Procedure 2017(“HKCP”) §18/19/4.

8. Questions of law can be determined in strike out applications provided that they are crucial and the court has all the relevant facts before it and these facts are certain: HKCP §18/19/4.

A2. Piercing of corporate veil

9. I agree with the following summary of the law in relation to piercing of corporate veil submitted by Mr Peter Chiu, counsel for P and Ms Cherry Xu, counsel for D2.

10. It is trite that a company is a legal entity distinct from its shareholders to enable it to carry on commercial activities as an individual distinct from legal liability arising out of those activities: see Winland Enterprises Group Inc v Wex Pharmaceuticals Inc [2012] 2 HKLRD 757, at §50.

11. Hence, the corporate veil of a company will only be pierced in a limited number of situations.

12. In Prest v Petrodel Resources Ltd & Others [2013] 2 AC 415, the UK Supreme Court reformulated the test for piercing the corporate veil as follows at p487 §§34-35, per Lord Sumption JSC:-

“These considerations reflect the broader principle that the corporate veil may be pierced only to prevent the abuse of corporate legal personality. It may be an abuse of the separate legal personality of a company to use it to evade the law or to frustrate its enforcement. It is not an abuse to cause a legal liability to be incurred by the company in the first place, or to rely on the fact that a liability is not the controller’s because it is the company’s. On the contrary, that is what incorporation is all about ...”

“I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality...” (emphasis added)

13. Hence, the court will only pierce the corporate veil when there is some relevant impropriety or wrongdoing. The mere fact that a company is a façade or puppet of its shareholders is neither here nor there. The corporate veil will only be pierced where it is used for some illegitimate purpose, such as devices to perpetrate frauds or to evade legal obligations: see Winland, supra at §§50-54.

14. The deliberate blurring of distinct legal personalities is one of the instances when the court is ready to pierce the corporate veil. In Yue Tai Plywood & Timber Co Ltd v Far East Wagner Construction Ltd [2001] 2 HKLRD 446, P entered into an agreement with D1, an associated company of D2. The payment was made by cheque drawn by D2, which was dishonoured. P sought summary judgment against D2 for the dishonoured cheques. The court rejected D2’s argument that there was no consideration for the cheques because there was no privity of contract between P and D2. D2 was found liable. The corporate veil of the associated company was pierced on the grounds that there had been “a deliberate and obvious blurring of the edges in the operation” of the transactions therein (at 450E).

A3. Personal liability of parties in control of corporate vehicle

15. Besides the doctrine of piercing of the corporate veil, liabilities may be attached to parties behind the corporate veil where the company is used as a mere agent or nominee. In Smith Stone & Knight Ltd v Lord Mayor [1939] 4 All ER 116, it was held at 120 that:-

“It is well settled that the mere fact that a man holds all the shares in a company does not make the business carried on by that company his business... It is also well settled that there may be such an arrangement between the shareholders and a company as will constitute the company the shareholders’ agent for the purpose of carrying on the business and make the business the business of the shareholders.” (emphasis added)

16. Whether such arrangement does exist is a question of mixed law and facts (see Siu Tung Choi v Foo Lum Holdings Ltd [2016] 1 HKLRD 1411 at 1431).

17. Alternatively, even when the individual was in fact the agent for the corporate vehicle, the mere...