Binchuang Resources Co., Ltd v. Lockwood Group Ltd and Another

HCA 2167/2019

[2020] HKCFI 2941

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2167 OF 2019

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Before: Hon Anthony Chan J in Chambers

Date of Hearing: 5 November 2020

Date of Decision: 27 November 2020

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D E C I S I O N

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1.This is the 2^nd Defendant’s (“Axis”) application by Summons filed on 5 June 2020 for an Order that :

(1)  All claims against Axis as set out in the Amended Indorsement of Claim in the Amended Writ of Summons dated 24 December 2019 and in the Statement of Claim (“SOC”) dated 28 April 2020 be struck out pursuant to O 18, r 19[1] and/or the inherent jurisdiction of the Court;

(2)  Additionally and/or alternatively, judgment be entered for Axis in respect of all claims against it set out in paras 19 and 41-46 of the SOC upon determination of two questions under O 14A, r 1, namely, whether as a matter of law and construction:

(a)  there is an implied “Termination Term” in the Collateral Agency Agreement (“CAA”) between the Plaintiff (“Binchuang”), 1^st Defendant (“Lockwood”) and Axis, as Binchuang alleges; and/or

(b)  the CAA continues in full force and effect unless and until the same is terminated pursuant to its express terms, as Axis submits.

(3)  The injunction against Axis granted by Mr Justice Coleman on 23 December 2019 and continued by Madam Justice Mimmie Chan on 3 January 2020 (“Injunction”) be discharged.

Background

2.These matters arose from a loan transaction.  In about July 2019, Binchuang and Lockwood entered into such a transaction through an intermediary known as Dimension Capital Group (“DCG”).

3.The following agreements were entered into between the parties (collectively, the “Agreements”) :

(1)  A Loan Agreement dated 17 July 2019 between Binchuang and Lockwood (“LA”);

(2)  An Amendment Agreement dated 21 August 2019 between Binchuang and Lockwood; and

(3)  The CAA dated 17 July 2019 but signed in August 2019 between Binchuang, Lockwood and Axis.

4.Under the Agreements, Lockwood agreed to make available to Binchuang a loan in the principal amount of up to RMB40,000,000 (“Facility”), which would be secured by a pledge of 30 million shares in a bank listed on the HKSE (“Shares”) by Binchuang in favour of Lockwood and deposited with Axis.

5.Clause 2(a) of the LA contemplated that the Facility would be funded in 2 tranches to be advanced in 20 trading days after the date of pledge of the Shares.

6.There were contractual terms in the LA to restrict Lockwood from dealing with the Shares as follows :

(1)  Clause 3(a) stated that Binchuang pledged and granted a charge on the Shares, and that Lockwood should have a continuing security interest in the Shares;

(2)  The warranties given by Binchuang in Clause 4(a)(8) stated that the LA “creates in favor of [Lockwood] a valid first priority security interest in the Shares included within the Collateral … in accordance with the terms of the Loan Documents, securing the payment and performance of the Obligations”;

(3)  Clause 3(b) provided that Binchuang should remain the beneficial owner of the securities account (maintained with Axis where the Shares were deposited), except where an event of default (“EOD”) took place;

(4)  Clause 3(d) provided that Lockwood should not transfer the Shares prior to an EOD, after which time Lockwood might transfer the Shares.  “Transfer” was defined at Clause 1(ff) as “sell, trade, transfer, assign, convey or otherwise dispose of title to securities (for clarification, Transfer does not include Portfolio Protection Arrangements which may be effected)”;

(5)  Clause 3(g) provided for a specific obligation on Lockwood’s part to return the Shares upon full repayment of the Facility:

“At such time as all of [Binchuang’s] Obligations have been paid in full, the [Shares] shall be returned to [Binchuang] to the extent and in the manner set forth herein. [Lockwood] acknowledges and agrees that all shares of Common Stock, including the [Shares], are fungible, such that [Lockwood’s] obligation to return the [Shares] is understood to mean the delivery to [Binchuang] of such number of shares of Common Stock as is equal to the total number of [Shares] required to be delivered to [Lockwood] hereunder.”

(6)  Clause 6(b) provided for Lockwood’s remedies which arose only after the occurrence of an EOD.  These remedies included power of sale and transfer of the Shares.

7.Following the execution of the LA, Binchuang executed the CAA with Axis on 8 August 2019.

8.Thereafter, Axis continued to correspond with Binchuang to facilitate the transfer of the Shares into a custodian account until 6 September 2019.  It is Binchuang’s evidence that :

(1)  On 21 August 2019, Binchuang’s representatives attended a WeChat call with Mr Hutchinson (acting on behalf of Axis), wherein Hutchinson represented that the Shares would not be disposed of in the absence of an EOD;

(2)  On 29 August 2019, Binchuang’s representatives again attended a WeChat call with Hutchinson when the latter explained that Binchuang would remain the beneficial owner of the Shares, even after the transfer of the Shares into the account at Axis.

9.On 6 September 2019, Binchuang deposited the Shares into a securities account (no 300026) (“Custodian Account”) at Axis in accordance with the LA.  It was understood that Axis would in turn use Citibank N.A. to hold the Shares.

10.On 12 September 2019, Lockwood advanced RMB 690,900 as a “test tranche” (“Test Tranche”) to “make sure the disbursement process works”.  It was, according to Binchuang, the only sum it ever received from Lockwood.  

11.Since mid-September 2019, Lockwood repeatedly represented that the loan would be advanced to Binchuang by a certain date, and when that date approached, sought further time extension for the advancing of the loan.  

12.As a very substantial part of the loan was not advanced, Binchuang became concerned with the whereabouts of the Shares.  It therefore requested Axis to send to it account statements of the Custodian Account.  In response, Axis sent to Binchuang :

(1)  A statement of the Custodian Account showing, Binchuang says, that the Shares remained in it as at 14 October 2019; and

(2)  A statement of the Custodian Account showing, Binchuang says, the same status as at 25 October 2019

13.At the risk of diversion, there is controversy between the parties as to the proper interpretation of the said statements.  Axis says that they merely showed that the Shares had been hypothecated to Lockwood.  For the purpose of strike out, I certainly accept that Binchuang’s reading of those statements is a reasonable one.

Lockwood’s failure to advance the loan

14.On 23 October 2019, by an email, Binchuang informed Lockwood that unless the loan was received by 1 November 2019, it would terminate the LA.

15.On 1 November 2019, Binchuang did not receive any further amount from Lockwood.  By way of an email dated 3 November 2019, Binchuang informed Lockwood that in light of the failure to provide the loan, it would terminate the LA.

16.On 6 November 2019, Lockwood stated by an email that the first tranche of the loan had been advanced to DCG which was holding the funds on behalf of Binchuang.  It was also suggested that DCG received the first tranche of the loan soon after 12 September 2019.  This, says Binchuang, was a blatant lie because :

(1)  DCG confirmed by email on 9 November 2019 that it had never received any loan from Lockwood;  

(2)  Lockwood was unable to produce any document evidencing the alleged transfer of the loan to DCG upon Binchuang’s request;  

(3)  Lockwood had no commercial reason to advance the loan to DCG.  DCG was never authorised by Binchuang to receive the loan. Under the LA, Binchuang only authorised one Beijing Jin Yu Rui Lian Investment Management Co to receive the loan;

(4)  The advancement of the loan soon after 12 September 2019 was also inconsistent with Lockwood’s repeated request in September and October 2019 for more time to fund the first tranche of the loan.

Disposal of the Shares

17.After receiving the 6 November 2019 email, Binchuang conducted investigations as to the whereabouts of the Shares.  By reviewing the CCASS records, Binchuang discovered that Lockwood had sold or disposed of the Shares contrary to the terms of the LA.

18.On 7 November 2019, Binchuang requested by an email to Axis for it to confirm whether the Shares were still held in the Custodian Account, having pointed out that the checking of CCASS records showed that Citi N.A. was not holding sufficient number of shares in the listed Bank in question.  Against the background of Binchuang’s concern :

(1)  Axis confirmed (on 8 November 2019) that the Shares were “still pledged” by Binchuang with Lockwood;

(2)  Axis confirmed that “nothing has happened to our sub-accounts held with [Citi N.A.]”.

(3)  Axis also sent Binchuang a statement of the Custodian Account showing, Binchuang says, that it contained the Shares as at 6 November 2019.

19.On 8 and 11 November 2019, Binchuang twice requested Axis to provide the details of the CCASS sub-accounts in which the Shares were held.  These requests were ignored by Axis.

20.Binchuang thereafter took out ex parte applications for relief against Lockwood and Axis.  The Injunction against Axis was for (a) delivery up of the Shares or their substitutes into the custody of the court and (b) disclosure of the whereabouts of the Shares and their traceable proceeds and the details of the sale of or dealings with the Shares.  It was made and granted on the limited ground that :

(1)  Upon the setting aside of the LA for Lockwood’s fraud, Axis came under an implied duty to return the Shares to Binchuang; 

(2)  For the safe custody of the Shares pending the resolution of the dispute between Binchuang and Lockwood, the Shares ought to be delivered into court.  No allegation of fraud was made against Axis at that time.

21.Having reviewed the documents disclosed by Axis pursuant to the Injunction in relation to the disposal of the Shares, it emerged that :

(1)  The Shares was transferred away from the Custodian Account in early September 2019;

(2)  They were all sold with the knowledge and assistance of Axis by 23 October 2019; and

(3)  According to Binchuang, Axis had concealed and misled it into believing that the Shares remained in the Custodian Account.

22.A good deal of these background facts are evidenced by the documents.  Binchuang says that it had lost the Shares due to the fraud of both Lockwood and Axis.

Axis’ case

23.Originally, another company called Sino Rich was going to act as the collateral agent for the Shares.  A Collateral Agency Agreement was signed on the same date as the LA (17 July 2019) naming Sino Rich as the agent.  Subsequently, due to Sino Rich’s inability to provide the custodian service, Lockwood proposed two alternative agents to Binchuang as replacement.  Axis was chosen by Binchuang out of the two.  Hence the Amendment Agreement referred to in para 3(2) above. 

24.Axis’ evidence is that it first learned of the loan transaction on 7 August 2019 when it was asked by Lockwood whether it would be interested in acting as collateral agent for the Shares.

25.After the Shares were transferred to the Custodian Account on 6 September 2019, they were (according to Axix) “hypothecated” from the Custodian Account to Lockwood’s account with Axis on the same day.  According to a Debit Note (“Debit Note”) purportedly addressed to Binchuang (see further below), the Shares were “debited” from the Custodian Account and “credited” to Lockwood’s account on 6 September 2019.

26.There were further “hypothecations”.  Also on 6 September 2019, Lockwood entered into a Hypothecation Agreement with Union Capital Investment Ltd.  On 9 September 2019, the Shares were hypothecated from Lockwood’s account to Union Capital’s account held with Axis.  On the same day, Union Capital entered into a Hypothecation Agreement with Adam International Investments Ltd and the Shares were hypothecated (on 9 September 2019) from Union Capital’s account to Adam International’s account with Axis. 

27.All the Shares were sold by Adam International in 8 transactions from 17 September to 23 October 2019.  The proceeds of sale, after deduction of Axis’ commissions, were withdrawn by Adam International. 

28.Axis says that it was merely the collateral agent in the transaction.  It had nothing to do with the loan transaction, and as collateral agent it had acted in accordance with the instructions of Lockwood and in compliance with the terms of the CAA.

29.Pursuant to the terms of the CAA :

(1)  So long as the Loan was outstanding, Axis was obliged to comply with all instructions it received from Lockwood with respect to the Custodian Account and the Shares without the prior written consent of Binchuang.  In order to secure its obligations to Lockwood, Binchuang granted to Lockwood and Axis exclusive control over the Custodian Account: Clause 3;

(2)  The CAA would terminate, according to Clause 7, as follows:

(i)  on notice from Lockwood or on 30 days’ notice from Axis;

(ii)  immediately upon Lockwood notifying Axis in writing that it no longer held a security interest in the Custodian Account; and

(iii)  immediately upon Lockwood notifying Binchuang and Axis in writing that an EOD had occurred under the Loan.

Applicable principles on strike out

30.The applicable principles are trite.  As stated in HKCP 2021, vol 1, [18/19/4] :

(1)  It is only in plain and obvious cases that the court should exercise its summary power to strike out the indorsement on any writ or any pleading under this rule;

(2)  There should be no trial upon affidavit. Disputed facts are to be taken in favour of the party sought to be struck out. Nor should the court decide difficult points of law in striking out proceedings;

(3)  The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out;

(4)  Where a pleading is defective only in not containing particulars to which the other side is entitled, application should be made for particulars under O 18, r 12, and not for an order to strike out the pleading under O 18, r 19.  Even a serious want of particularity in a pleading may not justify striking-out if (a) the defect can be remedied, and (2) the defect is not the result of a blatant disregard of court order.

31.Clear requirements had been developed under the law as to how fraud may be pleaded :

(1)  Fraud may only be pleaded when there is sufficient evidence: HKCP,[18/8/15];

(2)  A party should not be permitted to plead a vague and unparticularised case of fraud in the hope of making it good after discovery: HKCP,[18/8/15];

(3)  “Fraud must be distinctly alleged and as distinctly proved”: Armitage v Nurse [1998] Ch 241, 256G;

(4)  Fraud or dishonesty should not be inferred from pleaded facts that are consistent with honesty.  It was held in Three Rivers District Council v Governor and Company of the Bank of England (No 3) [2003] 2 AC 1, §§183-187, per Lord Millet:

“Having read and re-read the pleadings, I remain of opinion that they are demurrable and could be struck out on this ground. The rules which govern both pleading and proving a case of fraud are very strict. In Jonesco v Beard [1930] AC 298 Lord Buckmaster, with whom the other members of the House concurred, said, at p 300:

‘It has long been the settled practice of the court that the proper method of impeaching a completed judgment on the ground of fraud is by action in which, as in any other action based on fraud, the particulars of the fraud must be exactly given and the allegation established by the strict proof such a charge requires’ …

It is well established that fraud or dishonesty … must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence ... This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest …

… an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient ... It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.

In Davy v Garrett 7 Ch D 473, 489 Thesiger LJ in a well-known and frequently cited passage stated: ‘In the present case facts are alleged from which fraud might be inferred, but they are consistent with innocence. They were innocent acts in themselves, and it is not to be presumed that they were done with a fraudulent intent.’  This is a clear statement of the second of the two principles to which I have referred.”

32.In Choy Bing Wing v Chief Executive of HKSAR & Ors [2006] 1 HKLRD 666 Lam J (as he then was) held at §9 that it is well established that the court will not allow very serious allegations[2] to be made without proper evidence and if they were made irresponsibly, the court will exercise its inherent jurisdiction to strike out the same.

33.In Chan Shu Chun v Dr Kung Yan Sum, unrep, HCA 832/2014, 18 May 2017, §107 per DHCJ Marlene Ng J (as she then was), citing Yong Weng Chye :

“… one must also consider the practical reality of modern commercial life. … fraud and/or conspiracy by their very nature are clandestine and difficult to uncover, so quite often proof is not readily obtained. Hence, the averments of fraud and/or conspiracy cannot be too precise. In an application to strike out a fraud and/or conspiracy claim, the court will look upon such application with care to the above considerations, but at the same time will bear in mind that loose allegations that are not properly particularised will be oppressive as regards the defendants when the action goes to trial”

34.A pleader is only required to plead facts that are capable of supporting an inference of serious impropriety.  Unless the court concludes that there is no realistic prospect of findings being made that could support the necessary inference the action should be left to trial: Convoy Global Holdings Ltd v Cho Kwai Chee Roy, unrep, HCA 2922/2017, 19 September 2018, §§9, 10 and 12 per Harris J.

Causes of action against Axis

35.There are 4 causes of action pleaded against Axis :

(1)  Fraudulent misrepresentations: SOC, section D1;

(2)  Dishonestly assisted Lockwood in the transfer of the Shares from its account to that of Union Capital (both held with Axis): SOC, section D2;

(3)  An alleged implied term (the Termination Term) by which, predicated on the alleged fraud, the CAA was terminated automatically: SOC, §19 and section D3;

(4)  Unlawful means conspiracy which is predicated on an alleged Fraudulent Scheme (“Scheme”): SOC, section D4.

Submissions of Axis

36.In summary, Axis submits that :

(1)  Binchuang’s case is pleaded with complete disregard to the requirements in O 18 for pleading fraud. The requirement that allegations of fraud must be pleaded with the utmost particularity is not met. The SOC lacks any particulars of the facts, matters and circumstances relied upon to found the very serious allegations of fraud and knowing dishonesty made against it;

(2)  The SOC fails to disclose any reasonable cause of action against it.  It is liable to be struck out on its face pursuant to O 18, r 19(1)(a) and/or the court’s inherent jurisdiction;

(3)  The evidence relied on by Binchuang fails to provide any basis for its allegations against Axis.  This leads to the conclusion that the claim is frivolous, vexatious or is otherwise an abuse of the process of the court.  It should therefore also be struck out pursuant to O18, r 19(1)(b) and (d) and/or the court’s inherent jurisdiction;

(4)  There is no basis to imply the Termination Term in the CAA.  That claim should be struck out on the preceding bases, alternatively disposed of summarily under O 14A.

Misrepresentations

37.The SOC is a refreshingly succinctly document bucking the unhealthy trend of lengthy pleadings burdened with evidence and even submissions.

38.Seven misrepresentations were alleged in the SOC, 4 of which were relevant to Axis. They are in fact 2 pairs of identical representations with the “3^rd Representations” and “4^th Representation” forming 1 pair and the “6^th Representations” and “7^th Representation” the other.  Sub-paras (1) and (2) below are the 2 limbs of the 3^rd and 6^th Representations :

(1)  “To [Axis’s] knowledge, [Lockwood] genuinely intended to advance the Loan to [Binchuang], and to perform its obligations under the [LA] as stated in [it] and the draft [CAA]”;

(2)  “[Axis] genuinely intended to perform those obligations as stated in the draft [CAA] to be signed”;

(3)  “… [Lockwood] and [Axis] were not acting in collusion to fraudulently or otherwise unlawfully deprive [Binchuang] of its interest in the Shares.

39.It should be mentioned that the words “draft” and “to be signed” had disappeared in the 6^th Representations because the CAA had been signed by then.

40.It is reasonably clear that the Representations were based on alleged conducts.  The 3^rd and 6^th Representations were alleged to have been made by Axis, whereas the 4^th and 7^th Representations were made by both Lockwood and Axis. 

41.Two paragraphs were relied upon to ground the first pair of Representations, paras 12 and 13 of the SOC.  In those paras, it was alleged :

(1)  On 7 August 2019, Lockwood wrote to Binchuang by email enclosing a signed copy of the LA and stated that they “look forward to funding this loan”;

(2)  On the same day, Lockwood (on behalf of itself and Axis) wrote to Binchuang by email stating that they had to appoint alternative custodian agent and Lockwood would nominate, inter alios, Axis as the custodian agent.

42.Putting aside Axis’ complaint that the allegation that Lockwood was acting as its agent was completely unparticularised (which is a valid complaint), I find, with respect, no proper basis for the 3^rd and 4^th Representations (insofar as the 4^th Representation concerned Axis).

43.Paragraph 41(1) above had nothing to do with Axis. 

44.As for para 41(2), it is uncontroversial that Axis was not yet instructed as the replacement collateral agent.  It was put forward as 1 of 2 alternatives for Binchuang’s selection.  Whilst one can see the possibility or likelihood of preliminary discussion between Lockwood and Axis before the latter was put forward for consideration by Binchuang (not actually pleaded in the SOC), I fail to see how para 41(2) can ground the 1^st limb of the 3^rd Representations (see para 38(1) above).

45.As for the 2^nd limb, Axis was not even selected at the time, let alone entering into any agreement with Binchuang.  There is no plea that Axis had a copy of the draft CAA.  The contemporaneous documents are not controversial.  They show that :

(1)  In the email referred to in para 41(2) above, it was ended with the following: “Once you decide on which one of the two … we can send their Collateral Agreement for execution …”;

(2)  It appears that after Binchuang had decided on Axis, Lockwood then sent to Axis (on 7 August 2019) a copy of the Collateral Agreement signed with Sino Rich for review and asked if Axis could accept it as is;

(3)  Later the same day, Axis confirmed with Lockwood that it was happy to sign the CAA to become the collateral agent for the transaction.

46.With respect, the 2^nd limb of the 3^rd Representations is a wild quantum leap.

47.In respect of the 4^th Representation, there was no allegation of any direct communication between Axis and Binchuang at the time.  Based on para 41(2) above, Axis was merely put forward as 1 of 2 choices for consideration.  I simply cannot see how that could give rise to the 4^th Representation.

48.Both the 3^rd Representations and the 4^th Representation (regarding Axis) are untenable and baseless, and should be struck out.

49.The 6^th and 7^th Representations were based on para 20 of the SOC, which pleaded that from August until September 2019 :

(1)  By a series of emails and WeChat messages, Lockwood and Axis continued to liaise with, inter alios, Binchuang in relation to the opening of the Custodian Account and the transfer of the Shares into the same;

(2)  On 21 and 29 August 2019, by WeChat calls, the Plaintiff and Axis engaged in further discussions about the role of Axis under the LA.

50.In his submissions, Mr Lai, who appeared for Binchuang, had confirmed that Binchuang is not relying on any particular statement made by Axis in the course of the discussions on 21 and 29 August 2019.

51.In respect of Axis’ complaint that Binchuang had failed to identify the relevant emails and WeChat messages (there were over 300 pages of them), I believe that the issue is not what the documents show but, eg, the fact of exchanges about opening the Custodian Account and the transfer of the Shares into it. 

52.Although the matter had progressed at that point in time, I remain unable to see how the exchanges about account opening, transfer of the Shares and the role of Axis under the LA could give rise to the 1^st limb of the 6^th Representations.  I fail to understand why such conducts, individually or collectively, could constitute a representation by Axis about what Lockwood’s intention was? 

53.Binchuang is on firmer ground as regards the 2^nd limb.  Although the conducts concerned the follow-up work after the CAA was entered into, they clearly related to and were premised on the performance of the CAA. 

54.Mr Lai relies on the House of Lord authority of DPP v Ray [1974] AC 370 at 385F-G, 388F-G and 389B-E.  At 389D, Lord Hodson held that:

“It is trite law and common sense that an honest man entering into a contract is deemed to represent that he has the present intention of carrying it out …”

55.Although Ray was a case on obtaining pecuniary advantage by deception which arose out of the fact that the defendant, after ordering and consuming a meal in a restaurant, had decided to run off without payment, I accept that the dictum can be applied generally (certainly for the purpose of a strike out application) in respect of the conduct of a party in entering into a contract with another.

56.It is arguable that the 7^th Representation can also be supported by Ray.  Notwithstanding my reservation that it is an unnecessary sophistication of the principle, it may be said that the representation of intention to carry out a contract must embrace a representation not to cheat the counterpart to the contract.  Axis was well aware of the fact that the CAA was part of the transaction whereby Lockwood would lend money to Binchuang with the Shares as security.

57.For these reasons, I see no valid ground to strike out the 2^nd limb of the 6^th Representations or the 7^th Representation.  The 1^st limb of the 6^th Representation should be struck out.

The Scheme

58.The thread which runs through both the causes of action of dishonest assist and the unlawful means conspiracy is the Scheme.  It was alleged in the SOC that after terminating the LA due to the repeated failure on the part of Lockwood to advance the Loan (save for the Test Tranche), Binchuang discovered the Scheme.    

59.It was alleged (para 28 of the SOC) that there was an agreement or arrangement between Lockwood and Axis to fraudulently or otherwise unlawfully deprive Binchuang of its interests in the Shares by (a) making the Representations (only the 2^nd limb of the 6^th Representations and the 7^th Representation are relevant in respect of Axis for the reasons stated above), (b) carrying out various acts in breach of trust and in dishonest assistance of such breaches of trust and (c) committing various breaches of the LA and CAA.

60.Para 28 of the SOC went on to allege in particular that, contrary to its Representations, Axis knew that Lockwood never intended to advance the Loan to Binchuang, nor was it in a position to do so, and would act in concert with Lockwood to deprive Binchuang of its interest in the Shares.  Axis was never the independent custodian agent which it held itself out to be.

61.The matters relied upon showing the existence of the Scheme were than pleaded in paras 30 to 32 of the SOC, namely, the disposal of the Shares in breach of the LA (para 30), Lockwood’s lie about advancing the Loan (para 31) and Axis’ actions showing that it was “privy” (Mr Lai had clarified that the term was used to mean being party to) to Scheme (para 32).

62.For the present purpose, para 31 can be put aside because none of the pleaded facts was attributed to Axis, nor was it alleged that it knew about the same. 

63.In respect of the disposal of the Shares (para 30), the transfers of the Shares away from the Custodian Account (to Lockwood, then Union Capital and then Adam International) and the subsequently disposal of them by 8 transactions from 17 September to 23 October 2019 and paying away the proceeds were all, as shown by the documents, carried out with the assistance of Axis. 

64.It was pleaded that by virtue of Clause 3(d) of the LA, Binchuang remained the beneficial owner of the Shares despite the transfer of the Shares to Lockwood’s account held with Axis, and Lockwood was holding the Shares on trust for Binchuang.

65.I note that there is no allegation that Axis was aware of the terms of Clause 3(d) or the existence of the alleged trust. However, it would be surprising if Axis was not aware of the terms of the LA given that it was acting as the professional custodial agent.  Indeed, Hutchinson’s evidence went to some length in explaining the whole transaction.

66.As regards para 32 (Axis’ “privity” to the Scheme), the particulars pleaded were that :

(1)  Axis failed to send the monthly statement of the Custodian Account to Binchuang in breach of its undertaking in September 2019 when the purported hypothecation of the Shares took place;

(2)  Axis was aware of the various transactions relating to the Shares.  In particular, by 30 September 2019, the Shares were no longer held in the Custodian Account and by 23 October 2019, the Shares were all sold; 

(3)  Despite being put on notice by Binchuang that Lockwood had failed to advance the Loan and Binchuang’s request of confirmation that the Shares remained in the Custodian Account, Axis misled Binchuang into believing that the Shares remained in the Custodian Account with (i) the monthly statements produced in October 2019 falsely and/or misleadingly showing that the Shares remained in the Custodian Account; and (ii) falsely and/or misleadingly stating to Binchuang in the email dated 8 November 2019 (see para 18 above) that nothing had happened to Axis’ sub-accounts held with Citi N.A. and that the Shares were still pledged with Lockwood; 

(4)  Axis had failed to produce to Binchuang before the commencement of these proceedings, despite its repeated request for information on the whereabouts of the Shares (i) the Debit Note (see para 25 above); and (ii) a monthly statement of the Custodian Account dated 30 September 2019 which purportedly evidenced the transfer away of the Shares to Lockwood’s account with Axis;

(5)  In the premises, it is to be inferred that Axis must have been privy to the Scheme.

67.Despite the fact that the plea in respect of the Scheme involves a fair amount of mental gymnastics to understand, I am of the view that it is sufficiently pleaded and is sustainable for the present purpose.  In particular, it is reasonably arguable that Axis’ actions had facilitated the disposal of the Shares, and from its actions in hiding the disposal of the Shares from and delaying the discovery of it by Binchuang it can be inferred that Axis was a party to the Scheme.

The causes of action

68.After dealing with the Scheme, the SOC then went on to deal with each of the causes of actions.  Once the Scheme is understood, the causes of action fall into place. 

69.By virtue of the Scheme, the Representations legitimately attributable to Axis must be fraudulent as alleged (para 33 of SOC). 

70.The reliance on s 3 of the Misrepresentation Ordinance, Cap 284 as an alternative (para 34 of SOC) cannot be objectionable. 

71.In respect of dishonest assistance, it was alleged that Axis had dishonestly assisted in the transfer of the Shares from Lockwood’s account to that of Union Capital (both held with Axis). 

72.Paras 28 to 32 of the SOC were relied upon to show Axis’ dishonesty.  Those pleas have been analysed above in connection with the Scheme.  In short, I see no reason to strike out this cause of action based on Axis’ participation in the Scheme.

73.Next, Binchuang pleaded its case on breach of the LA by Lockwood and the termination of both the LA and the CAA.  In the latter case, in reliance of the Termination Term. 

74.It was further pleaded that Binchuang is ready and willing to redeem the Shares by paying back the Test Tranche with interest.  Accordingly, Binchuang is entitled to the return of the Shares from Lockwood and Axis.

75.I agree with Binchuang that the Termination Term is arguable and should not be struck out.  Plainly, the CAA was parasitic on the LA but there was an absence of any provision (see para 29(2) above) in the CAA for its termination in the event that the LA had come to an end by reason of, eg, Lockwood’s repudiation of the LA.   

76.As regards unlawful means conspiracy, a plaintiff have to prove :

(1)  there is an express/tacit agreement or understanding between the defendant and another or others;

(2)  there is an intention to injure the plaintiff by unlawful means, whether or not the intention to injure is the predominant purpose;

(3)  unlawful acts are carried out pursuant to the agreement or understanding and such intention; and

(4)  loss or damage has been caused to the plaintiff as a result.

See Pido v Compass Technology Co Ltd [2010] 2 HKLRD 537, §§14-17

77.It was pleaded in the SOC that by reason of the Scheme, Lockwood and Axis had unlawfully and fraudulently conspired to steal and deprive Binchuang of its interest in the Shares by (1) the Representations, (2) breach of trust (not pleaded against Axis) and dishonest assistance of such breach and (3) breaches of the LA and the CAA with the intention of injuring Binchuang.

78.It was accepted by Mr Lai that there was no breach of the CAA pleaded in the SOC.  Notwithstanding that concession, I am of the view that the conspiracy is adequately pleaded and there is no sufficient ground for striking it out.

79.Further, I am not inclined to strike out the reference to breach of the CAA because Clause 5 of the CAA had been pleaded in para 17(2) of the SOC.  It provided for Axis to send copies of all statements and confirmations for the Custodian Account simultaneously to both Lockwood and Binchuang.  Further, Axis “shall use reasonable efforts to promptly notify [Lockwood] and [Binchuang] if any other person claims that it has an interest in property in the [Custodian Account] and/or that it is a violation of that person’s rights for anyone else to hold, transfer or deal with the property therein or any portion thereof.”

80.The particulars pleaded in para 32 of the SOC (see para 66 above) may ground a case of breach of the CAA, and it would be a simple amendment to have such a case properly pleaded. 

O 14A

81.I agree with Mr Lai that the existence of the Termination Term is a facts sensitive issue and ought not to be decided in an O 14A application.  Further, it is plainly undesirable to fragment the determination of this action by such an application.  See Skillsoft Asia Pacific Pty Ltd v Ambow Education Holding Ltd [2016] 1 HKLRD 1052, §§9-11, as well as Rockwin Enterprises Ltd v Shui Yee Ltd [2003] 3 HKC 174, §25(a).

Injunction

82.Mr Seib, who appeared for Axis, accepted that the Injunction had been complied with.  It appears therefore academic to consider the discharge application.  No useful purpose would be served (none suggested by Axis) by the determination of the same. 

83.I am therefore inclined to agree with Binchuang that it is not a fruitful application of the court’s resources to entertain the discharge application.

84.Further, the discharge application is based upon Axis’ allegation of material non-disclosure.  Mr Lai complained that there was no adequate notice of the allegation.  Mr Seib accepted that there was no notice of the allegation given to Binchuang until the service of Axis’ skeleton arguments 3 days before this hearing.

85.A party seeking to have without notice relief discharged for non-disclosure should give adequate notice that this ground is relied upon together with sufficient particulars enabling the other party to understand the case to be advanced.  An allegation of non-disclosure is potentially serious both for the other party and his legal advisers and the party complaining of non-disclosure must give sufficient notice of his complaint so that there can be a fair hearing, and should be made without unnecessary delay: Gee on Commercial Injunctions, 6^th edn, [9-032].

86.For these reasons, I adjourn the discharge application sine die with liberty to Axis to restore it at the trial of this action if it sees fit.  I also give liberty to apply in the event that this action does not proceed to trial. 

Disposition

87.For the reasons aforesaid, the 3^rd Representations, the 4^th Representation (as regards Axis) and the first limb of the 6^th Representations are struck out, and the discharge application of the Injunction is adjourned. 

88.Binchuang and Axis should endeavour to agree the terms of the appropriate order to be made, including costs.  Failing agreement, the parties are to lodge a joint letter, in succinct terms, setting out (a) what is agreed and not agreed; (b) the respective position of the parties on the disagreement; and (c) the reason(s) in support of the respective position within 14 days from the date of this Decision.  The matter may then be disposed on paper if the court sees fit.    

Mr Lai Chun Ho, instructed by Nixon Peabody CWL, for the Plaintiff

Mr G A Seib (solicitor advocate) of Baker & McKenzie, for the 2^nd Defendant