China Medical Technologies, Inc (in Liquidation) and Others v. Bank of China (Hong Kong) Ltd
Read the full judgment text of HCA 1742/2018 on BabelCite. This High Court CFI judgment was delivered on 15 October 2021.
1. The Writ in this action was issued on 27 July 2018 claiming damages, equitable compensation, restitution and a declaration under s 275 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“ CO ”) in respect of the fraudulent transfer of US$355.5 million (“ Funds ”) belonging to the 1st Plaintiff and/or the 2nd Plaintiff to Supreme Well Investments Limited (“ Supreme Well ”) between November 2006 and December 2009. The Defendant was the banker of the 1st Plaintiff. Th
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HCA 1742/2018 [2021] HKCFI 3042 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1742 OF 2018 _________________
_________________ Before: Hon Ng J in Chambers (Open to public) Dates of Hearing: 20-21 May 2021 Date of Judgment: 15 October 2021 ________________ J U D G M E N T ________________ Introduction 1.The Writ in this action was issued on 27 July 2018 claiming damages, equitable compensation, restitution and a declaration under s 275 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“CO”) in respect of the fraudulent transfer of US$355.5 million (“Funds”) belonging to the 1st Plaintiff and/or the 2nd Plaintiff to Supreme Well Investments Limited (“Supreme Well”) between November 2006 and December 2009. The Defendant was the banker of the 1st Plaintiff. The Defendant was also the banker of Supreme Well. 2.By summons dated 21 December 2018, the Defendant applied to strike out the Statement of Claim and dismiss the action. Subsequently, the Plaintiffs were granted leave to amend the Statement of Claim while the Defendant was granted leave to amend the striking out summons. 3.There is before this court the Defendant’s application by Amended Summons dated 17 February 2021 (“Defendant’s Summons”) for an Order that the Amended Statement of Claim filed on 28 July 2020 (“ASOC”) be struck out and this action be dismissed on the grounds that:
4.There is also before this court the Plaintiff’s application by summons dated 26 April 2021 (“Plaintiff’s Summons”) seeking leave to file a Re-Amended Statement of Claim (“RASOC”) and an amended Further and Better Particulars of the Statement of Claim (“AFBPs”). The proposed amendments remove the claims based on breach of contract and negligence. The remaining causes of action are dishonest assistance, knowing receipt, unjust enrichment/restitution and fraudulent trading under s 275 CO.[1] Factual Background 5.The factual background for the purpose of the present application is set out in some detail in the Defendant’s skeleton submissions. As the Plaintiffs do not appear to dispute that, this court will adopt it, with certain modifications, as follows. 6.The 1st Plaintiff was incorporated in the Cayman Islands on 6 July 2004 and was listed on the NASDAQ on 10 August 2005. At all material times prior to its winding up, the 1st Plaintiff was held out as having a principal business of developing, manufacturing and marketing advanced surgical and medical equipment in the PRC. The 2nd Plaintiff was a wholly owned subsidiary of the 1st Plaintiff. 7.Between 2006 and 2013, the 1st Plaintiff’s board of directors consisted of the following individuals:
8.The Plaintiffs’ case is that the alleged fraud was committed on the 1st and 2nd Plaintiffs by the following individuals who were directors or officers of the 1st Plaintiff:
9.In essence, the Plaintiffs claim that the 4 Individuals had breached their fiduciary duties to the 1st Plaintiff by causing the 1st Plaintiff to acquire fluorescent in situ hybridization technology (“FISH Technology”) for US$176.8 million in February 2007 (“FISH Transaction”) and surface plasmon resonance technology (“SPR Technology”) for US$345 million in October 2008 (“SPR Transaction”) from Supreme Well and its subsidiaries (“Supreme Well Group”). 10.The FISH and SPR Transactions were presented to the Board of the 1st Plaintiff as arm’s length commercial transactions. In fact, Supreme Well and the Supreme Well Group were secretly controlled by Tsang and the medical technology purportedly acquired by the FISH and SPR Transactions was of little or no value. The Plaintiffs allege that Wu and Tsang caused the 1st Plaintiff to pay out significant sums as the purported consideration for the FISH and SPR Transactions, which were then transferred onwards to various third party recipients controlled by or connected to the 4 Individuals. These payments can be grouped into 2 tranches. 11.The first tranche of payments (“First Tranche”) consists of transfers from the 1st and 2nd Plaintiffs to Supreme Well and Innovative Technology Investment Ltd (“Innovative”) as follows:
12.The second tranche of payments (“Second Tranche”) consists of payments from Supreme Well and Innovative to bank accounts of other entities associated with or controlled by the 4 Individuals, including East Hope International Ltd, Innovative, Kam Hing Trading Co, Worldpro Investments Ltd and Neway Global Investments Ltd (“Third Party Payees” and “Third Party Accounts” respectively). 13.It is not in dispute that on 10 February 2009, the 1st Plaintiff’s auditor KPMG Hong Kong received an anonymous letter (“Anonymous Letter”) alleging that the FISH and SPR Transactions were, in essence, fictitious related-party transactions designed to siphon off a significant portion of the 1st Plaintiff’s assets. The Anonymous Letter stated that:
14.On 12 February 2009, KPMG Hong Kong provided a copy of the Anonymous Letter to Mr Bruce in his capacity as the Chairman of the 1st Plaintiff’s Audit Committee. After receiving the Anonymous Letter, the Audit Committee was advised on 20 February 2009 that it should engage independent lawyers to undertake an investigation of the matters alleged. On 6 April 2009, the Audit Committee resolved to appoint Paul, Weiss, Rifkind, Wharton & Garrison LLP (“Paul Weiss LLP”) as independent counsel to conduct an investigation into the allegations in the Anonymous Letter (“Investigation”). For this purpose, Paul Weiss LLP enlisted the assistance of New York firm AlixPartners LLP (“AlixPartners”) as forensic accountants. 15.Paul Weiss LLP and AlixPartners proceeded to carry out the Investigation from April 2009 onwards. The bulk of the work (at least as far as the FISH and SPR Transactions are concerned) was completed by July 2009. On 18 July 2009, Paul Weiss LLP provided a substantive report on the Investigation orally to the Audit Committee. In broad terms, the advice was that the allegations in the Anonymous Letter had no merit. On the same day, the Audit Committee resolved that “the allegations of the fraudulent activities contained in the anonymous letter had no merit”. A month later, the Audit Committee resolved to close the Investigation. 16.On 27 July 2012, the Grand Court of the Cayman Islands ordered that the 1st Plaintiff be wound up as insolvent and that Mr Cosimo Borrelli and Mr Kenneth Krys be appointed as the joint official liquidators of the 1st Plaintiff. On 29 November 2012, the Hong Kong Court ordered that Mr Borrelli and Ms Yuen Lai Yee (“Liquidators”) be appointed as the joint and several provisional liquidators of the 1st Plaintiff until the determination of a petition to wind up the 1st Plaintiff in Hong Kong. On 1 September 2014, the Hong Kong Court ordered that the 1st Plaintiff be wound up and that the Liquidators continued as provisional liquidators of the 1st Plaintiff. On 2 February 2015, the Liquidators were appointed as the joint and several liquidators of the 1st Plaintiff in Hong Kong. 17.Meanwhile, on 2 December 2014, the Liquidators filed a protective writ (“2014 Writ”) against the Defendant in HCA 2448/2014 (“2014 Action”). The validity of the 2014 Writ lapsed and the Order to extend the writ was set aside by Au-Yeung J, as affirmed by the Court of Appeal. Leave to appeal was refused by the Appeal Committee of the Court of Final Appeal. 18.On 27 July 2018, the Plaintiffs filed the Writ in the present action. 19.On 19 March 2015 and 14 December 2016, the 1st and 2nd Plaintiffs filed the writ of summons in HCA 577/2015 and in HCA 3272/2016 respectively. In those proceedings, the 1st and 2nd Plaintiffs brought claims against Paul Weiss LLP and its associated Hong Kong firm Paul, Weiss, Rifkind, Wharton & Garrison (collectively “Paul Weiss”) for allegedly negligent advice or misstatements given to the 1st Plaintiff’s Audit Committee in July 2009. 20.In broad terms, their claim was that Paul Weiss had failed to act with reasonable care, skill and diligence by reason of their (1) failure to adequately investigate whether the FISH and SPR Transactions were related party transactions, (2) failure to adequately investigate whether the consideration paid pursuant to those transactions was grossly inflated, (3) failure to adequately investigate certain unusual features of the transactions and (4) failure to adequately advise the 1st and 2nd Plaintiffs. A substantial part of the 1st and 2nd Plaintiffs’ allegations was that Paul Weiss failed to undertake reasonable independent enquiries to determine whether Supreme Well and its subsidiaries were related parties as alleged. But for the negligent advice, they would have been able to take steps to recover the payments to Supreme Well et al and stop any further payments to those parties in July 2009. Their case was that they should and would have been able to discover the Alleged Fraudulent Scheme within a very short period of time after the commencement of the Investigation. 21.In February 2018, Paul Weiss applied to set aside service of the writs on Paul Weiss LLP in Hong Kong on the ground that it did not carry on business in Hong Kong and to stay the proceedings on the ground of forum non conveniens. The applications were dismissed by G Lam J (as he then was) on 25 October 2019. Deliberation 22.The applicable principles are uncontroversial. They are stated in Hong Kong Civil Procedure 2021 at para 18/19/4:
23.As succinctly summarised in its Executive Summary, the Defendant submits that the remaining causes of action of knowing receipt, fraudulent trading, unjust enrichment/restitution and dishonest assistance should be struck out and the action be dismissed because:
Knowing Receipt 24.The paragraphs in the draft RASOC directly relevant to knowing receipt are as follows.
25.It is well established that one of the essential elements of this cause of action is the beneficial receipt by a defendant of assets which are traceable as representing the claimant’s own assets: El Ajou v Dollar Land Holdings Plc (No 1) [1994] 2 All ER 685, 700. 26.The Defendant submits that the Plaintiffs’ case fails to satisfy the requirement of beneficial receipt because as a matter of law, the Defendant, as a bank, did not beneficially receive any assets. The bank only receives money as agent for the account holder and does not receive it for its own use and benefit, unless the money pays off an overdraft: Agip (Africa) Ltd v Jackson [1990] Ch 265, 292B (per Millett J); Lewin on Trusts (20th ed) para 42-085. 27.It is true that the above legal proposition is supported by the authorities cited. But that proposition is inconsistent with other equally well-established principles that (i) a deposit by a customer (including a deposit by a cheque) creates a relationship of debtor and creditor between the bank and the customer[2] and that (ii) money paid into a bank account belongs legally and beneficially to the bank and not the account holder. In Foskett v McKeown [2001] AC 102, 128A, Lord Millett observed that:
28.Further, the distinction drawn in Agip (Africa) Ltd v Jackson between receipt by a bank into an account that is in credit and receipt into an account that is overdrawn is not universally accepted. For instance, Agip (Africa) Ltd v Jackson has been criticised in Uzinterimpex JSC v Standard Bank Plc [2008] 2 Lloyd’s Reports 456 in which Moore Bick LJ said at [39] ‑ [40]:
29.For the present purpose, another distinction is drawn by the learned editors of Goff and Jones The Law of Unjust Enrichment (9th ed) at paras 28-08 to 28-10 between deposit of funds by the account holder himself and deposit of funds by a third party:
30.In its Reply submissions, the Defendant submits that an intra-bank transfer ie a “payment” from account A to account B of the same bank has no effect on the level of a bank’s assets. What happens is a change in entries in the bank’s internal accounts as Lord Millett explained in Foskett v McKeown at 128B-C. That may well be so. If the Plaintiffs’ pleaded case were that the misappropriated funds were transferred directly from the P1 BOCHK Account to the Supreme Well BOCHK Accounts, then the Defendant might have a point. But that was not what the Plaintiffs have pleaded. 31.As pleaded in paragraph 259.1A of the draft RASOC, Tsang deposited the cashier orders in question on behalf of Supreme Well into its bank accounts with the Defendant as customer. That is the first situation referred to in Goff and Jones quoted above. If so, the Defendant received the funds represented by the cashier orders beneficially instead of ministerially. 32.To conclude, as submitted by Mr Manzoni SC, there is at least a difficult and unsettled question of law involved in this cause of action and that it is inappropriate to strike it out. Fraudulent Trading - no cause of action 33.The Plaintiffs’ case on fraudulent trading is pleaded at paras 261 and 262 of the RASOC:
34.At para 159 of the AFBPs, the Plaintiffs further elaborated on its plea at para 261 as follows:
35.Section 275 CO provides:
36.As stated in para 16-039 of McPherson & Keay The Law of Company Liquidation (4th ed), carrying on business is interpreted broadly. Indeed, “carrying on business” is so broad that it is not necessary for the liquidator to prove that there has been a course of conduct, as a single transaction or act is able to constitute it, citing Re Gerald Cooper Chemicals Ltd [1978] Ch 262. 37.At paragraph 67 of its skeleton submissions, the Defendant argues that the Plaintiffs clearly fail to establish the Alleged Fraudulent Scheme constitutes the “carrying on” of the 1st Plaintiff’s business as what the Plaintiffs have pleaded is not the carrying on of the 1st Plaintiff’s business, but simply a fraud on the 1st Plaintiff. The long and short of the Defendant’s argument is that because the FISH and SPR Transactions were not proper commercial transactions but were used as a means of misappropriating the 1st Plaintiff’s funds payable as consideration thereunder, they could not amount to the carrying on of the 1st Plaintiff’s business. 38.This court does not agree. 39.On the Plaintiffs’ pleaded case, the 1st Plaintiff did enter into and complete the FISH and SPR Transactions as part of its business which involved the acquisition of technologies. By entering into the Transactions, the 1st Plaintiff was to obtain the technology and other assets for the purpose of selling FISH and SPR products. The fact that (i) the technology had no or little commercial value, and (ii) the Transactions were used as a means of misappropriating the 1st Plaintiff’s funds and were a fraud on the 1st Plaintiff, does not alter the pleaded fact that the 1st Plaintiff had entered into the Transactions as part of its business. Equally, the fact that the Transactions were intended to defraud the 1st Plaintiff does not mean that they could not be intended to defraud the 1st Plaintiff’s creditors - the two are not mutually exclusive. As far as the pleaded intention to defraud the 1st Plaintiff’s creditors is concerned, that is fact sensitive and, for the purpose of striking out, is to be taken in favour of the Plaintiffs. 40.What the Defendant seems to be suggesting is that because the Transactions were fraudulent transactions, they could not constitute the carrying on of the 1st Plaintiff’s business. With respect, it is exactly because the Transactions were fraudulent which triggers section 275 CO. As Mr Manzoni SC submits, accepting the Defendant’s argument in this respect would require an absurd interpretation of the section, which would exclude businesses which are predominantly fraudulent. 41.To conclude, this court is of the view that it is arguable the pleaded case of fraudulent trading does disclose a reasonable cause of action. Fraudulent Trading - procedural objection 42.The Defendant submits that the claim based on fraudulent trading should be struck out on the ground that it fails to comply with Rule 58 of the Companies (Winding-Up) Rules. The objection is purely technical since there is no suggestion that the Defendant has suffered any prejudice as a result. 43.The relevant parts of Rule 58 provide:
44.In relation to a claim under section 276 CO brought in a writ action, this court held in China Medical Technologies, Inc v Wu Xiaodong [2020] 1 HKLRD 342 that the procedure under Rule 58 is mandatory. 45.In that case, the defendant applied to strike out a number of paragraphs of the Statement of Claim relating to inter alia the claim made under section 276 CO on the ground that they disclosed no reasonable cause of action and constituted an abuse of process while the plaintiffs applied under RHC O 2 r 1 to cure any irregularity in the manner of commencement of the section 276 claim. 46.In support of the striking out application, counsel for the defendant advanced 4 grounds in support[3]:
47.This court held the first 2 grounds boiled down to procedural irregularity in that the plaintiffs had failed to follow the procedure under Rule 58 - they were not concerned with whether or not the pleaded section 276 claim disclosed a reasonable cause of action. It was in that context that this court held that the procedure under Rule 58 is mandatory and suggested at [14] the following:
48.As far as the 3rd and 4th grounds are concerned, they were concerned with whether or not the section 276 claim disclosed a reasonable cause of action. As to that, this court said at [15]:
49.It is for this reason that this court struck out the section 276 “claim” as disclosing no reasonable cause of action. 50.Judging from the Plaintiffs’ skeleton, it seems that they advisedly accept the correctness of this court’s decision in China Medical Technologies, Inc v Wu Xiaodong as well its applicability to a claim under section 275 CO. Indeed, the Plaintiffs have issued a summons in HCCW 435/2012 on 31 August 2020 (“Summons”) asserting a claim under s 275 CO against the Defendant and seeking consolidation of the summons with the present action. 51.Given this court’s conclusion that it is arguable the pleaded case of fraudulent trading does disclose a reasonable cause of action, it is obviously inappropriate to strike it out on the 1st ground that it discloses no reasonable cause of action. The Defendant has not made it clear and this court does not see how the failure to follow the Rule 58 procedure comes within the other 3 grounds for striking out. 52.In any event, as this court sees it, the most appropriate and direct way to cure the procedural irregularity is to actually follow the procedure under Rule 58, which the Plaintiffs have done by issuing the Summons on 31 August 2020. Mr Manzoni SC further invites this court to follow the same course as that suggested in China Medical Technologies, Inc v Wu Xiaodong viz to consolidate the Summons with the present action. That course would be in line with the underlying objectives of the CJR in promoting a sense of reasonable proportion and procedural economy in the conduct of proceedings in that it would avoid unnecessary further amendments to the RASOC without causing any prejudice to the Defendant. 53.However, since the Summons has been adjourned by consent pending the determination of the Defendant’s present application[4] and the Defendant is not agreeable to vary the consent order, it is inappropriate for this court to make an order for consolidation at this stage. But this court expects the parties to fulfil their duty under RHC O 1A r 3 and deal with the Summons properly after this Judgment is handed down. 54.Given that the non-compliance with Rule 58 has already been cured by the issue of the Summons, it is academic and hence unnecessary to consider the questions raised by the parties as to whether non-compliance with Rule 58 can be cured by Rule 209 of the Companies (Winding-Up) Rules or RHC O 2 r 1(3). Limitation 55.An order striking out a statement of claim, which is based on a limitation defence, can only be sustained if that defence is manifestly and immediately destructive of the plaintiff’s claim: Kensland Realty Ltd v Tai Tang & Chong(2008) 11 HKCFAR 237 at [153] per McHugh NPJ. 56.The Defendant submits that the claims for (i) knowing receipt, (ii) unjust enrichment/restitution and (iii) dishonest assistance are all subject to a 6-year limitation period and that each of these causes of action must have accrued by 4 December 2009 ie the date on which the last of the First Tranche payments were completed at the latest. Thus over 8 years had elapsed between the accrual of the pleaded causes of action and the issuance of the writ in this action on 27 July 2018. 57.Judging from the Plaintiffs’ skeleton argument as well as its Annexure 2, it does not appear the above is in dispute. What the Plaintiffs seek to argue is that they are entitled to rely on section 26(1) of the Limitation Ordinance (“LO”) on the basis that the action is based upon the fraud of the Defendant; alternatively, section 22 on the basis of the 1st and 2nd Plaintiffs’ disability. Section 22 58.Section 22(1) and (3) LO provides:
59.The Plaintiffs’ pleaded case is that they had suffered from a “disability” until the Liquidators were appointed on 27 July 2012 because the 1st and 2nd Plaintiffs were, until then, controlled by the wrongdoers Wu and Tsang. At paragraph 49 of their skeleton, they submit that (i) the definition of “disability” cannot be restricted to cases of infancy and unsound mind and (ii) the most obvious way that a company could come within the definition of “disability” is when it was controlled by wrongdoers, such that it was unable to act to advance its own interests. No authority is cited in support of the above submissions save for (i) the Australian decision Gerard Cassegrain & Co Pty Ltd v Cassegrain [2011] NSWSC 1156[5] in which a company was held to be under a disability during the period when it was in receivership, and (ii) section 3 of the Interpretation and General Clauses Ordinance, Cap 1 which defines “person” to include “corporate” person. 60.As explained in the Defendant’s Reply submissions, Gerard Cassegrain & Co Pty Ltd v Cassegrain does not assist the Plaintiffs since section 11 (3) of the NSW Limitation Act 1969, which the Australian Courts relied upon, provides for an entirely different definition of “disability” from our section 22 which involves a detailed factual inquiry into a plaintiff’s mental and physical circumstances. Section 3 is also of little assistance since under section 2 of Cap 1, the definitions apply save where the contrary intention appears from inter alia the context of any other Ordinance, in the present case, the LO. Hence, one still has to ascertain the meaning of “disability” in the context of section 22. As the Hong Kong and UK authorities show, corporations are excluded from the ambit of section 22. 61.In Chan Kam Nun v Immigration Department [2018] 1 HKLRD 1251, the defendant applied to strike out the Statement of Claim on the ground inter alia that it was time-barred. In answer to that, the plaintiff, a natural person, relied on section 22 to postpone the running of time. The Master granted the defendant’s application and rejected the Plaintiff’s argument that because of his inability to return to Hong Kong and his lack of means to instruct a lawyer, he was under a “disability”. The Master’s decision was upheld on appeal. 62.It was in this context that DHCJ To concluded that the term “disability” should be given a narrow meaning to include only “a lack of mental capacity” by reason of being a minor or being mentally disabled or suffering from mental disorder. At [19], the learned Deputy Judge said:
63.As the Defendant points out, there is nothing to suggest that Chan Kam Nun is wrongly decided. None has been put forward by the Plaintiffs. 64.As for UK authorities, the Plaintiffs have very properly drawn this court’s attention to the case of Kazakhstan Kagazy Plc v Baglan Abdullayevich Zhunus [2017] EWHC 3374 at [559] in which Picken J held that the English equivalent of section 22 only applies to natural persons. 65.The Defendant submits that the short point here is that there is no difficult point of law or factual issue. The Plaintiffs’ reliance on section 22 is plainly misconceived. This court agrees. Section 26(1) 66.Section 26(1) provides:
67.The pleas relevant to section 26 (1) are set out in paragraphs 272 to 273 of the RASOC:
68.Further and Better Particulars of the said pleas are given in paragraphs 172 to 180 of the AFBPs:
69.As far as the facts pleaded in paragraph 179 regarding the Liquidators’ request for documents from the Defendant are concerned, they are supported by the 1st affidavit of Cosimo Borrelli filed herein on 25 August 2020 at section B4 (“Borrelli 1”). 70.In their skeleton, the Plaintiffs submit that time under section 26 does not start to run until a plaintiff has, or could with reasonable diligence, have, discovered the fraud of the defendant. Discovery of the fraud perpetrated by Tsang or Wu is not of itself sufficient for time to run - the Plaintiffs also have to know or be able to discover the Defendant’s part in their fraud. 71.In the present case, it is pleaded that the Defendant’s fraud was in fact not discovered until February 2014, at the earliest. That plea, even if disputed, has to be taken in favour of the Plaintiffs for the present purpose. The question then is whether the Defendant’s fraud could with reasonable diligence have been discovered earlier than in 2014 and if yes when. 72.On the Plaintiffs’ part, their primary allegation of fraud against the Defendant is that its 2 employees, Loman Lo and Jackie Chiu, were aware that the FISH and SPR Transactions were improper. Loman Lo and Jackie Chiu were aware of this because they were the relationship managers of the P1 BOCHK Account and the Supreme Well BOCHK Accounts, as well as other accounts through which the misappropriated funds were laundered. In order for the Plaintiffs to discover the Defendant had the requisite knowledge that the FISH and SPR Transactions were improper, they needed to discover that the Defendant knew Tsang was on both sides of the FISH and SPR Transactions by discovering that Tsang was the account signatory of the Supreme Well BOCHK Accounts. The Plaintiffs only found out about that when they obtained the Supreme Well bank documents in February 2014. It was therefore only at that time that the Plaintiffs discovered the fraud of the Defendant. The Writ in this action was issued and served within 6 years. 73.On the other hand, the Defendant submits that the Plaintiffs have failed to show that, objectively, a well-advised plaintiff with their resources could not with reasonable diligence have discovered the claim against the Defendant[6]. This is because the only essential fact that the Plaintiffs said was missing is information of the Defendant’s knowledge that Tsang was on both sides of the FISH and SPR Transactions by being the sole “Authorised Person” of the Supreme Well BOCHK Accounts (“Supreme Well Signatory Information”). It submits that from the following undisputed facts, the Plaintiffs could with reasonable diligence have discovered the Supreme Well Signatory Information well before the cut-off date of 27 July 2012. 74.First, the 1st Plaintiff’s board of directors was put on notice of the Alleged Fraudulent Scheme by the Anonymous Letter on 4 February 2009 ie more than 3 years before the cut-off date. The Anonymous Letter did more than merely put the 1st Plaintiff on notice of the existence of a potential fraud. It expressly suggested that the FISH and SPR Transactions were fraudulent related party transactions, involving a grossly inflated consideration, which were designed to siphon off the 1st Plaintiff’s assets to entities associated with its CEO and officers. 75.Second, on the Plaintiffs’ own case, (i) Paul Weiss was negligent and (ii) had Paul Weiss not been negligent, the 1st and 2nd Plaintiffs would have discovered the Alleged Fraudulent Scheme earlier. 76.Third, it is the Plaintiffs’ own case in the Paul Weiss Proceedings that had Paul Weiss not been negligent, the 1st and 2nd Plaintiffs would have prevented payments made after 1 July 2009 and taken steps to freeze, trace and recover the funds paid out prior to 1 July 2009. 77.Fourth, it is undisputed that it took less than 1 year and 7 months, between their appointment on 27 July 2012 and 6 February 2014, for the Liquidators to obtain the requisite documents from the Defendant and discover the Supreme Well Signatory Information. 78.On the basis of the above, the Defendant submits that (i) assuming Paul Weiss had not been negligent and the Plaintiffs were motivated by a reasonable sense of urgency, it is clear that the 1st and 2nd Plaintiffs could have discovered the Alleged Fraudulent Scheme by July 2009 or shortly thereafter and then traced the funds into Supreme Well’s bank accounts and (ii) having discovered the Alleged Fraudulent Scheme by the 4 Individuals, the Plaintiffs have not shown that a well-advised company in the position of the 1st and 2nd Plaintiffs could not, with reasonable diligence, have proceeded to discover the Supreme Well Signatory Information before the cut-off date of 27 July 2012. 79.It seems to this court that the Defendant’s said submissions are at most reasonably arguable but fall well short of being manifestly and immediately destructive of the plaintiff’s reliance on section 26(1) LO. 80.Whether or not the Plaintiffs could, with reasonable diligence, have discovered the fraud of the Defendant earlier than February 2014 and if yes when is highly facts sensitive and requires a minute and protracted examination of the documents and facts of the case. The Defendant’s submissions depend heavily on inter alia the knowledge of the 1st Plaintiff’s board of directors, including in particular that of its Audit Committee, and the action that they could have taken with that knowledge, after receiving the Anonymous Letter on 4 February 2009. The Defendant’s submissions also rely on an examination of Paul Weiss’ conduct in investigating the allegations in that letter. But as the Plaintiffs point out, Paul Weiss’ investigation was directed at possible wrongdoing by the former management of the 1st and 2nd Plaintiffs, not at the conduct of the Defendant.[7] Whether Paul Weiss should nevertheless have gone on to look into the Defendant’s conduct is clearly debatable. 81.To conclude, in accordance with the well-established principles governing striking out, the matter is wholly unsuitable to be decided in this application. Subject to the Defendant’s submission below to the effect that the claims in unjust enrichment and knowing receipt are outside the ambit of section 26(1)(a), this court is not satisfied it is plain and obvious that the Plaintiffs would be unable to rely on section 26(1)(a) to postpone the running of time. 82.The Defendant’s submission is straightforward. Section 26(1)(a) only applies if the fraud of the defendant is an essential element of the cause of action. If fraud is not an essential element, the fact that the pleadings also make reference to fraud or conduct amounting to fraud does not suffice: Beaman v ARTS Ltd [1949] 1 KB 550, 558 per Lord Greene MR, 567 per Somervell LJ. 83.The issue was recently canvassed by Mimmie Chan J in Hing Yip Holdings (Hong Kong) Limited v Cellmark China Limited [2021] HKCFI 1396, 17 May 2021 concerning claims based on want of authority and knowing receipt. At [230] to [236], the learned Judge analysed the authorities and concluded obiter that fraud was not an essential element of either claim so that section 26(1) had no application. At [232] to [236], the learned Judge explained her reasoning as follows:
84.Relying on Beaman v ARTS Ltd and Hing Yip Holdings (Hong Kong) Limited (and the authorities cited therein), the Defendant submits that since fraud does not form an essential element of the unjust enrichment[8] or knowing receipt claim, the Plaintiffs cannot rely on section 26(1) to postpone the running of time. 85.The Plaintiffs, on the other hand, refer this court to a recent decision by DHCJ Le Pichon in China Metal Recycling (Holding) Limited (in Liquidation) & Anor v UBS AG & Anor [2021] HKCFI 918 at [61] - [72] in which the learned Judge examined the issue whether section 26 is limited to common law fraud or extends to unconscionable conduct. At [72], the learned Judge concluded that there was a serious question to be tried that the meaning of fraud in section 26 included where the defendant acted with “some knowledge of the impropriety of the conduct involved” or unconscionably. 86.In this court’s view, China Metal Recycling (Holding) Limited (in Liquidation) only assists the Plaintiffs in so far as the knowing receipt claim is concerned. It is accepted by the parties that one of the essential elements of that claim is “knowledge on the part of the defendant that the assets are traceable to a breach of fiduciary duty or breach of trust”: El Ajou v Dollar Land Holdings Plc (No 1) supra. In section F of the draft RASOC, the Plaintiffs have pleaded extensively on the Defendant’s knowledge of the misappropriation by the 4 Individuals. Hence, it is at least arguable that section 26(1) can cover the Plaintiffs’ claim for knowing receipt, as the Defendant originally conceded in its skeleton submissions. 87.As for the unjust enrichment claim, not only is fraud not an essential ingredient of the claim, the Plaintiffs have not even pleaded any unconscionable conduct on the Defendant’s part or knowledge of the impropriety of the 4 Individuals’ conduct. All that the Plaintiffs have pleaded, at paragraph 260 of the draft RASOC, was want of authority of the 4 Individuals, period. With respect, this court fully agrees with Mimmie Chan J when her Ladyship concluded that a claim based simply on want of authority must be outside the ambit of section 26(1). In fact, if one looks carefully at para 273 of the draft RASOC, the Plaintiffs have not relied on section 26(1) in relation to this claim. 88.To conclude, of the 3 claims which are prima facie time-barred, this court is of the view that it is arguable that the Plaintiffs can rely on section 26(1) to postpone the running of time for the knowing receipt and dishonest assistance claims, but not the unjust enrichment claim. In other words, this court is of the view that the limitation defence is manifestly and immediately destructive of the unjust enrichment/restitution claim which should be struck out. Disposition and costs 89.The unjust enrichment/restitution claim pleaded at paragraph 260 of the ASOC is hereby struck out. Save as aforesaid, the Defendant’s Summons is hereby dismissed. 90.Concerning the Plaintiffs’ Summons, there does not appear to be any “opposition” from the Defendant save that it would be futile to give leave to the Plaintiffs if it succeeds in striking out the entire ASOC. Since this court is not minded to strike out the entire ASOC, the Plaintiffs’ Summons is hereby allowed. There shall be an Order in terms of paragraphs 3 to 5 of the Draft Order annexed to the Plaintiffs’ skeleton, save that the time for the Defendant to file and serve its Defence be revised to 56 days from the date of this Order. 91.As for costs, in the absence of agreement between the parties within 14 days, they are directed to obtain a hearing date for submissions on costs, 1 hour reserved. 92.Liberty to apply. 93.It remains for this court to thank counsel on both sides for their helpful assistance.
Mr Charles Manzoni SC and Mr Jason Karas, instructed by Lipman Karas, for the Plaintiffs Mr Sew-tong Jat SC, Mr Julian Lam and Mr Joshua Chan, instructed by K W Ng & Co, for the Defendant [1] At the hearing, both parties’ arguments are premised on what is pleaded in the draft RASOC. [2] See for instance DEX Asia Ltd v DBS Bank (Hong Kong) Ltd [2009] 5 HKLRD 160 at [59]. [3] See [7] of the Judgment. [4] See this court’s Order dated 16 November 2020. [5] Upheld in Cassegrain v Gerard Cassegrain & Co Pty Ltd (2013) 305 ALR 648. [6] Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2020] 3 WLR 1369 at [255]. [7] Borrelli 1 at [27]. [8] Plaintiffs’ claim is based on want of authority of the 4 Individuals and fraud is not pleaded as an element of this claim: see paragraph 260 of the draft RASOC. | ||||||||||||||||||||||||||||||||||||||||||||||
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