Sung Chung Kwun and Others v. Addchance Holdings Ltd and Others
Read the full judgment text of HCA 2385/2017 on BabelCite. This High Court CFI judgment was delivered on 15 June 2022.
1. This is the application made by the 2 nd Defendant (“ Champion ”) to strike out parts of the Amended Statement of Claim (“ SOC ”) filed in this action, on the ground that they disclose no reasonable cause of action of knowing receipt against Champion.
Cites 4 cases
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HCA 2385/2017 [2022] HKCFI 1799 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 2385 OF 2017 ______________ BETWEEN
______________ AND MISCELLANEOUS PROCEEDINGS NO 2556 OF 2017 ______________
______________ BETWEEN
______________ (Consolidated by Order of Deputy High Court Judge Sherrington dated 29 November 2018)
_____________ D E C I S I O N _____________ Background 1.This is the application made by the 2nd Defendant (“Champion”) to strike out parts of the Amended Statement of Claim (“SOC”) filed in this action, on the ground that they disclose no reasonable cause of action of knowing receipt against Champion. 2.There is no dispute: a striking out is only appropriate in plain and obvious cases. Where the ground to strike out is that there is no reasonable cause of action disclosed, the Court should only consider the SOC, and the facts pleaded are assumed to be true. If the threshold of “plain and obvious” is met, the Court should not hesitate to strike out a claim, however complicated the pleading is, or merely because the issues are difficult or complicated. 3.Champion has emphasized that where a party has pleaded the specific legal consequences arising from material facts pleaded, it is bound by that pleaded legal consequence, and is barred from contending another (Mui So Bing v Wan Chi Shing [2020] 1 HKC 85). 4.It is Champion’s case that on a plain and ordinary reading of the SOC, the parts of the SOC sought to be struck out (“Objectionable Parts”) are premised on a pleaded cause of action of knowing receipt, and none other. The Plaintiffs are barred from asserting any other, unpleaded, legal consequence said to arise from the material facts which are pleaded. On Champion’s case, the pleaded cause of action of knowing receipt is plainly and fatally defective, as the Plaintiffs, on their pleaded case, have no pre-existing or continuing proprietary interest in any trust property claimed to have been received by Champion. The Plaintiffs cannot rely on the cause of action of knowing receipt itself, to create and assert a proprietary right. As such, the Objectionable Parts disclose no cause of action and should be struck out. The claims made in SOC 5.As Counsel for Champion have summarized, the following matters are pleaded in the SOC and are assumed to be true for the present application:
6.The Plaintiffs claim that in procuring the Group to act as it did, Poon was in breach of his contractual and fiduciary duties owed to Sung and ADFL. The Plaintiffs plead in paragraph 44.1 of the SOC:
7.At paragraph 45 of the SOC, Poon’s breach of duties is pleaded:
8.The claim is followed by the pleading at paragraph 46, which contains the Objectionable Parts (underlined below):
9.Champion also seeks to strike out the following relief sought in the prayer:
Whether there is sustainable cause of action 10.First, there is no dispute from the Plaintiffs that the cause of action they asserted in the SOC is knowing receipt. 11.The elements of the cause of action, as set out in the judgment of Hoffmann LJ in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, are highlighted by Counsel for Champion:
12.Counsel for Champion pointed out that the key element of knowing receipt is that the defendant must have received property in which the plaintiff has a pre-existing or continuing proprietary interest, referring to the judgment of Newey LJ in Byers v Saudi National Bank [2022] 4 WLR 22:
13.Mr Sussex further relies on the passage in Hayton and Mitchell on the Law of Trusts & Equitable Remedies (14th edition) at para 11-019:
14.On behalf of Champion, it was argued that on the Plaintiffs’ pleaded case, the 2nd Mortgage was a valid transaction, under which the Banks gave valuable consideration for the assignment to them of the rights of security over the Tower. After the 2nd Mortgage was entered into, ADFL as the mortgagor had no interest in the mortgagee’s rights. Sung was at all material times only the shareholder and director of AFDL, and had no direct interest in either the Tower or in the mortgagees’ rights. The Banks which held the mortgagees’ rights at the material time were free to deal with their rights and to exercise such rights under the 2nd Mortgage as they pleased, with no duty to account to Sung and/or ADFL in respect of their exercise of such rights. Accordingly, when the Banks assigned the mortgagees’ rights to Champion, there was no pre-existing or continuing interest in the mortgagee rights on the part of either Sung or ADFL, and no valid cause of action in knowing receipt to vest in the Plaintiffs. 15.Mr Sussex for Champion emphasized that the Plaintiffs have not sought to impugn the 2nd Mortgage, a valid transaction under which the relevant property was transferred to the Banks. On that basis, there is no transfer of property or assets which can be said to be in breach of any fiduciary duties that may be owed by Poon to the Plaintiffs, and no assets received by Champion from the Banks as representing the assets of the Plaintiffs. The essential element comprising the cause of action in knowing receipt is missing - a fatal defect, according to Champion. Mr Sussex criticized the Plaintiffs for putting the wrong focus on the recipient or acquirer of the assets, rather than on the disposer, and without identifying any wrongful transaction (which is the wrong approach, according to the judgment of Nugee J in Courtwood Holdings SA v Woodley Properties Limited [2018] EWHC 2163 (Ch) 9 October 2018, at para 199). 16.On behalf of the Plaintiffs, Ms Sit argued that a proper reading of the SOC makes it clear that there were property rights which passed from the Plaintiffs to Champion, and that Champion has adopted a blinkered view of the claims made by the Plaintiffs, which caused it to misread and misunderstand the pleading in the SOC as to the property rights relied upon. 17.Ms Sit pointed out that the SOC made it clear (in paragraphs 12.3 to 12.4 and 14) that there was a pre-existing fiduciary relationship between Sung and Poon to preserve and maintain the Sung Business, which fiduciary relationship arose by reason of Poon’s ascendancy over Sung through his control over the shares in and the board of AHL following and pursuant to the AHL Sale Agreement. It was in the course of such fiduciary relationship that Poon had asked Sung to part with his personal asset, the Tower, and to subject it to the 2nd Mortgage, on the basis that Poon would procure ADL (through his control of the company) to pay off the debts due to the Banks, to discharge the 2nd Mortgage, and to return the Tower to the Plaintiffs, unencumbered. This gave rise to further fiduciary duties on the part of Poon, including the duty (as pleaded in paragraph 28 of the SOC) to exercise his power over the conduct of the affairs of the Group in dealing with the Loan Facilities and the 2nd Mortgage (“Power”) in good faith, to exercise the Power for proper purposes, not to make unauthorized profits or obtain unauthorized advantages, and to exercise the Power exclusively in the best interests of Sung. 18.On the Plaintiffs’ case, therefore, the scope and subject matter of Poon’s fiduciary obligation, and the “property” or asset which constitutes the claim of knowing receipt, are the Plaintiffs’ rights to the unencumbered Tower, which rights depend on the 2nd Mortgage being discharged and on the ancillary orders sought in the relief being granted, for the discharge of the 2nd Mortgage. The “rights under the 2nd Mortgage” referred to in paragraph 46 and paragraph 4 of the prayer for relief are these rights to the unencumbered Tower. Counsel highlighted that Poon had acted in breach of his fiduciary duties, when he procured Champion to acquire the 2nd Mortgage, instead of returning the Tower to the Plaintiffs pursuant to and in accordance with the 2nd Mortgage Agreement and the Collateral Repayment Agreement. These rights to the unencumbered Tower were the rights transferred to and held by Champion pursuant to the Banks’ assignment, as a result of the breach of Poon’s fiduciary duties. 19.As Counsel argued, property includes contractual rights as choses action. Sung and ADFL as parties to the 2nd Mortgage Agreement, and as pleaded in paragraph 23 of the SOC, had rights under the 2nd Mortgage Agreement. The understanding of the parties to the 2nd Mortgage Agreement, and the terms of the 2nd Mortgage Agreement, were all pleaded in paragraphs 25, 26 and 27 of the SOC, including the agreement that Poon would procure the Group to repay the Loan Facilities and discharge the 2nd Mortgage (paragraph 25.3), that Sung did not gratuitously give the 2nd Mortgage to benefit Poon and the Group (paragraph 26.2.4), that Poon would exercise his Power in good faith and not in a way to deliberately harm the interests of Sung (paragraph 27.1) or for his own benefit (paragraph 27.2), that Poon would not cause anything to be done to prevent the discharge of the 2nd Mortgage (paragraph 27.3), and would use his best endeavors to procure the Group to repay the Loan Facilities and to discharge the 2nd Mortgage (paragraph 27.4). 20.I accept the submissions of the Plaintiffs, that the above rights of theirs have all been pleaded in the SOC, and are not being raised for the first time to oppose the striking out application. When the purpose, terms and conditions and understanding agreed between Sung and Poon have all been set out in the SOC, it is a matter of argument at trial what the pleaded rights of property under the 2nd Mortgage Agreement comprised, and which rights had been transferred from the Plaintiffs to the Banks, and thereafter received by Champion. I cannot accept the argument advanced for Champion, that the “construction” of the SOC advanced by the Plaintiffs is distorted, or obviously untenable. 21.The reliance on the authorities (including Courtwood), that the knowing recipient must be in receipt of property from, or as a direct consequence of, a disposition which is itself a breach of trust or breach of fiduciary duty, or from a transaction which is impugned, and Champion’s emphasis that the transfer of the Tower to the Banks under the 2nd Mortgage is a valid transaction which the Plaintiff does not seek to impugn, lose force when it is recognized that the transaction which is sought to be impugned is the wrongful transfer of the Plaintiffs’ rights to the unencumbered Tower, and the breach of fiduciary duty claimed is Poon’s procurement of the 2nd Mortgage to be assigned to Champion, instead of procuring the discharge of the 2nd Mortgage with the money raised for the Group. 22.Counsel for the Plaintiffs emphasized that equity does not insist that the “property” subject to fiduciary obligations must move from the party to whom the obligations are owed (in this case the Plaintiffs) to the fiduciary (in this case Poon), and further, that it is not necessary for the same “property” to have been moved from one party to the other (Leung Ping Chiu Roy v Wai Wai Chen [2021] HKCA 941). 23.An assignment of a reversionary interest in the trust would suffice as “property”, even if the legal title to the underlying property at all times vested in the trustee (Lewin on Trusts, para 42-043 (4)). 24.Ms Sit also relies on Independent Trustee Services v GP Noble Trustees [2013] Ch 91, paras 47 and 49, to invoke the so-called Wilkes v Spooner exception and to argue that even if the transfer of the Property to the Banks under the 2nd Mortgage was a valid transaction in favour of purchasers for value without notice, when the 2nd Mortgage was transferred by the Banks to Champion which is Poon’s vehicle, the equitable title of the Plaintiffs “revived” to become enforceable against Poon and Champion. The principle was explained in the judgment of Patten LJ in Independent Trustee, as follows:
25.With the emphasis which has been placed by Counsel for Champion on the fact that the Banks were bona fide purchasers for value without notice, I am not persuaded that the principles enunciated in Independent Trustee on bona fide purchasers for value, and trustees’ claims against parties who claim title through them, are irrelevant to the claims made in the present case, as Counsel for Champion suggested. As Ms Sit pointed out, constructive trust, equitable principles on knowing receipt and proprietary remedies are areas of the law which are still developing. The Court should be cautious before exercising its discretionary power to drive a plaintiff from the judgment seat by striking out, and at this stage, I am not satisfied that the Plaintiffs’ pleaded claims are unarguably bad and doomed to fail. 26.Champion’s reliance on Byers v Saudi National Bank [2022] 4 WLR 22, and the requirement for the claimant to have a “continuing proprietary interest” was distinguished, on the basis that under Saudi law as the lex situs of the shares and property in question in the case, upon registration of the transfer of the shares, all previous interests in the shares were extinguished, and the claimant did not have any further title to support its claim of knowing receipt. There is no such law in this case. 27.Having considered the submissions made by Counsel, I cannot agree that it is plain and obvious from the SOC that the claim in knowing receipt is unsustainable and defective for lack of an identifiable asset of the Plaintiffs, which had been received by Champion. The rights under the 2nd Mortgage Agreement and the Collateral Repayment Agreement have been sufficiently pleaded, to enable the Plaintiffs to argue and identify the nature of the Plaintiffs’ property rights as including their right to have the 2nd Mortgage over the Tower to be discharged and their right to the return of an unencumbered Tower, and that these were rights which had been wrongfully transferred to Champion upon Poon’s procurement, in breach of his fiduciary duties which have likewise been identified in the SOC. 28.Having identified the Plaintiffs’ assets and property as the right to the unencumbered property and the right to have the 2nd Mortgage discharged, the other criticism made by Champion, that the Plaintiffs are seeking to construct a proprietary claim when no pre-existing right could be established, also falls away. 29.It is not disputed by the Plaintiffs that the claim in knowing receipt does not itself “create” the proprietary right. There is the clear and undisputed distinction between the equitable doctrine of tracing and the imposition of a constructive trust by reason of the knowing receipt of trust property (highlighted in Re Montagu’s Settlement Trusts and in Kanada Tejapaibulnational v Thai Mercantile Development Finance Ltd [1988] HKC 295. 30.What the Plaintiffs claim in the SOC is that by virtue of the relationship between Sung and Poon, whereby Poon was in a position to exercise his Power on behalf of Sung and able to abuse his Power to Sung’s detriment, Poon is a constructive trustee owing fiduciary duties to Sung. Under the 2nd Mortgage Agreement and the Collateral Repayment Agreement made between Sung (on his own behalf and on behalf of ADFL) and Poon, Sung and ADFL had choses in action being property rights. These were transferred to the Banks following and pursuant to the 2nd Mortgage Agreement and the Collateral Repayment Agreement, and pursuant to the Deed, the property rights were wrongfully transferred to Champion in breach of Poon’s fiduciary duties, when the rights should have been returned to ADFL and by Poon procuring the discharge of the 2nd Mortgage, in accordance with the 2nd Mortgage Agreement and the Collateral Repayment Agreement. 31.The Plaintiffs’ case is that as Poon had procured the transfer of the Plaintiffs’ property rights to Champion, in breach of his fiduciary duties, and Champion had received the rights in the Tower under the 2nd Mortgage as a result, this renders Champion a constructive trustee with the liability to account on the footing of its knowing receipt. Its liability as constructive trustee is to restore the assets immediately, and it may also be accountable for any profit made or loss avoided. If the trust property is still in the hands of the knowing recipient, the claimant will not only have personal equitable remedies against the recipient, but will also be entitled to recover the same by equitable proprietary remedies. Ms Sit highlighted that the Court recognized in Williams v Central Bank of Nigeria [2014] AC 1189 that the claimant may have a proprietary claim, as a measure of remedy. These are the remedies claimed in paragraph 46.5 of the SOC, and are all open to the Plaintiffs to seek. 32.There is nothing objectionable to the plea, made in paragraph 46, that Champion holds its rights under the 2nd Mortgage as constructive trustee, and that its rights under the 2nd Mortgage were “derived from” Poon’s breach of fiduciary duties. 33.As I have concluded and explained in the earlier part of this Decision, the arguments made by the parties on the “construction” of the SOC as it is pleaded, are more appropriate as an exercise for the trial of the action. Suffices it to say that it is not plain and obvious from the SOC that the Plaintiffs’ cause of action in knowing receipt is unsustainable. Disposition 34.The application to strike out is accordingly dismissed, and it follows that the appropriate order nisi is that Champion is to pay to the Plaintiffs the costs of and incidental to the striking out application (including any costs reserved), with Certificate for Counsel. The order nisi shall be made absolute unless application for variation is made within 14 days of the handing down of this Decision.
Ms Eva Sit SC, instructed by DLP Piper Hong Kong, for the plaintiffs Mr Charles Sussex SC, Mr Christopher Chain and Ms Tinny Chan, instructed by Reed Smith Richards Butler LLP, for the 2nd defendant | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under HCA 2385/2017