China Medical Technologies Inc (in Liquidation) and Others v. The Bank of East Asia, Ltd

HCA 1741/2018 & HCA 303/2022

[2023] HKCFI 2156

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1741 OF 2018 &

ACTION NO. 303 OF 2022

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(Consolidated by the Order of Honourable Mr Justice Ng dated 10 May 2021)

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JUDGMENT

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Introduction

1.There is before this court the Defendant’s application by Summons dated 17 December 2021 (“Strike Out Summons”) to strike out the Statement of Claim in its entirety and to dismiss this Action on the grounds that the claims (i) disclose no reasonable cause of action; (ii) are frivolous or vexatious; and/or (iii) are otherwise an abuse of the process of the Court in that:

1.1  The claims based on dishonest assistance:

(a)  are defective because there are no sufficient particulars of dishonesty on the part of the Defendant; and/or

(b)  are in any event time-barred as they could have been discovered by the Plaintiffs with reasonable diligence more than six years before the commencement of HCA 1741/2018 (“HCA 1741”) on 27 July 2018;

1.2  The claims based on knowing receipt:

(a)  are unsustainable because the Defendant received all the funds in a ministerial capacity only;

(b)  are time-barred under section 4 of the Limitation Ordinance (Cap 347) (“LO”) and do not fall within the postponement provisions under sections 22 or 26 of the LO; and/or

(c)  are in any event time-barred as they could have been discovered by the Plaintiffs with reasonable diligence more than six years before the commencement of HCA 1741 on 27 July 2018;

1.3  The claim based on want of authority is time-barred under section 4 of the LO and does not fall within the postponement provisions under section 22 or section 26 of the LO;

1.4  The claims based on fraudulent trading:

(a)  are unsustainable because there is no or no sufficient plea that the Defendant had dealings with the 1^st Plaintiff or that the Defendant was a party to the carrying on of any business of the 1^st Plaintiff; and/or

(b)  are defective because there are no particulars of any actual or blind eye knowledge on the part of the Defendant of any fraudulent trading by the 1^st Plaintiff.

2.As conceded in para 9 of the Plaintiffs’ skeleton, several points raised in the Strike Out Summons are no longer in issue ie their reliance on section 22 of the LO and their claim based on want of authority. In consequence, the Plaintiffs have prepared a draft Statement of Claim which removes reliance on section 22 LO and the claim based on want of authority. As to para 1.5 of the Strike Out Summons which seeks to strike out any claim beyond the amount of US$181.5 million that passed through the Defendant’s accounts, the Plaintiffs have also conceded in the 1^st Affidavit of Mr Borrelli dated 4 March 2022 (“Borrelli 1”) at [72] that they do not seek recovery of loss in excess of the amount that passed through BEA’s accounts ie US$181.5 million.

3.In the alternative, the Defendant seeks a direction that certain questions be tried as points of law under RHC Order 14A or as preliminary issues under RHC Order 33 r 3. It is fair to say that Mr Man SC, with his usual good sense, does not press upon a direction under RHC Order 14A.

4.In the afternoon of the first day of the hearing, this court is provided with a Draft Order for the trial of preliminary issues, para 1 of which states:

(a)  Whether the Plaintiffs’ claim based on dishonest assistance has become barred by operation of the LO as the alleged fraud could have been discovered by the Plaintiffs with reasonable diligence more than 6 years before the commencement of HCA 1741 on 27 July 2018; and

(b)  Whether the Plaintiffs’ claim based on knowing receipt has become barred by operation of the LO as the alleged fraud could have been discovered by the Plaintiffs with reasonable diligence more than 6 years before the commencement of HCA 1741 on 27 July 2018.

5.Para 3 of the Strike Out Summons seeks an Order that time for filing and service of the Defence be deferred until 28 days after the final determination of paras 1 and 2 thereof. No such Order has been obtained by the Defendant.

6.There is also before this court the Defendant’s application by Summons dated 5 January 2022 (“Relief Summons”) seeking relief from sanction of an Unless Order at para 1 of Master Dick Ho’s Order dated 18 November 2021 (“Master Ho Order”) in relation to the filing of Defence by the Defendant which it did not comply. Master Ho Order was made by consent.

7.Para 1 of Master Ho Order provides that: “Unless the Defendant do file and serve its Defence by 4:00p.m. on 17 December 2021, the Defendant shall be debarred from so doing”. The Defendant has waited more than 14 days after the expiry of the deadline as required by RHC Order 2 r 4 before issuing the Relief Summons.

Background facts

8.The factual background of the demise of the 1^st Plaintiff has been repeated again and again in various Judgments of this court as well as the Court of Appeal in HCA 3391/2016 & HCA 1417/2013 against inter alia the former directors of the 1^st Plaintiff. It can be found in this court’s Judgment dated 11 May 2023 in connection with the Plaintiffs’ application for leave to adduce expert evidence. For ease of understanding the basic background, this court will quote from [4] - [12] of that Judgment as follows.

“4. The 1^st Plaintiff was incorporated in the Cayman Islands in July 2004. Its shares were listed on NASDAQ in August 2005 and were delisted in February 2012. It was the holding company of a group whose principal business was said to be developing, manufacturing and marketing advanced surgical and medical equipment in the PRC. The 1^st Plaintiff was grossly insolvent with provable claims of over US$400 million. In July 2012, it was wound up by the Grand Court of the Cayman Islands. On 1 September 2014, Harris J made an ancillary winding up Order against it in HCCW 435 of 2012.

5. The 2^nd Plaintiff is the 1^st Plaintiff’s wholly owned subsidiary.

6. The 3^rd Plaintiffs were appointed as the provisional liquidators of the 1^st Plaintiff by Order of Harris J in November 2012. On 5 February 2015, they became the Liquidators of the 1^st Plaintiff (“Liquidators”).

7. The 1^st Defendant (“Mr Wu”) was at all material times the founder, Chairman, CEO, director and the largest shareholder of the 1^st Plaintiff. From January 2006 to July 2012, he was a director of the 2^nd Plaintiff.

8. The 2^nd Defendant (“Mr Tsang”) was the 1^st Plaintiff’s director from June 2007 to December 2011 as well as its CFO from January 2005 to January 2012. He was also a director of the 2^nd Plaintiff from January 2006 to December 2011. He was the second most senior executive of the 1^st Plaintiff after Mr Wu. Mr Tsang is in contempt of a High Court Order that he should attend Court in person for examination, has absconded from Hong Kong and is subject to an outstanding warrant for his arrest. Mr Tsang is also said to be a fugitive from the United States criminal justice system.

9. The Plaintiffs claim that the former senior management of the 1^st and 2^nd Plaintiffs, assisted by their associates, perpetrated, participated in and/or benefited from the fraudulent misappropriation of US$521.8 million in cash (“Fraud”) through purported acquisitions (“Acquisitions”) from the 7^th Defendant, Supreme Well Investments Limited (“Supreme Well”), and its subsidiaries, of the following alleged medical technologies:

a. FISH, acquired pursuant to a contract dated 6 February 2007 for US$176.8 million; and

b. SPR, acquired pursuant to a contract dated on or around 5 October 2008 for US$345 million.

10. It is the Plaintiffs’ case that:

a. FISH and SPR were worthless (or of no significant value) in that they were not new technologies;

b. Supreme Well, the counter party to the Acquisitions, was in fact controlled by Mr Tsang, who was the sole authorised signatory of its bank accounts with Bank of China (Hong Kong) Limited (“BOC”) and The Bank of East Asia, Limited (“BEA”) into which US$355.5 million of the consideration paid by the 1^st and 2^nd Plaintiffs were deposited. The balance was paid to Supreme Well by other means;

c. Mr Tsang authorised the transfer of funds from Supreme Well to the bank accounts of other persons and entities (“Supreme Well Payees”) all of whom were associated with or controlled by Mr Wu, Mr Tsang and/or their associates; and

d. the Supreme Well Payees subsequently transferred all or some of the funds to the bank accounts of other persons and entities (“Further Supreme Well Payees”), some of whom were associated with or controlled by Mr Wu, Mr Tsang and/or their associates, and thereafter to further recipients.

11. The 1^st Defendant orchestrated, participated and conspired in the Fraud.

12. Mr Tsang acted on both sides of the Acquisitions and directed payment of the consideration received by Supreme Well to the Supreme Well Payees. He received US$7.47 million directly and over US$379 million through entities controlled by him. The Plaintiffs claim US$524.7 million against Mr Tsang:

a. US$521.8 million misappropriated from the 1^st and 2^nd Plaintiffs by reason of, inter alia, his breaches of duty and trust and unlawful conspiracy; and

b. US$2.9 million, being salary and bonuses paid to him from January 2006.’”

9.Against the backdrop of the demise of the 1^st Plaintiff, the Plaintiffs have also brought claims against the Defendant in the present Action and the Bank of China (“BOC”) in HCA 1742 of 2018 (“BOC Action”). In 2021, this court has heard and largely dismissed BOC’s striking out application of the Plaintiffs’ claims: China Medical Technologies, Inc & Ors v Bank of China (Hong Kong) Ltd [2021] HKCFI 3042 (“BOC Decision”). Since the Defendant is content, for the purpose of the present application, to adopt the more detailed factual background summarized in the BOC Decision at paras 5-21, for ease of comprehension, the same will also be recited below.

“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 1^st 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 1^st Plaintiff was held out as having a principal business of developing, manufacturing and marketing advanced surgical and medical equipment in the PRC. The 2^nd Plaintiff was a wholly owned subsidiary of the 1^st Plaintiff.

7. Between 2006 and 2013, the 1^st Plaintiff’s board of directors consisted of the following individuals:

Name	Position
Mr Wu Xiaodong (“Wu”)	Chairman and Chief Executive Officer
Mr Samson Tsang Tak Yung (“Tsang”)	Director and Chief Financial Officer
Minshi Shen	Director and Chief Operating Officer
Ting Zheng	Director
Lawrence Arthur Crum (“Dr Crum”)	Independent non-executive director
Cole R Capener (“Mr Capener”)	Independent non-executive director
Iain Ferguson Bruce (“Mr Bruce”)	Independent non-executive director
Ruyu Du (“Dr Du”)	Independent non-executive director
Yuedong Li (“Dr Li”)	Independent non-executive director
Guoming Qi (“Dr Qi”)	Independent non-executive director

8. The Plaintiffs’ case is that the alleged fraud was committed on the 1^st and 2^nd Plaintiffs by the following individuals who were directors or officers of the 1^st Plaintiff:

(1) Wu;

(2) Tsang;

(3) Mr Feng Zhu (“Zhu”), the Vice President for Business Development and Investor Relations as well as Senior Vice President of Operations of the 1^st Plaintiff; and

(4) Zhong Chen (“Chen”), Chief Technology Officer of the 1^st Plaintiff.

(collectively “4 Individuals”)

9. In essence, the Plaintiffs claim that the 4 Individuals had breached their fiduciary duties to the 1^st Plaintiff by causing the 1^st 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 1^st 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 1^st 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 1^st and 2^nd Plaintiffs to Supreme Well and Innovative Technology Investment Ltd (“Innovative”) as follows:

(1) Between November 2006 and December 2008, Wu and/or Tsang caused the 1^st Plaintiff to transfer a total of US$303.75 million to Supreme Well, including its account with Bank of East Asia (Hong Kong) Ltd (“Supreme Well BEAHK Account”) and its accounts with the Defendant (“Supreme Well BOCHK Accounts”), by 52 cashier orders purchased with funds from the 1^st Plaintiff’s account with the Defendant (“P1 BOCHK Account”).

(2) In February 2007, Wu and/or Tsang caused the 1^st Plaintiff to transfer US$10 million to Innovative’s account with the Defendant (“Innovative BOCHK Account”) by 2 cashier orders purchased with funds from the P1 BOCHK Account.

(3) Between December 2008 and January 2009, Wu and/or Tsang caused the 1^st Plaintiff to transfer more than US$100 million to the 2^nd Plaintiff’s account with Standard Chartered Bank (Hong Kong) Ltd (“P2 SCBHK Account”). Between March and December 2009, Wu and/or Tsang then caused the 2^nd Plaintiff to transfer a total of US$51.75 million to the Supreme Well BOCHK Accounts by 3 cashier orders purchased with funds from the P2 SCBHK Account.

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 1^st 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 1^st Plaintiff’s assets. The Anonymous Letter stated that:

(1) The FISH and SPR Transactions involved possible illegal and fraudulent activities.

(2) The FISH and SPR Transactions were highly unusual and suspicious by reason of the following facts:

(a) Supreme Well and its subsidiary Molecular Diagnostics Technologies Ltd were BVI shell companies with no apparent business operations;

(b) the two shell companies were controlled by certain parties in China with relationship to the CEO and management of the 1^st Plaintiff;

(c) the SPR Technology was still under research and development and had not been approved by any health authorities in the world for commercial sale; and

(d) the consideration for the transactions involved a substantial portion of the 1^st Plaintiff’s cash balance.

(3) The irregularities had led industry insiders to believe that the 1^st Plaintiff grossly inflated the price of its acquisitions and channelled cash from investors to company insiders’ pockets without proper disclosure and possibly in violation of laws.

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 1^st 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 1^st Plaintiff be wound up as insolvent and that Mr Cosimo Borrelli and Mr Kenneth Krys be appointed as the joint official liquidators of the 1^st 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 1^st Plaintiff until the determination of a petition to wind up the 1^st Plaintiff in Hong Kong. On 1 September 2014, the Hong Kong Court ordered that the 1^st Plaintiff be wound up and that the Liquidators continued as provisional liquidators of the 1^st Plaintiff. On 2 February 2015, the Liquidators were appointed as the joint and several liquidators of the 1^st 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 1^st and 2^nd Plaintiffs filed the writ of summons in HCA 577/2015 and in HCA 3272/2016 respectively. In those proceedings, the 1^st and 2^nd 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 1^st 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 1^st and 2^nd Plaintiffs. A substantial part of the 1^st and 2^nd 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.”

10.The Defendant submits there are important differences between the position of BOC and itself. While BOC was the banker of the 1^st Plaintiff and Supreme Well Investments Limited (“Supreme Well”) ie the entity first received the misappropriated funds, the Defendant was not a banker of and had no dealings with the Plaintiffs.[1] However, there is no dispute that the Defendant was the banker of Supreme Well as well as other entities who received funds from Supreme Well viz East Hope International Limited (“East Hope”) and Cheer Link International Limited (“Cheer Link”) and that Mr Samson Tsang (“Tsang”) was an authorised signatory of the accounts of these 3 companies.

Deliberation

11.The applicable principles are uncontroversial and they can be reduced to a few propositions:

(a)  Striking out a plaintiff’s claim should only be done in “plain and obvious” cases.

(b)  Plain is not the same as simple and obvious is not the same as short. If on a careful reading of the Statement of Claim however complicated, it can be seen that there is no cause of action, the Court can, and probably will, order it to be struck out.

(c)  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 out a claim.

(d)  There should be no trial upon affidavits. Disputed facts are to be taken in favour of the plaintiff.

(e)  Where the legal viability of a cause of action is sensitive to the facts or requires a minute and protracted examination of the documents and facts of the case, an order to strike out should not be made.

(f)  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.

Dishonest assistance - insufficient plea of dishonesty

12.It is common ground that the element of dishonesty in dishonest assistance consists of both a subject and objective element: Hing Yip Holdings (Hong Kong) Limited v Cellmark China Limited [2021] HKCFI 1396. At [102], Mimmie Chan J explained as follows:

“102. The authorities are clear, that for the purpose of deciding whether the Defendants were dishonest to be liable for dishonest assistance, it is necessary for the Court to ascertain the actual state of the Defendants’ subjective knowledge or belief as to the facts. Only upon ascertaining the Defendants’ actual state of mind as to knowledge or belief as to facts can the Court decide whether the Defendants were dishonest by the objective standards of ordinary and decent people (Ivey v Genting Casinos (UK) Ltd [2018] AC 391, Group Seven Ltd v Nasir [2020] Ch 129. There is no requirement that the defendant must appreciate that what he has done is, by those objective standards, dishonest.”

13.For the present purpose, we are concerned with what is a sufficiently particularised pleading of dishonesty.

14.In Great Source Enterprise Ltd v Sino Estates Management Ltd [2004] 4 HKC 49 at [65], Yuen JA warned that the courts have always been cautious in scrutinising a plea of dishonesty which must be sufficiently and properly particularised.

15.At [66], the learned Judge then turn to Lord Millet’s Judgment in Three Rivers DC v Bank of England (No 3) [2003] 2 AC 1 at [184] and [186]. This court will quote at greater length from [184] to [186] of Three Rivers DC:

“184 It is well established that fraud or dishonesty (and the same must go for the present tort) 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: see Kerr on Fraud and Mistake, 7^th ed (1952), p 644; Davy v Garrett (1878) 7 Ch D 473, 489; Bullivant v Attorney General for Victoria [1901] AC 196; Armitage v Nurse [1998] Ch 241, 256. This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.

185 It is important to appreciate that there are two principles in play. The first is a matter of pleading. The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him…

186 The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient. This is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. 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.”

16.In the Statement of Claim at para 162.3, the Plaintiff’s case of dishonesty under this claim is based on allegations of (i) knowledge, actual or blind-eye, on the part of Manny Yuen (“Yuen”), a relationship manager of the Defendant handling the relevant bank accounts, (ii) Yuen’s suspicion that the funds received into the Supreme Well BEA Account and thereafter dispersed represented an unlawful misappropriation of funds etc, (iii) the Defendant’s wilful failure to make proper inquiries that an honest and/or rational banker would have made and (iv) its failure to make a suspicious transaction report (“STR”).

17.In its skeleton at section C3, the Defendant submits there are 2 serious defects with the pleas of knowledge and dishonesty.

18.First, there is no sufficient plea of the subjective state of mind of Yuen so as to justify the conclusion of actual knowledge or suspicion on his part. The crucial defect is said to be that, although there are pleas of suspicious features which would put an “honest and/or rational banker” on inquiry, it is not alleged that Yuen did have those suspicions.

19.Second, the repeated references as to what an “honest and/or rational” banker would do are defective. Such rolled-up pleas would be treated as a plea of the lesser state of mind. Here, to allege that a “rational banker” would make inquiries would not be sufficient to allege dishonesty. An irrational banker is not necessarily dishonest.

20.The second point can be disposed of first for it is not exactly supported by the 2 authorities cited: Armitage v Nurse [1998] Ch 241, 257B-C (Millett LJ); Top Point Ltd v K&L Gates [2020] 1 HKLRD 814 at [19] (Lok J). What the 2 cases stand for, as explained by Lok J at [19], is this:

“Second, a ‘rolled-up plea’, i.e. plea which, on its face, alleges actual or alternatively constructive knowledge, is not treated as making two alternative allegations. Instead, it is treated as a single allegation that a person ought to have known.[2] Therefore, where a claim involves an allegation of dishonesty or fraud which requires a plea of actual knowledge, and yet the pleader only makes a rolled-up plea, the claim is liable to be struck out for disclosing no reasonable cause of action or defence or being embarrassing.[3]”

21.This court does not accept the Defendant’s submission that rolled-up pleas are always defective - it all depends what the pleas are and the context in which they are made. If the context is that “actual knowledge” must be pleaded in order to sustain a cause of action and the plea is “actual or alternatively constructive knowledge”, then the plea is understandably embarrassing and defective. But it is at least arguable that the 2 cases cited do not support the proposition, and in principle this court does not support the proposition, that references as to what an “honest and/or rational” banker would do in a pleading will be treated only as a reference to what a rational banker would do. The plea of what an “honest and/or rational” banker would do is made in the alternative and should be treated as such. This court accepts, as submitted by the Defendant, an irrational banker may not necessarily be dishonest. But it is clear to this court that failure to do what an honest banker would do can only mean dishonesty.

22.Now back to the first submission in which the crucial defect is said to be that, although there are pleas in the Statement of Claim of suspicious features which would put an “honest and/or rational banker” on inquiry, it is not alleged that Yuen did have those suspicions.

23.Since the Defendant uses Section E.3 The November 2006 Misappropriation of the Statement of Claim for illustration, this court will do so likewise.

24.The section starts off with para 122 which alleges Yuen knew of matters recorded in the Supreme Well BEA Account opening form and supporting documents. While the Defendant submits these are prima facie innocuous matters concerning the ownership, officers and business of Supreme Well, the first level recipient of the misappropriated funds, when read together with what follows, they are hardly innocuous.

25.At paras 122.4, 122.5, 122.7 and 122.8, it is pleaded that:

“122.4 the Defendant had no, or alternatively no adequate, information with respect to Supreme Well’s purpose and reasons for opening the account, its source of wealth or the source of funds to be paid into its account;

122.5 Supreme Well’s paid up share capital as at 5 October 2006 was only US$1,000.00;

…

122.7 Mr Tsang was the sole “Authorised Person” for the operation of the account, notwithstanding that he was not an employee or de jure officer of Supreme Well…; and

122.8 the address for correspondence on the Supreme Well BEA Account was Mr Tsang’s residential address in Hong Kong.”

26.At paras 126 and 127, it is pleaded that:

“126. In the circumstances pleaded above and in any event, the deposit into the Supreme Well BEA Account of five cashier orders of US$6 million each, totalling US$30 million in aggregate, on or about 3 November 2006, was highly suspicious, or would have been perceived as highly suspicious by an honest and/or rational banker in the position of the Defendant, through Manny Yuen, in that:

126.1 a single large payment, vastly exceeding Supreme Well’s paid up share capital, had ostensibly been broken up into five individual cashier orders in lesser amounts, and presented for deposit into the Supreme Well BEA Account;

126.2 there was no commercial reason for using multiple payments with identical denominations, such that an honest and/or rational banker would suspect the possible avoidance of senior authorisation limits at the originating bank, and the avoidance of scrutiny of transactions involving higher denominations by senior management within that bank;

126.3 the source of funds could not be identified on the face of the cashier orders, such that the cashier orders provided a similar degree of anonymity as cash from the perspective of the recipient bank when considering the risk of money laundering;

126.4 there was no commercial reason for using cashier orders, such that an honest and/or rational banker would suspect the possible concealment of the source of the funds;

126.5 the Defendant, through Manny Yuen, had no, or no adequate, information as to the purpose of the payment, which otherwise bore no relationship to Supreme Well’s business, at least insofar as that business had been identified to the Defendant, through Manny Yuen; and

126.6 the method of payment was unusual having regard to the availability of easier, less expensive, more common and more transparent methods of transfer, such as via CHATS, given the information available to the Defendant, through Manny Yuen, and the purported purpose of the accounts.

127. The deposit would have been reported as an exception by any adequate MIS or ad hoc staff reporting system maintained by an honest and/or rational banker, and any such exception would have been reported to the account Relationship Manager and compliance officer. It is therefore to be inferred that Manny Yuen knew of the deposit at or around the time it was made, or shortly thereafter.” (emphasis added)

27.Then, at para 128(1), it is pleaded that:

“128. In the premises:

128.1 the Defendant knew, through Manny Yuen, that the funds deposited into the Supreme Well BEA Account on or about 3 November 2006 were the consequence of fraud or other illegal or illicit conduct, and/or were not at the free disposal of Supreme Well or Mr Tsang…” (emphasis added)

28.At paras 131 - 134, the Plaintiffs have pleaded the immediate transfer out of almost all the US$30m earlier paid into the Supreme Well Account to East Hope.

“131. Mr Tsang’s instruction on or about 7 November 2006 to transfer US$28 million from the Supreme Well BEA Account to the East Hope BOCHK Account and/or the transfer itself was highly suspicious, or would have been perceived as highly suspicious by an honest and/or rational banker in the position of the Defendant, through Manny Yuen, in that, among other things:

131.1 the vast majority of the US$30 million deposited in the Supreme Well BEA Account as its first transaction was being paid away on the instructions of Mr Tsang within a short period of time (less than a week);

131.2 the funds, having originated from a BOCHK account were being paid to another BOCHK account in a large round figure;

131.3 the Defendant, through Manny Yuen, had no, or no adequate, information as to the purpose of the payment, which otherwise bore no relationship to Supreme Well’s business, at least insofar as that business had been identified to the Defendant, through Manny Yuen; and

131.4 the receipt and payment of funds was unusual, given the information available to the Defendant, through Manny Yuen and the purported purpose of the accounts.

132. Further, the East Hope BEA Account was opened just over one month later on or about 12 December 2006, again with the involvement of Manny Yuen, and again with Mr Tsang as the “Authorised Person” for operating the account, and with his residential address given for account correspondence. From at least that time, the Defendant, through Manny Yuen, knew that East Hope, the recipient of the US$28 million payment on or about 7 November 2006:

132.1 was controlled by Mr Tsang, or had purportedly authorised Mr Tsang to operate its bank accounts; and

132.2 held at least two bank accounts with different institutions within the same locality.

…

134. A further US$1.5 million of the US$30 million deposited in the Supreme Well BEA Account on or about 3 November 2006 was transferred to the East Hope BOCHK Account on or about 19 December 2006, on the instructions of Mr Tsang.” (emphasis added)

29.At para 135, it is pleaded that;

“135. The activity on the Supreme Well BEA Account with the Defendant after the deposit of funds on or about 3 November 2006 and other matters pleaded at paragraphs 131 to 134 above would have exacerbated the Defendant’s suspicions, through Manny Yuen….” (emphasis added)

30.On the basis of the above, it seems to this court that the Plaintiffs have sufficiently pleaded actual knowledge and suspicion on the part of Manny Yuen, and hence the Defendant, of the unlawful nature of the transfers into and out of the Supreme Well BEA Account on or about 3 and 7 November as well as 19 December 2006. Importantly, the facts pleaded are, in this court’s view, sufficient to support a plea that Yuen did have the relevant suspicions, whether or not it is explicitly pleaded as such. If the Defendant’s complaint is simply that there is no such explicit plea as such, the same can easily be rectified and is not something that justifies the striking out of the entire cause of action.

Knowing Receipt - ministerial receipt

31.The Defendant’s submission on ministerial receipt is that: (1) it is well-established that liability in knowing receipt only arises if the defendant received the assets beneficially, as opposed to in a ministerial capacity; (2) a 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 (“Proposition (2)”). These are the same points raised by BOC in the BOC Decision at paras 25-26.

32.At para 27 of the BOC Decision, this court accepted that Proposition (2) was supported by the authorities cited viz Agip (Africa) Ltd v Jackson [1990] Ch 265, 292B (per Millett J); Lewin on Trusts 20^th Ed para 42-085. This court then went on to explain that (2) 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 and that (ii) money paid into a bank account belongs legally and beneficially to the bank and not the account holder (“Banking law propositions”).

33.Importantly, at para 29 of the BOC Decision, this court explained that a distinction is drawn by the learned editors of Goff and Jones The Law of Unjust Enrichment 9^th 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:

“ In a series of cases against banks which have received and dealt with misapplied trust property, the question has arisen whether the bank has received the property for its own benefit or has acted ministerially. To understand the authorities on this issue properly, it must be appreciated that the situation where the misapplied property has been deposited by the account holder differs from the situation where the property has been deposited by a third party. (28-08)

In the first situation, the bank always receives the money beneficially, and never receives it ministerially: there is simply a loan of money from the account holder to the bank, or if the account is overdrawn, a repayment of the debt owed to the bank by the account holder. Hence, the bank is potentially liable to claims that are predicated on the basis that it has received misapplied property for its own benefit, where a trustee or fiduciary himself deposits trust money into his personal account. Certain cases to the contrary, which suggest that in this situation a bank can only be liable as a dishonest assistant, are incorrect in principle. (28-09)

In the second situation, where cash is deposited with a bank by a person other than the account holder, or the bank’s own account with a central clearing bank is credited as a result of instructions from such a person, the bank will almost always take the proceeds of the transaction ministerially as agent for the account holder. It has been hard for the courts and legal scholars to accept this proposition although cases can be marshalled in its support. One reason for their difficulties may be that they have not always clearly understood that a bank which receives a third-party deposit on its customer’s behalf does not receive ‘beneficially’ simply because it takes good title to the money and then uses the money as its own: ‘beneficial receipt’ as distinguished from ‘ministerial receipt’ of money entails not merely that a defendant takes good title to the money, but also that the defendant does not have to account for an equivalent sum to a principal who is legally liable to the claimant from the moment of the defendant’s receipt.” (28-10) (emphasis added)

34.In the present case, the Defendant has cited another authority in support of Proposition (2) viz Evans v European Bank Ltd (2004) 61 NSWLR 75 (Spigelman CJ). But as illustrated clearly at para 175 of Evans, the facts of that case (involving a foreign currency deposit which would in due course be paid by the bank into an account with a corresponding bank located in the nation of the currency of the deposit) were clearly distinguishable and pointed decidedly and rightly towards a ministerial receipt by the bank in question.

35.The Defendant acknowledges that there is tension between Proposition (2) and the Banking law propositions and that both had been long standing but asserts that they are not treated as inconsistent, citing Lewin on Trusts 20^th Ed. Vol. 2 at para 42-085, Goff & Jones at para 28-10, Snell’s Equity 34^th Ed. at para 30-069 and Compagnie Commerciale Andre SA v Artibell Shipping Co Ltd 2001 SC 653 at [16].

36.This court has considered the above authorities cited by the Defendant but is not satisfied that the tension has been satisfactorily resolved in favour of the recipient banks. In particular, the distinction between the deposit of funds by the account holder himself and deposit of funds by a third party, propounded by the learned editors of Goff & Jones, remains eminently relevant.

37.In the present case, the deposits of the cashier orders into the Supreme Well BEA Account totalling US$30m on or about 3 November 2006, US$100.5m on 4 December 2008 and US$20m on 4 December 2009 are pleaded at paras 164.2 and 164.3 of the Statement of Claim as deposits by Tsang on behalf of Supreme Well as customer into its own account and were received beneficially by the Defendant ie the 1^st situation in Goff & Jones at para 28-08.

38.At para 56 of the Defendant’s skeleton, it is said that what were deposited were cashier orders and not cash and a cashier order is simply an instruction issued by a bank to itself (the cashier) that a certain sum of money should be paid to the named payee. The Defendant goes on to submit that, on proper analysis, when Tsang (even if acting on behalf of Supreme Well) deposited a cashier order, what happened was simply the delivery of an instrument containing the instruction that the issuing bank should pay the sum of money to the payee. The money would be paid by the issuing bank from its own funds to the account of Supreme Well, rather than Supreme Well depositing its own money into its account with the Defendant.

39.In this court’s view, the Defendant is in effect asking this court to ignore the reality, which this court is not inclined to do unless compelled by binding authorities, that a cashier order is the equivalent of cash and has universally been accepted as the equivalent of cash. When Tsang deposited the cashier orders into the Supreme Well account with the Defendant, he was depositing something valuable into that account and at the same time the Defendant was receiving something valuable from its customer Supreme Well. The situation is no different from what is stated in the Banking law propositions 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 and (ii) money paid into a bank account belongs legally and beneficially to the bank and not the account holder. For the present purpose, this court cannot see the difference between a deposit by cheque and a deposit by cashier order.

40.To conclude, this court accepts the Plaintiffs’ submission that it is far from well-established that a bank receives funds in situations like the present only does so in a ministerial capacity. Rather, this is a difficult and unsettled area of law which is not appropriate for a striking out application.

Knowing Receipt - whether based on fraud

41.The Defendant’s submission is this: there can be no dispute that the prima facie limitation period of 6 years has expired – The Defendant last dealt with any of the misappropriated funds in June 2011,[4] whereas the Writ in the present Action was issued only in July 2018. Since the cause of action of knowing receipt is not a claim “based upon fraud”, the postponement provision under section 26(1)(a) of LO does not apply. The Defendant submits that there are clear Hong Kong and English authorities to the effect that knowing receipt is not a cause of action “based upon fraud”. This is because section 26(1)(a) requires common law fraud and the element of unconscionability in knowing receipt does not suffice.

42.The issue was 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 [235], the learned Judge explained her reasoning as follows:

“232. For section 26 (1) to apply, the Plaintiff has to establish either that the action is based upon the fraud of the Defendants, or any fact relevant to the Plaintiff’s right of action had been deliberately concealed from the Plaintiff by the Defendants, in which case limitation shall not begin to run until the Plaintiff had discovered the fraud or concealment, or could with reasonable diligence have discovered it.

233. Whilst the Defendants accept that dishonest assistance is based upon fraud (to fall within section 26 (1) (a)), they do not accept fraud to be a necessary allegation to constitute knowing receipt and want of authority. Knowing receipt requires unconscionability on the basis of the defendant’s knowledge (BCCI v Akindele; Williams v Central Bank of Nigeria [2014] AC 1189) but as Counsel submitted in the context of the Plaintiff’s claim in knowing receipt, unconscionability requires a lower standard than dishonesty (Akai). The Plaintiff relies on Williams v Central Bank of Nigeria [2014] AC 1189 to contend that knowing receipt is accepted as activating section 26 (1) (a) of LO. In that case, Lord Neuberger observed at para 119 of his judgment:

‘Finally, it is right to mention that in some cases of dishonest assistance or knowing receipt, even though the normal six-year period may have expired, a claimant may be able to invoke section 32 of the 1980 Act, which postpones the commencement of the six years, in cases ‘based on the fraud of the defendant’, or where the defendant has ‘deliberately concealed’ relevant facts from the claimant.’

234. The above only states that in some cases, the six-year limitation may be postponed either in cases which are based on fraud, or where the defendant has deliberately concealed relevant facts. It is not, on its face, a broad and general statement that all cases of knowing receipt are based on fraud as a necessary element of the cause of action.

235. The Defendants rely on Brent Borough Council v Davies [2018] EWHC 2214 (Ch), which contains a more thorough analysis. There, the Court explained its basis for finding that knowing receipt is not based on fraud, and I agree with that finding…”(emphasis added)

43.The issue was canvassed in the BOC Decision at [82] - [86]. After referring to Beaman v ARTS Ltd [1949] 1 KB 550 and Hing Yip Holdings (Hong Kong) Limited, this court then turned to DHCJ Le Pichon’s decision in China Metal Recycling (Holdings) 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 LO was limited to common law fraud or could be extended to unconscionable conduct.

44.At para 61 of his submissions, Mr Man SC has helpfully summarised the reasoning of DHCJ Le Pichon as follows:

“61.1 Section 26(1) of the LO is based on s.32(1) of the English Limitation Act 1980. The predecessor of s.32(1) of the 1980 Act is s.26 of the Limitation Act 1939.

61.2 The event justifying postponement under s.26(b) of the 1939 Act was in the terms of ‘the right of action was concealed by the fraud of the defendant’. Section 26(a) of the 1939 Act reads ‘the action is based upon the fraud of the defendant’, which is identical to the current s.32(1)(a) of the 1980 Act and s.26(1)(a) of the LO.

61.3 Under s.26(b) of the 1939 Act, there were various cases to the effect that ‘fraud’ covered unconscionable behaviour…”

45.At [70], the learned Judge observed that when one looked at the language of section 26 (a) and (b) of the 1939 Act, “fraud” was the term used in both limbs. It was not obvious why the same term should be interpreted differently. Subsequent legislative changes to the provision dealing with concealment could not affect what the term “fraud” meant as used in both limbs in the 1939 Act.

46.Then, at [72], the learned Judge concluded that there was a serious question to be tried that the meaning of fraud in section 26 LO included where the defendant acted with “some knowledge of the impropriety of the conduct involved” or unconscionably.

47.On the basis of the above, this court concluded at [86] of the BOC Decision that “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.”

48.The Defendant submits at para 62 of its skeleton that: “DHCJ Le Pichon’s reasoning is flawed and unsustainable because the two provisions[5] dealt with different concepts of ‘fraud’. This is clear from the legislative history (which does not appear to have been placed before the court in China Metal or in the BOC Decision).”

49.The Defendant at paras 63 and 64 refers to various passages in the Law Revision Committee Fifth Interim Report (Statutes of Limitation) (1936) Cmd 5334 and the Law Reform Committee Twenty-First Report (Final Report on Limitation of Actions) (1977) (Cmnd. 6923) and submits that s.26(a) was not to be construed in the same way as s.26(b) and that s.26(a) simply refers to common law fraud. Hence, its aforesaid submission that DHCJ Le Pichon’s reasoning is flawed and unsustainable.

50.This court has also been referred to a much earlier decision of the Court of Appeal decision in China Everbright-IHD Pacific Ltd v Ch’ng Poh unrep, CACV 513/2001, 19 February 2002, Rogers VP, Le Pichon JA and Suffiad J. At [73] - [74], Rogers VP and Le Pichon JA observed:

“73. In her ruling dated 20 January 2000, the judge held (at pages 6J – 7R) that the word “fraudulently” in paragraph 6(1) of the re-re-amended statement of claim described the conspiracy but not the unlawful means used which were the contravention of section 48 of the Companies Ordinance, the concealment of that contravention and the conversion. Fraud was not an essential ingredient in any of the relevant causes of action in the present case. For that reason, the judge did not consider that paragraph (a) of section 26(1) was applicable: see Beaman v A.R.T.S. Limited [1949] 1 KB 550 at 558, 567 and 571.

74. In its respondent’s notice, the plaintiff contended that the judge was wrong, that section 26(1)(a) also applied and formed an additional reason for affirming the judgment below. The plaintiff submitted that the word “fraud” was not used in the common law sense but in the equitable sense and if that was right, “fraud” must be given the same meaning in both limbs of the same subsection. It relied on the observations of Somervell LJ in Beaman’s case at 567 to the effect that there may perhaps be equitable claims in which there would be scope for argument as to whether the claim was based on fraud and on King v Victor Parsons & Co. [1973] 1 WLR 29. But the question before the Court of Appeal in that case related to the predecessor provision of a different limb of section 26(1), namely, paragraph (b) rather than paragraph (a). Moreover, the successor provision to paragraph (b) of section 26(1) of the 1939 Act no longer refers to concealment by fraud but to deliberate concealment. In these circumstances, King v Victor Parsons case can be of no assistance in the construction of section 26(1)(a). In our judgment, the reasoning of the court in Beaman’s case stands and paragraph (a) of section 26(1) of the Limitation Ordinance cannot avail the plaintiff.” (emphasis added)

51.It can be seen from para 74 that while the Court of Appeal was of the view King v Victor Parsons (a case on s 26(b) of the 1939 Act) was of no assistance to the construction of s 26(a) of the 1939 Act ie section 26(1)(a) of LO, that passage did not demur from the observation of Somervell LJ in Beaman v ARTS Ltd (a case on s 26(a) of the 1939 Act)[6]at 567 to the effect that there might be equitable claims in which there would be scope for argument as to whether the claim was based on fraud. This is echoed in Williams v Central Bank of Nigeria [2014] AC 1189 where Lord Neuberger observed at para 119 of his Judgment that in some cases of dishonest assistance or knowing receipt, even though the normal six-year period might have expired, a claimant might be able to invoke section 32 of the 1980 Act, which postpones the commencement of the six years, in cases “based on the fraud of the defendant”.

52.Somervell LJ also made the general observation at 567 that where a word has been construed judicially in a certain legal area, it is right to give it the same meaning if it occurs in a statute dealing with the same general subject matter, unless the context makes it clear that the word must have a different construction. In this court’s view, a fortiori if the same term “fraud” was used in the same section of the same statute ie s 26 of the 1939 Act.

53.In view of the above, this court is far from convinced that the suggested legislative intention that s.26(a) was not to be construed in the same way as s.26(b) can be clearly ascertained from a few passages of the Law Revision Committee’s Interim Report or Final Report.

54.Further, DHCJ Le Pichon’s decision was affirmed by the Court of Appeal in China Metal Recycling (Holdings) Ltd (In Liq) v UBS AG [2021] 4 HKLRD 594 refusing to grant leave to appeal. At [38] - [40], Godfrey Lam JA, giving the judgment of the Court, explained thus:

“38. The Judge agreed with the plaintiffs that there is a serious issue to be tried that “fraud” in section 26 includes where the defendant acts with “some knowledge of the impropriety of the conduct involved” (a phrase used in Banque Commerciale SA (in liq) v Akhil Holdings Ltd (1990) 169 CLR 279, 286 in relation to a provision similar to section 20(1)(a) of the Limitation Ordinance) or unconscionably.

39. As pointed out by the plaintiffs, UBS Ltd did not initially seek leave to appeal on this point, but only sought to add this ground after the decision in Hing Yip Holdings (Hong Kong) Ltd (in compulsory liquidation) v Cellmark China Ltd (in voluntary liquidation), supra, was handed down on 17 May 2021, in which Mimmie Chan J expressed the view, obiter, that a claim in knowing receipt is not an action based upon fraud within the meaning of section 26(1)(a), adopting the reasoning in a first instance English decision: Brent Borough Council v Davies [2018] EWHC 2214 (Ch).

40. Although the cases on knowing receipt refer to a state of mind such as to make it unconscionable for the defendant to retain the benefit of the receipt, the degree of knowledge which might make such retention unconscionable varies with the context. This allows the court to set a standard that is appropriate to exigencies of the transaction in question: Snell’s Equity (34^th ed), §30-072. What precisely is the knowledge that is required on the part of UBS Ltd in the present case, and what knowledge it in fact had, are questions for the trial. It would in our view be undesirable to try to determine, at this stage, based on the (unproven) facts alleged in the statement of claim alone, the controversial question of what “fraud” means within section 26(1)(a) and whether section 26(1)(a) can apply in this case as against UBS Ltd: see Moulin Global Eyecare Holdings Ltd, §11; Altimo Holdings and Investment Ltd, §84. It is often undesirable to determine novel and difficult points of law based on hypothetical facts…”

55.In light of the clarification of the law by the Court of Appeal decision in China Metal Recycling (Holdings) Ltd (In Liq) v UBS AG, the question of what “fraud” means within section 26(1)(a) may not admit of a sufficiently clear answer to render the claim of knowing receipt obviously unsustainable.

56.To conclude, this court is not persuaded that the matter is plain and obvious in favour of the Defendant, notwithstanding Mr Man SC’s painstaking efforts.

Dishonest assistance & Knowing receipt - the claims could have been discovered with reasonable diligence

57.The point has been raised in the BOC Action and is raised again here.

58.The Plaintiffs’ plea on limitation of Actions can be found in section H of the Statement of Claim as follows:

“H. Limitation of Actions

175. The Defendant’s conduct as pleaded herein was dishonest and/or unconscionable, comprising “fraud” within the meaning of s. 26(1) of the Limitation Ordinance (Cap 347) (“Limitations Ordinance”).

176. The Plaintiffs first discovered the Defendant’s dishonest and/or unconscionable conduct following the receipt of account opening and account statements of the Defendant in December 2013, which identified Mr Tsang as the sole “Authorised Person” on the Supreme Well BEA Account. The Supreme Well account opening documents also identified that the circumstances of, and information available to the Defendant, through Manny Yuen, in connection with the opening of the Supreme Well BEA Account had features that would arouse the suspicions of an honest and/or rational banker in the Defendant’s position as pleaded at paragraphs 122 to 125 above.

177. Therefore, Plaintiffs could not with reasonable diligence have discovered the Defendant’s dishonest and/or unconscionable conduct sooner than they did. In the premises, s. 26(1) of the Limitation Ordinance operates so as to postpone the limitation period in respect of the claims pleaded herein.” (emphasis added)

59.On the other hand, the Defendant’s case is that the Plaintiffs could have discovered the two claims with reasonable diligence more than six years before the commencement of HCA 1741/2018 on 27 July 2018 ie before 27 July 2012. At para 78.7 of the Defendant’s skeleton, the Defendant puts the hypothetical discovery date as by 2 December 2011.

60.The relevant chronology of events can be found at para 77 of the Defendant’s skeleton.

“77. The following undisputed background facts are relevant to this point:

77.1 P1’s auditors received an anonymous letter on 10.2.2009, which alleged that the FISH and SPR transactions were illegal and fraudulent transactions for misappropriating funds from P1. The letter pointed to various suspicious circumstances, including that the counterparty companies (i.e. Supreme Well and its subsidiaries) were controlled by parties with relationships to the CEO and management of P1: BOC Decision §13. The points raised are exactly the same as the alleged fraud now relied on by Ps: see BOC Decision §§9-10. The letter was passed to P1’s audit committee on 12.2.2009: BOC Decision §14.

77.2 The audit committee then decided to engage independent lawyers to investigate into the allegations and appointed Paul Weiss, Rifkind, Wharton & Garrison LLP (“Paul Weiss”) in April 2009. Paul Weiss in turn engaged forensic accountants: BOC Decision §14.

77.3 They then proceeded with the investigation and completed the work and reported back to the audit committee by July 2009. The conclusion was however that the allegations had no merit, and the audit committee closed the investigation: BOC Decision §15.

77.4 Ps now allege that Paul Weiss were negligent in carrying out the investigation and had commenced proceedings against them. Ps’ case is that Paul Weiss failed to undertake reasonable independent enquiries to determine whether Supreme Well and its subsidiaries were related parties as alleged in the anonymous letter, and that Ps would have been able to discover the fraud within a very short time, and would have been able to take steps to recover the misappropriated funds in July 2009: BOC Decision §§19-20.

77.5 Liquidators were appointed in respect of P1 in the Cayman Islands on 27.7.2012, and provisional liquidators were appointed in Hong Kong on 29.11.2012: BOC Decision §16.

77.6 Upon their appointment, steps were taken by the liquidators to investigate into the FISH and SPR transactions, including approaching BOC and D for bank account documents.

77.7 On 2.12.2014, P1 issued proceedings against D making essentially the same claims now made in this action. This 2014 action was dismissed for unrelated reasons, but this is the point in time when Ps had sufficient information to bring the claims against D.”

61.At para 78 of the Defendant’s skeleton, the Defendant submits that with reasonable diligence, the Plaintiffs could have discovered the claims now alleged against the Defendant before 27 July 2012. The submissions run like this:

“78.1 By the anonymous letter, Ps would have been alerted to a need to investigate, and they did investigate the alleged fraud. This was the same fraud Ps now say did in fact take place.

78.2 In the proceedings against Paul Weiss, it is Ps’ own case that if an investigation was conducted with reasonable diligence, the fraud by Ps’ former officers would have been discovered in July 2009. Ps must be taken to know the things that a reasonably diligent investigation would reveal: see §75 above. It is also Ps’ case that recovery steps would have been taken by then.

78.3 A new investigation was conducted only after liquidators were appointed over P1. As a matter of historical fact, this investigation took 2 years and 4 months (from 27.7.2012 to 2.12.2014) before P1 was able to issue proceedings against D.

78.4 In fact, it is Ps’ own case that they actually discovered the claim against D in December 2013, when Ps obtained account opening documents from D, which identified Mr Tsang as the person in control of the account of Supreme Well with D: SOC §176. This would push the time forward by 10-11 months.

78.5 Since Ps had suffered a massive fraud, and the Court must proceed on the basis that Ps would be motivated by a reasonable sense of urgency, and would wish to take steps to find out why, and how and against whom they might recover their loss (see §§73-74 above), it follows that it should be taken that Ps would go on to investigate potential claims against parties other than just the recipients. This is in fact what happened.

78.6 Indeed, it is not to the point that Paul Weiss’s investigation was not targeted at D – once the fraud is discovered, a listed company in Ps’ position would surely have engaged lawyers to consider what recovery actions could be taken, and any diligent lawyer would not limit their sights on only the primary wrongdoers.

78.7 The simple point is that, if reasonable diligence had been used, Ps could have discovered the fraud in July 2009, and could have conducted further investigation so as to discover the claims against D within, at most, another 2 years and 4 months, i.e. by 2.12.2011.”

62.The point raised above is said to be similar to the one recorded in the BOC Decision at paras 73-78. So this court will use its reasoning in the BOC Decision mutatis mutandis in answer to the Defendant’s submissions.

63.This court’s reasoning can be found in paras 79 and 80 of the BOC Decision.

“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 1^st 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 1^st and 2^nd Plaintiffs, not at the conduct of the Defendant. Whether Paul Weiss should nevertheless have gone on to look into the Defendant’s conduct is clearly debatable.”(emphasis added)

64.On the facts of this case, this court is similarly of the view that whether or not the Plaintiffs could, with reasonable diligence, have discovered the fraud of the Defendant earlier than December 2013 as pleaded and if yes when is highly facts sensitive and requires a minute and protracted examination of the documents and facts of the case. This would include inter alia the knowledge of the 1^st Plaintiff’s board of directors, 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 as well as Paul Weiss’ conduct in investigating the allegations in that letter. It seems to this court that the Defendant’s submissions, similar to those presented by BOC, fall well short of being manifestly and immediately destructive of the plaintiff’s reliance on section 26(1) of the LO. In any event, disputed facts are to be taken in favour of the Plaintiffs. The Plaintiffs rely on the fact that the Liquidators first discovered the Defendant’s dishonest and/or unconscionable conduct following the receipt of account opening and account statements of the Defendant in December 2013, which identified Tsang as the sole “Authorised Person” on the Supreme Well BEA Account and they could not with reasonable diligence have discovered the Defendant’s dishonest and/or unconscionable conduct sooner than they actually did.

65.The only other question left is whether the claims based on dishonest assistance and knowing receipt could have been discovered with reasonable diligence within the limitation period should be dealt with under RHC Order 14A or at the trial of a preliminary issue under RHC Order 33 r 3. For the latter purpose, the Draft Order produced by the Defendant on Day 1 of the hearing has been set out earlier in this Judgment.

66.This court has misgivings about ordering a trial of preliminary factual or mixed factual and legal issues in a case with complicated and intertwined factual issues like the present one.

67.In Re Tai Ping Yeung Motors Ltd [2001] 2 HKC 611 at pp 614-5, Le Pichon LJ observed at follows:

“ Preliminary Issues - Applicable Principles

The annotation in the Supreme Court Practice 1999 is a useful starting point. At paragraph 33/4/10 it is stated that:

‘An order for the separate trial of separate issues is a departure from the beneficial object of the law that all disputes should be tried together, and therefore, generally speaking, such an order should only be made in exceptional circumstances or on special grounds (per Jessel M.R. in Piercy v. Young (1880) 15 Ch.D. 475 at 479 and 480; per Scrutton L.J. in Bottomley v. Hurst and Blackett (1928) 44 T.L.R. 451 at 452.’

This approach was echoed by Lord Wilberforce in his speech in Tilling v. Whiteman [1980] AC 1 at 17H-18A:

‘I, with others of your Lordships, have often protested against the practice of allowing preliminary points to be taken, since this course frequently adds to the difficulties of courts of appeal and tends to increase the cost and time of legal proceedings. If this practice cannot be confined to cases where the facts are complicated and the legal issue short and easily decided, cases outside this guiding principle should at least be exceptional.’

Indeed, as Lord Roskill observed in his speech in Allen v. Gulf Oil Refining Ltd (1981) AC 1001 at 1022 A:

‘The preliminary point procedure can in certain classes of case be invoked to achieve the desirable aim both of economy and simplicity. But cases in which such invocation is desirable are few. Sometimes a single issue of law can be isolated from the other issues in a particular case whether of fact or of law, and its decision may be finally determinative of the case as a whole. Sometimes facts can be agreed and the sole issue is one of law.’

Lord Roskill went on to urge those whose task it is to decide whether or not the trial of preliminary points should be ordered to be “extremely cautious” before acceding to pleas for the making of such orders as a result of attractively advanced submissions founded upon pleas of supposed economy.”(emphasis added)

68.This court fully agrees with the observations of Le Pichon LJ, Lord Wilberforce and Lord Roskill quoted above. In relation to the suggestion of dealing with the matter under RHC Order 14A, this court would wish to add the incisive comment by Lord Scarman in Tilling v. Whiteman at 25C that: “Preliminary points of law are too often treacherous short cuts. Their price can be, as here, delay, anxiety, and expense.” This is not to say that no issue however distinct and isolated from the rest can be ordered as the subject of the trial of preliminary issue in a case like the present. It is just that extreme caution should be exercised and that exceptional circumstances or special grounds must be shown before making such an Order.

69.In the present case, the reality is that whether or not the Plaintiffs could, with reasonable diligence, have discovered the fraud of the Defendant earlier than December 2013 as pleaded is not something that could simply be isolated as a distinct issue of fact or law. It all ties in with the evidence starting from the misappropriations of the funds by the former directors of the 1^st Plaintiff, the anonymous letter received on 4 February 2009, the subsequent investigation by Paul Weiss on those misappropriations and the further subsequent investigation by the Liquidators. In other words, it starts almost from the beginning of the Plaintiffs’ case. As submitted by the Plaintiffs in their skeleton, these are complex questions that should not be resolved in a vacuum. In particular, Paul Weiss are now being sued by the Plaintiffs in relation to their investigation into the misappropriations. What they did, and what knowledge they imparted to the audit committee, and how the audit committee had understood what had been imparted etc are all now subject to substantive dispute in those proceedings. It is clear that these issues will require elaborate argument and substantial evidence at trial.

70.In this court’s estimation, a lot of the evidence to be adduced at the full trial has to be examined in order to find out what the Plaintiffs could have discovered with reasonable diligence and when. Any economy said to be gained by ordering a trial of preliminary issue is false.

71.For these reasons, as a matter of case management, this court is not minded to made any Order under RHC Order 14A or order a trial of preliminary issues under RHC Order 33 r 3 as proposed by the Defendant.

Fraudulent trading

72.The plea is made at paras 166 and 167 of the Statement of Claim:

“F3. Fraudulent Trading

166. Further or alternatively, by reason of its conduct as pleaded herein, the Defendant was knowingly a party to the carrying on of the business of the First Plaintiff with intent to defraud creditors of the First Plaintiff, with reckless indifference as to whether or not the creditors of the First Plaintiff were defrauded and/or whether or not the business of the First Plaintiff was carried on for a fraudulent purpose.

167. In the premises, the Third Plaintiffs seek remedies against the Defendant under s. 275 of the Companies Ordinance in respect of the debts and other liabilities of the First Plaintiff in the amount of at least US$181.5 million or as the Court may direct.” (emphasis added)

73.Section 275 (1) of the Companies Ordinance Cap 32 provides that:

“If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court, on the application of… the liquidator… of the company, may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.” (emphasis added)

74.It is accepted by the Defendant that liability under section 275 can extend to third parties or outsiders who deal with the company. But the focus of the section is on those who were “parties to the carrying on of the business”.

75.The meaning of this phrase was discussed by Pennycuick VC in Re Maidstone Buildings Provisions Ltd [1971] 1 WLR 1085 at 1092F-G:

“The expression “parties to the carrying on of the business” is not, I think, a very familiar one, but so far as I can see, the expression “party to” must on its natural meaning indicate no more than “participates in,” “takes part in” or “concurs in.” And that, it seems to me, involves some positive steps of some nature. I do not think it can be said that someone is party to carrying on a business if he takes no positive steps at all. So in order to bring a person within the section you must show that he is taking some positive steps in the carrying on of the company’s business in a fraudulent manner.” (emphasis added)

76.In the present case, the Defendant submits it is difficult to see why the Defendant is a party to the carrying on of the 1^st Plaintiff’s business when it is not even the banker of the 1^st Plaintiff.

77.In the BOC Action, the Plaintiffs’ case on fraudulent trading was elaborated at para 34 of the BOC Decision as thus: (i) The 1^st Plaintiff’s business involved the acquisition of inter alia technologies to complement its existing business; (ii) the business operations of the 1^st Plaintiff were conducted by inter alia Tsang and/or Wu; (iii) the FISH and SPR Transactions, presented to the Board and public as legitimate arm’s length transactions, were not arm’s length transactions made for proper commercial purposes; (iv) by procuring and carrying out the FISH and SPR Transactions, Tsang and/or Wu intended to defraud the creditors of the 1^st Plaintiff, or were recklessly indifferent as to whether those creditors were defrauded or otherwise acted for a fraudulent purpose; (v) BOC participated in the carrying on of the 1^st Plaintiff’s business by executing all payment instructions from Tsang and/or Wu.

78.The Defendant submits its position is completely different – it was never a banker of the 1^st Plaintiff and has no direct dealings with it (or with the 2^nd Plaintiff for that matter). It never received or executed any payment instructions from the 1^st Plaintiff or the 2^nd Plaintiff, and was never involved in the payments for the FISH or SPR Transactions. Rather, the Defendant’s dealings were with Supreme Well, the counterparty to the FISH and SPR Transactions and the recipient of the misappropriated funds.

79.This court agrees. It is difficult to see how the Defendant can be said to be knowingly a party to the carrying on of the 1^st Plaintiff’s business in entering into the 2 transactions as pleaded at para 166 of the Statement of Claim, or had taken any positive steps in respect of the same.

80.At para 70.5 of Borrelli 1, the Plaintiffs argue that the Defendant participated in the carrying on of the business of the 1^st Plaintiff in a fraudulent manner by assisting in the breaches of duty by inter alia Tsang and Wu. This is clearly misconceived as submitted by the Defendant. As the Defendant puts it in para 94 of its skeleton, which this court agrees, liability under section 275 requires the Defendant carrying on the business of the 1^st Plaintiff. In principle, this should not to be equated with rendering dishonest assistance to the delinquent directors’ breaches of duties. A director who steals money from the company’s safe would be in breach of his duties to the company, but it cannot be said a bank who receives the stolen money from the director by reason of such act alone is carrying on the company’s business. For clarity of thoughts, liability of the bank should in those circumstances be framed in terms of dishonest assistance or knowledge receipt, if the requisite ingredients of the 2 causes of action are present.

81.For these reasons, the claim of fraudulent trading against the Defendant should be struck out. There is no need to go into the other submissions about insufficient of the plea of knowledge.

Breach of an Unless Order - Relief from Sanction

82.For the present purpose, the Defendant has prepared a Chronology related to its Relief Summons. For ease of reference, a copy of the Chronology is set out below.

Date	Event
27.07.2018	Ps issued their Writ of Summons in the 2018 Action.
28.08.2018	Ps served the Writ in the 2018 Action on D: Chui 2nd §59.
28.09.2018	By an Order made by Master J. Wong, this 2018 Action was stayed.
10.05.2021	Ng J gave directions that Ps should file and serve a Statement of   Claim by 07.06.2021 and D should file a Defence within 84 days   thereafter.
07.06.2021	Ps served their Statement of Claim in the 2018 Action;   Parties agreed that D would have until 30.09.2021 to file a Defence   given that the Statement of Claim runs to 130 pages and that there   was a 3-year delay after commencement of the 2018 Action before   service of the Statement of Claim: Chui 2nd §60.
From   07.06.2021	D was considering, together with legal advisers, whether to   pursue a strike out or to file a Defence: Chui 2nd §61.
Before   30.09.2021	D understood and believed, based on legal advice, that (Chui 2nd   §§61-62):   (i)      there is a practice that where a defendant applies to strike            out a statement of claim, it would not be required to file a            defence until after disposal of the strike out application;   (ii)     as such, the usual practice would be for the defendant            to issue a strike out summons prior to the deadline for filing            of a defence while, at the same time, asking for the filing of            the defence to be deferred; and   (iii)    this practice is generally appropriate and well-recognised            by authorities.
30.09.2021	D applied for an extension of time for filing of its Defence by 42 days.
07.10.2021	At the hearing of D’s time extension application before Master   S.H. Lee, D’s legal representative submitted openly that D was   considering whether to file a Defence or, alternatively, pursue a   strike-out, and needed more time to complete its evaluation   between the two alternative options: Tang §17; Chui 2nd §62.
16.11.2021	D decided to pursue a strike out application but needed further time   to prepare its evidence in support. Hence, D wrote to Ps’ solicitors   seeking a further extension of time for filing of Defence: Chui 2nd   §§63, 64.
18.11.2021	D had prepared an advanced draft of the evidence in support of the   strike out application. It therefore consented to the extension   sought being on an unless basis, believing there would be   sufficient time to complete the strike out evidence: Chui 2nd §68.
18.11.2021	Order of Master Dick Ho extending the deadline for filing of   Defence to 17.12.2021 (on an unless basis) pursuant to a consent   summons.
17.12.2021	D filed its Strike Out Summons which seeks, inter alia, a deferral   of the filing of a Defence until after disposal of the Strike Out   Summons:   (i)      believing that it would be in line with recognised normal            practice: see Chui 2nd §§61, 69[7]   (ii)     with the intention that it would defend the claims in the            Statement of Claim substantively, by applying for a strike            out and filing a Defence if any part of the Statement of            Claim survives the strike out, in accordance with the            recognised normal practice: see Chui 2nd §§73-74;   (iii)    not realising this was a course to which Ps would object:            see Chui 2nd §77.
21.12.2021	D wrote to Ps proposing directions to deal with the Strike Out   Summons.
31.12.2021	14-day period for taking out relief application under O.2 r.4   expired.
04.01.2022	Ps wrote to D raising (inter alia) the following points:   (i)      complained that D failed to comply with the unless order            and did not take out a relief application within the 14 day            period (§§25-30);   (ii)     offered to provide relief from sanction by consent on the            basis that D filed its Defence within 14 days on an unless            basis and conditional on there being no further applications            to extend time for filing the Defence (§31);   (iii)    in the event that the offer in (ii) was not accepted, proposed            to argue whether the Defence should be deferred until after            disposal of the Strike Out Summons on the first available            date before a Master (§32); and   (iv)    reserved of Ps’ right to apply for default judgment (§32).
05.01.2022	D filed the Relief Summons seeking relief from sanction when it   realized that Ps would seek that D be debarred from filing a   Defence: Chui 2nd §77.
07.01.2022	Hearing before Registrar Kwang, during which D sought to obtain   an order on the issue of relief / deferral of Defence, but the   Registrar directed the parties to fix a directions hearing before   Ng J.
04.03.2022	Ps filed the Affidavit of Cosimo Borrelli reiterating threat of   entering judgment: Borrelli §43.
20.04.2022	D decided to produce a draft Defence in order to demonstrate D’s   firm intention all along to defend the action substantively in the   event that the strike out fails: Chui 2nd §82.
20.02.2023	D issued Summons to adduce draft Defence in support of the   Relief Summons.

83.RHC O 2 r 4 provides that:

“Where a party has failed to comply with a rule or court order, any sanction for failure to comply imposed by the rule or court order has effect unless the party in default applies to the Court for and obtains relief from the sanction within 14 days of the failure.”

84.The Defendant did not apply for or obtain relief from sanction within 14 days of its failure from 17 December 2021. It only issued the Relief Summons on 5 January 2022, 5 days after the expiry of the deadline. However, the court clearly has a discretion to extend the time for taking out a relief summons.

85.RHC Order 2 r.5(1) provides that the Court should consider all circumstances on an application for relief from sanction, including:

(a)  the interests of the administration of justice;

(b)  whether the application for relief has been made promptly;

(c)  whether the failure to comply was intentional;

(d)  whether there is a good explanation for the failure to comply;

(e)  the extent to which the party in default has complied with other rules and court orders;

(f)  whether the failure to comply was caused by the party in default or his legal representative;

(g)  in the case where the party in default is not legally represented, whether he was unaware of the rule or court order, or if he was aware of it, whether he was able to comply with it without legal assistance;

(h)  whether the trial date or the likely trial date can still be met if relief is granted;

(i)  the effect which the failure to comply had on each party; and

(j)  the effect which the granting of relief would have on each party.

86.These factors, though helpful as a checklist of relevant factors, are not meant to be exhaustive. They serve to highlight the grant of relief is discretionary and one must have regard to the facts and circumstances of the case in the exercise of discretion bearing in mind the different interests and different factors involved. It is a multi-facet balancing exercise with no single factor being conclusive. Much depends on the facts and circumstances of the case in question: The Incorporated Owners of Yue Sun Mansion v Lake Side Elderly Centre Ltd unrep, HCMP 556 of 2017, 25 October 2017 at [12], per Lam VP (as he then was).

87.The Defendant submits that a weighty factor in the exercise of the Court’s discretion whether to grant relief is the question of proportionality of the sanction in the circumstances of the case. In particular, a case which involves an allegation of fraud raised many years after the events in question ought to go to trial. To allow the sanction of an unless order to stand would have the effect of convicting the party alleged of fraud without any trial: Daimler AG v Leiduck [2012] 3 HKLRD 119 at [57] – [58] per Fok JA (as he then was).

88.On the other hand, the Plaintiffs urge this court to take heed of the strict nature of an unless order and the need to ensure that they are complied with, citing the well-known passage of Ward LJ in Hytec Information Systems Ltd v Coventry City Council [1997] 1 WLR 1666 at 1674H - 1675B.

89.Going through the list of circumstances in RHC Order 2 r 5(1), this court’s view is as follows.

90.As for (a), the interests of the administration of justice require that Orders of the Court must be complied with and that the parties are held to their obligation to assist the Court in furthering the underlying objectives of the RHC. It is not in the interests of the administration of justice to relieve a party from his obligation under an unless order in circumstances in which he has consciously decided not to comply with it: George Chu v Tan Giong Seng Johnson [2019] 5 HKLRD 323 at [21].

91.However, one must always bear in mind that the Court is required by RHC Order 1 r 2(2) to exercise its powers to secure the just resolution of disputes in accordance with the substantive rights of the parties. It would not be in the interest of the administration of justice that serious findings of fraud be allowed to be made by default against a party.

92.Recognising that it may be too draconian to seek Judgment in default of Defence under RHC O 19 r 3 in the event that relief from sanction is not given, Mr Manzoni SC, towards the end of Day 1, indicates that the Plaintiffs do not intend to apply for default Judgment against the Defendant in that event. Rather, the Plaintiffs intend to prove its case at trial in the usual way. It is just that at the trial, the Defendant, not having filed a Defence, cannot run a positive case.

93.As for (b), the Defendant was out of time but not by a lot ie only 5 days. The explanation in the 2^nd affirmation of Chui, Una Wing Yi (“Chui 2”) is to the effect the Plaintiffs only raised the complaint that the Bank should have applied for relief until they waited after two weeks had passed from the deadline under Master Ho Order. It was only then that the Defendant filed the Relief Summons. This explanation is hardly a convincing one, if at all. The Defendant has always been legally represented and solicitors for the Defendant could not possibly claim they were unaware of the time limit under RHC Order 2 r 4. If they were, they should and probably would have advised the Defendant to abide by it.

94.As for (c), judging from the Defendant’s Chronology, Tang 1 and Chui 2, the failure to comply with Master Ho Order was clearly a conscious decision and intentional.

95.As stated in para 123 of the Defendant’s skeleton, is accepted that the taking out of the Strike Out Summons does not automatically mean that the Defendant would not need to file a Defence in light of the Master Ho Order. This is really basic. In this court’s view, even assuming, as submitted by the Defendant, that a direction deferring the filing of the defence is routinely given by the courts when there is a pending striking out application, the Defendant still has to apply for that direction in order to be relieved from its obligation to file a Defence. This is acknowledged at para 61 of Chui 2. While the Defendant has asked for a deferral of filing a Defence pending the disposal of the Strike Out Summons at para 3, there is no explanation as to why it did not follow that through and actually obtained such an Order. The Defendant’s failure to obtain an Order to defer the filing of the Defence is really hard to excuse.

96.In these circumstances, Mr Man SC is forced to admit in the skeleton that the Defendant’s failure was in the nature of having taken the wrong approach procedurally. Of course the Defendant has taken the wrong approach, but the point is it has done so consciously and intentionally.

97.At para 127 of its skeleton, the Defendant submits that since it had openly indicated its intention to strike out, this is not a case where it has deliberately misled the Plaintiffs or the Court into thinking that a Defence would be filed. This is neither here nor there.

98.As for (d), it should be obvious from the discussions on (b) and (c) above that the Defendant’s explanation is clearly not good enough.

99.As for (e), apart from failing to comply with Master Ho Order, the Defendant has also failed to issue the Relief Summons within 14 days.

100.As for (f), it seems to this court both the Defendant and its legal advisers are at fault. The truth is the Defendant together with its legal advisers have committed a very basic procedural mistake as to the approach it should take in relation to Master Ho Order. Further, having asked for a deferral of filing a Defence pending the disposal of the Strike Out Summons, the Defendant and its legal advisers inexplicably failed to follow that through.

101.As for (h), the proceedings are at an early stage and no trial date has been fixed.

102.As for (i), this court is concerned with the effect of the Defendant’s failure to comply with Master Ho Order, not the effect of its delay in filing the Strike Out Summons. While the Defendant has taken 6 months after service of the Statement of Claim to make up its mind to seek to strike it out, given the Strike Out Summons, whether or not the Defence has been filed in accordance with Master Ho Order, in the interest of saving time and costs and as a matter of good case management, the Action is unlikely to make much progress until the disposal of the Strike Out Summons. The Defendant’s failure to comply does have an adverse effect on the Plaintiffs in that they do have to spend time and legal costs in dealing with the Relief Summons. This will be taken in account when it comes to costs.

103.Lastly, as for (j), the effect of granting relief from sanction on the Plaintiffs is that the Defendant can file its Defence, a draft of which is already ready, and this court will ensure it does file the Defence within a very short time. The Defendant suggests that, if relief is granted, the Court should give a direction that it should file its Defence within 28 days on an unless basis. This court is only minded to give the Defendant 14 days on an unless basis.

104.After that, the Action will proceed in the usual way and the Plaintiffs will eventually have to prove its claims at trial. Despite the submission of the Plaintiffs, this court does not see why it would inevitably cause further delay in these proceedings should relief be granted. If the Defendant drags its feet from now on, the Plaintiffs’ legal advisers will no doubt alert the Court at the appropriate juncture the procedural history of this Action and invite the Court to take appropriate measures to prevent the Defendant from doing.

105.On the other hand, the effect of refusing relief is that the Defendant is debarred from filing and service of its Defence. Even if, as Mr Manzoni SC suggests, the Plaintiffs intend to prove its case of fraud at trial instead of applying for default judgment, the Defendant will still be under a serious handicap if it goes to trial without filing a Defence - its role will likely be limited to putting the Plaintiffs to proof without being able to run any positive case or to adduce evidence. Given the substantial amount of the Plaintiffs’ claim and the serious nature of the allegation of dishonesty or fraud against the Defendant, this court agrees the consequences of refusing to give sanction is completely disproportionate.

106.It is of course true that any prejudice to the Defendant in refusing sanction is entirely self-induced while the prejudice to the Plaintiffs, if sanction is granted, is not. It is also true that the interests of justice require that justice be shown to the injured party for the procedural inefficiencies caused by the twin scourges of delay and wasted costs. But as this court explains earlier, it does not accept the Defendant’s failure to comply with Master Ho Order has caused any significant delay to this Action. As for wasted costs, this will be dealt with by way of indemnity costs. Since the Defendant is a bank, there can be little doubt that it will be able to honour any adverse Order on costs.

107.To conclude, having looked at all the facts and circumstances of this case, this court in the exercise of its discretion, is prepared to grant the relief from sanction sought by the Defendant, albeit not without some misgivings.

Disposition and costs order nisi

108.The Defendant’s application by the Strike Out Summons as to paragraphs 1.3 and 1.4 and 1.5 are allowed. The rest of the Summons is dismissed.

109.The Defendant’s application for relief from sanction of paragraph 1 of Master Dick Ho’s Order dated 18 November 2021 is allowed. Time for the Defendant to apply for relief from sanction be extended to 5 January 2022.

110.The Defendant do file its Defence in this Action within 14 days on an unless basis.

111.On a nisi basis, costs of the Strike Out Summons be to the Plaintiffs to be taxed if not agreed and paid forthwith, certificate for senior counsel. Costs of the Relief Summons be to the Plaintiffs to be taxed if not agreed on an indemnity basis and paid forthwith, certificate for senior counsel. While this court has not granted certificate for 2 counsel, since the Plaintiffs are not represented by 2 counsel, for the avoidance of doubt, this court certifies that the assistance of Mr Jason Karas, solicitor advocate, is equivalent to that of a junior counsel and shall be allowed as such on taxation.

Mr Charles Manzoni, SC and Mr Jason Karas, Solicitor Advocate of M/s Karas So LLP for the Plaintiffs

Mr Bernard Man, SC, and Mr Keith Lam, instructed by M/s Linklaters for the Defendant