Mason Group Holdings Ltd Formerly Known As Mason Financial Holdings Ltd and Another v. Tam Joseph Wing on and Others

HCA 1114/2021

[2023] HKCFI 3305

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1114 OF 2021

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D E C I S I O N

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A.  INTRODUCTION

1.In this action, the 1^st and 2^nd Plaintiffs (respectively “Mason Group” and “Full Joyous”, collectively, “Ps”) claim against all the Defendants the main cause of action of unlawful means conspiracy and against the 2^nd Defendant (“Chapman Chan”) for breach of fiduciary and common law duties and misrepresentation.

2.For determination in this contested hearing are two applications.

3.First, an application by summons taken out by the 4^th Defendant (“Hau”) on 28 September 2022 to strike out such part of the Statement of Claim making up the entire claim against Hau[1] on the grounds that it discloses no reasonable cause of action and/or is scandalous, frivolous or vexatious, and/or is an abuse of process, and consequentially to dismiss the action as against him. As an alternative, Hau seeks the determination of 2 questions of law against the locus standi to sue of Mason Group and Full Joyous respectively, and to dismiss the action against Hau consequential upon a favourable determination (“the Locus Standi Challenges”). The Locus Standi Challenges were also relied on as a basis for striking out.

4.Second, Ps’ summons taken out on 16 December 2022 for leave to amend the Statement of Claim per the attached draft (“1^st Draft ASoC”), though for determination before me are only such of the intended amendments therein relevant to Ps’ claim against Hau, as the leave to amend the remaining intended amendments was ordered to be determined separately on another occasion.

5.Mr Douglas Lam SC leading Mr Kwan appeared for Ps (both of whom did not settle Ps’ original pleadings) and Mr Jeff Yau appeared for Hau.

6.Two days before this hearing, a 2^nd draft Amended Statement of Claim (“2^nd Draft ASoC”) was submitted to the court. The 2^nd Draft ASoC contained significant additions and departures from the 1^st Draft ASoC, which I summarize in this footnote[2]. Significantly and among others, in the 2^nd Draft ASoC, Ps completely deleted all averments relating to lawful means conspiracy. Mr Lam asked the court to consider the striking out on the footing of this new draft.

7.Though not disputing that in an application to strike out the Statement of Claim the court may consider any intended amendments to it put forth by a plaintiff, Mr Yau initially objected to referring to the 2^nd Draft ASoC as it was produced unduly late and the proposed changes significant. After some discussions at the hearing, Mr Yau no longer maintained the objection. Therefore, the summaries of Ps’ case and references to different aspects of Ps’ claim below are from the 2^nd Draft ASoC (the paragraph numbers of which are referred to by “§”).

8.As the Locus Standi Challenges are rather distinct questions from the rest, whether as questions of law or as one of the basis for striking out, I will defer their consideration after the determination of the striking out based on other matters.

B.  PRINCIPLES ON STRIKING OUT

9.They are trite and not disputed. Striking out is for plain and obvious cases. The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable for the claim to succeed before the court will strike it out. The burden is on the party seeking to strike out to prove so.

10.A reasonable cause of action means a cause of action with some chance of success when only the allegations in the pleading are considered. So long as the Statement of Claim or the particulars disclose some cause of action, or raise some question fit to be decided by a judge or jury, the mere fact that the case is weak, and not likely to succeed, is no ground for striking it out. For striking out on the ground that there is no reasonable cause of action, the disputed factual averments are to be taken in favour of the party whose pleading is under attack. However, if on a careful reading of the Statement of Claim, however complicated, it can be seen that there is no reasonable cause of action, a court can, and probably will, order it to be struck out.

11.A claim is frivolous when it is not capable of reasoned argument, without foundation or where it cannot possibly succeed. A proceeding is vexatious when it is oppressive and/or lacks bona fides. An abuse of the process of the court involves an improper use of the procedure and pursuit of a case that is entirely without substance. It is an abuse of process for a party to start a case without a solid foundation hoping that evidence will turn up during the course of the proceedings, whether by discovery or otherwise (Falcon Private Bank Ltd v Borry Bernard Edouard Charles Limited, HCA 1934/2011, 9 July 2012, §212, To J.)

12.Mr Lam reminded the court and emphasized:

a.  Striking out is not justified merely because the story told is highly improbable, and one which is difficult to believe, and that to strike out another’s case as being unsustainable, one will have to show that the other party’s case is “wholly imaginary, a myth or not bona fide” (Sealegend Holdings Ltd v China Taiping Insurance (HK) Co Ltd and Others HCAJ 95/2012 24 October 2014, Au-Yeung J), or “incontrovertibly false” (Lam Kit Sing v Chungshan Commercial Association Hong Kong HCA 2011/2014, 29 June 2016, per G Lam J (as he then was) at §18).

b.  “Where the legal viability of a cause of action is sensitive to the facts, an order to strikeout should not be made” (per Recorder Manzoni SC, Polyline Development Limited (in liquidation) v Ching Lin Chuen & Others HCA 2319/2019, 3 March 2021, §10(3)). The learned Recorder also observed in the same paragraph: “However, the court should remain vigilant to ensure that its processes are not abused by the prosecution of hopeless claims (New China Hng Kong Group Ltd & Another v Kwai Kai Kenneth & Others HCA 519/2021, 11 February 2011 per Fok JA (as he then was at §40))”.

C.  ELEMENTS TO BE PLEADED AND PROVED ON A CLAIM OF CONSPIRACY TO INJURE

13.They have been examined and summarized by Au-Yeung J in Chan Wai Keung Lawrence v Au Chi Man Albert [2021] HKCFI 2096:

“25. Four elements must be pleaded to sustain a case of conspiracy: Pido v Compass Technology Co Ltd [2010] 2 HKLRD 537, per Ma CJHC (as he then was) at §17:

(1) The agreement between two or more persons. The means of carrying out the agreement, whether lawful or unlawful, must be set out.

(2) The intention to injure the plaintiff, whether predominant (in the case of a lawful means conspiracy) or merely an intention to injure (in the case of an unlawful means conspiracy).

(3) The acts that were carried out pursuant to the agreement and the stated intention.

(4) The damage caused to the plaintiff.

26. In relation to the 1^st element, conspiracies are usually concealed, so the existence of an agreed mechanism can only be inferred from overt acts. Nevertheless, the formulation of a party’s cause of action should clearly and cogently be made in the pleadings. It should not be left to an exercise of drawing inferences: Pido v Compass Technology, §25.

27. In relation to the 2^nd element, intention to injure must be pleaded. Although intention could be a matter of inference, the facts and circumstances must be examined to see what inferences could be drawn. Jackson Xu Zhao Ze v Tsai Tim Yuen, CACV 117/2013, 10 April 2014, §5.

28. In JSC BTA Bank v Ablyazov (No. 14) [2020] AC 727, §6, Lord Sumption and Lord Lloyd-Jones JJSC stressed that the 4 established economic torts have been carefully defined to avoid “trespassing on legitimate business activities or imposing any wider liability than can be justified in principle”. In respect of lawful means conspiracy, a distinction is drawn between deliberately injuring the plaintiff in the “absence of just cause” or “legitimate interest”, and exercising of a right to advance one’s own interest by lawful means albeit the foreseeable consequence of which is to damage the interest of others:

‘10. What is it that makes the conspiracy actionable as such? To say that a predominant purpose of injuring the claimant in the one case and the use of unlawful means in the other supply the element of unlawfulness required to make a conspiracy tortious simply restates the proposition in other words. A more useful concept is the absence of just cause or excuse, … A person has a right to advance his own interests by lawful means even if the foreseeable consequence is to damage the interests of others. The existence of that right affords a just cause or excuse. Where, on the other hand, he seeks to advance his interests by unlawful means he has no such right. The position is the same way and the means used are lawful but the predominant intention of the defendant was to injure the claimant rather than to further some legitimate interest of his own. This is because in that case it cannot be an answer to say that he was simply exercising a legal right. He had no interest recognised by the law in exercising his legal right for the predominant purpose not of advancing his own interests but of injuring the claimant. In either case, there is no just cause or excuse for the combination.” (underline added)

29. In relation to the 3^rd element, the gist of the tort of conspiracy is not the conspiratorial agreement alone, but that agreement plus the overt act causing damage. An overt act is one which shows that the conspiratorial agreement has already been made. Allegations of knowledge, common purpose and intention (which are not acts) cannot alter the lack of a proper plea of overt act with the aforesaid characteristics. Such allegations also have to be viewed with some caution, because, when the mass of particulars pertaining to them are examined, it can be seen that they involve piling one layer of inference on top of another in order to obtain the end product. See Jackson Xu Zhao Ze, HCA 902/2011, 22 May 2013, §§12-13, DHCJ Winnie Tam SC, following Aktieselskabet Dansk Skinsfinansiering v Wheelock Marden & Co. Ltd [1994] 2 HKC 264, 272C-G, 273B-C.

30. … dishonesty is not an element of lawful means conspiracy …

31. The origins of all conspiracies are concealed and it is usually quite impossible to establish when or where the initial agreement was made, or when or where other conspirators were recruited. It is not necessary that every overt act is done by every conspirator, but the act must be done pursuant to the conspiracy. Nor is it necessary for the conspirators to join the conspiracy at the same time, but the parties to it must be sufficiently aware of the surrounding circumstances and share the same object for it properly to be said that they were acting in concert at the time of the act complained of. In most cases, it will be necessary to scrutinise the acts relied upon in order to see what inferences can be drawn as to the existence or otherwise of the alleged conspiracy. Pak Win Investment Ltd v Chung Yuet Sheung Lorrain (unrep, HCA 419/2011, 9 February 2012), at §15, DHCJ Au-Yeung (as she then was), following Kuwait Oil Tanker Co SAK v Al Bader [2000] 2 All ER (Comm) 271 (CA). Pak Win was a case on unlawful means conspiracy but the principle should equally apply.

32. The pleader has to plead at least one overt act which is the act of all the alleged conspirators or, failing that, a number of overt acts which include at least one act on the part of each conspirator. If the pleader fails to do that, the plea is liable to be struck out altogether or as against some or one of the defendants. See ADS v Wheelock Marden, p272B-D, Bokhary JA (as he then was).

33. In reality, conspiracy is by its nature clandestine and difficult to uncover, so quite often proof is not readily obtained. Hence, the averments of conspiracy cannot be too precise. In an application to strike out a conspiracy claim, the court will look upon such an application with care, but at the same time bear in mind that those allegations that are not properly particularized will be oppressive to the defendant when the case goes to trial. The broad question for the court is whether, from the pleaded facts, it can be argued that the defendant sufficiently knows the plaintiff’s case on the conspiracy that they have to meet. See Chan Shu Chun and anor v Dr Kung Yan Sum & Ors (unrep, HCA 832/2014, 18 May 2017), DHCJ Marlene Ng (as she then was), at §107.

C4. Reliance on inference

34. Inferences are matters of evidence and cannot substitute material facts in pleading. Speculations and conjectures are impermissible in pleadings as the bases upon which inferences are invited to be drawn: Jackson Xu Zhao Ze (CA), §3.11.”

(Mr Yau’s emphasis by underlining and in bold)

14.In addition to what Au-Yeung J already summarized, Mr Yau placed reliance on the following observation of Bokhary JA (as the PJ then was) in Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & Co Ltd & Others [1994] 2 HKC 264 at p.272 (applied in Lee Tak Yan & Others v The Prudential Enterprises, Limited & Others HCA 4225/2001, 27 May 2003 §53, Chu J (as the VP then was)) as to what the overt act or overt acts must show:

“… And the overt act or overt acts pleaded must be such as to show: (i) that the conspiratorial agreement alleged against the defendants had been entered into by each and every one of them; (ii) that the agreement, and not merely the intention of one person alone, was implemented; and (iii) that such implementation caused the damage complained of.”

15.Mr Lam did not seek to dispute that the overt act must show the above-mentioned 3 matters, he submitted that the court should bear in mind:

a.  That “fraud and/or conspiracy by their very nature are clandestine and difficult to uncover, so quite often proof is not readily obtained. Hence, the averments of fraud and/or conspiracy cannot be too precise” (per B Chu J in Ubiquiti Networks International Ltd v Chan Kim Chuen, unrep, HCA 1606/2016, 26 May 201, §81; cited with approval by A Chan J in Dingway Investment v China City Construction [2022] HKLRD 67 §103).

b.  That “agreement” in this context is to be understood loosely:

“It is not necessary to show is anything in the nature of an expressed agreement, whether formal or informal. It is sufficient if two or more persons combined with a common intention, or in other words, that they deliberately combine, albeit tacitly, to achieve a common end.” (Kuwait Oil Tanker [2000] 2 All ER (Comm) 271, at §111)

“ … the word ‘agreement’ in this context does not mean an agreement in any contractual sense but a combination and common intention to do the act which is the object of the alleged conspiracy”. (Belmont Finance Corp v William Furniture (No. 2) [1980] All ER 393 at p.404, per Buckley LJ)

16.Mr Lam also placed reliance on Metro Holdings Ltd v Periwin Development Ltd [2001] 4 HKC 446 at 459B-F. There, Chu J (as the VP then was) held that whether the pleaded overt acts were acts in furtherance of a combination or conspiratorial agreement involving the defendants could be a matter of inference to be drawn from the facts pleaded; and that in that case, the learned judge held that it was not an inference that was impossible to be drawn and refused to strike out.

D.  Ps’ PLEADED CASE RELATING TO CONSPIRACY

D.1.  The Victor Mind Sale and the Active Compass Sale

17.Mason Group (formerly known as Mason Financial Holdings Limited) was and is a company listed on the Main Board of HKEX. Mason Worldwide Capital Limited (“Mason Capital”) was, and Full Joyous was and is, Mason Group’s wholly indirectly owned subsidiary.

18.Ps’ claim concerns 2 lots of shares Mason Group has purchased through its nominee Mason Capital. The 2 sales (collectively, “the Two Sales”) were apparently negotiated, agreed upon and completed in tandem.

19.The first one was the sale by the 5^th Defendant (“Victoria Fortress”) and purchase by Mason Capital of the entire issued share capital of Victor Mind International Limited (“Victor Mind”) consisting of 1 ordinary share of par value US$1.00 (“the Victor Mind Share”) at the consideration of HK$187,500,000 (“the Victor Mind Sale”).

20.The second one was the sale by the 6^th Defendant (“Ruby Success”) and purchase by Mason Capital of the entire issued share capital of Active Compass Limited (“Active Compass”) consisting of 1 ordinary share of par value US$1.00 (“the Active Compass Share”) at the consideration of HK$26,716,000 (“the Active Compass Sale”).

21.The sale and purchase agreements of the Two Sales were both entered into on 30 December 2016 (respectively “the Victor Mind SPA” and “the Active Compass SPA”). Full consideration of the Two Sales having been respectively paid by Mason Group by 2 tranches in respect of each sale, and on 31 March 2017, the Two Sales were completed.

22.By acquiring the Victor Mind Share, Mason Group in effect acquired 16,057,997 preferences shares of DiagCor Technology Limited (respectively “the Preference Shares” and “DiagCor Technology”) then held by Victor Mind. According to Ps, the Preference Shares represented 37.53% of total shares of DiagCor Technology.

23.By acquiring the Active Compass Share, Mason Group in effect acquired 2,288,000 ordinary shares of DiagCor Technology (“the Ordinary Shares”) then held by Active Compass. According to Ps, the Ordinary Shares represented 5.35% of total shares of DiagCor Technology.

24.According to Ps, at the time of the Two Sales, DiagCor Technology held (a) 99.62 % shareholding of Diagcor Bioscience Incorporation Limited (“DiagCor Bioscience”), (b) 100% shareholding of Total Bliss Holdings Limited and (c) 100% shareholding of Simply Bliss Limited (“Simply Bliss”).

25.According to Hau, not accepted nor seriously disputed by Ps, that DiagCor Technology was incorporated in July 2016 to be the holding company of DiagCor Bioscience, and that such was a part of an internal restructuring.

26.Moreover, DiagCor Technology on 13 October 2017 changed its name to Pangenia Holdings Limited, which on 29 August 2018 changed its name to Pangenia Inc. For ease of reference, I will refer to this company in this Decision by its earlier name DiagCor Technology, unless the context materially requires otherwise.

27.Though it is not pleaded by Ps, it has been clearly stipulated in both the Victor Mind SPA[3] and the Active Compass SPA[4] that it was a condition precedent of the Two Sales that certain restructuring would have to be completed by 31 March 2017 (or such date as Mason Group might direct). The restructuring entailed, among others, the Bio-Gene Acquisition (defined below) having been completed and member companies of the Bio-Gene Group becoming wholly owned subsidiaries of DiagCor Technology in the manner set out in the Victor Mind SPA and the Active Compass SPA.

D.2.  The Inflated Sale Conspiracy

28.In §29 and §§35 to 37, Ps claim that there was what they called “Inflated Sale Conspiracy” amongst all the Defendants in that:

a.  “since around July 2016, the 1^st to 6^th Defendants conspired together and formulated an agreement and/or arrangement to carry out a series of transactions with the aim of selling [the Victor Mind Share and the Active Compass Share] to [Mason Group] at grossly inflated prices for the financial benefit of the 1^st to 6^th Defendants” (§29);

b.  “the 1^st to 6^th Defendant … by unlawful means conspired and combined together … ” (§35);

c.  each of the 1^st to 6^th Defendant carried out various overt acts set out in section C of the 2^nd Draft ASoC (§§27-34D), and as a result, Ps suffered substantial loss and damage (§37); and

d.  the intention to injure “is to be inferred from the fact that, as pleaded in Section C hereinabove, the 1^st to 6^th Defendants took concerted action in furtherance of a common design to carry out acts in execution and in furtherance of the Inflated Sale Conspiracy and for their personal benefit” (§36).

For ease of reference and consistency, in this Decision I will also call this alleged conspiracy by the same abbreviation of “Inflated Sale Conspiracy”.

D.3.  The price of Victor Mind Sale being inflated and the related overt acts and inference to be drawn

29.Ps claim that its price for acquiring the Victor Mind Share at HK$187,500,000 (effectively acquiring the Preference Shares at HK$11.676 per share) was grossly inflated as compared to the total price paid by Victor Mind of HK$150,000,000 at the time it subscribed for the Preference Shares pursuant to a share subscription agreement entered on 29 July 2016 (“the Victor Mind Subscription”), which was HK$9.34 per preference share. The Victor Mind Subscription was completed on 20 September 2016.

30.The overt acts carried out since mid-2016 up to the completion of the Victor Mind Sale were and the inference to be drawn was:

a.  The 1^st Defendant (“Joseph Tam”) was a founder of and has been a director of DiagCor Bioscience since 1 September 2006 and a director of DiagCor Technology since 20 September 2016. He facilitated and arranged the Victor Mind Subscription.

b.  The subscription price of the Victor Mind Subscription “appeared to be a highly inflated price”.

c.  The investors behind the Victor Mind Subscription were Intellectus Fund I L.P. (“Intellectus Fund”) and CMBC International Holding Limited.

d.  Chapman Chan is and was one of the beneficial owners and/or controlling parties and/or authorized representative of Intellectus Fund and Intellectus Capital Limited (“Intellectus Capital”), the latter being owned and/or controlled by the former.

e.  Since 8 August 2016, Chapman Chan has been employed as the Principal of the Direct Investment Division of Mason Group (until he left on 31 October 2019).

f.  In recommending the Two Sales to Mason Group in around December 2016 and in a meeting of the board of directors of Mason Group held on 30 December 2016 (respectively, “the Mason Group BOD” and “the Board Meeting”), Chapman Chan intentionally concealed or did not disclose to Mason Group that (i) he had a material financial interest in that Intellectus Fund was one of the ultimate investors in the Victor Mind Subscription, and (ii) the Preference Shares were subscribed by Victor Mind only months ago at HK$150,000,000, and thus Mason Group would be acquiring the Preference Shares at a price about 25% higher that the Victor Mind Subscription price.

g.  Chapman Chan misrepresented the valuation when he represented that the total value of the Preference Shares and the Ordinary Shares at approximately HK$214,000,000 “was fair and reasonable based on a comparison of historical PE ratios for similar acquisitions in the market and considering the performance and growth aspect of DiagCor Bioscience”[5]. The representation was false or was made negligently “in that … HK$214,000,0000 was in fact unfair and unreasonable”[6] in that Victor Mind acquired the Preference Shares at HK$9.34 per share (“the Valuation Misrepresentation”).

h.  Chapman Chan misrepresented that the seller of the Victor Mind Share and the seller of the Active Compass Share “were a private fund and an independent investor, and that their selling behaviour was normal commercial behaviour for financial investors”[7] when in fact Chapman Chan had an interest in Intellectus Fund and Intellectus Capital which procured Victoria Fortress to sell the Victor Mind Share and when in fact Joseph Tam was the beneficial owner or the controlling party of Ruby Success which was selling the Active Compass Share (“the Independent Shareholders Misrepresentation”).

i.  “An inference could be drawn from the said subscription price of HK$150,000,000 that the said investors must have known beforehand that (a) the Preference Shares would be resold at a higher/ inflated price for profit in due course pursuant to the Inflated Sale Conspiracy; and (b) the Bio-Gene Acquisition would take place in due course as part and parcel of the Inflated Sale Conspiracy” (§30(1) (1b)).

D.4.  The price of Active Compass Sale being inflated and the related overt acts

31.Ps claim that its price for acquiring the Active Compass Share at HK$26,716,000 (effectively acquiring the Ordinary Shares at HK$11.68 per share) was grossly inflated as compared to the total price paid by Sharp Point Consultant Limited (“Sharp Point”) of HK$6,456,140 at the time it subscribed for the Ordinary Shares on 24 August 2016 (“the Sharp Point Subscription”), which was HK$2.39 per preference share.

32.Sharp Point at all material times has been ultimately beneficially owner and/or controlled by Joseph Tam

33.The overt acts carried out since mid-2016 up to the completion of the Active Compass Sale were:

a.  Joseph Tam caused (i) the Sharp Point Subscription on 24 August 2016, (ii) Sharp Point purchasing the Active Compass Share on 20 December 2016, (iii) Sharp Point selling the Ordinary Shares to Active Compass at HK$2.39 per share on 28 December 2016, (iv) Sharp Point selling the Active Compass Share to Ruby Success on 29 December 2016 at the consideration of HK$19,660,000 (effectively selling the Ordinary Shares at HK$8.59 per share)(collectively “the JT Active Compass Transactions”).

b.  In recommending the Two Sales to Mason Group in around December 2016 and in the Board Meeting, Chapman Chan intentionally concealed or did not disclose to Mason Group that (i) Joseph Tam was the ultimate beneficial owner and/or person in control of Ruby Success, (ii) the Sharp Point Subscription price was HK$2.39 per share, (iii) Joseph Tam had caused to be transacted the JT Active Compass Transactions and (iv) Mason Group would be acquiring the Ordinary Shares at a price representing an increase of 389% from the Sharp Point Subscription price.

c.  Ps’ claim that Chapman Chan was also guilty of the Valuation Misrepresentation and the Independent Shareholders Misrepresentation in that the Ordinary Shares were subscribed by Sharp Point months ago at HK$2.39 per share and that Rubby Success was not an independent investor as it was ultimately owned or controlled by Joseph Tam.

D.5.  The Bio-Gene Acquisition

34.According to Hau[8] and not part of Ps’ pleaded case, (a) in October 1993, he co-founded and incorporated Bio-Gene Technology Limited (“Bio-Gene Technology”) with Mr Cheng Wai Man, (b) Mr Wong Hon Wah in September 2001 joined as a shareholder, and (c) on 23 December 2016, Prestige Season Limited and True Wonder Holdings Limited were incorporated. The former was to be the holding company of Bio-Gene Technology and its related companies (“the Bio-Gene Group”) while the latter held the entire share capital of Prestige Season Limited consisting of 1 ordinary share of par value US$1.

35.According to Ps, on 31 December 2016, Joseph Tam, Chapman Chan and the 3^rd Defendant (“Terence Leung”) caused DiagCor Technology to enter into a share purchase agreement to acquire the Bio-Gene Group, which agreement “appeared to have been taken over” by the Bio-Gene SPA.

36.On 24 March 2017, a share purchase agreement was executed whereby DiagCor Technology, through Simply Bliss, agreed to acquire the Bio-Gene Group from Hau and the other shareholders (from their nominee True Wonder Holdings Limited) at the total consideration of HK$84,000,000 payable (a) as to HK$39,000,000 by cash upon completion (“the Cash Consideration”), and (b) the remaining HK$45,000,000 by allotment and issue of 4,817,987 ordinary shares in DiagCor Technology (“respectively, “the Bio-Gene SPA” and “the Bio-Gene Acquisition”).

37.The Bio-Gene Acquisition was completed on the same day of the Bio-Gene SPA, ie. 24 March 2017.

D.6.  The Bio-Gene Acquisition was part and parcel of the Inflated Sale Conspiracy

38.In §32, Ps plead that, sometime in December 2016 to March 2017, Joseph Tam, Chapman Chan and Terence Leung caused DiagCor Technology to enter into a share purchase agreement with Hau, and other shareholders of the Bio-Gene Group to utilize the subscription proceeds from the Victor Mind Subscription and the Sharp Point Subscription to acquire the Bio-Gene Group from Hau and the other shareholders. Importantly, Ps claim that the above was done “[i]n execution of the Inflated Sale Conspiracy”.

39.In §33, Ps plead that:

“…the Bio-Gene Acquisition was part and parcel of the Inflated Sale Conspiracy in that :

(1) One of the objectives of the Inflated Sale Conspiracy was to generate subscription monies via the issuance and subscription of the Preference Shares and the Ordinary Shares from (a) the Victor Mind Subscription; and (b) the Sharp Point Subscription (the “Subscription Proceeds”), which were subsequently sold to [Mason Group] … at significantly inflated prices;

(2) The Subscription Proceeds would not have been generated in the first place had it not been for the Inflated Sale Conspiracy; and

(3) Since around May 2016, [Hau] knew of (or alternatively, turned a blind eye to the fact that) the Inflated Sale Conspiracy, and/or that the Subscription Proceeds (which were to be utilized for the Bio-Gene Acquisition) would originate and/or be derived from the wrongful conduct pleaded above, including the breach of fiduciary duty by [Chapman Chan].”

40.In §32A and §32B, Ps allege that “in the course of communicating with [Chapman Chan], [Hau] communicated with [Chapman Chan] using [his] email addresses of [email protected] and [email protected]” (§32A) and therefore:

“… [Hau] had knowledge of [Chapman Chan]’s dual roles in (a) the group and (b) [Intellectus Capital] and [Intellectus Fund] at all material times”; and

…

[Hau] well knew, or alternatively, turned a blind eye to the fact that, or was put on notice that [Chapman Chan] was in breach of duties when he recommended and procured [Mason Group] and Mason Capital into entering the Victor Mind SPA and the Active Compass SPA” (§32B).

41.Ps aver that Hau derived substantial benefit from the Inflated Sale Conspiracy by receiving his share of consideration in respect of the Bio-Gene Acquisition (“Hau’s Bio-Gene Sale Proceeds”) “which would not have materialized had it not been for the existence of the Inflated Sale Conspiracy” (§34(4)).

D.7.  The 3 subsequent incidents

42.Ps then plead 3 incidents in §§34A, 34B and 34C and in §34D (together “the 3 Subsequent Incidents”) and averred that.

“… the … incidents … supports [sic] [Ps’] averment … that the Bio-Gene Acquisition was part and parcel of the Inflated Sale Conspiracy. [Ps] aver that [Hau]’s scheme together with the other Defendants (in particular [Chapman Chan]) at all material times was to (1) derive significant benefit via the receipt of the sale proceeds of the Bio-Gene Acquisition (as a result of the Inflated Sale Conspiracy); and (2) upon the completion of the Bio-Gene Acquisition, to follow up the same by a further dissipation of the assets of the Pangenia Group … to [Hau] (and [Chapman Chan]) under the circumstances particularized hereinabove.” (§34D)

43.The 1^st incident is pleaded in §34A. The allegations related to Bio-Gene Technology and one Grandtech Scientific Hong Kong Limited (a related company) each agreeing to pay certain service fees at HK$500,000 each month to an unknown private company owned and controlled by Hau pursuant to 2 respective service agreements entered into in around December 2020, which service agreements were later cancelled, but Ps aver that certain purported consultancy service fees were indeed paid but the amount and details were unknown as they were “in the course of conducting further investigations”.

44.The 2^nd incident is pleaded in §34B. The allegations concerned Chapman Chan’s cheque dated 12 November 2019 (after his resignation in November 2019) for the amount of HK$1,025,056 issued to a subsidiary of Mason Group (the name of which was not pleaded), which Ps alleged to be the return of “illegal payments received by [Chapman Chan]”; and that these “illegal payments” Chapman Chan received “with the assistance of [Hau] (who was the person in the executive management of the Pangenia Group making all the executive decisions and was the person in actual control of the Pangenia Group)”.

45.The 3^rd incident is pleaded in §34B. It concerns the sale of Guangzhou DiagCor Tongshu Medical Laboratory Limited, a subsidiary of Pangenia Inc for RMB6,600,000 in December 2020 to Nanjing Shihe Health Information Technology Limited. It is averred by Ps that the sale was at a gross undervalue and was without the approval of the board of directors of Pangenia Inc. However, it was not averred that Hau derived any personal benefit therefrom.

D.8.  Reliefs against Hau

46.Apart from the usual relief of damages for unlawful means conspiracy, Ps also claim as against Hau for (a) a declaration that Hau holds Hau’s Bio-Gene Sale Proceeds as constructive trustee and/or the same is “subject to the equitable interests of [Mason Group]”, and (b) accounts and inquiries and/or equitable damages to be assessed.

47.According to the averments in new §64, which was added by the 2^nd Draft ASoC, such further equitable reliefs against Hau were justified because (a) “[Hau’s Bio-Gene Sale Proceeds] was derived or traceable from breaches of [Chapman Chan]’s Fiduciary Duties to [Mason Group]”, (b) Hau knew or ought to know that Hau’s Bio-Gene Sale Proceeds were so derived from or traceable to the said breaches by Chapman Chan, (c) he thus was not a bona fide purchaser for value without notice and is liable for knowing receipt.

E.  HAU’S PLEADED DEFENCE

48.Hau’s defence case is indeed straight forward:

a.  He had no knowledge or involvement in the Sharp Point Subscription.

b.  He was informed of the Victor Mind Subscription at the material time in the capacity as one of the then directors of DiagCor Bioscience – that Intellectus Capital would invest in DiagCor Technology through the Victor Mind Subscription; but he had no involvement in the Victor Mind Subscription.

c.  He had no knowledge or involvement in the Victor Mind SPA, the Active Compass SPA, the Victor Mind Sale or the Active Compass Sale. Particularly, he had no knowledge or involvement concerning Chapman Chan’s investment proposal or recommendation made by him to Mason Group BOD.

d.  He had not carried out any wrongful act against Ps, whether as alleged or at all. He had not conspired with any other Defendants to carry out the alleged Inflated Sale Conspiracy.

e.  Concerning the Bio-Gene Acquisition:

i.  In or around October 2016, Chapman Chan on behalf of DiagCor Technology approached Hau for the potential acquisition of the Bio-Gene Group.

ii.  On 16 December 2016, DiagCor Technology’s board of directors resolved to enter into the acquisition of the Bio-Gene Group.

iii.  After discussions among the shareholders of the Bio-Gene Group, they accepted the offer from DiagCor Technology to acquire the Bio-Gene Group at the consideration of HK$84 million payable as to HK$39 million by way of cash and the rest by way of the allotment and issue of an aggregate of 4,817,987 ordinary shares of DiagCor Technology.

iv.  The said consideration was calculated based on the historical financial performance of the Bio-Gene Group and the acquisition was concluded based on arm’s length negotiations.

v.  He avers that to the best of his knowledge, the source of the cash consideration of HK$39 million for the Bio-Gene Acquisition originated from the Victor Mind Subscription.

vi.  The consideration he received from DiagCor Technology for the Bio-Gene Acquisition was payment for acquiring his interest in the Bio-Gene Group and not “financial benefit from the Inflated Sale Conspiracy” as alleged.

vii.  “Given the timeline of the relevant transactions, it is illogical and groundless for [Ps] to make the allegation that the Subscription Proceeds, even if part of such Subscription Proceeds was utilised for the acquisition of the Bio-Gene Group, originated from the alleged Inflated Sale Conspiracy, if any”. (paragraph 26(3) of the Defence)

F.  HAU’S SPECIFIC BASES FOR STRIKING OUT

49.The specific bases now raised by Hau for striking out the entire claim against him are that Ps have failed to plead, or their such pleas are defective, and/or Ps’ case in establishing these elements is unsustainable and bound to fail:

a.  The conspiratorial agreement;

b.  Any overt act;

c.  Such overt act which caused any loss or damage to Ps; and

d.  Relevant knowledge on the part of Hau about the Inflated Sale Conspiracy.

G.  DISCUSSION

50.The Two Sales were sales and purchases at very substantial considerations. The sellers – Victoria Fortress and Ruby Success – evidently had a right to advance their own commercial interests by lawful means, by seeking as high a price as the shares could fetch, even if, and indeed despite the fact that, the foreseeable consequence was to “damage the interests” of the purchaser – Mason Group – by seeking to have it pay a high price, such being the nature of the usual opposing positions between a seller and a purchaser in a commercial transaction by way of sale. The offensive part, if established, was the conspiracy or combination of the Defendants in the employment of unlawful means. The focus for present purposes therefore is whether Ps have shown a reasonable cause of action in respect of such conspiracy or combination to employ unlawful means, and not whether the sellers by their actions were seeking a high or higher price, and whether their such case is sustainable.

51.Basic as these are, I have to remind myself of them and of this focus, particularly in respect of the conspiracy case as concerned Hau and the Bio-Gene Acquisition, because of the following matters and contexts.

52.First, Ps plead the alleged overt acts not separately or distinctly, but said that they were contained in section C of the 2^nd Draft ASoC entitled “Wrongful acts carried out by the Defendants against the Plaintiff’s [sic] interest”, which section has 14 paragraphs with many long sub-paragraphs spanning a total of 18 pages, and it is not at all clear whether the alleged “wrongful” acts are or are not “overt acts” for the purpose of a conspiracy claim.

53.Second, many of such pleaded alleged acts said to be “in execution of the Inflated Sale Conspiracy” [9] or knowledge said to be relevant to the Inflated Sale Conspiracy could indeed have been entirely normal and innocent commercial behaviours in the context of the transactions involved. Notably and for instance, (a) that the Preference Shares would be resold by the investors at a higher or “inflated” price for profit in due course (see paragraph 30(i) above), and (b) that Joseph Tam, Chapman Chan and Terence Leung caused DiagCor Technology to enter into an agreement to acquire the Bio-Gene Group and to utilize the Subscription Proceeds to pay for the same (see paragraph 38 above).

54.Third, Ps’ complaints of having paid “inflated” prices were entirely based on their comparison of the prices Mason Group paid with the prices the sellers paid when they earlier subscribed for the shares in the Victor Mind Subscription and the Sharp Point Subscription. Such comparison is not a usual methodology adopted for valuation of shares in cases of acquisition. On the contrary, in a commercial setting, sellers are expected to make a profit from their sales, and therefore the price of their sales are expected to be higher than their costs.

55.Fourth, the nature of the Two Sales and that of the Bio-Gene Acquisition are very different. The former were sale of shares of DiagCor Technology by the original shareholders to the incoming shareholder and it would be the original shareholders, and not DiagCor Technology, who would be receiving the proceeds. The latter was the acquisition by DiagCor Technology of the Bio-Gene Group and paid for with the financial resources of DiagCor Technology. It is thus most difficult to understand Ps’ repeated suggestion that the consideration for the Bio-Gene Acquisition was paid by the “inflated” prices they paid for the Two Sales, which as said, went to the selling shareholders and not DiagCor Technology. In this connection, Ps plead a set of very convoluted allegations in §33 that “One of the objectives of the Inflated Sale Conspiracy was to generate [the Subscription Proceeds]”, that the Subscription Proceeds “would not have been generated in the first place had it not been for the Inflated Sale Conspiracy” and that the Subscription Proceeds “would originate or be derived from” the Defendants’ wrongful conducts (collectively “the Subscription-Proceeds-Origin Allegations”).

56.Fifth, I am of the view that the Subscription-Proceeds-Origin Allegations are illogical, frivolous and unsustainable. According to Ps’ pleaded case, the Victor Mind Subscription and the Sharp Point Subscription were already completed and paid for respectively on 20 September 2016 and 24 August 2016. There was no averment (or even suggestion) otherwise. Thus, the Subscription Proceeds were already paid up months before the Victor Mind Sale and the Active Compass Sale were agreed by the signing of the respective SPA. It is not Ps’ pleaded case that Mason Group had already committed to the Two Sales prior to or the time the Subscription Proceeds were paid up, nor is it their pleaded case that at the time Victor Mind and Sharp Point knew with any degree of certainty that Mason Group would later agree to the Two Sales and would agree to pay the “inflated” prices. In the circumstances, one may loosely say, with hindsight, that Victor Mind and Sharp Point recouped the Subscription Proceeds from the prices paid by Mason Group for the Two Sales. But that is far from amounting to the Subscription-Proceeds-Origina Allegations, which allegations, as said, I find illogical, frivolous and unsustainable, if not also absurd.

57.Sixth, and importantly in my view, it was clearly confirmed and accepted at the hearing by Mr Lam on behalf of Ps that there was no complaint from Ps of any impropriety concerning the price paid by DiagCor Technology for the Bio-Gene Acquisition. In other words, that the price paid to acquire the Bio-Gene Group was fair market price and that there was no allegation that the price has been wrongfully “inflated” in whatever way. It follows that Hau’s Bio-Gene Sale Proceeds were by way of proper payment for acquiring Hau’s interest in the Bio-Gene Group. Further, it is not Ps’ pleaded case (nor is there any suggestion) that DiagCor Technology would not have been able financially to complete the Bio-Gene Acquisition but for the Two Sales or the Inflated Sale Conspiracy, as it is common ground that the Cash Consideration for the Bio-Gene Acquisition was paid from the Subscription Proceeds. There is thus no basis for Ps’ allegation that Hau’s Bio-Gene Sale Proceeds were in fact the benefit Hau received for participating in the Inflated Sale Conspiracy, rather than being the due consideration he received for the sale of his interest in the Bio-Gene Group.

58.With those said, I turn to consider whether the requisite overt acts are pleaded or whether such pleas are defective.

59.I begin by identifying the unlawful means that Ps said the Defendants have agreed or conspired to employ.

60.The unlawful conducts alleged were all entirely those of Chapman Chan’s. As alleged, they consisted of breaches of fiduciary and common law duties by (a) concealing from Mason Group his interest in the Victor Mind Subscription and the Victor Mind Share, (b) therefore putting himself in a position of conflict of interest with Mason Group, (c) falsely or negligently making to the Mason Group BOD the Valuation Misrepresentation and the Independent Shareholders Misrepresentation, (d) concealing from Mason Group the prices of the Preference Shares and the Ordinary Shares when they were first subscribed and the timing when the two subscriptions took place, (e) making a secret profit from the Victor Mind Sale at the expense of Mason Group, (f) concealing from Mason Group the JT Active Compass Transactions, and (g) failing to disclose to Mason Group that it would in fact be purchasing the Preference Shares and the Ordinary Shares at “grossly inflated” considerations (collectively “Chapman Chan’s Breaches of Duties”).

61.Concerning the Victor Mind Sale and the Active Compass Sale, all of the so-called overt acts pleaded were the individual acts of Chapman Chan and Joseph Tam – on Chapman Chan’s part were Chapman Chan’s Breaches of Duties; on Joseph Tam’s part were respectively his facilitation and arrangement of the Victor Mind Subscription in the Victor Mind Sale and the JT Active Compass Transactions in the Active Compass Sale. There is not one act pleaded which was participated by them together, or by any or both of them with another Defendant.

62.Notably and importantly, it is not pleaded that Joseph Tam had any form of knowledge that Chapman Chan would commit, was committing or had committed any (or all) of the Chapman Chan’s Breaches of Duties, particularly, that Chapman Chan (a) had in fact had an interest in the Victor Mind Subscription or the Victor Mind Share or the Preference Shares and that Chapman Chan would make the Independent Shareholders Misrepresentation to Mason Group. Joseph Tam’s involvement in the Victor Mind Subscription, leaving the allegation of conspiracy aside, was otherwise most normal and was well expected, as he was the founder, director and main shareholder of DiagCor Technology. Unless it is pleaded that Joseph Tam facilitated the Victor Mind Subscription at least with some form of such knowledge, Ps cannot even begin to say that the facilitation of the Victor Mind Subscription by Joseph Tam was an overt act on his part showing that the alleged conspiratorial agreement had been made.

63.In Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & Co Ltd & Others, Bokhary JA (as the learned PJ then was) rejected the contention that the express misrepresentations made by one defendant would amount to an overt act for the purpose of pleading conspiracy, thus:

“Only one defendant, … , is alleged to have uttered the statements said to be misrepresentations. The making of misrepresentations by one person does not require any agreement; and it does not show that any agreement has been made.” (p.272H)

64.I respectfully adopt the learned judge’s reasoning and observation here. Evidently, the reasoning and observation would apply with greater force in relation to such of the Chapman Chan’s Breaches of Duties in the form of his silence or inaction, namely failure to disclose to, and concealing from, Mason Group.

65.In the result, concerning the Victor Mind Sale and the Active Compass Sale as part of the Inflated Sale Conspiracy, there is simply no overt act pleaded.

66.Conspicuously and importantly, in relation to the Victor Mind Sale and Active Compass Sale, there is no acts pleaded, overt or otherwise, that involved Hau.

67.In his written skeleton arguments, Mr Lam identified for Ps 2 overt acts involving Hau in connection with the Bio-Gene Acquisition.

68.The first one was said to be Hau’s negotiations with Chapman Chan by emails (§32(1) and (2), and §7(1) in Ps’ Reply). They were 4 emails[10], respective dated 6 May 2016, 8 May 2016, 6 September 2016 and 13 November 2016. They did not involve any negotiations. All 4 emails were short emails sent by Hau to Chapman Chan enclosing therewith information concerning the Bio-Gene Group, such as Audited Financial Statements, company profile, business licenses and such.

69.In relation to the emails, much was said by Ps that because Chapman Chan used the email addresses of [email protected] and [email protected] in some of the emails, Hau had actual or constructive knowledge of Chapman Chan’s “dual roles”, his conflict of interest with Mason Group, and even his breaches of fiduciary and other duties. Though I have serious reservation whether Hau by seeing those 2 email addresses alone could come to a knowledge of all these matters alleged, this being a striking out application and the averment being that Hau had such knowledge, and as submitted by Mr Lam, the emails could be but some glimpse of all the evidence, I am prepared at this stage to assume this matter of knowledge in favour of Ps. However, such knowledge is not an act, and of itself cannot be a proper plea of overt act.

70.The second so-called overt act involving Hau was said to be the execution of the Bio-Gene SPA (§32), which by itself was a commercial transaction on which otherwise Ps have no complaint, and the Bio-Gene Acquisition indeed was the main part of the condition precedent of the Two Sales.

71.These 2 so-called overt acts were thus acts done by Hau in connection with selling the Bio-Gene Group and in furtherance of the Bio-Gene Acquisition. Mr Lam did not seek to address the court how the 2 so-called overt acts showed more than the furtherance of the Bio-Gene Acquisition, in that they would show that the alleged conspiratorial agreement to employ unlawful means (namely, Chapman Chan’s Breaches of Duties) to “inflate” the prices of the Victor Mind Share and the Active Compass Sale was entered into by, and implemented on the part of, Hau with the Defendants.

72.In my view, the 2 so-called overt acts clearly did not show that the alleged conspiratorial agreement had been made between Hau and the other Defendants.

73.Mr Lam has referred the court to the various pleaded events and transactions, their timing and the “connections” said to be there between these transactions and events, and submitted that they had “close causal and transactional link”, and asked the court to “draw the thread together”, and to “take a holistic view of the conspiracy”, and thus to conclude that it is not impossible to draw an inference that the alleged conspiratorial agreement existed amongst the Defendants with Chapman Chan to employ Chapman Chan’s Breaches of Duties to grossly inflate the prices.

74.Having carefully considered Ps’ case as pleaded, and as analysed and discussed above, I am of the clear and firm view that it is impossible for such inference to be drawn based on Ps’ pleaded case. I thus must reject Mr Lam’s submissions. In my judgment, Ps’ pleas of so-called overt acts against Hau are defective and there is no one overt act pleaded sustaining Ps’ case of unlawful means conspiracy as against Hau.

75.For completeness, I also hold that the 3 Subsequent Incidents, as pleaded, do not qualify as overt acts in support of the alleged Inflated Sale Conspiracy. They occurred some 2 to 3 years after the Two Sales. They are separate complaints of dissipation of assets which are totally different in nature and are unconnected with the alleged Inflated Sale Conspiracy, and in respect of which no separate cause of action is pleaded.

76.In all, I am satisfied that it is plain and obvious that there is no reasonable cause of action of unlawful means conspiracy against Hau, and such claim against Hau should be struck out.

77.As I have considered the matter based on the 2^nd Draft ASoC, I also conclude that the defect cannot be cured by the intended amendments.

78.Those being my conclusions, it is not necessary for me to consider the striking out of the equitable reliefs of constructive trust, accounts and equitable damages as against Hau or for me to consider striking out based on the Locus Standi Challenges. It is also not necessary for me to consider the alternative application of Hau to determine the Locus Standi Challenges as questions of law.

79.As unlawful means conspiracy is the only cause of action claimed against Hau, upon it being struck out Ps’ action against Hau ought to be dismissed.

H.  DISPOSAL

80.In the premises, I order the striking out of such part of the Statement of Claim and dismissal of this action as against Hau in terms of paragraph 1 of Hau’s summons taken out on 28 September 2022, and make no order in respect of paragraph 2 thereof.

81.I dismiss Ps’ application by their summons taken out on 16 December 2022 for leave to amend the Statement of Claim and for further orders consequential upon the amendment, insofar as the intended amendments pertain to Ps’ claim against Hau.

82.On nisi basis, I order that Hau’s costs of this action, including his costs of these 2 summonses and all costs reserved, be paid by Ps, to be taxed if not agreed. This costs order nisi will become absolute in 14 days unless any party applies by summons to vary.

83.Lastly, I thank Mr Lam, Mr Kwan and Mr Yau for their assistance.

Mr Douglas Lam SC and Mr Kwan Ping Kan, instructed by Li & Partners, for the 1^st and 2^nd Plaintiffs

Mr Jeff Yau, instructed by ONC Lawyers, for the 4^th Defendant