Wang Shuliang v. Pan Daming and Others

HCA 590/2023

[2024] HKCFI 3363

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 590 OF 2023

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DECISION

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1.Introduction

1.1The Plaintiff (“P”) claims that he has been defrauded by the 1^st Defendant (“D1”). The fraudulent scheme (“Scheme”) involved a purported real estate project in the Republic of Palau (“Project”), which Project P now says did not exist. It is P’s pleaded case that, at the request of D1:

(1)  On 16 May 2015, P issued a cashier order from DBS Bank (Hong Kong) Limited in the sum of HK$5 million (“D2 Cashier Order”) to the 2^nd Defendant (“D2”). The D2 Cashier Order was passed to D1 on the same day; and

(2)  On 19 May 2015, D1 requested P to, and P did, issue 2 cheques: (a) a cheque in the sum of HK$10 million (“D3 Cheque”) payable to the 3^rd Defendant (“D3”) and (b) a cheque in the sum of HK$5 million with the recipient name left blank (“D2 Cheque”). The said cheques were passed to D1 on the same day.

1.2The D3 Cheque is pleaded to have been paid into an account held by D3 with Hang Seng Bank. The evidence before the court shows that the sums covered by the D2 Cashier Order and the D2 Cheque were deposited into an account held by D2 (“D2’s Account”) with the Hong Kong and Shanghai Banking Corporation Limited (“HSBC”) on 16 and 21 May 2015.

1.3P commenced the present action almost 8 years later on 19 April 2023. In the original Statement of Claim (“SOC”), the causes of action advanced against D2 were (1) conscience-based constructive trust of the HK$10 million received by D2 (or its traceable proceeds), (2) Quistclose trust, (3) unjust enrichment based on mistake and total failure of consideration, and (4) dishonest assistance and knowing receipt.

1.4By a summons dated 1 November 2023, D2 applied to strike out the SOC and for an order that the action against her be dismissed. At the hearing before Master Ebony Ling on 14 March 2024, the learned Master made the following orders (“14/3/24 Order”):

(1)  The SOC, insofar as it concerns D2, be struck out;

(2)  Unless P files and serves his Amended Statement of Claim (“ASOC”) reflecting subparagraph 1 above and pleading a claim of conspiracy to injure by unlawful means as against D2 by 4 pm on 11 April 2024, the Amended Writ of Summons, insofar as it concerns D2, be dismissed;

(3)  D2 be at liberty to apply for striking out the ASOC against her;

(4)  Costs of and occasioned by the summons be paid by P to D2 on an indemnity basis to be summarily assessed with a certificate for counsel (“Costs Order Below”).

1.5By his Notice of Appeal dated 28 March 2024 (“NOA”), P seeks to set aside the 14/3/24 Order.

1.6In the meantime, pursuant to the 14/3/24 Order, P filed his ASOC on 11 April 2024, advancing a claim premised on conspiracy to injure by unlawful means against D2. By her summons dated 9 May 2024, D2 applies to strike out the ASOC and for an order that the action be dismissed against her (“2^nd Strike-Out Application”).

1.7Thereafter, by a summons dated 24 June 2024 (“Reamendment Application”), P applies for leave to amend the ASOC as per the draft Reamended Statement of Claim annexed to the summons (“DRASOC”). The DRASOC (a) reasserts most of the claims (differently formulated) advanced in the SOC (except the claims premised on dishonest assistance and knowing receipt) and (b) maintains (but sets forth a fuller pleading on) the conspiracy claim. As matters presently stand, the following claims are advanced against D2 in the DRASOC: (1) conscience-based constructive trust, (2) Quistclose trust, (3) unjust enrichment on the basis of mistake only and (4) conspiracy.

1.8The NOA, the 2^nd Strike-Out Application and the Reamendment Application were heard together at the hearing on 15 August 2024 (“Hearing”). P was represented by Mr Adrian Lai (with Mr Kevin Lau)[1] and D2 by Mr Ernest Ng (with Mr Raphael Leung).

1.9At the Hearing, counsel confirmed that the court’s focus should be on the Reamendment Application. As I understand counsel, they are content to adopt the approach set out at Chan Suk Ying (aka Chan Shock Ying) v Lee Wai Ling Celine (the personal representatives of the Estate of Peter Li Chak Ming) [2023] HKCFI 3085 §2, namely that the merits of P’s case should be assessed on the DRASOC. In considering the Reamendment Application, it is also common ground between counsel that the usual threshold of striking-out applies: LY Group Development Ltd v East Canton Ltd [2015] 4 HKLRD 84 at §13, namely whether the DRASOC can survive an application to strike it out.

2.The DRASOC

2.1I broadly adopt the summary of the DRASOC (insofar as relevant to D2) set out at Mr Ng’s Skeleton Submissions §7 (with my edits and supplements):

(1)  DRASOC §§1 and 28: It is pleaded that (a) D2 is a housewife and (b) P and D2 never had any business relationship or dealings.

(2)  DRASOC §§2-12: D1 (allegedly working for a Mr Che) made certain oral representations (“Representations”) to P in early 2015 which led P to invest HK$20 million (“Subject Sum”) into the Project. D1 then requested P (and P, in reliance on the Representations, did) pay the Subject Sum, of which HK$10 million went into D2’s Account (“D2 Sum”). According to P, Mr Che was a very famous and successful businessman in the real estate industry in the Mainland with a wide business network.

(3)  DRASOC §§12A-12C and 31: P intended the Subject Sum to be used solely for the purpose of investing in the Project and no other purpose ("Alleged Intention"). Both D1 and D2 knew, accepted or acquiesced in the Alleged Intention when the D2 Sum was paid into D2's Account. D2 is said to have actual knowledge, imputed knowledge and/or blind eye knowledge of the Alleged Intention. In respect of the blind eye knowledge, it is said that D2 refused to enquire the purpose and basis of the payment of the D2 Sum into D2's Account against the circumstances pleaded at DRASOC §31.

(4)  DRASOC §§13-22: In June 2015, P learned from D1 that Mr Che was arrested and began to follow up on the details of the Project. D1 refused to provide any details or documents about the Project despite P’s repeated requests. When P requested D1 to return the Subject Sum, 3 oral guarantees were offered by D1 (“3 Guarantees”) in 2015, 2016 and 2019 guaranteeing the refund of the Subject Sum. A total sum of RMB1.3 million was refunded by D1 personally in September 2015 and November 2016 (equivalent to HK$1,531,685.50) pursuant to the first of the 3 Guarantees (“Partial Repayment”). Thereafter, D1 offered the second of the 3 Guarantees to return the balance of the Subject Sum, namely [HK$20,000,000 – HK$1,531,685.50 =] HK$18,468,314,50 (“Remaining Sum”). As there was no further refund of the Remaining Sum, P had a meeting with D1 on 8 May 2019, at which D1 offered the third of the 3 Guarantees to return around HK$2 million in September 2019 and eventually the rest of the Remaining Sum. On 11 May 2019, P requested details including (a) repayment schedule under the 3 Guarantees, (b) D2’s role in the Project, (3) D2’s relationship with Mr Che and (4) D2’s contact information. Should there be a failure to provide the information requested, P would report the matter to the police. P did not receive any repayment by 30 September 2019 and eventually reported the matter to police on 9 September 2020.

(5)  It is pleaded at DRASOC §21 that the Scheme is fraudulent by reasons of the particulars provided therein, namely (a) the Project did not exist and was a fabrication, (b) D1 made up the Representations, (c) relying on the false Representations, D1 intended to, and did, induce P to make payment of the Subject Sum to D2 and D3, who as accomplices of D1 either participated actively in the Scheme or turned a blind eye to the Scheme by allowing their bank accounts to be used as stooge accounts to receive the Subject Sum as a result of the perpetration of the Scheme, (d) upon receipt of the Subject Sum, D1 began to concoct the story of Mr Che being arrested and thus the Project being delayed, as a reason to forestall P from making inquiries and (e) thereafter D1 made limited repayments to P so as to placate P and to continue to buy time for D1 and his accomplices to deal with the Subject Sum. It is pleaded that by reason of the fraudulent nature of the Scheme, its true nature could not reasonably have been discovered before 30 September 2019 (ie the deadline for the repayment of HK$2,000,000 under the third of the 3 Guarantees) or alternatively at the earliest May 2019 (ie after the meeting with D1 on 8 May 2019 and D1’s subsequent refusal to provide any information pursuant to P’s request made on 11 May 2019).

(6)  DRASOC §§23-27 (Section D): In Section D, P advances his claims against D1.

(7)  DRASOC Section E: Section E advances P’s claim against D2 (and D3) as recipients of the Subject Sum. Section E1 pleads P’s proprietary and trust-based claims based on conscience-based constructive trust and Quistclose trust. Section E2 pleads P’s claim for unjust enrichment[2]. Section E4 pleads the claim based on conspiracy to injure by unlawful means.

(8)  DRASOC §§29-33 (Section E1): For constructive trust, it is pleaded that D2's conscience was affected as she knew and/or was willfully blind as to the possibility that the D2 Sum was proceeds of fraud. At DRASOC §31, the particulars alleged against D2 are (a) she was at all material times a housewife, (b) the D2 Sum was deposited into D2’s Account within a period of less than a week, (c) P and D2 did not know each other and never had any dealings (business or otherwise) with each other, (d) D2 had no legitimate interest or entitlement to receive the D2 Sum, (e) it is to be inferred that D2 knew D1 at the material time and (f) D2 allowed, procured, or caused D2’s Account to be used as a stooge account for the carrying out of the Scheme. It is pertinent to note that §31(vi) pleads “By reasons of the matters pleaded above, [D2] had actual or “blind eye” knowledge that [the D2 Sum] deposited into [D2’s Account] were proceeds of fraud at the time when the two tranches were deposited into [D2’s Account] on 16 May 2015 and 21 May 2015 respectively.” For Quistclose trust, it is pleaded at §33 that D2 holds the D2 Sum on Quistclose trust for P by virtue of D2's knowledge and acceptance of (or acquiescence in) the Alleged Intention, and P is entitled to enforce the Quistclose trust against D2 and/or seek personal relief against D2.

(9)  DRASOC §34 (Section E2): P pleads unjust enrichment against D2 relying on the unjust factor of mistake, namely P made payments to D2 on the false beliefs that (a) the Project existed; (b) D1 was an honest and genuine businessman who was legitimately seeking investment into the Project; (c) D2 was D1's colleague on the Project; and (d) the payments made by P would be used for investment purposes in the Project.

(10)  DRASOC §§40-42 (Section E4): P pleads unlawful means conspiracy against D1-D3, viz D1-D3 had entered into an agreement, understanding or combination to conspire to use unlawful means (ie dealing with proceeds of crime and/or breach of trust) to cause damage to P, namely receiving the Subject Sum by defrauding P pursuant to the Scheme, which caused loss and damage to P. The overt acts pleaded at DRASOC §41 include (a) D1 made the Representations and procured P to pay the Subject Sum to D2 and D3 on the basis of the Alleged Intention, (b) D2 and D3 allowed their accounts to be used as stooge accounts and (c) D1 then made the 3 Guarantees and made limited repayments to forestall P’s inquiries and action.

2.2As stated at §1.9 above, in considering the Reamendment Application, the usual threshold of striking-out applies. At the Hearing, it was broadly Mr Ng’s submissions that:

(1)  The constructive trust claim cannot survive a strike-out application since (a) it discloses no reasonable cause of action and/or (b) it is scandalous, frivolous or vexatious;

(2)  The Quistclose trust claim cannot survive a strike out application as it is scandalous, frivolous or vexatious; and

(3)  The unjust enrichment claim and the conspiracy claim cannot survive a strike-out application since (a) they disclose no reasonable cause of action, (b) they are scandalous, frivolous or vexatious and/or (c) there are otherwise an abuse of the process of the court as they are time-barred.

3.The applicable principles

3.1There is no real dispute between counsel on the broad principles. In summary, disputed facts should be taken in favour of the party whose pleading is under attack. The court should not decide difficult points of law in striking out proceedings. Where the legal viability of a cause of action is fact-sensitive, an order to strike out should not be made. If it is shown to be plain and obvious that the disputed assertion is made without evidence or any solid basis, a spurious action may be struck out. However, unless it can be shown that what is asserted is incontrovertibly false, the court will not find that a claim is plainly and obviously unsustainable. The court should not lightly engage in debate on affidavit evidence.

3.2On the specific issues debated in the present case, counsel further agree that:

(1)  Once a limitation defence is raised in a strike-out application, the onus is on the plaintiff to prove that the claim is not time-barred to the strike-out threshold: Polyline Development Ltd v Ching Lin Chuen [2021] HKCFI 483 at §§10 and 15; and

(2)  On pleading an allegation of fraud, both Mr Lai and Mr Ng referred to Chinachem Charitable Foundation Limited v Chan Wai Tong Christopher & Ors [2021] HKCFI 1347. Whilst it is true, as contended by Mr Ng that an allegation fraud is not to be lightly made, I think counsel agree that the test for present purpose is whether P’s case of fraud can be said (a) to have arisen from P’s imagination, (b) to be an improbably story brought forward without any reasonable grounds or (c) to present a tissue of improbabilities which ought not be sent to proof. The test remains whether P’s case can be clearly shown to be incontrovertibly false: Chinachem §§21-22.

4.Analysis

4.1I now proceed to analyze whether the 4 causes of action pleaded in the DRASOC are demurrable.

(i)  The constructive trust claim

4.2Mr Ng says that the constructive claim advanced in the DRASOC is demurrable on the following grounds.

4.3First, it is said that the allegation that the Scheme is fraudulent is an improbable case brought forward without reasonable grounds. Mr Ng submits that the Project, even if it turned out to be unsuccessful or even abortive, does not mean that it did not exist or was entirely a fabrication, or that the Representations were fraudulent as alleged at DRASOC §§21(i) and (ii) and highlights that no evidence has been adduced by P to show that the Project was a fabrication.

4.4In the circumstances of the present case, I am unable to agree with Mr Ng for the following reasons:

(1)  This is not a case where the court has to engage in a debate on affidavit evidence, as D2 has not adduced any evidence to suggest that the Project did exist. In fact, it is D2’s evidence that she has no knowledge of and was not involved in any aspect of the Project;

(2)  In my view, the allegations that the Project did not exist or was a fabrication do not present a “tissue of improbabilities” such as those made in Chinachem. There, an accusation was made against professional administrators that they had inflated their bills for the purpose of secret remuneration, which accusation the learned Judge observed as problematic in many respects. For example, any overbilling would be subject to an elaborate mechanism for the assessment of the bills and would therefore risk being challenged and exposed by the stakeholders including the Secretary for Justice: Chinachem §28;

(3)  Here, the Representations were made in May 2015, and very soon thereafter, on 2 June 2015, D1 informed P that Mr Che had been arrested;

(4)  As pleaded at for example DRASOC §21, the scale and complexity of the Project must have involved significant documentation and none was provided to P despite P’s requests;

(5)  On the present material, I have to proceed on the basis that D1 did offer and partially perform the 3 Guarantees to fully refund the Subject Sum. Were the Project genuine, it is at least arguable that, commercially, D1 would not have taken up the personal responsibility to refund in full the Subject Sum;

(6)  I am therefore of the view that it cannot be show that the allegations that the Project was non-existent is incontrovertibly false.

4.5Secondly, Mr Ng says that there is an insufficient plea that D2’s conscience was affected, relying on JSP International SRO v Alacrity Limited & Ors [2022] HKCFI 977.

4.6I agree with Mr Lai that the comparison sought to be drawn by Mr Ng with JSP is not justified, for the following reasons:

(1)  The pleading under consideration in JSP is set out at §27 thereof. At §28, Cheng J cautioned that the court cannot infer dishonesty from facts which were consistent with honesty;

(2)  At §30, Cheng J was of the view that the pleaded particulars might be consistent with the first-tier defendants being fraudulent recipients, but they might be equally be consistent with them being innocent recipients;

(3)  However, as pointed out by Mr Lai, unlike the pleaded particulars in JSP, it is pleaded at DRASOC §31 (as set out at §2.1(8) above) that (a) D2 actively participated in the fraudulent scheme, (b) D2 allowed the D2 Account to be used as a stooge account and (c) D2 had actual or blind-eye knowledge of P as the payor, but failed to make any enquiry notwithstanding the lack of any basis or entitlement to receive the D2 Sum;

(4)  It is notable that D2 has not adduced any evidence to explain why she received the D2 Sum except the D2 Sum was, to her, not a significant amount (D2’s 2^nd Affirmation §4(b)) and it appears that she was not even aware that D2’s Account had been frozen by the police since April 2023 when she made her 2^nd Affirmation in February 2024.

4.7Thirdly, and related to the second complaint, Mr Ng complains that the DRASOC fails to plead the necessary actual knowledge on the part of D2, which Mr Ng says is the only type of knowledge sufficient for a claim premised on conscience-based constructive trust.

4.8I do not agree with Mr Ng that the complaint is well-founded, for the following reasons:

(1)  As pointed out by Mr Lai, actual knowledge (or actual awareness) is in fact alleged at DRASOC §§12C, 31 and 32;

(2)  In any event, the proposition that only actual knowledge (or actual awareness) is sufficient to affect D2’s conscience is not as established as Mr Ng suggests. Whilst Mr Ng cites Zief Incorporated v Tekchandani Ajai Mohan [2021] 3 HKC 69 §50 in particular §§50(3) and (4) in support of his proposition, Mr Lai relies on Empire Summit International Ltd v Sun Hongmei [2024] 2 HKLRD 646 §5 for the proposition that “blind eye” knowledge is arguably sufficient. There, DHCJ Reyes SC, in granting a proprietary remedy based on resulting and/or constructive trust, observed that funds “[do] not suddenly turn up in one’s bank account” and the recipient in such circumstances “should at least have conducted reasonable inquiries to ascertain the source of the transferred monies”;

(3)  Both Zief and Empire Summit are decisions of the Court of First Instance. No (direct) appellate authority has been cited by counsel;

(4)  Mr Lai refers to Americhip Inc v Zhu Hongling [2021] 4 HKLRD 490 §61 where, in the context of dishonest assistance, blind-eye knowledge is equated with actual knowledge. Although Mr Ng cautions that the Americhip is not a case on constructive trust, no further or sufficient elaboration was proffered as to why the proposition in Americhip cannot (arguably) be applied by analogy to a constructive trust situation. Indeed, it is further noted that in the context of knowing receipt, the recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt, and for that assessment, if the recipient’s reliance on the alleged agent’s apparent authority, when accepting the asset from the alleged agent on behalf of the principal, was dishonest or irrational, it has been held that it would be unconscionable for the recipient to retain the asset against the wishes of the principal: Akai Holdings Ltd (in Liquidation) v Thanakharn Kasikorn Thai Chamkat (Mahachon) (2010) 13 HKCFAR 479 §§127 and 137;

(5)  Even in England, the position appears to be unsettled. For example, at Fitzalan-Howard v Hibbert [2009] EWHC 2855 §49, it was observed (obiter) that, in the context of constructive trusts, the point at which conscience would be affected would not necessarily be the point at which the recipient suspected, or even learned of, the mistaken payment, but might be the point at which he could reasonably be required to have acted, which observations are at least not inconsistent with DHCJ Reyes SC’s observations in Empire Summit;

(6)  As Mr Ng is unable to demonstrate that it is beyond argument that only actual knowledge (or actual awareness) is sufficient to affect D2’s conscience, his complaint that P’s plea of D2’s knowledge amounts to a rolled-up plea offending the pleading principle set out at Top Point Ltd v K&L Gates (A Firm) [2020] 1 HKLRD 814 §19 is also not made out.

4.9Fourthly, Mr Ng complains that, as a matter of pleading, the constructive trust claim fails because no subject-matter of the trust has been pleaded, in that P has failed to plead that the money at the time of receipt is the same as the money now resting in D2’s Account. In this regard, Mr Ng relies on JSP §§31-41 and Milestone Electric Inc v Meihoukang Trading Co Limited [2020] HKCFI 2542 §§14-15. Mr Ng further refers to a letter from HSBC adduced by D2 which states that “the request documents before August 2016 is beyond the retention”.

4.10I agree with Mr Lai that this is not a valid reason to disallow the constructive trust claim, for the following reasons:

(1)  Both JSP and Milestone are default judgment cases. As such, the court had to identify the specific property to be imposed with a trust from the pleadings and the pleadings alone. In the present case, P intends to proceed to discovery and obtain relevant information and documents regarding the movement of funds in D2’s Account (if any);

(2)  D2 is effectively contending that P must have completed the tracing process before even pleading his case. As noted at Milestone §14, to obtain proprietary relief for a sum transferred to the defendant or assets derived from it, the plaintiff must establish that the assets claimed can be identified by the tracing process as representing the original trust property. In my view, this is plainly a matter for trial and subject to P in the meantime deploying available procedures to obtain the relevant evidence;

(3)  At the very least, if at trial, D2’s conscience is found to have been affected, the court may grant declaratory relief and consequential relief such as a duty to account (which relief are already pleaded);

(4)  It is unclear that the relevant evidence is not obtainable. All that HSBC has stated is that the requested documents “are beyond the retention”. It is not clear that the documents are destroyed and hence unavailable, as opposed to simply not produced to D2 absent a court order because of the bank’s retention policy.

4.11I hope I have dealt with all the criticisms advanced by Mr Ng against the constructive trust claim. For the above reasons, I am of the view that the constructive trust claim can survive a strike-out application.

(ii)  The Quistclose trust claim

4.12As submitted by Mr Lai, the leading authority is the very recent Court of Final Appeal decision in China Life Trustees Ltd v China Energy Reserve and Chemicals Group Overseas Co Ltd [2024] HKCFA 15. It is observed at China Life §57:

“ If, as a matter of fact, the evidence objectively establishes that the payer intended to pay the money to the recipient to be used for a specific purpose and no other, with the recipient agreeing to or acquiescing in that restriction, such finding carries with it the logical consequence that the money was not to be added to the recipient’s general assets or to be at the recipient’s free disposal. It would follow as a matter of legal consequence that the transferee did not acquire a beneficial interest in the funds and that the transferor retained a beneficial interest throughout, so that on failure of the specific purpose, the money would be held on resulting trust for the payer.” (emphasis added)

4.13As to what happens when more than 2 parties are involved, Bellis v Challinor [2015] EWCA Civ 59 observes at §§61-62:

“ [61] In such cases the invitation usually comes from the transferee. In Twinsectra it took the form of a solicitor's written undertaking, the terms of which, as Lord Millett put it, were "crystal clear" in restricting the use of the money transferred for the specified purpose of the acquisition of property.

[62] But I am content to assume, as the judge did in the present case, that the invitation may come from someone other than the transferee. A may say to B:

‘ If you transfer money to C, it will be used solely for a specified purpose.’

The proper interpretation of B's conduct in transferring money to C pursuant to that invitation is that he thereby created a Quistclose-type trust. Whether C will be liable for breach of that trust by using the money for some other purpose will then depend on whether C knew of the terms of A's invitation before disposing of the money.” (emphasis added)

4.14Mr Ng points out the Bellis was applied in Vidya Bhushan Goyal v Florence Care Limited & Ors [2020] EWHC 659. The facts of Vidya are as follows:

“ [13] The judge summarised the arrangements made between Mr Goyal and Mr Edwards and others as to a proposed joint venture involving the purchase of care homes. The joint venture involved the creation of a company to become the holder of the legal title to the care homes. The First Respondent, Florence Care Ltd, was the company which was formed for this reason.

[14] The joint venture involved Mr Goyal investing his own money in the venture. In February 2012, Mr Goyal transferred £160,000 to the client account of DKLM LLP, which is the Third Respondent. I will refer to them as “the Solicitors”. They regarded Mr Edwards as their client for this purpose. In August 2012, Mr Goyal transferred £590,000 to the Solicitors’ client account. When I consider the appeal in relation to the Solicitors, I will need to set out the communications between Mr Goyal and the Solicitors in much greater detail.

…

[73] … on 21 February 2012, Mr Goyal sent an email which is now at the centre of his claim against the Solicitors. The email was sent to [email protected]. Although the judge thought that the email did not bear any reference, it is fairly clear that in the subject matter line of the email was written “AK.SHA”. The email stated:

‘ Dear Sir/Madam

I have transferred £160,000 into your account which as agreed should be held till you receive further instructions and should only be used as proof of funds for exchange until advised further.

Please confirm these have been received.

Kind Regards

Vidya Goyal’ ”

4.15On the need for knowledge on the part of the Solicitors, Vidya is an authority for the proposition that the answer is in the affirmative:

“ [104] Mr Butler submits that the sending of the email of 21 February 2012 to the Solicitors had the effect of making the Solicitors trustees of the £160,000. The first question is: must it be shown that the Solicitors knew of the terms of that email? I consider that the answer to that question is: yes. I also consider that this answer is in accordance with principle and is supported by the relevant authorities.

[105] As to principle, I would analyse the position as follows. The money in a solicitor’s client account is normally held on trust for the client. When a sum of money is paid by third party to a solicitor, to be held in the client account, then the default position is that the money is held on trust for the client. This proposition is established by Bellis v Challinor per Briggs LJ at [79] where that is described as the default position, subject to any agreement or arrangement to the contrary.

[106] Further, as is also explained in Bellis v Challinor, for there to be a trust binding the Solicitors in this case, the trust must be created by words or conduct: see per Briggs LJ at [58]-[59]. The agreement or arrangement referred to in that case at [79] must be one which is binding on the Solicitors. On the facts of the present case, Mr Edwards owed fiduciary duties to Mr Goyal in relation to the money advanced by Mr Goyal. However, what Mr Goyal has to show, in order to succeed against the Solicitors, is that the money held by the Solicitors was not held by them on trust for Mr Edwards but was held by them on trust for Mr Goyal.

[107] As to the requirement of knowledge on the part of the Solicitors, that requirement is considered in Quistclose itself, both in the Court of Appeal (reported at [1968] Ch 540) and in the House of Lords. In the Court of Appeal, all three members of the court proceeded on the basis that knowledge of the terms of the trust was necessary and they held that the bank had the requisite knowledge: see at 555E-556C, 556F-G, 561C-563D and 563G-564D. In the House of Lords, Lord Wilberforce (with whom the other members of the House agreed) held that the bank had to have “notice” of the trust (see at 579G-H) and he held that the bank did have the requisite notice (see at 582B-G). There is a difference between notice and knowledge: see, for example, In re Montagu’s Settlement [1987] Ch 264 at 285D. The arguments of counsel in the House of Lords in Quistclose approached the matter on the basis that was required was knowledge and not merely notice: see at 571H and 575D.

…

[109] Further, the requirement is described in Bellis v Challinor as ‘knowledge’: see at [93]-[94].

[110] In view of the fact that the default position in the present case was that the Solicitors held the money in their client account on trust for Mr Edwards, it ought to be necessary for Mr Goyal to make the Solicitors aware that the money he is paying to them, to be received by them in their client account, is not held on trust for Mr Edwards but is instead impressed with a trust for Mr Goyal. Only in that way would Mr Goyal make an agreement or arrangement to the contrary of the default position, as described in Bellis v Challinor at [79].

[111] The House of Lords in Quistclose left open the question as to when the recipient of the money must know of the restriction on its use: see per Lord Reid at 578D and per Lord Wilberforce at 582B.

[112] It is enough if the Solicitors knew (at whatever is the relevant time) of the restriction being imposed by Mr Goyal on the use of the monies; it does not have to be shown that the Solicitors understood that the legal consequence of that restriction was the creation of a trust obligation: see Quistclose in the Court of Appeal, per Russell LJ at 561E.”

4.16Relying on the foregoing, Mr Ng says that the Quistclose trust claim is scandalous, frivolous or vexatious, as P could not have made known to D2 the Alleged Intention, bearing in mind it is P’s pleaded case that he has no relationship with D2 whatsoever.

4.17In my view, it is not plain and obvious that the Quistclose claim pleaded in the DRASOC is unarguable.

4.18First, it must be pointed out that both Bellis and Vidya are cases concerning solicitors. The relevant default position is therefore that stated at Bellis §79 (referred to at Vidya §105 cited above):

“ To my mind, the fact that the Loan Note email requested interested investors to make payments into the Firm’s client account is, at best, neutral, if not positively adverse to the Respondents’ case. Of course, money paid into a solicitors’ client account is held on trust, but where a party to a transaction pays money at the other party’s request to that other party’s solicitor, then the default position is, and has been for over a century, that payment to the solicitor is equivalent to payment to the solicitor’s client, so that the money is held on trust for the client: see Ellis v Goulton [1893] 1QB 350. By ‘the default position’, I mean the position in the absence of any agreement or arrangement to the contrary.” (emphasis added)

4.19But D2 is not a solicitor. It seems to me that it is at least arguable whether the default position in Bellis and Vidya should be applied on a wholesale basis in the present case, such that P has to make D2 aware that the money he paid to her was impressed with a trust for P himself: Vidya §110.

4.20Indeed, Vidya observes as follows:

“ [139] Finally, Mr Butler argued that when the Solicitors received the £160,000 they were under a duty to inquire of the paying party as to the circumstances of the payment. Mr Butler submitted that the very act of paying the money to the Solicitors showed that Mr Goyal might not have wanted to place the money at the free disposal of Mr Edwards and therefore the Solicitors were under a duty to inquire, as alleged. I am not able to accept this submission. Before they received the money, the Solicitors had been told, on behalf of their client, that the money was on its way and the reason for the payment. Assuming that the Solicitors did not know of the email of 21 February 2012, the Solicitors had not received any communication from Mr Goyal. The default position is that money paid into the client account is to be at the free disposal of the client. The Solicitors were entitled to act on that being the default position.

[140] Accordingly, I consider that the only way in which Mr Goyal could succeed in showing that the Solicitors knew of the contents of the relevant email would be if, on the facts, the practice manager knew of the contents of the relevant email and if, on the law, that knowledge is to be imputed to the Solicitors.” (emphasis added)

4.21It may be seen that the argument that the Solicitors were under a duty to inquire was rejected only because of the default position applicable to solicitors. In my view, it is not plain and obvious that where, as here, D2 is pleaded to have no legitimate interest to receive the D2 Sum, the blind eye knowledge pleaded at DRASOC §12C(iv) is unarguably insufficient.

4.22Secondly, I agree with Mr Lai that it is at least arguable that Bellis §62 supports the proposition that once the D2 Sum was transferred to D2 pursuant to the Alleged Intention, a Quistclose trust arose (ie the proprietary consequences). Whether D2 will then become personally liable for breach of trust would depend on whether and when D2 acquired knowledge of the restricted purpose. In my view, whether and when D2 acquired knowledge is plainly a matter for trial, and would depend on, for example, factual findings on what D2 was told at the time of the D2 Sum (a substantial sum) was paid into D2’s Account within a very short period.

4.23For the above reason, I am of the view that the Quistclose trust claim can survive a strike-out application.

(iii)  The conspiracy claim and the unjust enrichment claim

4.24Both claims are premised on the Scheme being fraudulent. Mr Ng confirmed at the hearing that two complaints are pursued in respect of the conspiracy claim and the unjust enrichment claims.

4.25First, it is said that P’s case at DRASOC §21 that the Scheme was fraudulent is doomed to fail. I have already decided otherwise at §§4.3 and 4.4 above. For completeness, I ought to point out that the Scheme pleaded at DRASOC §21 involves (1) the Project being non-existent, (2) P being induced to part with the Subject Sum as investment in the non-existent Project and (3) the use of D2’s Account as a result of the perpetration of the Scheme. I do not find that the pleaded allegations can be shown to be incontrovertibly false.

4.26Secondly, it is said that both claims are time-barred. The debate between counsel is whether P could have with reasonable diligence uncovered the fraudulent Scheme before April 2017, 6 years before the issuance of the commencement of these proceedings on 19 April 2023.

4.27For the following reasons, I agree with Mr Ng that the conspiracy claim and the unjust enrichment claim should be struck out, in that there is no possibility that P can avail himself of the extended period under section 26 of the Limitation Ordinance Cap 347: Chow How Yeen Margaret v Wex Pharmaceuticals Inc, HCA 537 of 2013, 18 September 2013 §36:

(1)  I do not accept P’s evidence that P could only realistically have discovered the fraudulent Scheme in September 2019 when D1 failed to honour the third of the 3 Guarantees and became incognito;

(2)  I also do not accept Mr Lai’s submission that time should only start to run in November 2017, being one year after the repayment of RMB800,000 in November 2016;

(3)  In both scenarios, P’s submissions are tied to whether the 3 Guarantees were being honoured;

(4)  However, as pointed out by Mr Ng, the authorities show that, in approaching the question of what reasonable diligence requires is to be asked at 2 distinct stages, namely (a) whether there is anything to put the claimant on notice of a need to investigate, and at this stage, the claimant must be reasonably attentive so that he becomes aware (or is treated as becoming aware) of the things which a reasonably attentive person in his position would learn and (b) what a reasonably diligent investigation would then reveal, and at this stage, he is taken to know those things which a reasonable diligent investigation would then reveal: Sun Tian Gang v Changchun High & New Technology Industries Development Parent Company [2022] HKCFI 3348 at §95;

(5)  The onus is on P to show that he could not with reasonable diligence have uncovered the fraudulent Scheme, namely he could not have discovered it without exceptional measures which he could not have reasonably been expected to take: Paragon Finance plc v DB Thakerar & Co (a firm) [1999] 1 All ER 400 at 418. Put differently, reasonable diligence means “not the doing of everything possible, not necessarily the using of any means at the plaintiff’s disposal, not even necessarily the doing of anything at all, but that it means of doing of that which an ordinarily prudent buyer and possessor of a valuable work of art would do having regard to all the circumstances, including the circumstances of the purchase”: Peco Arts Inc v Hazlitt Gallery Ltd [1983] 3 All ER 193 at 199;

(6)  In the present case, it is plain that whether the Scheme was fraudulent and whether D1 honoured the 3 Guarantees were two separate matters and the issue is when the former could have been uncovered with reasonable diligence;

(7)  In my view, Mr Ng is right that the fraudulent Scheme could have been uncovered well before April 2017;

(8)  P parted with the Subject Sum in May 2015 and he was told that Mr Che was arrested in June 2015. P’s own pleaded case is that he then began to follow up on the details of the Project but his requests for documents were not entertained by P;

(9)  It is P’s pleaded case that the Project was stated to involve HK$1 billion and that P was shown photographs that some people whom P knew also visited Palau (DRASOC §3(ii));

(10)  It is P’s case that the Project did not exist. Given the size of the Project and the fact that P’s acquaintance had allegedly visited the site, P could reasonably have made enquiries, for example, with his acquaintances, especially when D1 refused to provide any details or documents about the Project since June 2015;

(11)  P was plainly concerned with the Project, so much so that he asked for a complete refund of the Subject Sum. By September 2015, only 3% was returned and by November 2016 another 4% was returned. I do not accept the (minimal) extent of the refund of the Subject Sum would reasonably have alleviated P’s concerns. In a similar vein, I also do not accept Mr Lai’s submission that P should be given a year from November 2016 before time starts to run against him.

4.28For the above reasons, I am of the view that the conspiracy claim and the unjust enrichment claim would not survive a strike-out application by reason of time bar.

5.Conclusion

5.1The Reamendment Application is allowed only to the extent that leave is granted to P to include the constructive trust claim and the Quistclose Trust claim against D2.

5.2The conspiracy claim was first raised in the ASOC and is subject to the 2^nd Strike-Out Application. As the conspiracy claim pleaded in the DRASOC is liable to be struck out, it seems to me that I should also accede to the 2^nd Strike-Out Application to strike out the ASOC (without dismissing the action against D2).

5.3As regards the NOA, counsel have agreed that, consequent upon my decision on the Reamendment Application, a draft order reflecting that decision will be submitted for my approval. As the 14/3/24 Order did not dismiss the action against D2 and P has confirmed that it does not intend to revert back to the SOC, I think counsel agreed that a number of different permutations (eg making no order on the NOA or allowing the appeal) may equally reflect the outcome of the Reamendment Application. I record that, at the Hearing, Mr Lai confirmed that P will not seek to challenge the Costs Order Below irrespective of the outcome of the Reamendment Application. In my view, the foregoing is a fair concession as P is not seeking to reinstate the SOC. The parties are to provide the said draft order within 7 days hereof.

5.4As to the issue of costs, I direct parties to lodge concise submissions after having had the opportunity to consider the conclusions set out above. P is to lodge and serve written submissions (limited to 3 pages) within 7 days hereof and D2 her written submissions (limited to 3 pages) within 7 days thereafter.

Mr Adrian Lai and Mr Kevin Lau, instructed by Oldham, Li & Nie, for the Plaintiff

Mr Ernest Ng and Mr Raphael Leung, instructed by Lewis Silkin, for the 2^nd Defendant