Chen Yue v. Arthur Kuan and Others

HCMP 550/2024

[2025] HKCFI 4172

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 550 OF 2024

__________________

__________________

__________________

_______________

D E C I S I O N

_______________

I.  INTRODUCTION

1.On 2 April 2024, the Plaintiff issued the Originating Summons herein under section 41 of the High Court Ordinance (Cap. 4) and Order 24 rules 7A(1) and 11A of the Rules of the High Court (Cap. 4A) for pre-action discovery of documents from the 1^st, 2^nd and 3^rd Defendants (collectively the “Defendants”) in relation to “the Plaintiff’s intended and/or potential claim against the Defendants”, including “the Defendant’s suspected mismanagement of a digital asset investment fund named ‘Evernew Crypto’ allegedly domiciled on the Ethereum blockchain (the “Fund”), whereby an alleged security breach involving the Fund’s cryptocurrency hot wallet (of which the 1^st Defendant was a signatory), resulting in substantial lossess to the Fund and its investors”. All the Defendants are in the United States of America (the “US”). By Master Rita So’s Order made ex parte on 10 May 2024 (the “Ex Parte Service-out Order”), leave was granted to the Plaintiff to issue a Concurrent Originating Summons and serve it on the Defendants out of jurisdiction.

2.The present application is the 2^nd and 3^rd Defendants’ application by Summons filed on 27 November 2024 (the “Summons”) pursuant to Order 12 rule 8 and the Court’s inherent jurisdiction for:-

(1)  An order to set aside the Ex Parte Service-out Order and the service of the Concurrent Originating Summons;

(2)  A declaration that the Court has no, or should not exercise, any jurisdiction, over the 2^nd and 3^rd Defendants in respect of the subject matter of this action; and

(3)  Further or alternatively, an order to stay all further proceedings herein against the 2^nd and 3^rd Defendants on the ground of forum non conveniens.

II.  PARTIES

3.The Fund was set up in Delaware, US, in or around 2021. It invests in crypto assets.

4.The 3^rd Defendant, a limited liability company established in Delaware in around 2016, manages the Fund as the investment manager for remuneration. The 3^rd Defendant employed the 2^nd Defendant, who is an American citizen and resides in the US. He is not a managing member of the 3^rd Defendant.

5.The 1^st Defendant holds dual US and Taiwanese citizenship, resides in the US and was a managing member of the 3^rd Defendant until September 2023, when he ceased to hold any shares in the 3^rd Defendant.

6.The Plaintiff is a subscriber to the Fund. He is a businessman and investor based in Hong Kong.

III.  BACKGROUND

7.On 8 April 2021, under a subscription document titled “In-Kind Digital Asset Subscription Certification” (the “Subscription Certification”) signed by the Plaintiff as “Subscriber” and the 1^st Defendant as “Managing Member” of the Fund, sent by the 1^st Defendant to the Plaintiff on 30 March 2021 together with an “Offering Summary” (the “Offering Summary”), the Plaintiff transferred $1,000,000 USDC (a cryptocurrency pegged to the US dollars) into a designated wallet specified in the Subscription Certification for investment. I shall refer to this investment as the “First Investment”.

8.The Offering Summary provided that:-

“The Fund: Evernew Crypto (the ‘Fund’) is a digital asset investment fund, domiciled on the ethereum blockchain, managed by [the 3^rd Defendant] (the ‘Manager’)

…

Multi-Signature Custody: The Fund has a non-custodial, multi-signature blockchain wallet initially signed by two members, [the 1^st and 2^nd Defendants].

The Investment Manager: [the 3^rd Defendant]… is the investment manager of the Fund (the ‘Investment Manager’). The Investment Manager is responsible for the business and affairs of the Fund, including the management of the Fund’s portfolio. [The 1^st Defendant] is the Founder and Managing Partner of [the 3^rd Defendant].”

9.I note that this Offering Summary was sent as an attachment by way of email, and the file name of this Offering Summary was “Evernew Crypto Offering Memorandum v032021.pdf”.

10.On or around 29 March 2021, the 1^st Defendant issued a Side Letter to the Plaintiff, stating that the 3^rd Defendant agreed to lesser fees as set out therein (Clause 3) and the Plaintiff became a “Limited Partner of the Fund” (Clause 4). The Plaintiff as “Investor” signed the Side Letter and emailed it back to the 1^st Defendant on 28 June 2021. The Side Letter also referred to “the Offering Memorandum dated 20 March 2021”.

11.On or around 30 June 2021, the 1^st Defendant appended his e-signature as “Managing Member” of the Fund to the Side Letter signed by the Plaintiff, and the 2^nd Defendant emailed the “e-signed” Side Letter to the Plaintiff, copying in the 1^st Defendant.

12.All the above took place in the US.

13.On 29 December 2022, when visiting Taiwan, the 1^st and 2^nd Defendants received notification from Etherscan (a block explorer whereby the movement of crypto assets into and out of crypto wallets is monitored) that there was a transfer of crypto assets out of one of the wallets of the Fund. Since the movement was without any authorisation, the transfer meant that a hacker had hacked the wallet (the “Hacked Wallet”), and the 1^st and 2^nd Defendant found that a large position of USDC, along with other crypto assets, were stolen by the hacker. I shall refer to these stolen assets as the “Stolen Assets”.

14.The 1^st and 2^nd Defendant (1) reported the matter to the Taipei police, (2) engaged a private security firm to investigate the hack, and (3) reported the hack to the Federal Bureau of Investigation (FBI) in the US.

15.By a Deed of Assignment and Transfer dated 20 July 2023 between the Plaintiff and one Ms Li Shan (“Shan”), Shan agreed to assign her interest in the Fund to the Plaintiff. On 15 August 2023, the 3^rd Defendant confirmed the completion of the transfer. By this, the Plaintiff acquired another investment in the Fund. I shall refer to this investment as the “Second Investment”.

16.At the end of December 2023, the loss of the Stolen Assets was written down, and the loss for the Plaintiff is approximately around 40% loss or USD717,144.38. The Plaintiff, among other investors, was notified accordingly by email sent on 5 January 2024 (the “5 January 2024 Email”). It read:-

“We are writing to provide you with an important updated regarding an incident that occurred within our fund last year and its subsequent impact on your investment.

In December 2022, the fund experienced a security breach involving out hot wallet. This incident resulted in the unauthorized access and transfer of funds. Given the severity of this situation, we immediately commenced an investigation with Certik, a private security firm, and local and federal law enforcement agencies including the US Federal Bureau of Investigation. Due to the active nature of this investigation and in order to avoid compromising its effectiveness, we were asked to keep this matter confidential until now.

The stolen funds remain traceable and are currently in on-chain addresses which are under active surveillance. Given there has been no response from the hacker and no further movement of the funds for the past year, we have decided to write down the loss and notify LPs [that is, Limited Partners].

The impact of this incident on your position is significant, equating to an approximate 40% loss, which in dollar terms is approximately $717,144.38. Should there be any recoveries of the hacked funds, the recovery amounts will be distributed to LPs at that time.

We deeply regret the inconvenience and concern this incident may have caused. We understand that this news is unsettling, and we are committed to maintaining the utmost integrity and transparency moving forward.

Given the impact of the hack and the long vesting schedules of underlying investments, we are implementing a 10% per quarter redemption gating for positions larger than $1M USD…

On a positive note, the market situation has improved in recent weeks…

We understand you may have questions or concerns regarding this update. We are available for further discussion and to provide any additional information you require. Thank you for your continued trust and support.”

IV.  APPLICATION FOR PRE-DISCOVERY

17.The 5 January 2024 Email formed the basis for the application for pre-discovery by the Originating Summons herein. At §28 of his supporting affirmation, the Plaintiff made the following observations:-

“28.1 the email provided no detail as to precisely when and how the security breach occurred, and the extent to which the Fund has suffered loss (other than making a bare assertion that, on my part, there is a 40% loss).

28.2 No particulars of the investigation purportedly conducted by Certik was given. No investigation report was provided.

28.3 There was no discussion as to whether any person (whether within the Fund management or otherwise) is responsible for the alleged security breach, or whether the Fund management had put in place proper and reasonably adequate security protocols in the first place given the significant amount of funds involved. The only information available to me (via the Offering Summary) is that the ‘wallet’ which has been hacked appears to be in the sole control of [the 1st and 2nd Defendants].

28.4 There has been no explanation of how the arbitrary decision to ‘write down the loss’ was arrived at. There has been no discussion as to what (further) efforts the Fund management had made in light of the suggestion that the funds ‘remain traceable and are currently in on-chain addresses which are under active surveillance’ before they decided to ‘write down the loss’ altogether.

28.5 Other than a bare assertion that the ‘Evernew team’ ‘were asked to keep this matter confidential’, there was no discussion as to who made this request or whether this request was properly justifiable in light of the Fund management’s duties to its investors / shareholders / limited partners. This is particularly important when the Fund has, during the relevant period, continued to issue ‘Statements of Changes in Capital’ which are representations to me that my investment remained intact and the changes in my account balance were only results of market movements. It would appear, in hindsight, that these representations were false.

28.6 The email was addressed to me only…

28.7 In fact, there was another email sent from [the 2^nd Defendant] to an undisclosed list of recipients (including myself) on 15 January 2023 titled ‘[Evernew] Hacking/Impersonation warning’, which was several weeks after the time of the alleged security breach. The email informed its recipients of a recent incident of an Evernew team member’s Telegram account being compromised, and asked us to take certain security measures to protect our account… Nothing was mentioned in that email about the alleged security breach that happened in December 2022.”

18.On 19 January 2024, the Plaintiff wrote to the 1^st and 2^nd Defendants demanding more information and documents from the Defendants. However, there has been no response, and the Fund has since January 2024 not issued any statement of changes in capital (the “Statement of Changes in Capital”) as in the past from April or September 2021 to November 2023.

19.In his application for pre-action discovery, the Plaintiff deposes at §32 that “there are at least reasonable grounds to suspect that the Fund management are in breach of duties in the following manner”:-

“32.1 The failure to properly safeguard assets of the Fund and/or put in place proper and reasonably adequate security protocols and measures to prevent such a security breach. This is particularly so when it seems that [the 1^st and 2^nd Defendants] are the only two persons (identified in the Offering Summary) responsible for the Fund’s ‘wallet’.

32.2 The non-disclosure of information about the security breach (and misrepresentation of Fund performance and account balances) to the limited partners of the Fund.

32.3 The refusal to provide information to which a ‘limited partner’ / ‘shareholder’ of the Fund ought to be entitled in the circumstances.

32.4 The arbitrary decision to write down the alleged loss thereby impacting my investment position.”

20.The Plaintiff goes on to assert at §33 that the breaches had caused substantial loss to the Fund and himself, and at §34, explains why the pre-action discovery is necessary:-

“The non-disclosure of information even until now had also disabled me from conducting, whether by myself or by engaging suitable competent forensic investigators, the most preliminary assessments of whether the integrity of the Fund’s management of its hot wallet had been compromised as a result of systemic failures on the part of the Fund or inexcusable human errors on the part of the Fund management.”

21.A solicitor of the Plaintiff’s solicitors firm also made an affirmation in support, explaining that the Plaintiff relied on Order 11 rule 1(1)(d)(i) and/or (f).

22.Order 11 rule 1(1)(d)(i) provides that:-

“(d) the claim is brought to enforce, rescind, dissolve, annul or otherwise affect a contract, or to recover damages or obtain other relief in respect of the breach of a contract, being (in either case) a contract which-

(i) was made within the jurisdiction”.

For convenience, I shall refer to this gateway for leave to service out as the “Contract Gateway”.

23.Order 11 rule 1(1)(f) provides that:-

“ (f) the claim is founded on a tort and the damage was sustained, or resulted from an act committed, within the jurisdiction”.

For convenience, I shall refer to this gateway for leave to service out as the “Tort Gateway”.

24.For the Contract Gateway, the solicitor explained in §25 of his affirmation that:-

“25… there is good arguable case that the application falls within Gateway (d)(i) that, firstly, a contract exists between [the Plaintiff], [the 1^st Defendant] as Managing Member of the Fund and/or of the General Partner of the Fund, and [the 3^rd Defendant] as the manager and investment manager of the Fund; and, secondly, the contract was made in Hong Kong.”

25.The 2^nd Defendant is not named.

26.For the Tort Gateway, the solicitor explained in §26 of his affirmation:-

“26… there is a good arguable case that the tortious act was committed within the jurisdiction of Hong Kong, and/or [the Plaintiff] has sustained significant loss and damage in Hong Kong for Gateway (f).”

27.The solicitor elaborated in §27 of his affirmation:-

“27.1 The alleged security breach which happened in December 2022 involved the Fund’s ‘hot wallet’ which resulted in unauthorized access and transfer of funds out of the wallet. It is Mr. Chen’s case that there are at least reasonable grounds to suspect that the Fund management (comprising the 1^st, 2^nd and/or 3^rd Defendants) are in breach of duties in multiple ways in their managing and safeguarding the assets of the Fund, in their actions, if any, after the alleged security breach has happened, and in their decisions and communication vis-à-vis Mr. Chen;

27.2 Without limiting the generality of the foregoing, the incident of the security breach was only first notified to Mr. Chen over a year later, with little or no useful information or details except that ‘an approximate 40% loss, which in dollar terms is approximately [US]$717,144.38’ was scarped from Mr. Chen’s position. The undue delay and non-disclosure of information on the part of the Fund management (comprising the 1^st, 2^nd and/or 3^rd Defendants) constitutes a breach of the duties of their part;

27.3 Furthermore, Perseverance Capital issued the ‘Statement of Changes in Capital’ for the period from 1 June 2023 to 30 June 2023, which was signed by Mr. Shyong, falsely stating the value of Ms. Li’s position in the Fund, notwithstanding the fact that the Fund alleged security breach had already happened 6 months ago which significantly struck the Fund’s assets. The Statement was provided to and relied on by Mr. Chen in Hong Kong, which led Mr. Chen to believe that he was to be transferred interest in the Fund that worth much more, which induced Mr. Chen to enter into the Deed of Assignment and Transfer dated 20 July 2023 to his detriment;

27.4 As a result of the above breaches of duties on the part of the Fund management (comprising the 1^st, 2^nd and/or 3^rd Defendants), Mr. Chen suffered substantial loss and damage in Hong Kong.”

28.On 10 May 2024, per the usual procedure for an ex parte application for leave to serve out, Master Rita So, having read the affirmation in support without hearing, granted the Ex Parte Service-out Order. Service out was effected accordingly.

29.On 29 July 2024, the 2^nd and 3^rd Defendants’ solicitors, on their behalf, filed Acknowledgement of Service without prejudice to their rights to dispute jurisdiction.

30.On 27 November 2024, the 2^nd and 3^rd Defendants filed the Summons.

V.  LEGAL PRINCIPLES IN RELATION TO SETTING ASIDE SERVICE OUT

31.The legal principles in relation to setting aside service out are well established:-

(1)  The burden remains on the Plaintiff to prove a good arguable case that the claim falls within the gateway under Order 11 rule 1; and

(2)  The burden remains on the Plaintiff to show a serious issue to be tried for the claim.

VI.  IS AN APPLICATION FOR PRE-ACTION DISCOVERY A CLAIM FOR ORDER 11 RULE 1?

32.The first ground for setting aside is a fundamental one. Mr Victor Joffe SC (leading Mr Shaun Elijah Tan), counsel for the 2^nd and 3^rd Defendants, submits that an application for pre-action discovery is not a claim for the purpose of Order 11 rule 1. He gives two reasons.

(1)  The first reason is that Order 11 of the Rules of the High Court is not intended to permit service out of an application for pre-action discovery.

(a)  Mr Joffe submits that in England, (i) CPR rule 6.2(c) expressly defines a “claim” as including “any application made before action”, and (ii) §3.1 (20)(a) of Practice Directions 6B expressly permits service out of an application for pre-action discovery.

(b)  Similarly, in Singapore, Practice Direction 63(2) expressly provides for application for pre-action discovery.

(c)  In contrast, in Hong Kong, there is no such Practice Directions as in England and Singapore, and there is no express definition of “claim” as including an application for pre-action discovery.

(2)  The second reason is that an application for pre-action discovery does not fall within the natural and ordinary meaning of a “claim”:-

(a)  Under the Contract Gateway, namely, “brought to enforce, rescind, dissolve, annul or otherwise affect a contract, or to recover damages or obtain other relief in respect of the breach of a contract”; and/or

(b)  Under the Tort Gateway, namely, “founded on a tort”. The application for pre-action discovery here was for “intended and/or potential claim” only, as stated in the Originating Summons itself.

33.For the following reasons, with respect, I am unable to accept Mr Joffe’s first reason, and find that an application for pre-action discovery is a “claim”:-

(1)  The Court should construe the gateways in Order 11 rule 1 according to the natural and ordinary meaning of the words: see Fong Chak Kwan v Ascentic Ltd (2022) 25 HKCFAR 135 at §§69 and 107.

(2)  Order 11 rule 1 refers to “writ of summons”, and Order 11 rule 9(1) refers, among others, to “originating summons”. The rule does not differentiate between pre-action originating summons, while it has been a very long practice even before the Civil Justice Reform in 2009 that an originating summons is used for pre-action discovery such as Norwich Pharmacal order. Therefore, in my view, there must have been clear indication if the statutory rule was intended to exclude originating summons for pre-action application, especially when the Civil Justice Reform was a very comprehensive exercise to amend the Rules of the High Court.

(3)  In my view, by natural and ordinary meaning, an application for a pre-action discovery order is a “claim” for a pre-action discovery order. I cannot see why the application would become a non-claim when the application is for a pre-action order. This goes contrary to the natural and ordinary meaning of “claim”.

(4)  With respect, the English materials relied upon by Mr Joffe were subsidiary legislation and Practice Directions only. Neither subsidiary legislation nor Practice Directions confers jurisdiction. Therefore, the express inclusion by the subsidiary legislation and/or Practice Directions of a pre-action application, in my view, just clarifies the matter for the avoidance of doubt (if any). It does not advance Mr Joffe’s position.

(5)  Similarly, the material from Singapore Mr Joffe relies on is also Practice Directions. It also does not advance Mr Joffe’s position.

(6)  Due to (3) and (4), I do not think ED&F Man Capital Markets LLP v Obex Securities LLC & Anors [2018] 1 WLR 1708, cited by Mr Joffe, which referred to Practice Directions 6B, helps his position.

(7)  In my view, the subsidiary legislation and Practice Directions, not conferring jurisdictions, only confirm that the Courts in England and Singapore do have jurisdiction under the primary legislation or inherent jurisdiction to grant leave to serve out an application (or a claim) for pre-action discovery.

(8)  The Hong Kong Courts exercise jurisdiction as the English High Courts do.

34.So, the Hong Kong Courts do have such jurisdiction but the gateway under Order 11 rule 1 should be passed first. This brings me to Mr Joffe’s second reason.

35.As mentioned above, Mr Joffe’s second reason is that a claim for pre-action discovery cannot be a “claim… in respect of the breach of a contract” under the Contract Gateway or “a claim founded on tort” under the Tort Gateway. With respect, I disagree.

36.I shall deal with the Contract Gateway first. It is convenient here to quote the Contract Gateway again:-

“(d) the claim is brought to enforce, rescind, dissolve, annul or otherwise affect a contract, or to recover damages or obtain other relief in respect of the breach of a contract, being (in either case) a contract which-

(i) was made within the jurisdiction”.

37.In an application for pre-action discovery, the applicant would still have to state the intended cause of action he would rely on after the discovery. A breach of contract can be one of such intended causes of action that could, in appropriate circumstances, sustain an application for pre-action discovery. Such a claim for pre-action discovery is, in my view, “a claim… to obtain other relief in respect of the breach of a contract”, by its natural and ordinary meaning. I do not see any reason, as Mr Joffe urges me, to construe the phrase so narrowly as to confine the claim to a claim for substantive relief based on the breach of a contract. “In respect of” is a phrase wide enough to include a claim for pre-action discovery in respect of the breach of a contract.

38.For the Tort Gateway, again, for convenience, I shall quote it again here:-

“the claim is founded on a tort and the damage was sustained, or resulted from an act committed, within the jurisdiction”.

39.Similarly, an intended cause of action founded on tort committed in Hong Kong and/or resulting in damages sustained in Hong Kong could, in appropriate circumstances, sustain an application for pre-action discovery. “In respect of” is not used here. However, in my view, just like “damage” is not intended to mean technically “damage” that completes the cause of action of a tort: see Fong Chak Kwan v Ascentic Ltd, supra at §107 but by its natural and ordinary meaning, a claim for pre-action discovery is, in my view, still “a claim… founded on a tort and the damage was sustained, or resulted from an act committed, within the jurisdiction”, by its natural and ordinary meaning. I do not need to stretch the meaning of any words there.

40.In conclusion, for the above reasons, an application for pre-action discovery can be a claim under the Contract Gateway and the Tort Gateway.

VII.  ANY GOOD ARGUABLE CASE AND SERIOUS ISSUE TO BE TRIED FOR CONTRACT GATEWAY?

41.To determine whether a gateway under Order 11 rule 1 is passed, it is well-established that the plaintiff has to show that:-

(1)  There is a good arguable case that the claim falls within the gateway; and

(2)  There is a serious issue to be tried on the merits of the claim.

42.Mr Laurence Li SC (leading Mr Byron Chiu), counsel for the Plaintiff, submits that for an application for pre-action discovery, the merits of the claim are not the merits of the intended claim, but the merits of the claim for the pre-action discovery. I agree. The purpose of a pre-action discovery is to discover documents which may sustain the intended or potential claim of the plaintiff. It would, in my view, be illogical to consider the merits of the intended or potential claim when there has not yet been any pre-action discovery, and requiring consideration of the merits of the intended or potential claim would defeat the purpose of an application for pre-action discovery.

43.For the Contract Gateway, the Plaintiff has to prove the existence of the relevant contract made in Hong Kong: see Deyi Investment Ltd v Macjin Info-Com Tek Ltd [2016] 5 HKLRD 137 at §6.11 per Cheung JA. In cases of near instantaneous communications like emails or instance messaging, a contract is formed at a place where the offeror receives the notification of acceptance by the offeree: see Emirates Shipping Line Dmcest v Trans Asian Shipping Services PVT Ltd, HCCL 2/2013, 30 November 2015 at §§15-16 per Ng J.

44.In the present case, in respect of the 1^st Investment, the evidence shows that the Plaintiff, as offeror, electronically signed the Subscription Certification, and sent it to the 3^rd Defendant by WeChat. On the same day, the 1^st Defendant counter-signed it as acceptance of the offer on the same day, and the 2^nd Defendant sent the counter-signed copy to the Plaintiff by email, together with the Offering Summary, as communication of the acceptance of the offer. The Plaintiff received the communication. Where was the Plaintiff when receiving the communication?

45.The Plaintiff says that he was in Hong Kong, consistent with the Hong Kong address given in his affirmations, while the 2^nd and 3^rd Defendants say that this was the Plaintiff’s mere assertion without proof. Taking into account the unchallenged evidence of the Plaintiff that he is a businessman and investor based in Hong Kong and the absence of any positive evidence from the 2^nd and 3^rd Defendants as to the Plaintiff’s whereabouts, I am satisfied that there is a good arguable case that the Plaintiff was in Hong Kong and therefore that the agreement by the Subscription Certification was formed in Hong Kong.

46.The next question is whether there is a serious issue to be tried in relation to the claim for the pre-action discovery. As set out in Hong Kong Civil Procedure 2025 Vol 1 §24/7A/5, citing Zhang Shouen & Ors v Standard Chartered Bank (Hong Kong) Ltd, HCMP 682/2015:-

“(1) The applicant appears to be likely to be a party to subsequent proceedings in the court in which a claim is likely to be made. In order to satisfy the requirement that a claim is likely to be made, the applicant must show a claim ‘may’ or ‘may well’ be made if discovery is granted (to be literally construed to include the case where the claim has a reasonable basis and it’s not irresponsible or speculate).

(2) The respondent appears likely to be a party to such proceedings.

(3) The respondent appears likely to have or to have had in his possession, custody or power the document requested.

(4) The requested document is ‘directly relevant’ to an issue arising or likely to arise out of that claim. ‘Direct relevance’ is shown only if:

(a) the document would be likely to be relied on in evidence by any party in the proceedings (‘likely’ has the same meaning as ‘may well’ or reasonable prospect’); or

(b) the document supports or adversely affects any party’s case (the applicant has to show the requested document supports or adversely affects any party’s case, and not merely that it is likely to do so, but as the applicant has not seen the requested document, he can only be reasonably expected to prove this on a balance of probabilities).

(5) The applicant must satisfy the court that the order for pre-action discovery is necessary either for disposing fairly of the cause of matter or for saving costs (… that discovery before commencement of the action is necessary, bearing in mind the need to strike a reasonable balance between the need to protect against harassment and fishing applications on the one hand and the need to enable a potentially meritorious plaintiff to bring a claim which could not effectively otherwise be brought).”

47.Mr Joffe submits that in the Subscription Certification, the Offering Summary and the Side Letter, the 2^nd and 3^rd Defendants made no promise, representation, warranties or the like whereby obligations were imposed on them. As a matter of fact, in the Subscription Certification and the Side Letter, it was the Plaintiff who made representations and warranties, and the Offering Summary just contained information on the Fund and its operation. Therefore, Mr Joffe submits that no claim could be brought on contract whether against the 2^nd or the 3^rd Defendant. Mr Joffe further submits that his case is even be stronger in respect of the 2^nd Defendant, who was just an employee of the 3^rd Defendant.

48.In response, relying on Ziyavudin Magomedov & Ors v TPG Group Holdings (SBS), LP & Ors (Rev1) [2025] EWHC 59 (Comm) at §§96-119, Mr Li submits that it would be sufficient as long as there is a relevant connection between (1) on the one hand, the relevant contractual relationship between the Plaintiff and the Fund and (2) on the other hand, the 2^nd and 3^rd Defendants’ respective rights and obligations.

49.In my view, even if I assume (without finding) that there is such a relevant connection, neither in his skeleton submissions nor in the affirmation in support of the Originating Summons (§32 of the Plaintiff’s affirmation quoted in §19 above and §25 of the Plaintiff’s solicitor’s affirmation quoted in §24 above) is there any explanation as to what contractual obligations or basis on which the intended or potential claim would be brought. It is, in my view, not sufficient that the Plaintiff could just say that even he does not know the basis because of lack of information at this stage. As mentioned in §46(5) above, the Court has to “strike a reasonable balance between the need to protect against harassment and fishing applications on the one hand and the need to enable a potentially meritorious plaintiff to bring a claim which could not effectively otherwise be brought)”. In my view, the minimum for this balance must include an explanation as to what intended or potential is likely to be based on, in consonance with §46(1) above. Here, since the Plaintiff cannot even suggest any proper basis with which there is a relevant legal relationship between the contract and the intended or potential claim (not articulated at all in terms of contract), I am not satisfied that for the 1^st Investment, there is any serious issue to be tried in relation to the claim for pre-action discovery “in respect of the breach of a contract” in the Contract Gateway.

50.For the 2^nd Investment, there is even no evidence as to where the contract assigned to the Plaintiff was made. I am therefore not satisfied that there is any good arguable case that the claim falls within the Contract Gateway. In any event, for the same reason as explained for the 1^st Investment, I am not satisfied that there is any serious issue to be tried in relation to the claim for pre-action discovery “in respect of the breach of a contract” in the Contract Gateway.

51.For the sake of completeness, Mr Li refers me to the references “Offering Memorandum dated March 20, 2021” in Side Letter, and submits that there is no such document ever provided. Mr Li explains that this is another reason why a pre-action discovery is necessary and why the Plaintiff cannot specify with any precision what the breach of contract was. With respect, I am unable to accept such submissions: first, this is not the basis set out in support of the Originating Summons or the application for service out; second, the 2^nd and 3^rd Defendant’s evidence that the Subscription Certification, the Offering Summary and the Side Letter were all the documents provided is not traversed; and third, more fundamentally, this so-called “Offering Memorandum dated March 20, 2021” is in my view the same Offering Summary because the filename of the Offering Summary is “Evernew Offering Memorandum v032021”.

VIII. ANY GOOD ARGAULBE CASE AND SERIUOS ISSUE TO BE TRIED FOR TORT GATEWAY?

52.For the Tort Gateway, it is convenient to quote here again §§28.5 and 32 of the Plaintiff’s affirmation in support of the Originating Summons:-

“28.5 Other than a bare assertion that the ‘Evernew team’ ‘were asked to keep this matter confidential’, there was no discussion as to who made this request or whether this request was properly justifiable in light of the Fund management’s duties to its investors / shareholders / limited partners. This is particularly important when the Fund has, during the relevant period, continued to issue ‘Statements of Changes in Capital’ which are representations to me that my investment remained intact and the changes in my account balance were only results of market movements. It would appear, in hindsight, that these representations were false.

…

32.1 The failure to properly safeguard assets of the Fund and/or put in place proper and reasonably adequate security protocols and measures to prevent such a security breach. This is particularly so when it seems that [the 1^st and 2^nd Defendants] are the only two persons (identified in the Offering Summary) responsible for the Fund’s ‘wallet’.

32.2 The non-disclosure of information about the security breach (and misrepresentation of Fund performance and account balances) to the limited partners of the Fund.

32.3 The refusal to provide information to which a ‘limited partner’ / ‘shareholder’ of the Fund ought to be entitled in the circumstances.

32.4 The arbitrary decision to write down the alleged loss thereby impacting my investment position.”

53.I also quote §27 of the Plaintiff’s solicitor’s affirmation:-

“27.1 The alleged security breach which happened in December 2022 involved the Fund’s ‘hot wallet’ which resulted in unauthorized access and transfer of funds out of the wallet. It is Mr. Chen’s case that there are at least reasonable grounds to suspect that the Fund management (comprising the 1^st, 2^nd and/or 3^rd Defendants) are in breach of duties in multiple ways in their managing and safeguarding the assets of the Fund, in their actions, if any, after the alleged security breach has happened, and in their decisions and communication vis-à-vis Mr. Chen;

27.2 Without limiting the generality of the foregoing, the incident of the security breach was only first notified to Mr. Chen over a year later, with little or no useful information or details except that ‘an approximate 40% loss, which in dollar terms is approximately [US]$717,144.38’ was scarped from Mr. Chen’s position. The undue delay and non-disclosure of information on the part of the Fund management (comprising the 1^st, 2^nd and/or 3^rd Defendants) constitutes a breach of the duties of their part;

27.3 Furthermore, Perseverance Capital issued the ‘Statement of Changes in Capital’ for the period from 1 June 2023 to 30 June 2023, which was signed by Mr. Shyong, falsely stating the value of Ms. Li’s position in the Fund, notwithstanding the fact that the Fund alleged security breach had already happened 6 months ago which significantly struck the Fund’s assets. The Statement was provided to and relied on by Mr. Chen in Hong Kong, which led Mr. Chen to believe that he was to be transferred interest in the Fund that worth much more, which induced Mr. Chen to enter into the Deed of Assignment and Transfer dated 20 July 2023 to his detriment;

27.4 As a result of the above breaches of duties on the part of the Fund management (comprising the 1^st, 2^nd and/or 3^rd Defendants), Mr. Chen suffered substantial loss and damage in Hong Kong.”

54.In Mr Li’s submissions, the focus is on misstatement or misrepresentation by the Statements of Changes in Capital. In this regard, Mr Joffe submits that the misstatement or misrepresentation can only be the one mentioned in §27.3 of the Plaintiff’s solicitor’s affirmation being the affirmation in support of the application for service out. He submits that §27.3 of the same affirmation referred to breach of duties and not any misstatement by way of non-disclosure. With respect, I disagree with Mr Joffe. §27.3 did in my view include misstatement by non-disclosure. In general, one has no duty to make statement and thus non-disclosure cannot be regarded as misstatement. However, where one has a positive duty, non-disclosure may constitute a misstatement. In the present case, where the 3^rd Defendant kept sending Statements of Changes in Capital regularly after the Hack stating the Plaintiff’s position as if no Hack had happened, I do see that there is a good arguable case the 3^rd Defendant has a positive duty to disclose the Hack. The misstatement was therefore constituted by the non-disclosure accompanied with the Statements of Changes in Capital.

55.Mr Joffe also submits that in the relief sought in the Originating Summons, the documents to be discovered were for investigating (1) the whereabouts of the Stolen Assets; (2) the identities of persons involved in the Hacking; and (3) the suspected mismanagement of the Fund by the 1^st, 2^nd and/or 3^rd Defendants. He submits that “mismanagement” does not include misstatement or misrepresentation. With respect, in my view “mismanagement” in this context does include misstatement or misrepresentation made by the 3^rd Defendant in managing the Fund (those in management making the misstatement and the reason for this misstatement, for example, knowingly or neligiently?), and in any event, the supporting affirmations as mentioned above clearly include misstatement or misrepresentation. If necessary, to me, this would be a technical matter that could be cured by a simple amendment which would cause no prejudice to the Defendants.

56.For the purpose of the Tort Gateway, as pointed out above, the ordinary and natural meaning of “damage” is not the “damage” that completes a cause of action, but simply damage, direct or indirect, physical or financial: see Fong Chak Kwan v Ascentic Ltd, supra at §107. For a claim based on negligent or fraudulent misstatements or misadvice, in general:-

(1)  The tort is committed at the place of receipt of and reliance on such misstatements or misrepresentation; and

(2)  Damage is sustained at the place of receipt of and reliance on such misstatements or misrepresentation.

See China Medical Technologies Inc (in liquidation) v Paul, Weiss, Rifkind, Wharton & Garrison LLP (a firm) [2019] HKCFI 2631 at §§134 and 140 per G Lam J (as he then was).

57.Therefore, there is a good arguable case that the tort was committed in Hong Kong and the damage was sustained in Hong Kong.

58.However, who could be sued for the tort?

59.Mr Joffe’s answer is not the 2^nd Defendant because he was an employee only and owed no duty to the 3^rd Defendant’s customer or client. I do not really see any direct answer from Mr Li to this save and except his submissions that tend to put the 2^nd and 3^rd Defendants together. With respect, I agree with Mr Joffe.

60.Mr Joffe’s answer is also not the 3^rd Defendant because it was Shan, but not the 3^rd Defendant, who gave the Plaintiff the Statement of Changes in Capital for June 2023, when assigning the 2^nd Investment to the Plaintiff. However, in my view:-

(1)  The evidence is that the Plaintiff himself received regular updates and Statement of Changes in Capital from April 2021 to November 2023, covering the material period from December 2022 to June 2023: see §24 of the Plaintiff’s Affirmation;

(2)  Mr Joffe’s such reason seems to unduly stress the Plaintiff’s specific reference to the Plaintiff’s evidence of his reliance on the Statement of Changes in Capital for June 2023 provided by Shan in entering into the assignment for the 2^nd Investment. Viewed in context, the Plaintiff never said that for this month, he only received the Statement from Shan. He specifically referred to this as provided by Shan in order to make good his claim that for the 2^nd Investment, he specifically relied also on the Statement for June 2023: see 21 of the Plaintiff’s affirmation; §37 of the Plaintiff’s 2^nd affirmation; and

(3)  In any event, the Statement of Changes of Capital for June 2023 was signed by and issued on behalf of the 3^rd Defendant. In my view, there is a good arguable case that the 3^rd Defendant owed a duty to assignees reasonably knowing that an assignee would rely on the statements for his decision of entering into an assignment.

61.In the circumstances:-

(1)  In respect of the 2^nd Defendant, I am not satisfied that there is a good arguable case that the claim falls within the Tort Gateway. Further, applying the test as set out in §44 above, I am not satisfied that there is at least a serious issue to be tried on the merits of the claim for the pre-action discovery based on the tort.

(2)  In respect of the 3^rd Defendant, I am satisfied that there is a good arguable case that the claim falls within the Tort Gateway. Further, applying the test as set out in §44 above, I am satisfied that there is at least a serious issue to be tried on the merits of the claim for the pre-action discovery based on the tort.

IX.  FORUM NON CONVENIENS

62.Given my view above, I only have to consider the conveniens of the claim based on tort against the 3^rd Defendant.

63.The 3^rd Defendant is resident out of Hong Kong. Therefore, as pointed out by Ma CJHC (as he then was) in §22(2) of Noble Power Investments Ltd v Nissei Stomach Tokyo Co Ltd [2008] 5 HKLRD 631:-

“… the burden will not be on the defendant to demonstrate that there is an alternative forum which ought to entertain the action. Rather, the legal burden is all along on the plaintiff to show, in seeking to persuade the court to grant an order to serve out, that Hong Kong is clearly the appropriate forum for the trial of the action.”

64.The conveniens I should be looking at is not that of the intended or the potential claim, but the claim for the pre-action discovery. That said, the conveniens of the intended or the potential claim certainly is an important consideration.

65.In the present case:-

(1)  The governing law: Arguably, the tort was committed in Hong Kong (as explained above) and damage was suffered also in Hong Kong (as explained above). This points to Hong Kong. The relevance is that the governing law may be Hong Kong law. However, the tort law in respect of misstatement or misrepresentation, whether by way of active statement or representation or by way of non-disclosure, is well established and I cannot see any significant inconvenience if the Hong Kong law in this respect would become an issue – a proper legal expert opinion on Hong Kong law should be sufficient.

(2)  The location of the likely witnesses and documents: The Plaintiff is a Hong Kong resident and has been based in Hong Kong. The 3^rd Defendant is incorporated and operates in the US, and its staff reside in the US. However, for an application for pre-action discovery, affirmations would usually be sufficient, and in any event, as acknowledged by Mr Li, in this day and age, witness convenience is not determinative. Neither is document convenience in my view. In any event, there is no evidence of the form (physical or electronic) and the whereabouts of the documents to be discovered.

(3)  The subject property is not in Hong Kong but on blockchain accessible anywhere in the world, or to borrow Mr Li’s words “everywhere but nowhere”. This, in my view, is neutral.

(4)  The Fund is in the USD currency. This, in my view, is also neutral.

(5)  The (2^nd and) 3^rd Defendants have not identified any alternative court in the evidence, although Mr Joffe suggests Delaware (where the 3^rd Defendant was incorporated) and/or Arkansas (where the 2^nd Defendant reside) and in any event there is no obligation on them to do so: see Hargreaves v Taian Insurance Co Ltd [2006] 3 HKLRD 70 at §74 per Stone J.

(6)  The (2^nd and) 3^rd Defendants are resident or domiciled out of Hong Kong. This points away from Hong Kong.

66.Having considered the above, I am unable to say that Hong Kong is clearly the appropriate forum for the claim for pre-action discovery. There is also no evidence that the Plaintiff would suffer any juridical disadvantage (for example, there is no evidence suggesting that the Plaintiff cannot make any application for pre-action discovery in the US against the 3^rd Defendant). Insofar as a balancing exercise is necessary, in my consideration would be the absence of any evidence of how the pre-action discovery order (being an order directing a person out of jurisdiction to do certain act) would be enforced against the (2^nd and) 3^rd Defendants. All in all, in my view, the Court should not exercise jurisdiction over the claim.

X.  CONCLUSION

67.In the premises, I set aside leave to serve out the Originating Summons and the service thereto, and declare that the Court should not exercise jurisdiction on the Plaintiff’s claim by the Originating Summons. For the avoidance of doubt, the declaration does not concern the intended or the potential claim, which is not a matter I am concerned with.

XI.  MATERIAL NON-DISCLOSURE

68.Further, in my view, the following disclosures should have been made at the ex parte stage:-

(1)  There was weakness in the claim for the purpose of the Contract Gateway, as discussed above;

(2)  There was weakness in the claim against the 2^nd Defendant for the purpose of the Tort Gateway, as discussed above; and

(3)  There was weakness in the Plaintiff’s application on the ground of forum non conveniens when the burden lied upon the Plaintiff to satisfy the Court that Hong Kong is clearly the appropriate forum.

69.The above non-disclosures were material. The Plaintiff should at least have pointed out these weaknesses at the ex parte stage. However, the Plaintiff failed to do so. Therefore, I would also set aside the leave to serve out and the service thereto on the ground of material non-disclosure.

XII.  DISPOSITION

70.For the above reasons, I make the following order:-

(1)  The ex parte Order made by Master Rita So dated 10 May 2024, the Concurrent Originating Summons issued pursuant thereto filed on 21 June 2024 and the service thereof on the 2^nd and 3^rd Defendants be set aside.

(2)  There be a declaration that the Court should not exercise jurisdiction over the Plaintiff’s claim against the 2^nd and 3^rd Defendants herein. (For the avoidance of doubt, this declaratory relief is not related to the intended or potential claim the Plaintiff may have against any of the Defendants.)

71.As regards costs, the 2^nd and 3^rd Defendants lost on the discrete point of whether an application for pre-action discovery is a claim for the purpose of Order 11 rule 1. By broad-brush approach, I order that the Plaintiff shall pay 80% of the 2^nd and 3^rd Defendants costs of the application and the Originating Summons with certificate for two counsel, payable forthwith. The whole costs is summarily assessed at HK$800,000, and so 80% is HK$640,000.

72.It remains for me to thank the Plaintiffs’ counsel (Mr Li and Mr Chiu) and the 2^nd and 3^rd Defendants’ counsel (Mr Joffe and Mr Tan) for their assistance.

Mr Laurence Li SC, leading Mr Byron Chiu, instructed by Stephenson Harwood, for the Plaintiff

Mr Victor Joffe SC, leading Mr Shaun Elijah Tan, instructed by Deacons, for the 2^nd and 3^rd Defendants