Sure Fast Enterprises Ltd v. China Environmental Technology Holdings Ltd

HCA 783/2019

[2026] HKCFI 1893

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 783 OF 2019

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BETWEEN

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JUDGMENT

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A. INTRODUCTION

1.This dispute arises out of a subscription agreement dated 16 May 2018 (“Subscription Agreement”) between the Plaintiff and the Defendant, whereby the Plaintiff agreed to subscribe for 3-year convertible bonds (coupon at 8%) due 2021 with an aggregate principal amount of USD 7,000,000 issued by the Defendant (“CBs”).

B. BACKGROUND

B1. THE SUBSCRIPTION AGREEMENT

2.The Plaintiff (“Sure Fast”) is a limited liability company incorporated in the British Virgin Islands (“BVI”). Mr Chan Tsang Wing is its sole director and shareholder.

3.The Defendant (“CETH”) is a Cayman Islands company listed on the Main Board of the Hong Kong Stock Exchange (“HKEx”), which at all material times carried on a business in the field of environmental protection and in December 2016 expanded into the fertility medical treatment service business after Xu Xiaoyang (“Raymond Xu”) (its CEO at the time) had introduced to CETH the investment opportunity in a group of companies (“PFI Group”) owned by one Leon Li. Leon Li was the ultimate beneficial owner of Pacific Fertility Institutes Holding Co Ltd, a company incorporated in the BVI (“PFI BVI”).

4.Pursuant to a sale and purchase agreement dated 30 December 2016, CETH, through its wholly-owned subsidiary INNOMED Group Ltd (“Innomed”), acquired from PFI BVI a 50% shareholding in Pacific Fertility Institutes Holdings Co Ltd, a Cayman Islands company holding a group of companies engaged in the fertility medical treatment business (“PFI Cayman”). CETH paid for the consideration of the transaction by issuing and allotting 650 million shares in CETH to PFI BVI. As a result of this transaction, Leon Li, through PFI BVI, became the second largest shareholder of CETH.

5.CETH’s projects in relation to fertility medical treatment included the following:-

(1) A reproductive medicine clinic in Singapore established through Innomed’s directly wholly-owned subsidiary, Pacific Fertility Institutes (Singapore) Pte. Ltd (“PFI SG”). This was approved by the board of CETH and publicly announced on 1 February 2018; and

(2) The Beijing INNOMED Women’s and Children’s Hospital (“BIWC Hospital”), which was intended to be operated by a subsidiary of Innomed in Beijing, Beijing INNOMED Women’s and Children’s Hospital Co Ltd (“BIWC”). It had been under construction since mid-2018.

6.The Subscription Agreement entered into between the Plaintiff and the Defendant in respect of the CBs contains the following key terms:-

(1) Clause 3.2(J) provides that “The obligations of the Subscriber [i.e. Sure Fast] to subscribe and pay for, and the obligations of the Company [i.e. CETH] to issue, the Bonds are subject to the fulfilment, prior to or simultaneously at Completion of the following conditions to the satisfaction of the Subscriber: … (J) on or before the Completion Date, the Subscriber and Company shall have set up an escrow account with a bank licensed with the Hong Kong Monetary Authority, with joint authorised signatures including a person respectively nominated by the Subscriber and the Company in writing from time to time to receive the Proceeds (defined in Clause 5.4(A)) and to operate and maintain the account in strict accordance with the provision in Clause 5.4(A)”.

(2) Clause 5.4(A) provides that “The Company undertakes with the Subscriber that: (A) Unless the Subscriber otherwise agrees in writing, the Company shall cause and procure that the proceeds of the Bonds (the “Proceeds”) be applied exclusively for the purposes as follows: (a) as to US$1,500,000, towards the initial working capital for Pacific Fertility Institutes (Singapore) Pte. Ltd. [i.e. PFI SG]; (b) as to US$3,000,000, towards the initial working capital for Beijing INNOMED Women’s and Children’s Hospital; and (c) as to the remaining US$2,500,000, towards future medical investment projects related to fertility medical treatment services.”

(3) Clause 10.6 provides that “No variation of this Agreement shall be effective unless made in writing and signed by all of the parties.”

(4) Clause 10.9 provides that “If at any time any provision of this Agreement is or becomes illegal, void or unenforceable in any respect, the remaining provisions hereof shall in no way be affected or impaired thereby.”

(5) Clause 10.12 provides that “All payments due under this Agreement are to be made in US Dollars …”.

(6) Clause 11 provides that “This Agreement … shall be governed by and construed in accordance with the laws of Hong Kong …”.

7.On 16 May 2018, CETH announced the Subscription Agreement and its principal terms on the HKEx. In respect of the “Reasons for issuing the Convertible Bonds” specifically, it was stated that:-

“The Board has considered various ways of raising funds to develop the businesses of the Group and considers that the issuance of the Convertible Bonds represents a suitable opportunity to raise funds having considered the recent market conditions which represent an opportunity for the Company to enhance its working capital, strengthen its capital base and financial position and broaden the shareholders’ base.

The Directors (including the independent non-executive Directors) consider that the terms and conditions of the Subscription Agreement, which were arrived at after arm’s length negotiations between the Company and the Subscriber, are fair and reasonable and are in the interests of the Company and the Shareholders as a whole.”

B2. SUBSEQUENT DISCUSSIONS

8.It is not in dispute that after the execution of the Subscription Agreement, the representatives of the parties discussed the arrangements for setting up the escrow account in accordance with Clause 3.2(J) of the Subscription Agreement (“Escrow Account”). The discussion took place via a WeChat group (“WeChat Group”), the members of which included:-

(1) Liu Xiaojing (“Sarah Liu”), Legal Director of Sure Fast;

(2) Hu Yueyue (“Kelly Hu”), Executive Director of CETH;

(3) Raymond Xu, Executive Director and CEO of CETH;

(4) Li Wang Hing Nelson (“Nelson Li”), Company Secretary of CETH;

(5) William Ji, Partner of Tian Yuan Law Firm, the solicitors of CETH at or around the time the Subscription Agreement was entered into; and

(6) Grace Shi (时辰), Financial Controller of 北京醫諾北方醫療技術服務有限公司 (“Beijing Innomed”), an indirectly wholly owned subsidiary of CETH.

9.The key parts of the WeChat discussions can be summarised as follows:-

(1) On 31 May 2018, Nelson Li initially proposed that CETH would use its wholly owned subsidiary, Great Champion Holdings Ltd (“Great Champion”), to set up the Escrow Account at Taishin International Bank Co Ltd (“Taishin Bank”).

(2) On 4 June 2018, whilst Nelson Li and Sure Fast’s authorised signatory Wang Xi were at Taishin Bank for setting up the Escrow Account, Sarah Liu asked Nelson Li to confirm whether CETH could change the authorised signatories of the Escrow Account without the prior consent of Sure Fast in the future. Nelson Li replied that this was the case according to the bank staff. However, Nelson Li assured Sarah Liu that this was not an issue as the parties would observe the terms of the CBs (“這是沒問題的，公司與投資人有CB協議，當然要遵守共管的條款”). He further stated that simple forms of the Escrow Account could only operate in this manner, while the use of other methods would not allow completion to take place before 15 June 2018 (“簡單的共管也只能這樣操作，其他形式 15 日前完不成”).

(3) Sarah Liu replied that Sure Fast would prefer a proper escrow account to be set up so as to allow both parties to supervise the same (“我們希望是一個正式的escrow account的形式，這樣可以達到雙方需要的帳戶監管的目的”). She asked Nelson Li whether the Escrow Account could be opened at other banks. Later on the same day, Nelson Li informed Sarah Liu that after enquiring with Hang Seng Bank and China CITIC Bank, neither provided escrow account services.

(4) On 5 June 2018, in response to Nelson Li’s invitation for opinion on the way forward, William Ji indicated that the parties could find other companies which provide escrow account services, and that the parties could agree in writing to waive the requirements set out in the Subscription Agreement including those in relation to the Escrow Account.

(5) On the same day, Nelson Li responded that he had begun searching for such companies but noted that the target completion date of 15 June 2018 (“Completion Date”) might have already passed by the time the search could be completed. Nelson Li then made the following proposals (“CETH’s Proposal”):-

(i) A jointly controlled account would be set up by Beijing Innomed to hold USD 5.5 million out of USD 7 million (“Bond Consideration”) designated for the working capital for BIWC Hospital and the future medical investment projects related to fertility medical treatment services; and

(ii) The remaining USD 1.5 million would be paid by Sure Fast directly into the Singapore account of PFI SG.

(6) Later that day, Nelson Li further confirmed that CETH agreed to his proposal, and that its lawyer had stated that there would be no issues with it (“我司方面對我今早的建議是同意的，律師也說明是沒有問題”). He urged Sarah Liu to consider CETH’s Proposal as soon as possible and provide comments, noting that only 8 working days remained until the Completion Date.

(7) Kelly Hu then added that as soon as Sure Fast internally approved CETH’s Proposal, CETH would immediately arrange for its implementation (“一經你們內部同意，我們馬上安排人辦理”).

(8) On 7 June 2018, upon further chasers by Nelson Li, Sarah Liu confirmed that Sure Fast agreed for Beijing Innomed to establish a jointly controlled account in Mainland China, and that the procedures to establish it could begin the next day.

(9) On 11 June 2018, Sarah Liu suggested that CETH sign a confirmation letter to confirm CETH’s Proposal, as it would vary the payment arrangement prescribed under the Subscription Agreement.

10.On 13 June 2018, CETH signed a confirmation letter (“Confirmation Letter”) confirming the terms of CETH’s Proposal. Clause 1 of the Confirmation Letter stated, inter alia, that CETH entrusted Beijing Innomed to receive, on its behalf, the RMB equivalent of USD 5.5 million of the Bond Consideration (“RMB Consideration”) (“我方委託 [Beijing Innomed] 代為收取貴方支付的認購款中的 550 萬美元 … 之等額人民幣”). The remaining USD 1.5 million of the Bond Consideration (“USD Consideration”) would be paid directly into the USD account held by PFI SG in Singapore.

11.In the Confirmation Letter, it was further stated that the above payments would be regarded as Sure Fast’s fulfilment of the payment obligations under the Subscription Agreement (“即視為完全履行了《認購協議》項下貴方之付款義務”), and that CETH agreed to bear all legal consequences and responsibilities arising from Beijing Innomed’s receipt, on CETH’s behalf, of the RMB Consideration and its management of the account opened for such receipt (“在代收款及帳戶管理過程中，北京醫諾的一切行為均代表我方，與我方的行為具有同等法律效力，我方將承擔北京醫諾代收款及賬戶管理行為的全部法律後果和法律責任”).

12.On 15 June 2018, the parties signed a side letter agreement (“Side Letter Agreement”), which provided the following:-

(1) The arrangements in relation to the payment of the USD Consideration to PFI SG and the RMB Consideration to a bank account opened by Beijing Innomed and maintained by Beijing Innomed and Sure Fast are confirmed (Clauses 2.2(i), (ii));

(2) Sure Fast designated Lasa Huiyu Trade Co., Ltd (拉薩匯譽貿易有限公司) (“Lasa Huiyu”) as the payer to wire the RMB Consideration on behalf of Sure Fast (Clause 2.2(iii));

(3) The payment of the RMB Consideration shall be treated the same as part of the Bond Consideration which should have been paid by Sure Fast in accordance with the Subscription Agreement (Clause 2.2(iv));

(4) The payment arrangement listed therein shall not affect other rights under the other terms of the Subscription Agreement or any subsequent amendments (Clause 3.1);

(5) The Side Letter Agreement is intended to be an integral part of the Subscription Agreement. Save as otherwise amended by the Side Letter Agreement, the provisions of the Subscription Agreement shall continue in full force and effect (Clause 3.2);

(6) The Side Letter Agreement is governed by and construed in accordance with Hong Kong law (Clause 3.3).

13.On 19 June 2018, the Bond Consideration was paid as follows:-

(1) Lasa Huiyu transferred RMB 35,368,300 (equivalent to USD 5.5 million) to Beijing Innomed’s account in Beijing;

(2) Sure Fast withdrew HK$12 million (equivalent to USD 1.5 million) from a loan facility with Vinson Finance Ltd. The payment of USD 1.5 million was then made by Sure Fast to PFI SG’s account in Singapore.

14.Upon the above payments and on the same day i.e. 19 June 2018, CETH formally issued the bond certificate for the CBs, and further made an announcement on the HKEx stating that “all Conditions Precedent in relation to the issue of the [CBs] have been fulfilled in accordance with the Subscription Agreement” and that completion took place on 19 June 2018. The announcement also provided that, to the best of the directors’ knowledge, information and belief, having made “all reasonable enquiries”, as at the date of the announcement, the subscriber (i.e. Sure Fast) and its ultimate beneficial owners are “Independent Third Parties”.

B3. CB TERMS

15.Clause 6.1 of the Terms and Conditions of the Bonds (“CB Terms”) provides that upon issuance of the CBs, Sure Fast acquired the right to convert any CB into duly authorised, validly issued, fully-paid and unencumbered shares in CETH at any time within the period of the issue date (19 June 2018) up to 4pm (Hong Kong time) on the day immediately prior to the maturity date (19 June 2021).

16.Under Clause 9.1 of the CB Terms, unless previously converted, redeemed, purchased and cancelled or discharged as provided in the CB Terms, CETH was required to redeem the CBs at 112% of their principal amount together with interest upon maturity.

17.Clause 2A.1 of the CB Terms states that “[CETH] will on any date when the Bonds or any of them become due to be redeemed unconditionally pay to or to the order of the Bondholder(s) by 4:00 pm (Hong Kong time) in US Dollars in immediately available funds in Hong Kong the principal amount of the Bonds becoming due for redemption on that date together with any applicable interest…” (emphasis added). This is an important provision because, as I shall turn to below, CETH contends that such an obligation constitutes illegality under Mainland law, as a result of the payment of the RMB Consideration under the Side Letter Agreement.

B4. ALLEGED MISCONDUCT OF RAYMOND XU AND LEON LI

18.CETH has made various allegations of serious misconduct against Raymond Xu and Leon Li. For reasons set out more fully below, I do not consider these allegations pertinent to the determination of the issues in dispute.

19.On 12 April 2019, CETH made an announcement on the HKEx stating, inter alia, that the board (excluding Raymond Xu) discovered on 27 February 2019 the Side Letter Agreement and that, upon obtaining preliminary legal advice, CETH’s position is that the Side Letter Agreement and the Subscription Agreement are unenforceable due to illegality and that they, together with the CBs, should be rescinded and set aside.

C. PARTIES’ RESPECTIVE CASES

20.The parties’ pleaded cases on the issues in dispute can be summarised as follows.

21.Sure Fast’s case is as follows:-

(1) On 30 April 2019, CETH entered into a subscription agreement with China Daisy Finance Ltd (“China Daisy”) whereby CETH agreed to issue and China Daisy agreed to subscribe for convertible bonds in the aggregate principal amount of HK$40 million. This amounted to a breach of Clause 8A.1 of the Subscription Agreement and Clauses 6.3, 6.4 and 8.1(N) of the CB Terms. However, as Sure Fast indicated in its opening submissions, Sure Fast will not pursue its claim for injunctive relief at trial and hence whether CETH has acted in breach of the Subscription Agreement and/or the CB Terms is no longer material.

(2) The Subscription Agreement, the CBs (and the CB Terms) and the Side Letter Agreement are valid and enforceable.

(3) Alternatively, CETH is estopped from contending the otherwise. Furthermore, even if the Side Letter Agreement is invalid or unenforceable by virtue of illegality under PRC law, the Subscription Agreement and the CBs (and the CB Terms) are still valid and enforceable under Hong Kong law, in that they would not be affected and/or tainted by the illegality and that the Side Letter Agreement is severable from the Subscription Agreement.

(4) In the further alternative, if the above agreements are invalid or unenforceable by virtue of illegality under PRC law, CETH is unjustly enriched at Sure Fast’s expense and Sure Fast is entitled to restitution of the Bond Consideration.

22.CETH’s case is that:-

(1) The Subscription Agreement (as varied or amended by the Side Letter Agreement) is unenforceable because:-

(i) The combined effect of the Subscription Agreement (as varied or amended by the Side Letter Agreement) was that:-

(a) Sure Fast designated a PRC company as its agent to transfer an amount of RMB equivalent to USD 5,500,000 to CETH’s subsidiary in the PRC;

(b) Upon maturity of the CBs, CETH was to redeem the same by paying Sure Fast the principal amount together with interest and premium in USD in immediately available funds in Hong Kong.

(ii) Its performance required or necessarily involved conduct which is illegal under PRC law, and would not be given effect by the Hong Kong court despite the contracts being governed by Hong Kong law; and

(iii) Alternatively, its actual performance, i.e. the payment of RMB equivalent to USD 5,500,000 in the PRC with repayment obligation in foreign currency outside of the PRC, is a sufficiently serious breach of PRC law, which reflected important policies of the PRC, that it would be contrary to public policy to enforce the contracts.

(2) CETH was not unjustly enriched because:-

(i) The whole or part of the Bond Consideration was actually from CETH’s funds which had been misappropriated by Leon Li and/or Raymond Xu who allegedly “own, control, or are connected, affiliated or otherwise acting in concert with, [Sure Fast]”. Those funds were at all material times assets held on trust and belonging beneficially to CETH;

(ii) Alternatively, CETH was not enriched at all as it had never received or benefited from the Bond Consideration which was directly paid to PFI SG (then controlled by Leon Li) and into the joint account owned and controlled by Sure Fast and Beijing Innomed (also controlled by Leon Li); and

(iii) Further or alternatively, CETH relies on the defence of change of position as the Bond Consideration has been wholly spent or dissipated by Leon Li.

(3) CETH further counterclaims for a declaration that the Subscription Agreement and the Side Letter Agreement are unenforceable by reason of illegality under PRC law.

23.Pausing here, in its Amended Defence and Counterclaim, CETH made a range of allegations against Leon Li and Raymond Xu concerning alleged misconduct and misappropriation of CETH’s assets. These allegations were advanced to resist Sure Fast’s claim based on unjust enrichment. It is, however, noteworthy that neither Leon Li nor Raymond Xu is a party to the present case. According to CETH, it has commenced separate proceedings against them in Hong Kong (HCA 1117/2019 and HCA 1158/2019), but it appears that none of those proceedings has resulted in any published judgment.

24.Moreover, although CETH remarked in its Amended Defence and Counterclaim that the Confirmation Letter and the Side Letter Agreement were signed by Raymond Xu “purportedly on behalf of [CETH]”, it is not CETH’s pleaded case that those two documents should be null and void or liable to be set aside for want of authority. Instead, CETH’s case is that the Side Letter Agreement “was an effective variation or amendment of the Subscription Agreement”, and the only ground invoked to invalidate the Subscription Agreement “as varied or amended by the Side Letter Agreement” is illegality under PRC law (see §32 of the Amended Defence and Counterclaim). Such position taken by CETH is perhaps unsurprising, given the acknowledgement of Mr Xu Zhongping (“Chairman Xu”), Chairman of CETH, in his oral evidence that Raymond Xu (the then CEO) was specifically authorised by the board to represent CETH and to deal with matters relating to the CBs with Sure Fast. Nelson Li (CETH’s company secretary) and Kelly Hu (executive director) were also privy to the parties’ WeChat discussions and entering into of the Side Letter Agreement.

D. ISSUES TO BE DETERMINED

25.The parties have agreed that the following issues arise for determination:-

(1) Whether the performance of the Subscription Agreement (as varied or amended by the Side Letter Agreement) requires or necessarily involves conduct which is illegal under PRC law and violates Articles 45 and 49 of the PRC Foreign Exchange Regulations (“Illegality Issue”);

(2) If so, whether the Subscription Agreement, the CBs, the CB Terms and/or the Side Letter Agreement is/are valid and enforceable (“Enforceability Issue”); and

(3) If not, whether Sure Fast is entitled to restitution of the Bond Consideration (i.e. USD 7 million) (“Restitution Issue”).

E. WITNESS EVIDENCE

26.At trial, I heard evidence from:-

(1) Sure Fast’s factual witness: Sarah Liu (Sure Fast’s former Legal Director).

(2) CETH’s factual witnesses: Xu Zhongping (i.e. Chairman Xu), Kelly Hu (executive director of CETH), and Li Fenggang (an engineer in Mainland China employed by a construction contractor on the BIWC Hospital project).

(3) The parties’ expert witnesses on Mainland law: Zhang Sijie (“Mr Zhang”) (for Sure Fast) and Xiao Long (“Mr Xiao”) (for CETH).

27.The principles on assessing factual witnesses’ evidence have been summarised in Hui Cheung Fai v Daiwa Development Ltd (unrep., HCA 1734/2009, 8 April 2014) at §§77-83, which need not be repeated here.

E1. SARAH LIU

28.Sarah Liu was the former Legal Director of Sure Fast and had left Sure Fast in October 2019. Her testimony pertains to, inter alia, the background of the relevant agreements, the parties’ subsequent discussions over the difficulties in setting up the Escrow Account, and the payment arrangements for the Bond Consideration. Her evidence is consistent with the documentary record. I find that she was keen to assist the Court and answered questions in cross-examination in a direct manner.

E2. CHAN TSANG WING

29.Mr Chan Tsang Wing (“Mr Chan”) made a short witness statement for Sure Fast. At trial, Counsel for Sure Fast[1] did not call him to testify and indicated that Sure Fast would not rely on his evidence.

30.Counsel for CETH[2] invites the Court to draw adverse inferences against Sure Fast for failing to call Mr Chan without any proper explanation, citing Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd (unrep., CACV 90-91, 93-96/2012, 17 September 2013) at §§106-107, and Telings International Hong Kong Ltd v John Ho and Ors (unrep., CACV 10/2010, 22 October 2010) at §§78-81.

31.Specifically, it is said that Mr Chan is expected to give material evidence on (i) whether Lasa Huiyu’s payment on behalf of Sure Fast was made without any repayment obligation on the part of Sure Fast; and (ii) the connection between Leon Li, Raymond Xu, and Sure Fast.

32.The relevant legal principles are as follows:-

(1) There is no presumption that an adverse inference is to be drawn from a party’s decision not to call a witness. There must be a case to answer before an inference – that the witness’s evidence would not have assisted in answering the prima facie case – can be drawn. But even then, it does not necessarily follow that such an inference can be drawn. A party can proceed on the basis that although a prima facie case was advanced in pleadings and witness statements, after cross-examination of the other party’s witnesses it can be demonstrated that the case has not been proved on the balance of probabilities, and the party need not call any evidence. Thus, what a failure to call a witness cannot do is to transform one party’s unsatisfactory evidence into satisfactory evidence: Moorthy Selvaraj v Karupayee Ammal [2024] HKCFI 403 at §20.

(2) It is for the party asking the court to draw an adverse inference to (i) establish that the counter-party might have called a particular person as a witness and that person had material evidence to give on that issue; (ii) identify the particular inference which the court is invited to draw; and (iii) explain why such an inference is justified on the basis of other evidence that is before the court: Chan Pui Sze v Wang Jue [2024] HKCFI 2491 at §49.

(3) Ultimately, however, the drawing of adverse inferences should not be approached in an overly technical manner, as it comes down to a matter of ordinary rationality. Whether any positive significance should be attached to the fact that a person has not given evidence depends entirely on the context and particular circumstances: Efobi v Royal Mail Group Ltd [2021] 1 WLR 3863 at §41.

33.I am not convinced that this is a proper case for the drawing of adverse inferences. As I shall explain below, CETH’s allegations against Sure Fast in this regard are irrelevant and unparticularised. Without a prima facie case, there is no basis to draw any adverse inference.

E3. CHAIRMAN XU

34.Chairman Xu is the main factual witness for CETH. He gave evidence in a generally forthright and direct manner. As I shall explain below, he made certain concessions during cross-examination that undermine CETH’s case, especially in relation to (i) his knowledge of the delegation by CETH’s board to Raymond Xu and Kelly Hu with respect to payments under the Subscription Agreement and (ii) the lack of evidence concerning the alleged affiliation between Sure Fast and Leon Li or Raymond Xu.

E4. KELLY HU

35.According to Kelly Hu, she had since around 15 May 2018 taken maternity leave and was not on work duty during the relevant period of communications in the WeChat Group mentioned above. In her evidence, Kelly Hu disclaimed knowledge of the Side Letter Agreement and CETH’s Proposal and underscored that she did not pay active attention to the messages. This does not, however, sit well with the contemporaneous WeChat records, which show that she in fact actively participated in the discussions regarding the payment proposal and payment arrangements between 5 June 2018 and 21 August 2018. I do not find her evidence helpful in my determination of the disputed issues.

E5. LI FENGGANG

36.Mr Li Fenggang has no personal knowledge of the matters concerning the CBs. His evidence depends primarily on what he was allegedly told by one Zhang Xiaoming, who claimed that the CBs belonged to himself and Leon Li. In the circumstances, I would attach limited weight to Mr Li Fenggang’s evidence.

F. THE ILLEGALITY ISSUE

37.In assessing expert evidence on foreign law, I have borne in mind the following principles:-

(1) The court has to examine the legal reasoning of a foreign law expert to determine the validity and reliability of the evidence as to the content of the foreign law in question, even where that evidence is uncontradicted. The court is not inhibited from using its own intelligence as on any other question of evidence: Zhang Hong Li v DBS Bank (Hong Kong) Ltd (2019) 22 HKCFAR 392 at §§95-97.

(2) A judge is entitled and indeed obliged to use his legal training insofar as it may have a bearing on the resolution of dispute. He may, in a suitable case, form his own view of the meaning of a statute which the expert witness tells him is the governing foreign law, even if the expert’s opinion as to its meaning is different from his own. In a case where the court interprets the foreign statute in accordance with domestic rules of construction, the judge’s power is not only limited to rejecting the expert’s opinion when he has put forward an impossible view, particularly when there is no evidence that different rules would govern the foreign court’s interpretation. A bilingual court is duty bound to use its knowledge in the Chinese language and legal training to examine the relevant legislations, directives and other authorities referred to by the experts: China Citic Bank Corp Ltd (Quanzhou Branch) v Li Kwai Chun [2019] HKCFI 2540 at §42; citing Shenzhen Development Bank Co Ltd v New Century International (Holdings) Ltd (unrep., HCA 2976/2001, 31 July 2002).

38.CETH relies on Articles 45 and 49 of the Regulations of the People’s Republic of China on Foreign Exchange Administration (中華人民共和國外匯管理條例) (“Mainland Forex Law”) in support of its case on illegality:-

(1) Article 4 states that “境內機構、境內個人的外匯收支或者外匯經營活動，以及境外機構、境外個人在境內的外匯收支或者外匯經營活動，適用本條例。”

(2) Article 45 provides that “私自買賣外匯、變相買賣外匯、倒買倒賣外匯或者非法介紹買賣外匯數額較大的，由外匯管理機關給予警告，沒收違法所得，處違法金額 30% 以下的罰款；情節嚴重的，處違法金額 30%以上等值以下的罰款；構成犯罪的，依法追究刑事責任。”

(3) According to Article 49, “境內機構違反外匯管理規定的，除依照本條例給予處罰外，對直接負責的主管人員和其他直接責任人員，應當給予處分；對金融機構負有直接責任的董事、監事、高級管理人員和其他直接責任人員給予警告，處5 萬元以上 50 萬元以下的罰款；構成犯罪的，依法追究刑事責任。”

39.The experts have prepared a Joint Expert Report (“Joint Report”). They agreed on the following two conclusions (§§4-5):-

(1) The performance of the contract, if involving foreign exchange receipts and payments, shall fall within the scope of foreign exchange control under the Mainland law.

(2) The performance of the contract, if not involving foreign exchange receipts and payments, shall not fall within the scope of foreign exchange control under the Mainland law, and shall cause no harm to foreign exchange administration, financial order and public interest in China.

40.The experts also agreed on two assumptions stated in §6 of the Joint Report, namely:-

“(a) Lasa Huiyu is not affiliated in any way with [Sure Fast].

(b) Sure Fast has not paid any foreign currency to Lasa Huiyu for payments made on its behalf, and Lasa Huiyu will not acquire any creditor’s right or offset its debt in any form to any company by paying the RMB consideration for an equivalent amount of US$5.5 million on behalf of Sure Fast. Sure Fast will also not pay the consideration of US$5.5 million in any currency to any affiliated entity of Lasa Huiyu out of China or other entity designated by Lasa Huiyu.”

41.It is common ground that if both assumptions are factually correct, the domestic payment behaviour related to the performance of the contract does not involve foreign exchange receipts and payment and thus falls out of the scope of foreign exchange control under the Mainland law. If either is not factually correct, the performance of the contract may violate the Mainland law or Articles 45 and 49 of the Mainland Forex Law: §§7-8 of the Joint Report.

42.Logically, the primary question is whether the relevant conduct falls within one of the categories enumerated under Article 45 – i.e. “私自買賣外匯、變相買賣外匯、倒買倒賣外匯或者非法介紹買賣外匯”.

43.I am unable to accept that the Subscription Agreement and the CBs fall under any of the categories under Article 45.

44.To begin with, as acknowledged by CETH’s expert Mr Xiao in his oral evidence, the first question in determining whether a transaction is illegal is whether there is foreign exchange trading (買賣外匯) in the first place. In order to determine whether there is foreign exchange trading, one looks objectively at what has been carried out. The nature and substance of the transaction would need to be considered.

45.In the present case, I take the view that in light of its nature, substance and purpose, the Subscription Agreement (whether as varied or amended by the Side Letter Agreement) is not one about carrying out foreign exchange trading (買賣外匯). Instead, it was for Sure Fast to subscribe to the CBs issued by CETH, with the right to convert them into shares in CETH. The payment of the Bond Consideration (even as varied by the Side Letter Agreement) consisted not only of the RMB Consideration but also the USD Consideration paid to PFI SG in Singapore. The payment of the RMB Consideration in the Mainland was proposed by CETH not for the purpose of foreign exchange trading, but in light of the difficulty in setting up the Escrow Account in Hong Kong as shown in the parties’ WeChat messages referred to above. The specific purposes of the Bond Consideration were likewise not for foreign exchange trading, but to provide CETH with working capital for its designated projects as set out in the Subscription Agreement. Any obligation to redeem the CBs would arise only if no conversion right was exercised. Even if the CBs were to be redeemed upon maturity, any repayment would not entail a direct conversion of the Bond Consideration (or the RMB Consideration) in terms of foreign exchange. Against such backdrop, it would be divorced from reality and at odds with commercial common sense to treat any redemption payment under the CBs as amounting to a sale of USD by CETH to Sure Fast in return for RMB.

46.Mr Xiao relies on Article 5 of the Supreme People’s Court and the Supreme People’s Procuratorate’s answers to reporters’ questions regarding the Interpretation[3] (“Answers”), where it was noted that cross-country (border) fund settlement (資金跨國（境）兌付) is a typical disguised form of foreign exchange trading.

47.I am not persuaded that it assists Mr Xiao or CETH’s case.

48.Article 5 of the Answers reads as follows:-

“5、《解釋》就認定非法買賣外匯是如何規定的？

答：我國對外匯實行強制管理制度，任何組織、個人在我國境內從事外匯買賣、結匯業務，必須獲得國家外匯管理部門的許可並在指定場所進行。根據全國人大常委會《關於懲治騙購外匯、逃匯和非法買賣外匯犯罪的決定》的規定，在國家規定的交易場所以外買賣外匯，擾亂市場秩序，情節嚴重的，以非法經營定罪處罰。根據《中華人民共和國外匯管理條例》的規定，非法買賣外匯主要包括倒買倒賣外匯、變相買賣外匯等情形。

實踐中，地下錢莊非法買賣外匯主要有較爲傳統的以境內直接交易形式實施的倒買倒賣外匯行為和當前常見的以境內外“對敲”方式進行資金跨國（境）兌付的變相買賣外匯行爲。倒買倒賣外匯，是指不法分子在國內外匯黑市進行低買高賣，從中賺取匯率差價。此類錢莊俗稱爲“換匯黃牛”。變相買賣外匯，是指在形式上進行的不是人民幣和外匯之間的直接買賣，而採取以外匯償還人民幣或以人民幣償還外匯、以外匯和人民幣互換實現貨幣價值轉換的行爲。

資金跨國（境）兌付是一種典型的變相買賣外匯行爲。跨國（境）兌付型地下錢莊，不法分子與境外人員、企業、機構相勾結，或利用開立在境外的銀行賬戶，協助他人進行跨境匯款、轉移資金活動。這類地下錢莊又被稱爲“對敲型”地下錢莊，即資金在境內外實行單向循環，沒有發生物理流動，通常以對賬的形式來實現“兩地平衡”。

現在多數地下錢莊的主要業務是資金跨國（境）兌付，導致巨額資本外流，社會危害性巨大，屬重點打擊對象。據此，《解釋》規定實施倒買倒賣外匯或者變相買賣外匯等非法買賣外匯行爲，擾亂金融市場秩序，情節嚴重的，以非法經營罪定罪處罰。” (emphasis added)

49.As pointed out by Sure Fast, the focus or primary concern of the above is on the different modes of operation employed by underground banks (地下錢莊). Mr Xiao or CETH seeks to rely on disguised foreign exchange trading (變相買賣外匯) which concerns situations where the true nature and substance of the transaction is the sale and purchase of foreign exchange (買賣外匯), but the parties have chosen to achieve this by way of a disguised transaction without any direct exchange of currencies (“在形式上進行的不是人民幣和外幣之間的直接買賣”). Here, as analysed above, the nature, substance and purpose of the Subscription Agreement (whether as varied or amended by the Side Letter Agreement) do not show it is about carrying out foreign exchange trading (買賣外匯) in the first place, let alone in any disguised form as submitted by CETH.

50.Consistent with this, none of the Mainland case law cited by Mr Xiao shows that similar transactions have been considered by the Mainland courts and authorities as “買賣外匯” or “變相買賣外匯” within the meaning of Article 45. On the contrary:-

(1) The case law cited by Mr Xiao involves buying and selling foreign exchange for the purpose of making a profit (Case 1, the Guangdong Decision (defined below)), a gang of 22 people using domestic and foreign bank accounts to facilitate selling foreign currencies in a disguised form (Case 2), and a corporate mobile application providing foreign currency sale and purchase service for its customers (Case 3). They are materially different from the present case.

(2) Moreover, in the decision (2020) 粵 0781 刑初 181 號 (“Guangdong Decision”), the Guangdong Taishan People’s Court drew a distinction between (i) exchange of currencies for the purpose of making a profit (“以盈利為目的的經營行為”) and (ii) conduct which did not involve such a business and where the currency exchange was carried out pursuant to a longstanding business relationship, which was held not to constitute an offence of 非法經營罪 under Article 225 of the Mainland Criminal Code.

(3) When cross-examined on this, Mr Xiao claimed that a party’s conduct would constitute 非法經營罪 as long as the foreign currency exchange was not carried out with a designated institution, and the transaction amount exceeded RMB 5 million. However, this does not appear to be supported by the description of the offence i.e. “非法經營罪” which naturally requires some form of misconduct constituting “非法經營”. Moreover, it is inconsistent with the said Guangdong Decision cited by Mr Xiao himself in his report.

(4) In this regard, Mr Xiao further asserted that the Guangdong Decision should not be considered an authority as it was not issued by the Supreme People’s Court, and that both the Procuratorate and the police regarded the relevant conduct as a crime. Nonetheless, in citing the Guangdong Decision in his report, Mr Xiao did not indicate that he considered it to be of no persuasive value, nor did he indicate any reservation as to its reasoning. Further, no evidence has been adduced on the persuasiveness of the Guangdong Decision as a matter of Mainland law. Even assuming that the Procuratorate and the police may take a different view, there is no explanation as to why such view could assist in view of the legal system of Mainland China.

51.CETH, in support of its case, also relies on the experts’ agreed assumptions referred to in §§40-41 above, but I do not consider that they detract from the foregoing conclusions:-

(1) First, the experts’ relevant agreement was that if any one of the two factual assumptions turns out to be untrue, then there may be a violation of (可能違反) the Mainland law or Articles 45 and 49 of the Mainland Forex Law. This is not a consensus that the present transaction constitutes a sale and purchase of foreign exchange (買賣外匯).

(2) As mentioned in §44 above, the primary question in determining whether a transaction is illegal is whether there is foreign exchange trading (買賣外匯) in the first place. That question is answered by looking objectively at the nature and substance of what has been carried out. This was acknowledged by Mr Xiao in his oral evidence.

(3) In any event, given that the parties have not adduced any evidence of special rules of statutory construction under Mainland law, the Court is not inhibited from construing Article 45 based on established principles of statutory interpretation: see §37(2) above. This does not mean that the Court is embarking on a frolic of its own. In the present case, the Court has considered the Mainland legal authorities adduced by the experts in analysing the text of the Mainland statutory provisions.

52.CETH further relies on what it describes as Mr Zhang’s “concession” during cross-examination that where a domestic entity A pays RMB on behalf of a foreign entity C to a domestic entity B, and B’s foreign parent D pays foreign currency to C overseas, there is a breach of Article 45. However, the scenario presented by CETH was postulated in the abstract, focusing solely on the exchange of RMB for foreign currency. Mr Zhang’s acceptance that this may constitute a violation of Article 45 is therefore not surprising. I do not understand him to be endorsing the extreme position that every transaction (regardless of its nature and substance) which involves the payment of foreign currencies automatically qualifies as “買賣外匯” under Article 45.

53.Given that there is no uncontroverted expert evidence as such, we are not in the territory where “each party’s expert witness agrees on the meaning and effect of the foreign law” in the sense mentioned in Zhang Hong Li at §96 (citing Dicey, Morris & Collins on the Conflict of Laws (15^th ed., 2012) at §9-016), in which case the Court may be more reluctant to reject such agreed evidence and to form its own conclusion as to the effect of foreign law.

54.In any event, applying the principles in China Citic Bank at §42 (see §37(2) above), the Court is duty bound to draw upon its knowledge in the Chinese language and legal training to examine the relevant legislations, directives and other authorities referred to by the experts. Ultimately, foreign law evidence is a matter of fact, and such evidence has to be critically examined and weighed.

55.CETH also contends that the nature of the transaction is such that the subscription money would eventually have to be repaid, with the redemption price payable to Sure Fast in USD in immediately available funds in Hong Kong. The domestic RMB payment therefore must be viewed together with the offshore transfer. I have no difficulty with the proposition that the overall payment arrangement should be considered. Ultimately, however, the question remains whether there was any foreign exchange trading (買賣外匯) involved in the present case.

56.In this connection, CETH’s reliance on TTI Global Resources Hong Kong Ltd v Hongkong Myphone Technology Co Ltd & Ors [2021] HKCFI 306 at §52 does not assist its case. There, DHCJ To found that the transaction was “clearly a sale and purchase of foreign exchange and export of the foreign exchange out of the Mainland” and amounted to “a ‘double-knock-type’ underground cross-border sale of RMB and purchase of USD”. §32 of the decision also makes clear that it was a case involving currency matching arrangements where a party had a strong demand to purchase USD with RMB.

57.Likewise, the decisions in DBS Bank (Hong Kong) Ltd v Pan Jing [2020] 4 HKC 395 and Americhip Inc v Zhu Hongling [2021] 4 HKLRD 490 cited by CETH are concerned with underground banking and currency purchase and exchange arrangements. They do not shed light on the transaction at issue in the present case.

58.For the above reasons, I find that CETH has failed to discharge its burden of establishing its case on illegality under Mainland law or Articles 45 and 49 of the Mainland Forex Law.

G. THE ENFORCEABILITY ISSUE

59.In light of the conclusions I have reached on the Illegality Issue above, it is unnecessary for me to rule on the Enforceability Issue.

60.Had it been necessary to do so, even assuming the alleged illegality were established, I would have held that the Subscription Agreement, the CBs, the CB Terms and the Side Letter Agreement are, as a matter of Hong Kong law, valid and enforceable for the following reasons.

61.For the purposes of the conflict of laws, Mainland China and Hong Kong are treated as two separate law districts: First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd (2012) 15 HKCFAR 569 at §43. The present case therefore engages the principles on foreign illegality, as opposed to domestic illegality.

62.The principles on foreign illegality are summarised by Lord Collins NPJ in Ryder Industries Ltd v Chan Shui Woo (2015) 18 HKCFAR 544 at §39 (citing Johnston, Conflict of Laws in Hong Kong (2^nd ed.) at §5-012):-

(1) First, if the contract is unenforceable under its proper law, then it will not be enforced by the Hong Kong court.

(2) Second, if the performance of the contract requires or necessarily involves conduct which is illegal under the laws of the place where it is required to be performed, then it will not be given effect regardless of its proper law (“Second Category”).

(3) Third, the contract will not be given effect regardless of its proper law if the real object and intention of the parties at the time of concluding the contract necessitates them joining in an endeavour to perform in a foreign and friendly country some act which is illegal by the law of such country notwithstanding the fact that there may be, in a certain event, alternative modes or places of performing which permit the contract to be performed legally (“Third Category”).

(4) Fourth, violation of foreign laws in the actual performance of a contract may, even though not required or initially intended, lead to the unenforceability of the contract before a Hong Kong court, regardless of its proper law. In this regard, a more flexible approach having regard to the seriousness of the foreign illegality is required to determine whether public policy and comity really require enforcement of the contract to be denied in such a case (“Fourth Category”).

63.In She Ching Yan v Cai Yunxiang [2023] HKCFI 592, DHCJ Winnie Tsui (as she then was) held at §§109-110 that:-

“109. It is clear from … Ryder that when considering the effect of foreign illegality, the first task is to identify which type of illegality the case falls within. If it is a type 2 case or type 3 case, in line with Lord Collins’ express endorsement of the principles summarised in Johnston, the contract will not be given effect. If, on the other hand, it is a type 4 case, the court should make a judgment as to whether comity should require it to give effect to the contract or deny its enforcement by evaluating the seriousness of the illegality and the important policies which may underlie the impugned foreign law.

110. In this regard, I accept [the plaintiff]’s submissions on the principle governing type 2 cases. That is to say, if the performance of the contract requires or necessarily involves conduct which is illegal under the laws of the place where it is required to be performed, it will not be given effect regardless of its proper law. In other words, the court applies a strict approach in type 2 cases. It is to be contrasted with the treatment of type 4 cases.”

64.CETH relies on the Second Category and the Fourth Category. It contends that:-

(1) The Second Category is engaged because the payment arrangement requires and necessarily involves foreign exchange receipts and payments, i.e. onshore payment by Sure Fast’s agent in RMB, and offshore repayment by CETH to Sure Fast in USD.

(2) The Fourth Category is engaged because the actual performance of the payment arrangement would amount to a serious breach of the Mainland law.

65.Sure Fast’s case is that:-

(1) The present case does not fall within the Second Category or the Fourth Category.

(2) Ryder did not in fact require a mechanistic approach in She Ching Yan, whereby one simply considers whether (i) the case falls within the Second Category; and (ii) if so, refuse relief. Where the foreign illegality is said to affect the contract from the outset, there is good reason to acknowledge that the court must engage in a balancing exercise, in which comity based principles specified in pre-existing case law should be set against any countervailing principles, including examination of, at least at a high level, the seriousness of the violation of the foreign law: citing Dicey, Morris & Collins on the Conflict of Laws (16^th ed.) (Vol. 2) at §32-255 (which in turn referred to Ryder and Magdeev v Tsvetkov [2020] EWHC 887 (Comm)).

G1. THE PROPER APPROACH

66.She Ching Yan involves an attempt to invoke the defence of change of position against an unjust enrichment claim, where the change involves the performance of a contract or a transaction which comes within the Second Category. In that case:-

(1) The Court posed the following question: “where a defendant’s change of position is tainted with foreign illegality, is the defence still available to him?” (§69).

(2) The Court answered this question as follows: “whether the court should adopt a strict approach or engage in an evaluation exercise would depend on how the foreign illegality came about or the circumstances in which the illegality arose. Where the change of position is tainted with any illegality coming within the type 2 cases, the defence is not open to the defendant” (§112).

(3) The same analysis should apply when considering the effect of foreign illegality in the context of the defence of bona fide purchaser (§113).

67.She Ching Yan was decided before Monat Investment Ltd v All Person(s) in Occupation of Part of No 16 Ma Po Tsuen [2023] 2 HKLRD 1311, in which the Court of Appeal (at §§51 – 52.5) decided that in respect of domestic illegality, Hong Kong courts should now follow the “range of factors approach” enunciated in Patel v Mirza [2017] AC 467 rather than the “reliance approach” in Tinsley v Milligan [1994] 1 AC 340.

68.In Magdeev v Tsvetkov [2020] EWHC 887 (Comm), Cockerill J (as she then was) rejected the direct application of Patel v Mirza to a case involving allegations of foreign illegality. However, Cockerill J held that a “balancing exercise” would have to be performed:-

“331. On this I cannot follow Mr Robins along the line to Patel v Mirza. On this it seemed to me that Mr Adkin was right to say that the approach advocated for Mr Magdeev involved conflating two different iterations of public policy. The public policy underpinning the law relating to domestic illegality is as noted above: ex turpi causa and consistency. But that underpinning both Ralli and Foster v Driscoll is international comity.

332. Having said that I do not consider that this involves (as Mr Robins suggested) a perverse dichotomy with a flexible rule in one context and a rigid and inflexible rule in another. Patel v Mirza does provide a guide in this sense. Surely it is right in both cases that a balancing exercise has to be performed, though the elements in the balancing exercise will at least in part be different because the public policy which underpins the question in the foreign illegality cases is different to that which affects Patel v Mirza type cases. One does not go to the questions at which Lord Toulson arrived via a consideration of the caselaw and academic thinking on domestic illegality. One does not specifically invoke proportionality, because that assumes an understanding of the questions of weight and gravity which may not be available in respect of a foreign court’s or foreign judicature’s priorities. But where the clear answer is not given by either of the main principles, one balances the relevant factors discernible from the case law in the light of the underpinning principle. It is thus that one gets to the factors which Lord Collins set out in Ryder. These are the kind of factors which are relevant to the particular public policy.”

69.Sure Fast submits that the approach taken in Magdeev (at e.g. §341) is that all relevant factors are considered, including whether (and to what extent) the case falls within any of the established categories (including the Second Category in Ryder) and the seriousness of the illegality, in deciding whether the overall balance in light of the requirements of comity indicates that it would be contrary to justice to refuse enforcement. Sure Fast further cites Haddad v Rostamani [2021] EWHC 1892 (Ch) (at §§86-93) and Jones v McCarthy [2022] EWHC 2186 (Ch) (at §§118-120) as examples of the application of this approach.

70.I have reservations about Sure Fast’s suggestion that the balancing exercise propounded in Magdeev should also be applied in a Second Category case:-

(1) I see the force in CETH’s submission that Magdeev was not strictly concerned with the application of the Second Category. It was noted in Magdeev at §330 that the case did not fall squarely within either Ralli Bros v Compania Naviera Sota y Aznar [1920] 2 KB 287 or Foster v Driscoll [1929] 1 KB 470 (on which the Second Category and the Third Category were respectively based). Instead, Cockerill J’s concern arose out of the discussion in Ryder at §57, which would appear to be concerned with the Fourth Category. Hence, it was necessary for the court in Magdeev to consider whether the breach of UAE law was “sufficiently serious” and reflected “important policies of the foreign state”.

(2) In Wong Chi Hung v Lo Wing Pun [2023] 5 HKLRD 302 (“Wong Chi Hung (DC)”) which concerned a money exchange transaction, the plaintiff had deposited RMB 1 million into an account in Mainland China designated by the 2^nd defendant but the latter failed to remit the equivalent amount of HKD to the plaintiff in Hong Kong as agreed. Deputy District Judge Gary CC Lam (as he then was) upheld the plaintiff’s claim in unjust enrichment, but dismissed the claim in contract on the ground that the contract was unenforceable as its performance fell within the Second Category of Ryder. In so doing, the judge agreed with the analysis in She Ching Yan and further rejected the submission that a “flexible, holistic approach” in Patel should be adopted for foreign illegality, stating at §35 that:-

“35. For the sake of completeness, Mr Cheung refers me to DHCJ Dawes SC’s decision in Lesnina H DOO v Wave Shipping Trade Co Ltd [2022] 2 HKLRD 727, and the Court of Appeal’s judgment in Monat Investment Ltd v All Person(s) in Occupation of No 16 Ma Po Tsuen [2023] 2 HKLRD 1311 in an attempt to urge me that for the defence of foreign illegality, a flexible, holistic approach as in Patel v Mirza [2016] UKSC 42 should also be adopted for coherence sake. Indeed, in Magdeev v Tsvetkov [2020] EWHC 887 (Comm), [332], Cockerill J agreed that Patel v Mirza may provide some guidance for the defence of foreign illegality. However, in Hong Kong, Ryder is the highest authority on the defence of foreign illegality, and there, Lord Collins NPJ held effectively that cases on the defence of domestic illegality (based on ex turpi causa and consistency: see She Ching Yan v Cai Yuxiang & Ors, [12]) are not relevant to the defence of foreign illegality (based on international comity): see Ryder, [55]. While there is attraction in Mr Cheung’s submissions, in reliance on Lesnina … and Monat … that a unified, flexible, holistic approach should be adopted for both domestic and foreign illegality given that the fundamental basis for both defences is public policy, Lesnina … is a first instance decision to refuse an O.14 application on the ground that the foreign illegality involves triable legal issues, and Monat is a Court of Appeal authority on domestic illegality. I do not think that this first instance court is an appropriate forum for any departure from Ryder.”

(3) The 2^nd defendant’s appeal against the judge’s ruling on the claim in unjust enrichment was dismissed by the Court of Appeal in [2025] HKCA 370; [2025] 2 HKLRD 882 (“Wong Chi Hung (CA)”). As the plaintiff did not cross-appeal against the judge’s rejection of his claim in contract, the issue of whether a “flexible, holistic approach” approach in Patel should be adopted for the Second Category cases was not the subject of the Court of Appeal’s decision (although, as noted below, G Lam JA made comments which call into question whether the claim at issue was in fact a Second Category case).

(4) In the present case, I appreciate that Sure Fast takes a more nuanced approach than that articulated in Wong Chi Hung (DC) at §35, in that it does not ask for a direct application of Patel but relies on Magdeev which applies a balancing exercise despite having expressly refused to apply Patel: see §68 above. Whilst I can see the attraction in taking a holistic approach for both domestic and foreign illegality, however, applying a further balancing approach also to the Second Category – which was couched in strict terms in Ryder (see §62 above) – would blur the distinction between the Second Category and the Fourth Category. This additional “balancing gloss” does not appear to sit well with the structure of analysis in Ryder, which as a matter of stare decisis, is binding on this Court.

71.In any event, as I shall explain below, even if CETH were able to establish the requisite foreign illegality, I consider that the present case does not fall within the Second Category, and that the enforcement of the Subscription Agreement and the CBs should not be denied even if it falls within the Fourth Category.

G2. WHETHER THE SECOND CATEGORY APPLIES

72.The Second Category involves cases where the contract is required to be performed in the foreign state and the performance necessarily involves conduct which is illegal under foreign law: Ryder at §39. It has its genesis in Ralli Bros, where the question was whether Spanish owners could require English charterers to pay the unpaid balance of freight for a cargo from Calcutta to Barcelona, when, as a result of changes in exchange rates, the freight exceeded the maximum permitted under Spanish law. The English charterers tendered freight within the limit permitted by Spanish law, but refused to pay the entire balance. It was held that the charterers were “not bound to perform that part of the contract, that is, the payment of freight above the maximum allowed by Spanish law, which has become illegal by the law of the place of its performance” (p.292).

73.As observed by Lord Collins NPJ in Ryder at §§42-43, Ralli Bros “has been cited in many cases … [but] has been applied in very few commercial decisions to hold that performance of a contract or a particular obligation was discharged”. The prevailing view is that the decision turned on the doctrine of impossibility of performance in English law.

74.This category has been described as “illegality as to formation” as it involves contracts which cannot be performed in accordance with their terms without the commission of an illegal act: She Ching Yan at §104.

75.The underlying concern of the rule in Ralli Bros is that it is contrary to comity for the court of a country to seek to enforce the performance of something in another country which is forbidden by the law of that country: R v International Trustee for the Protection of Bondholders Aktiengesellschaft [1937] AC 500, 519.

76.The authorities draw a further distinction between cases where (i) a party seeks to enforce a mode of performance in another state which is illegal there and (ii) one where the illegal performance has already taken place by the party seeking counter-performance by the other party in a way which is not illegal: Re O’Connor’s Bills of Costs [1993] 1 Qd R 423 at 429-430; and Nygh’s Conflict of Laws in Australia (10^th ed.) at §§19.80 – 19.83. In Re O’Connor, Derrington J explained that:-

“As for the former it is understandable that in the interests of comity a court of one state will not order a party to do something which is illegal in the place in which it is to be done. Nor will it even award damages in lieu of such performance, for such an order is the pale ghost of performance. But that is a different thing from ordering something to be done in Queensland which is legal both in Queensland and New South Wales, such as the payment of money under a contract. It is not an enforcement of illegal performance where the illegal performance is already past. Other considerations may apply, but at least the principle mentioned above [i.e. Ralli Bros principle] whereby the court turns its face against the enforcement of the illegal performance of a contract in another state is not applicable to the present circumstances.”

77.With these principles in mind, had it been necessary to rule on the issue, I would have held that the Subscription Agreement and the CBs do not fall within the Second Category:-

(1) To begin with, none of the terms of the Subscription Agreement or the CBs required or necessarily involved payment of the RMB Consideration in Mainland China. Rather, Clause 3.2(J) of the Subscription Agreement provides that the Escrow Account would be set up in a bank licensed with the Hong Kong Monetary Authority. This was also reflected in the parties’ discussions in the WeChat Group: see §9(1) above.

(2) In Wong Chi Hung (CA) at §§29-30, after discussing the line of authorities associated with Ralli Bros in respect of the Second Category, G Lam JA noted that on the facts of Wong Chi Hung, what remained to be performed under the contract was simply the payment of HKD by the defendant to the plaintiff in Hong Kong. There was no illegality, and hence no impossibility, in the performance of this obligation in the place where it was required to be performed. In view of Kleinwort, Sons & Co v Ungarische [1939] 2 KB 678, it was further noted that at common law, a prohibition under the law of another jurisdiction is generally not an excuse for not performing in Hong Kong a payment obligation governed by Hong Kong law. Although G Lam JA at §32 reserved his opinion on the validity of the plaintiff’s contractual claim (there being no cross-appeal by the plaintiff), his Lordship’s observations at §§29-30 were evidently consistent with Re O’Connor and Aktiengesellschaft as discussed above.

(3) In the present case, the Side Letter Agreement was agreed by the parties to accommodate CETH’s request, made around one month after the conclusion of the Subscription Agreement, for the RMB Consideration to be paid in Mainland China. What Sure Fast is seeking is the counter-performance under the Subscription Agreement and the CB Terms (see Re O’Connor at 429-430), the enforcement of which does not involve seeking to enforce any performance in Mainland China and is also not illegal under their proper law (i.e. Hong Kong law).

(4) CETH contends that Nygh’s and Re O’Connor make clear that there is no absolute rule that where a party seeks counter-performance in return for performance that has already taken place (albeit illegally under the laws of the place where it was done), the court would enforce the contract for the counter-performance. In such a case, there is still a question of whether the illegal performance “taints” the performing party’s right to demand counter-performance. However, I do not think there is such tainting in the present case. As I shall explain in Section G3 below, the seriousness of any alleged violation was not such that enforcement of the Subscription Agreement and the CBs should be refused.

78.Accordingly, the present case does not fall within the Second Category of Ryder.

G3. WHETHER THE FOURTH CATEGORY APPLIES

79.The Fourth Category requires an examination of the seriousness of the foreign illegality in the actual performance of a contract to determine whether public policy and comity really require enforcement of the contract to be denied in such a case: Ryder at §39. The Court is entitled to consider, for instance, whether the breach was a small incident of a perfectly legitimate transaction with no apparent intent to break foreign laws and which has attracted no sanction from the foreign authorities: Magdeev at §341.

80.Had it been necessary to rule on the issue, I would have held that any alleged violation of Article 45 of the Mainland Forex Law would not constitute such a serious breach as to warrant denial of enforcement of the Subscription Agreement and the CBs:-

(1) First, there is no suggestion that any enforcement action has been taken in respect of the alleged violation. Citing DBS Bank (Hong Kong) Ltd v Pan Jing [2020] 4 HKC 395 at §41, CETH submits that this is irrelevant. However, I do not understand Sure Fast to be suggesting that a determination or sanction by the relevant authorities is a prerequisite for the doctrine of foreign illegality to operate. Rather, the Court is entitled to take this into account in assessing the gravity of any alleged contravention. This is supported by Magdeev at §338 (“there has apparently been no prosecution or enforcement proceedings by the UAE authorities”) and Ryder at §59 (“not to have resulted in actual criminal or enforcement proceedings in the PRC”).

(2) Second, there is no suggestion that the parties agreed to any scheme to violate the Mainland Forex Law. As discussed above, the payment of the RMB Consideration in Mainland China was proposed by CETH in light of the difficulties in setting up the Escrow Account in Hong Kong.

(3) Third, as noted above, any contravention of Article 45 of the Mainland Forex Law does not necessarily entail the commission of a criminal offence, specifically the 非法經營罪 under Article 225 of the Mainland Criminal Code. There is no evidence that any exchange of currencies was conducted with a view to pursuing a profit-making business (以營利為目的經營行為) or a business relating to underground banking.

(4) Fourth, there is also no evidence of any Mainland case law or authority to demonstrate that the Mainland courts or authorities would consider transactions similar to the present case to be a “serious” violation, if at all, under Mainland law.

G4. SEVERANCE

81.Sure Fast contends, as a further alternative, that the obligation to pay “in US Dollars in immediately available funds in Hong Kong” by CETH under Clause 2A.1 of the CB Terms can be severed.

82.Reliance is placed by Sure Fast on the “blue-pencil test” in Midland Business Management Ltd v Lo Man Kui [2011] 1 HKLRD 470 at §40, which requires showing that (i) the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains; (ii) the remaining terms continue to be supported by adequate consideration; and (iii) the removal of the unenforceable provision does not change the character of the contract that it becomes “not the sort of contract that the parties entered into at all”.

83.Had it been necessary to rule on the matter, I do not think the doctrine of severance assists Sure Fast.

84.To begin with, it appears that Sure Fast no longer pursues its originally pleaded contention that the Side Letter Agreement is severable from the Subscription Agreement. Indeed, I do not consider this argument to be open to Sure Fast, as the Side Letter Agreement makes clear that it is an “integral part of the Subscription Agreement”.

85.Even if Sure Fast still seeks to rely on the argument on severance, it would not provide Sure Fast with an independent answer to foreign illegality (if established). It is true that Cockerill J alluded in Magdeev at §359 that severance should be possible where the illegality was incidental, but her Ladyship also observed that if the seriousness of the conduct which was part of the overall scheme did pass the hurdle for being unenforceable for illegality, it is difficult to understand how the doctrine of severance can have any role to play: §§355-358.

86.Moreover, the severance envisaged may well require adding to or modifying the wording of what remains. This is because there is no provision requiring repayment to be made in RMB and/or in Mainland China. Rather, Clause 5.1 of the CB Terms further provides that “Payments in respect of principal, interest, premium or yield (if any) thereon will be made to the registered Bondholder by a US Dollar cheque or cashier order drawn on a licensed bank in Hong Kong, or by transfer to a US Dollar account maintained by the Bondholder… subject in all cases to any fiscal or other laws and regulations applicable thereto…” (emphasis added). The risk of the alleged illegality under Mainland law would thus remain, absent any modification of the same.

G5. ESTOPPEL

87.Sure Fast also contends, as a further alternative, that CETH is estopped from claiming that the Subscription Agreement and the CBs are invalid and/or unenforceable by virtue of illegality under Mainland law, given, inter alia, the parties’ shared common assumption, as shown in the discussions in the WeChat Group, that the payment arrangements under the Side Letter Agreement were valid and lawful. This issue would arise only if the Subscription Agreement as varied was held to be unenforceable. In view of my analysis above, it is again unnecessary to rule on this issue.

88.In any event, the estoppel argument does not assist Sure Fast. An estoppel by convention cannot make lawful a transaction that was unlawful (if established): Unruh v Seeberger (2007) 10 HKCFAR 31 at §141; and Hyundai Engineering and Construction Co Ltd v Vigour Ltd [2004] 3 HKLRD 1 at §§113-114. It is therefore unnecessary to consider whether the elements of estoppel by convention have been satisfied.

H. THE RESTITUTION ISSUE

89.Given my conclusions on the Illegality Issue, it is unnecessary for me to resolve the Restitution Issue. In any event, had it been necessary to rule on the matter, I would have held that Sure Fast is entitled to restitution of the Bond Consideration even if the Subscription Agreement and the CBs are invalid and unenforceable.

90.The elements of restitution for unjust enrichment are set out in Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at §67: (1) Was the defendant enriched? (2) Was the enrichment at the plaintiff’s expense? (3) Was the enrichment unjust? (4) Are any of the defences applicable?

H1. ENRICHMENT

91.The relevant principles on enrichment are as follows:-

(1) Enrichment is tested at the date of receipt even for a claim founded on a failure of basis which post-dates receipt of the benefit: Goff & Jones on Unjust Enrichment (10^th ed.) at §§4-67, 4-70.

(2) There is no hard and fast rule that there must be a direct transfer or provision of benefit from the claimant to the defendant. In assessing the relevant transactions, the court looks to the substance and reality of the transactions, as opposed to their mere form: ANZ Commodity Trading Pty Ltd v Excellence Raise Overseas Ltd [2023] HKCFI 179 at §§200-202.

(3) The transaction between parties dealing through agents is legally equivalent to a transaction directly between the parties themselves: Investment Trust Companies v Revenue & Customs Commissioners [2018] AC 275 at §48.

92.CETH contends that it was not enriched because it had never received or benefited from the Bond Consideration. This contention should be rejected:-

(1) It is clear that at the date of the receipt of the Bond Consideration, PFI SG and Beijing Innomed had received the transfers, pursuant to CETH’s own instructions, as agents on CETH’s behalf, for the purpose of providing CETH with working capital for its use on Beijing Innomed, PFI SG and future projects with respect to fertility medical treatment services. This was made clear in Clause 5.4(A) of the Subscription Agreement.

(2) As Chairman Xu accepted under cross-examination, he knew that Sure Fast had to pay CETH pursuant to the terms of the CB, and that the board had entrusted Raymond Xu, Kelly Hu and Nelson Li as to how and when the payments were to be made. He also knew that funds were transferred to PFI SG and Beijing by the end of June 2018 and the summer of 2018 respectively.

(3) CETH’s pleaded case that the “whole or part of” the Bond Consideration was “actually from [CETH]’s funds which had been misappropriated by Leon Li and/or Raymond Xu, who are persons that own, control, or are connected, affiliated or otherwise acting in concert with, [Sure Fast]” raises serious allegations which are, however, not properly pleaded or supported by evidence (including any fund flow showing that the Bond Consideration in fact came from funds allegedly misappropriated from CETH). It is also unclear how the alleged connection or affiliation supports the assertion that CETH was not enriched.

(4) Further, whether Leon Li had control of PFI SG and Beijing Innomed is a matter of CETH’s internal affairs and is irrelevant to Sure Fast’s claims.

(5) CETH has not shown a prima facie case that Sure Fast was involved in any alleged misappropriation of funds from CETH. During cross-examination, Chairman Xu said that they are “still finding evidence” of Sure Fast’s connection or affiliation with Leon Li or Raymond Xu. In these circumstances, applying the principles summarised in §32 above, there is no basis to draw any adverse inference against Sure Fast.

H2. AT THE EXPENSE OF

93.It is clear from the above that the Bond Consideration was made at the expense of Sure Fast. Sure Fast directly paid the USD Consideration. The RMB Consideration was paid by Lasa Huiyu as agent on behalf of Sure Fast.

H3. UNJUST FACTOR

94.If the Subscription Agreement and the CBs are unenforceable, consideration for payment of the Bond Consideration would have totally failed: Goff & Jones at §13-36; Haugesund Kommune v Depfa ACS Bank [2012] QB 549 at §62. CETH has not taken issue with this analysis.

H4. CHANGE OF POSITION

95.I am of the view that CETH’s change of position defence fails for similar reasons. CETH has wholly failed to particularise, let alone establish on the evidence, how the Bond Consideration was “wholly spent or dissipated by Leon Li”.

96.It is only in CETH’s written opening that it was suggested that the alleged change of position consisted of Leon Li causing RMB 33,069,649 to be spent on the BIWC Hospital project. That, however, was precisely one of the intended purposes of the Bond Consideration.

97.CETH also contends that the board had no knowledge that the Bond Consideration would have to be repaid if the basis of the transfer fails. This is untenable and defies commercial common sense. Completion of the Subscription Agreement and the net proceeds from the issue of the CBs were publicly announced by the board of CETH. Chairman Xu also admitted that he knew of the prescribed purposes for the Bond Consideration: see also §92(2) above.

98.The defence of change of position fails.

I. DISPOSITION AND COSTS

99.For the reasons above, I grant a declaration as sought under prayer (1) of the Statement of Claim that the Subscription Agreement, the CBs, the CB Terms and the Side Letter Agreement are valid and enforceable. CETH’s counterclaim is dismissed.

100.I also make a costs order nisi that the costs of the action and the counterclaim be to Sure Fast, with certificate for two counsel, to be taxed if not agreed. The order nisi shall become absolute unless an application to vary the same is made within the next 14 days.

Mr Victor Dawes SC and Mr Peter Dong, instructed by King & Wood Mallesons, for the Plaintiff

Mr John M.Y. Yan SC and Mr Roger Phang, instructed by Cheung & Choy, for the Defendant