Peconic Industrial Development Ltd v. Lau Kwok Fai and Others

cacv 245/2006, CACV 247/2006 AND CACV 248/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal noS. 245 AND 248 of 2006

(on appeal from HCA NO. 3083 of 2002)

______________________

BETWEEN

______________________

AND

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 247 of 2006

(on appeal from HCA NO. 16255 of 1999)

______________________

BETWEEN

______________________

Before : Hon Rogers VP, Le Pichon JA and Stone J in Court

Dates of Hearing: 5-7 & 9 November 2007

Date of Handing Down Judgment: 18 December 2007

______________________

J U D G M E N T

______________________

Hon Rogers VP and Le Pichon JA :

1.These were three appeals from a judgment of A Cheung J given on 1 June 2006.  There were two actions which the judge had heard together.  The first action, HCA 16255 of 1999, was against six personal defendants and the second action, HCA 3083 of 2002, was against a solicitor as the first defendant and two firms of which he had been a partner, or sole proprietor, at different times as the second and third defendants separately.

2.The second plaintiff in the first action is a wholly-owned subsidiary of the Agricultural Bank of China (“the Bank”).  The first plaintiff, (“Peconic”) was a joint venture company which was acquired with a view to implementing a scheme devised by the first defendant (who has been referred to as “Chio”) whereby property in Hong Kong would be purchased with funds from the Bank which was induced to enter the arrangement on the spurious footing that it would make a substantial profit.  Chio was apparently the person who conceived and planned the scheme of purchase of the properties which lies at the root of these actions.  The second to fifth defendants were all connected in some way with Chio.  The sixth defendant, (“Chen”), was the former General Manager of the Foshan Sub-branch of the Bank. 

3.It was the plaintiffs’ case that Chen was implicated with Chio in bringing it about that the Bank, through the second plaintiff and its investment in Peconic, would put up money for the purchase of a number of contiguous plots at what were excessively inflated prices.  The plaintiffs’ claims in the first action included not only claims against the first, third and sixth defendants for fraud but also claims against all defendants as constructive trustees liable to account to the plaintiffs.

4.Peconic was the sole plaintiff in the second action.  The first defendant in that action (“Danny Lau”) acted as the solicitor of Asiagreat Ltd (“Asiagreat”).  He did so on the instructions of some or all of the defendants in the first action, essentially on the instructions of Chio.  Asiagreat was used by Chio and the other defendants in the first action as an intermediary for the purchase of the land used in the fraud.

5.It was accepted that Chio, Chen and the third defendant in the first action had fled the jurisdiction and could not be contacted.  They took no part in the proceedings and judgment had been entered against them prior to trial.  After a trial of some 40 days, the judge found, in a very lengthy judgment, that the second, fourth and fifth defendants in the first action were liable to Peconic in the sums of HK$350,534,416, HK$92,307,341.70 and HK$27,800,000 respectively.  He made no finding in respect of the second plaintiff’s claim.  In respect of the second action the judge held that the first defendant was liable to the plaintiff in the sum of HK$350,534,416.  Judgment was entered against the second and third defendants in that action for sums to be agreed between them with liberty to apply to the court for further directions and determination, if necessary.  Appeals were lodged by the fourth defendant in the first action and all the defendants in the second action.  At the conclusion of the hearing of this appeal judgment was reserved which we now give.

Background

6.When the events which are the subject of these proceedings began it would appear that Chio had the appearance, at least, of being a person of substance and a successful business person.  At some stage he was a legislator in Macau.  It would seem that prior to September 1991 Chio had gained the confidence of persons in the Foshan Sub-branch of the Bank.  This was apparently connected with the fact that the Sub-branch had earned a significant profit from some earlier deals involving Chio.  In circumstances which are not known, Chen interested the Bank into joining into a venture, apparently devised by Chio, to purchase 32 agricultural lots in the Deep Bay area of the New Territories.  The properties were within the Mai Po and Fairview Park district and comprised mudflats, fishponds and “gei wais", which were intertidal shallow ponds used for shrimp farming.

7.In about September 1991 Chen spoke to a Mr Foo, who was the branch manager of the Guangdong Branch of the Bank.  Mr Foo was in Hong Kong on a business trip and Chen told him that he intended to invest in this venture with a view to the property being sold to a Taiwanese consortium at a profit of approximately HK$200 million.  Chen told Mr Foo that, if the sale to the Taiwanese businessmen did not go through, the land could be developed into a golf course which was said to be likely to bring in a profit of several hundred million dollars.

8.On the following day Chio, Chen and Chio’s girlfriend, Elsie Chan, the second defendant, accompanied Mr Foo to the area.  Mr Foo was apparently told that property development was being undertaken in the area by a well-known property developer in Hong Kong.  He was seemingly given an encouraging picture as to the prospects.  Later the same month Chen visited Guanzhou and saw Mr Foo; he encouraged him to act quickly on the pretext that the property was likely to be sold to other persons.  Mr Foo was taken in by this.  As a result the Guangdong Branch of the Bank approved a loan to the Foshan Sub-branch of US$20 million for the purpose of meeting the Sub-branch’s short term funding needs.

9.The first step towards the purchase came when Johnson, Stokes and Master (“JSM”) wrote on 26 September 1991 to Danny Lau the first defendant in the second action and his firm, the second defendant in that action, indicating that their client, who was not named in the letter, intended to purchase 2.5 million square feet of land in lot 68 of D.D. 101 at a price of HK$185 per square foot.  That letter also stated that the deposit would be 30% of the total purchase price and the deposit would be released to the vendors upon approval of title to the properties.  The response came two days later confirming the broad outline save that the 30% deposit was to be released to the vendors upon signing the sale and purchase agreement.  It has to be said that that exchange of correspondence had the hallmarks of a deal that had been finalised.  Indeed, credence to that is given by reason of the fact that the US$20 million loan from Guangdong Branch to the Foshan Sub-branch was dated 26 September.

10.At the time Peconic was a shelf company and it was only acquired for the purposes of the purchase of the property on 3 October 1991.  The initial shareholding was that Chen held 50 shares on behalf of the Foshan Sub-branch of the Bank, a Mr Li, who at the time was the deputy branch manager of the Foshan Sub-branch, held a further 25 shares again on behalf of the same Sub-branch and Chio held 25 shares on his own behalf.  The finance for the purchase of the property which was taken in the name of Peconic was provided by the second plaintiff in the first action, which had been set up by the Foshan Sub-branch as a “window” company for investment in Hong Kong.

11.Prior to this Chio had set up Asiagreat with a view to the purchase of the various lots.  Chio himself was not a director or shareholder of Asiagreat.  One of the complaints in the case was that Chio had induced the Bank to believe that a Mr Poon Kam was the beneficial owner and controller of Asiagreat.  Poon Kam was an elderly relative by marriage of Danny Lau.  He was also a person of influence amongst the indigenous landowners in the area where the land to be purchased was situated.  Whereas the fourth defendant, who has been described as the common law wife of Chio’s brother, was a director of Asiagreat together with Mickey Wong, the third defendant, the records kept by Danny Lau’s firm showed that Elsie Chan was the beneficial owner of Asiagreat and Danny Lau kept the records on the basis that Asiagreat’s account was under the name of Elsie Chan.  Indeed, it appears that in July 1991 Danny Lau’s firm filed the initial documents relating to the first directors and registered office of Asiagreat.  On 14 July 1992 Mickey Wong ceased to be a director of Asiagreat and the fifth defendant, who was Elsie Chan’s mother was appointed the only other director with the fourth defendant.  Nevertheless the judge was satisfied on the evidence that Danny Lau was well aware that the beneficial ownership and control of Asiagreat was in fact in Chio.

12.The initial arrangement which was made nominally by Elsie Chan with Poon Kam was that Poon Kam would acquire as many properties as he could at an average ceiling rate of $60 per square foot.  If he managed, as transpired to be the case, to purchase some of the properties at less than that price he could keep the difference.  The properties would be purchased in the name of Asiagreat.  As the judge recorded, later some of the properties which were used in the arrangements with the plaintiffs were purchased through another agent at considerably higher prices.

13.In order to finance the purchases there was an initial payment of a sum of $8 million notionally from Elsie Chan to Asiagreat to finance the acquisition, the remainder of the acquisition costs were to be financed by the use of the 30% deposit monies.  Another device which was used was that the purchase monies payable by Asiagreat were, in a number of instances, provided by cheques drawn on banks in Macau.  That meant that payment under the cheques would be delayed by a sufficient period in order to enable the deposit money which was provided by the second plaintiff in the first action on behalf of Peconic to be credited into the paying account.  When some of the vendors’ solicitors raised objections, Danny Lau gave undertakings that the cheques would be honoured.

14.On 4 October 1991 Peconic entered a sub-sale and purchase agreement with Asiagreat for the purchase of the properties in the first 15 transactions, Asiagreat, in those instances, acting as confirmor.

15.As the judge said at § 81 of the judgment, at the trial there was no dispute that Chio was the culprit who had defrauded the Bank.  The representations which the judge found had been proved were:

1.	Representations to the bank officials to the effect that the properties could be acquired for a quick resale at a profit of $200 million.
2.	That there were some Taiwanese businessmen who were seriously interested in buying the properties.
3.	That if there were no sale to Taiwanese businessmen the land could be developed into a golf course earning an even greater profit.
4.	That the Bank officials had to act quickly as otherwise the properties could be sold to others.

16.The judge held that the representations were made in a meeting in September 1991 in Hong Kong when Chen first mentioned the matter to Mr Foo and on the following day when Chio and Chen arranged for the site visit.

17.As the judge held in § 86 of the judgment, the Bank had clearly made the decision to invest by 26 September 1991 since that was the day when the intrabank loan agreement was executed.  Chen’s involvement can also be seen from a memo of an internal meeting of the Foshan Sub-branch dated 12 October 1991.  Chen is reported as indicating that the properties could be resold at a profit of $200 million.  It was said that in the alternative that if the golf course would be developed, the profit could be as great as $2 billion.

18.Further sub-sale and purchase agreements were entered in November and December 1991 and in January 1992 Chio and Chen requested a further US$20 million to complete the acquisition of the properties.  That was at a meeting which was held in Macau.  The judge held that Chio had referred to the fact that the area was not large enough for the development of an 18 hole golf course but that it could be developed into low rise residential buildings and that there should be no problem in doing so.

19.Later, in the middle of 1992, a senior land Officer of the District Lands Office in Yuen Long and an architect also attended a meeting with Chen, Chio, Elsie Chan and others.  The judge considered that representations about the proposed development and the resale potential of the properties and the reasonableness of the general unit prices of acquisition were made from time to time.

20.The judge also held that Chio and Chen had told the solicitor handling the matter at JSM that despite the relevant plans that were in existence in relation to the area in which the properties lay, they had obtained favourable expert opinion from an architect regarding planning permission.  It was also said that Chio had represented to the solicitor at JSM during the conveyancing process that Asiagreat was owned or controlled by Poon Kam and that it had been necessary to enlist his help as a middleman and confirmor in order for the properties to be acquired.  Both Chio and Chen had told that solicitor that there was no impropriety in the arrangement; it was a good bargain and that they had agreed to proceed with the purchase.

21.The judge was satisfied that the suggestion of any profit arising from conversion of the land into a golf course was absurd and that there never had been any serious interest from any Taiwanese businessmen.  The judge also held, on the basis of evidence of an expert who was called on behalf of Danny Lau, that at the relevant time the chances of successfully obtaining the necessary planning permission to develop the land was no more than 35%.  Other evidence was given by a Ms Iris Tam, Peconic’s expert, who appeared to have been rather less optimistic.  The judge did not decide between the two experts but was satisfied even on the more optimistic version that Chio’s representations were false.

22.One thing is clear, however, Peconic did attempt to obtain planning permission to develop the land.  Attempts appear to have been made as early as August 1992 and later in 1993.  On both occasions the Town Planning Board stated that the proposed development was not in line with the planning intention for the area, which was primarily to protect the special landscape and ecological value of the Deep Bay area.  It was said that new developments would not normally be permitted in the area unless required to support conservation of the area’s natural features and scenic qualities.

23.The failure to obtain planning permission caused some consternation within the Bank.  Evidence was given by Mr Huang Zhiyong, who up until November 1992 had been the manager of the International Department of the Bank’s Guangdong Branch.  He said that in January 1992 he had attended a meeting in Macau where Mr Foo, Chen, Chio and Elsie Chan had been present.  His evidence was that Chen and Chio never mentioned to anybody else in the Bank that the acquisition of the properties had been conducted through a middleman acting as confirmor.  He said in his witness statement that if the Bank had been aware that there was a middleman that earned a huge price difference, the Bank would not have agreed to proceed with the transaction.  Nevertheless, in November 1992 Huang was sent by the Guangdong Branch to Hong Kong, in his words, to take charge and handle this project.  He stated that he had meetings around the beginning of 1993 with Chen and Chio but at no time did they reveal the enormous profit which had been made by Asiagreat.

24.In early 1993, Huang took over the management of Peconic.  It was at that time that he discovered that Chio had only contributed a few million dollars to the project and, apparently, even the amount injected via the second plaintiff in the first action fell far short of the amount that that was needed.  Huang then said that he went after them for the outstanding balance but without success.

25.In July 1993, Huang secured the return of the land title documents from JSM.  Huang said that he then discovered that there had been a huge price difference between the price which Peconic had paid Asiagreat and the cost of the land to Asiagreat.  He said he reported the matter to the Guangdong Branch and had made enquiries of Chen and Chio.  Huang’s statement then continues:

“

They replied that due to the complication in the land title and the sale and purchase arrangements, there was the need to pay such price and proceed with such payment method.  I personally did not feel that the price paid by Peconic for the acquisition of the Mai Po land and the payment method used were reasonable.  However, because of Chen’s position, he had the authority to make decision and all the transactions of land were conducted with Johnson, Stokes and Master checking on (the matters) for us, there was nothing I could do.  The Guangdong Branch also instructed me to do my best regarding the application to the Government in order to minimise the loss.”

26.It is perhaps interesting to note that Mr Li Rui Chang, who was a senior officer of the Bank’s Guangdong Branch, gave evidence that he had signed the conveyancing documents along with Chen and that he had noticed that there was a price difference between the price that Peconic paid and the cost price to Asiagreat but that he had considered that the price difference was “not very large”.  Leaving that, probably self-exculpating, statement aside, it is clear that the Bank was well aware by July 1993 of the enormous price difference between the cost price to Asiagreat and the price paid by Peconic.  At that stage it is clear that the Bank was in full control of Peconic.

27.No enquiries were ever made of or about Asiagreat.  No investigation was made of that company.  A simple search at the Companies Registry would have revealed that the fourth defendant, the common law wife of Chio’s brother, and the fifth defendant, the mother of Elsie Chan, were the only directors of that company.  The Bank was well aware at the time of the connection between Elsie Chan and Chio.

28.In 1993 the conveyancing papers were sent to a second firm of solicitors namely Poon and Cheung.  It would seem however that the consultation of that firm was in respect of conveyancing matters and nothing was taken up with them as to the propriety of Asiagreat’s actions.

29.Apart from making abortive, and seemingly hopeless, applications for planning permission, the Bank and the plaintiffs took no further action on the matter apart from removing Chio as a director and reducing his shareholding to a bare minimum in view of his lack of payment for his shares until 1998 when they were contacted by the ICAC who had made investigations in respect of other matters.  It was then that it was abundantly clear to the plaintiffs and the Bank that Chio and Elsie Chan had been the persons behind Asiagreat.

30.The first action was commenced on 13 October 1999 and the second action against Danny Lau and the solicitors firms was commenced on 12 August 2002.

The trial

31.At the trial there was, as already indicated, little discussion as to the correctness of the proceedings against Chio.  Whilst the judge accepted that Chio had made false representations to the Bank he also held that those representations had been made to Peconic because they were representations made to the Bank with a view to their being acted upon by Peconic when it was formed.

32.In respect of the fourth defendant the judge had little difficulty in coming to the conclusion that the fourth defendant was far more implicated in Chio’s wrongdoings than she was prepared to admit.  There were two major transfers of money in respect of which the fourth defendant was fully involved.  The first took place in October 1991 when a sum of $81.8 million was paid into her account from the account of the second defendant in the second action.  That was transferred out three days later to Chio’s bank account save for half a million dollars which was transferred into a joint account held by the fourth defendant and her common-law husband, Chio’s brother.  Then in June 1992 part of that amount of $81 million, namely $10.5 million, was paid into a joint bank account which the fourth defendant held with her common-law husband.  There were withdrawals of that money but the judge was by no means satisfied with the fourth defendant’s explanations.  Indeed he found the fourth defendant to be dishonest in material respects, largely on the basis of a statement which the fourth defendant had made to the ICAC in 1998 that had been produced in the course of the trial.  The production of that statement caused the recall of the fourth defendant.  It was clear that she knew far more about Chio’s dishonest conduct.  The judge accepted that the fourth defendant had received the various sums of money dishonestly.

33.As regards Danny Lau the case that had been made by the plaintiff was that Danny Lau had assisted Chio and Elsie Chan in their dishonest conduct.  The judge declined to find that Danny Lau had received any money, as such, being the proceeds of sale by Asiagreat.  There was, quite simply, no evidence that that had happened.  Danny Lau had, of course, prepared all the sale documentation on behalf of Asiagreat.  The proceeds of sale from Peconic to Asiagreat had passed through his firms’ accounts because Asiagreat itself had no bank accounts.  Money thus came into the accounts of the two firms and was paid out.  The judge considered the question of Danny Lau’s knowledge at great length.  There was a long passage in the judgment devoted to the question of whether there had been a deed of indemnity given by Chio and Elsie Chan to Poon Kam.  Despite the fact that no such document had been produced, the ICAC had no record of such a document and Danny Lau denied having drafted such a document, the judge reached the conclusion that there had been, not least because Poon Kam in his turn had given a guarantee for the return of the 30% deposit should the sale fall through.

34.The fundamental acts of assistance comprised the setting up of Asiagreat, with the appointment of the directors, the drafting of the conveyancing documents as well as acting as the solicitor in the conveyances.  In addition guarantees had also been given to vendors in respect of payment of cheques drawn on banks in Macau.  Although this eased the problem of financing Asiagreat and was outside the normal scope of a solicitor’s functions, as regards acts of assistance it added no more than what has just been referred to.

35.Importantly, as already referred to, the judge refused to hold that Danny Lau had received any direct payment in respect of the transactions other than the firms’ fees.  He also held there was no evidence that Danny Lau knew that Peconic did not know of Chio’s involvment in Asiagreat and thus his profit therefrom, but he held that Danny Lau had shut his eyes to it.  On that basis he was found to be a knowing assister but not a joint tortfeasor, conspirator or fraudster.

36.In view of the fact that the second action was not commenced until 2002 the question arose as to whether an action lay against Danny Lau and the two firms or whether they were statute barred.  Two questions arose on that.  First as to whether the Limitation Ordinance applied in any event and, second, if it did, whether section 26 of the Ordinance enabled the action to be maintained because the facts relevant to the plaintiff’s right of action had been deliberately concealed by the defendants and the period of limitation would not begin to run until the plaintiff had discovered the fraud, concealment or mistake as the case may be or could with reasonable diligence have discovered it.

37.It was thus necessary for the judge to analyse the nature of the claim against Danny Lau.  Danny Lau was only alleged to have been liable by reason of his having dishonestly assisted in the breaches of fiduciary duty on the part of Chio.  In analysing that, the first matter to be considered was the nature of Chio’s own liability and secondly the position of a dishonest assister in a breach of trust.

38.The judge referred to the analysis of what constituted a constructive trustee in the way that expression had been used over the years by Millett LJ (as he then was) in Paragon Finance v D B Thakerar and Co. (a firm) [1999] 1 All E R 400.  In the judgment in that case, starting at page 408, Millett LJ analysed how the expression had been used in two senses.  The first was where a defendant who though not expressly appointed as a trustee had assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust.  The second situation covered a case where the trust obligation arose as a direct consequence of the unlawful transaction which was impeached by the plaintiff.

39.As regards Chio’s own liability the distinction between the two was perhaps not important.  The action against him had been brought seemingly within time.  In respect of the first type of constructive trustee the limitation periods would not apply since the trustee was always regarded as having received the trust property not in his own right but in circumstances where there was an intention to create a trust.  Historically there was no limitation period in respect of trust property held by a trustee.  It was only in the Trustee Act 1888 that relief was given to trustees who were not fraudulent or dishonest.

40.However in the second class of case the defendant is not a trustee at all.  In respect of such persons the statutes of limitation applied by analogy because that type of constructive trust arose in the exercise of Equity’s concurrent jurisdiction.

41.In respect of Chio’s position the judge held that not only was he a fraudster but that he was a constructive trustee of the first category.  He held that because he had been a director of Peconic, Chio had always had control of Peconic’s money and by taking a secret profit, which he did by taking the profits which Asiagreat had made in the absence of any knowledge by the Bank or the third director of Peconic, Chio effectively never lost control of the money and the possession of the secret profits was an extension of the trusteeship constituted by his being a director.  The judge also held that by arranging for, if not merely permitting, Peconic’s monies to be expended in the fraudulent scheme which he had devised, Chio had breached his fiduciary duties in relation to the monies of Peconic of which he had control.

42.The judge then went on to consider the position of Danny Lau.  In view of Danny Lau’s involvement with Asiagreat, there was little argument that he had to be regarded as coming within the category of a dishonest assister in Chio’s scheme.  The judge then, relying on what had been said in Soar v Ashwell [1890] 2 QB 390, approached the matter on the basis that the dishonest assister of a fraudulent or dishonest disposition of trust property was treated as an express trustee and did not have a limitation defence prior to the Trustee Act 1888.  He then proceeded to consider the position under the 1888 Act and, at § 652, reached the conclusion that section 8 of that Act did not apply to a knowing assister of a primary trustee in his dishonest and fraudulent design.  He then considered the position under section 19 of the Limitation Act 1939.  By the same process of reasoning he considered that, as a dishonest assister in Chio’s fraudulent and dishonest breach of fiduciary duties as a director, Danny Lau did not have any limitation defence.  The same applied to Elsie Chan and the fourth and fifth defendants since they, too, were knowing assisters and in their cases recipients in Chio’s fraudulent scheme.

43.In view of the finding as to Danny Lau’s inability to rely on any limitation defence it was strictly unnecessary to consider whether there would have been a postponement of the limitation period under section 26(1) of the Limitation Ordinance.  Nevertheless, the judge did so.  In this regard the judge made reference to what had been said by Millett LJ in Paragon Finance (at p. 418d) where he said:

“	How a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by reasonable but not excessive sense of urgency.”

44.The judge referred to what Huang and Mr Foo had said.  He adopted the argument that it was only when Danny Lau’s bill of 25 October 1991 had been produced by the ICAC showing that there had been an indemnity given not only by Elsie Chan but also Chio to Poon Kam that Danny Lau’s liability could be shown.  Indeed, it would not be discourteous to say that at that stage, having already decided that the limitation defence could not apply to Danny Lau, the judge was content to proceed on the basis of adopting the final submissions on behalf of the plaintiff; these were referred to with approval twice on this topic.

45.As regards the second and third defendants in the second action, the judge simply recorded that there was no dispute as to their liability for Danny Lau’s primary liability.

The appeals by the defendants in the second action

46.The issue of law that arises is whether a dishonest assister to the first type of constructive trustee in the sense explained by Millett LJ in Paragon Finance may rely on limitation as a defence.

Limitation and the dishonest assister

47.The judge’s decision that limitation is not an available defence rests essentially on what had been said by the Court of Appeal in Soar v Ashwell [1893] QB 390.  In that case, the trustees had entrusted custody of some of the trust monies to the trust’s solicitor who died in November 1879 without having repaid the monies to the trustees.  In 1891 the surviving trustee brought an action against the solicitor’s widow who was his personal representative.  The questions that arose were (1) whether the solicitor was a ‘trustee’ within the meaning attributed to it in equity and, if so, (2) whether he could rely on the statutes of limitation.

48.Lord Esher MR began the relevant part of his judgment by stating the two cases situated at either end of the spectrum where it is clear whether or not limitation could be invoked as a defence:

“

If there is created in expressed terms, whether written or verbal, a trust, and a person is in terms nominated to be the trustee of that trust, a Court of Equity, upon proof of such facts, will not allow him to vouch a Statute of Limitations against a breach of that trust.  Such a trust is in equity called an express trust.  If the only relation which it is proved the defendant or person charged bears to the matter is a contractual relation, he is not in the view of equity a trustee at all, but only a contractor; and equity leaves the contractual relation to be determined by the common or statute law.  If the breach of the legal relation relied on, whether such breach be by way of tort or contract, makes, in the view of a Court of Equity, the defendant a trustee for the plaintiff, the Court of Equity treats the defendant as a trustee become so by construction, and the trust is called a constructive trust; and against the breach which by construction creates the trust the Court of Equity allows Statutes of Limitation to be vouched.”

He was there drawing a distinction between an express trust and the second type of constructive trust described by Millett LJ in Paragon Finance.  In the case of an express trust, time does not run against an express trustee who remains accountable to his beneficiaries without limit of time because, as already noted, the possession of an express trustee was always treated as that of the beneficiaries.  His possession was never in his own right or adverse to that of the beneficiaries.  See Paragon Finance at 408f-h.

49.That distinction was also drawn by Bowen LJ (at p.396) where he expanded on the reason why time was allowed to run where the constructive trust is of the second category:

“

An express trust can only arise between the cestui que trust and his trustee.  A constructive trust is one which arises when a stranger to a trust already constituted is held by the Court to be bound in good faith and in conscience by the trust in consequence of his conduct and behaviour.  Such conduct and behaviour the Court construes as involving him in the duties and responsibilities of a trustee, although but for such conduct and behaviour he would be a stranger to the trust.  A constructive trust is therefore, as has been said, “a trust to be made out by circumstances.”  It is not unreasonable in the latter class of cases, where the liability of a stranger to the trust arises from his conduct and depends on the proof of his contemporary acts, that time should run in favour of the person to be charged.  In such cases conflicts of evidence are possible or probable, and to deny to the person to be charged the shelter or benefit of a period of limitation would be obviously dangerous and unjust.”

Similarly, Kay LJ (at p.400) referred to the need for evidence of external facts not contained in the original declaration of trust to make a stranger responsible as a trustee.  Since that evidence may have been destroyed through the lapse of time, Kay LJ considered that it would be unjust not to allow limitation as a defence.  So whilst an express trustee may not raise limitation as a defence, a stranger to the trust whose liability arises from his conduct (i.e. the second type of constructive trustee) may do so.  In Beckford v Wade (1805) 17 Ves 87, 97, Sir William Grant MR explained the reason why this was so:

“

It is certainly true that no time bars a direct trust, as between cestui que trust and trustee; but, if it is meant to be asserted, that a Court of equity allows a man to make out a case of constructive trust at any distance of time, after the facts and circumstances happened out of which it arises, I am not aware, that there is any ground for a doctrine, so fatal to the security of property as that would be…”

50.Both Lord Esher and Bowen LJ went on to analyse the position of the solicitor in the case before them and concluded that he was to be treated as an ‘express trustee’ and could not rely on limitation.  In other words, he was not the second type of constructive trustee who could rely on limitation.  Lord Esher reasoned as follows (at p. 394):

“

But the questions in this case are whether Ashwell was not, in view of a Court of Equity, a trustee of the money before the alleged breach by misappropriation, and, if he was, under which class of trust he was with regard to limitations.  The moment the money was in his hands, he was in a fiduciary relation to the nominated trustees; he was a fiduciary agent of theirs; he held the money in trust to deal with it for them as directed by them; he was a trustee for them.  He was therefore a trustee of the money before he committed, if he did commit, the alleged breach of trust, and was in possession of and had control over the money before he committed, if at all, the alleged breach of trust.

The cases seem to me to decide that, where a person has assumed, either with or without consent, to act as a trustee of money or other property, i.e., to act in a fiduciary relation with regard to it, and has in consequence been in possession of or has exercised command or control over such money or property, a Court of Equity will impose upon him all the liabilities of an express trustee, and will class him with and will call him an express trustee of an express trust.  The principal liability of such a trustee is that he must discharge himself by accounting to his cestui que trusts for all such money or property without regard to lapse of time.”

Bowen LJ was of a similar view as appears from the following passage from his judgment (at p.397):

“

It has been established beyond doubt by authority binding on this Court that a person occupying a fiduciary relation, who has property deposited with him on the strength of such relation, is to be dealt with as an express, and not merely a constructive, trustee of such property.  His possession of such property is never in virtue of any right of his own, but is coloured from the first by the trust and confidence in virtue of which he received it.  He never can discharge himself except by restoring the property, which he never has held otherwise than upon this confidence … and this confidence or trust imposes on him the liability of an express or direct trustee.”

Although both Lord Esher and Bowen LJ treated the solicitor as an express trustee, in reading the older cases such as Soar v Ashwell, it is as well to bear in mind Millett LJ’s remarks (at 409j) that the first type of constructive trustee was treated as an express trustee and was “often confusingly described as such”.  Their analysis shows that Lord Esher and Bowen LJ were in fact referring to the first type of constructive trustee.

51.The third member of the court, Kay LJ, after referring to Barnes v Addy, concluded (at p.405) as follows:

“

…there are certain cases of what are, strictly speaking, constructive trusts, in which the Statute of Limitations cannot be set up as a defence.  Amongst these are the case where a stranger to the trust has assumed to act and has acted as a trustee, and the case where a stranger has concurred with the trustee in committing a breach of trust, and has taken possession of the trust property, knowing that it was trust property, and has not duly discharged himself of it by handing it over to the proper trustees or to the persons absolutely entitled to it.”

In his view, the solicitor came within one or both the situations described and had to be treated as an express trustee although later (at p.406) it would appear that his decision was on the basis that the solicitor did assume to act and acted as trustee of the funds which he received i.e. that he was within the first situation described.  It should be noted that the second situation described involved ‘knowing assistance’ which was not a feature of the case before him.  Accordingly, all this has to be borne in mind when reliance is placed on that passage of his judgment.

52.Whilst those passages in the judgments (and in the case of what Kay LJ had said, subject to the comment above) were sufficient to explain the basis of the decision, Lord Esher went on to state obiter (at p.394) that:

“

There is another recognised state of circumstances in which a person not nominated a trustee may be bound to liability as if he were a nominated trustee, namely, where he has knowingly assisted a nominated trustee in a fraudulent and dishonest disposition of the trust property.  Such a person will be treated by a Court of Equity as if he were an express trustee of an express trust.  The propositions thus enunciated seem to me to follow the judgments of Lord Hatherley and Giffard, L.J., in Burdick v. Garrick (1), and of Lord Selborne in Barnes v. Addy.”

Bowen LJ, for his part, noted that there had been some variety and inconsistency both in the language used about constructive trusts and in the line of demarcation drawn between the cases of express and constructive trusts.  He mentioned four matters (at p.396) including the following:

“	the rule as to limitations of time which has been laid down in reference to express trusts has also been thought appropriate to cases where a stranger participates in the fraud of a trustee: Barnes v. Addy.”

Those propositions or statements of principle as well as what Kay LJ had said about dishonest assisters formed the basis of the judge’s conclusion that time does not run in favour of a dishonest assister to the first type of constructive trustee and, in particular, that that was the law prior to the Trustee Act 1888.  But the solicitor in Soar v Ashwell was liable because he was the first type of constructive trustee and not because he was a dishonest assister.  ‘Knowing assistance’ did not come into that case at all.

53.The propositions highlighted in § 52 above, which lie at the heart of the plaintiff’s case directed, as they were, at dishonest assisters must consequently be no more than obiter dicta.  As they appear to have been based on Barnes v Addy and Burdick v Garrick [1869-70] 5 LR Ch App 233, those cases must now be considered.

54.Dealing first with Burdick, the facts were these.  During his lifetime G conferred a very special power of attorney on his agent who was authorised in the widest terms to receive and invest G’s property.  The agent received certain monies in that capacity and paid them into the general account of his firm.  G died in 1859 intestate.  In 1867 his widow became the administratrix and in 1868 sought an account from the agent.  Both Lord Hatherley LC and Giffard LJ were of the view that the agent was a fiduciary and property which came to him qua fiduciary was trust property for which he had to account and the statute of limitations was no bar to the suit.  Liability thus arose because the monies when received by the constructive trustee became subject to the pre-existing fiduciary relationship.  It was thus direct support for the decision in Soar v Ashwell itself and like Soar v Ashwell, it involved the first type of constructive trust and had nothing to do with dishonest assisters.

55.Turning to Barnes v Addy, there the surviving trustee, A, appointed B sole trustee of half the fund as he was empowered to do, taking an indemnity from B.  B subsequently misapplied the trust monies and became bankrupt.  A’s solicitor, D, had advised A against the appointment but had prepared the deeds of appointment and indemnity.  P who was B’s solicitor was sent the drafts for perusal on behalf of B and his wife and children.  P perused and approved the deed of appointment, having alerted B’s wife of the risk involved.  It was not suggested and there was no evidence that either of the solicitors had any inkling of B’s intention to misappropriate the fund.  The issue was whether the solicitors could be held responsible for the loss and, if so, on what basis.  No question of limitation arose in that case.

56.The question Lord Selborne LC had to consider was whether the solicitors could properly be regarded as ‘trustees’ and be held liable on that basis.  He stated (at 251-2) that the responsibility of a trustee

“

may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust.  But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agent of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.”

Applying those principles to the facts, he concluded that they could not be held liable as neither of the two factors that would have rendered the solicitors constructive trustees was present.  There was not a scintilla of evidence that the solicitors knew or suspected any dishonest purpose.  Further, P never had any part of the trust fund in his possession at any time and there was nothing improper about the payments made by the sole trustee to D (who did not retain or use for his own benefit any part of that money) in respect of certain costs.

57.Lord Selborne’s statement of principle when put in its proper context was no more than that on the facts of the case before him, to be rendered liable as constructive trustees, the solicitors either had to have assisted with knowledge of the dishonest design (in which event they would be dishonestly assisting or participating in the fraudulent conduct of the trustee i.e. the second type of constructive trustee) or had to have taken possession of trust property when acting as solicitor to the trustee (i.e. the first type of constructive trustee).  Lord Selborne did not decide that, had the solicitors referred to in that judgment been the second type of constructive trustee, they would not have been able to rely on limitation as a defence.  When so analysed, Lord Selborne’s statement also did not provide support for interpreting the propositions of Lord Esher, Bowen LJ and Kay LJ in Soar v Ashwell identified in §§ 50 and 51 above as equating a dishonest assister, as opposed to a recipient or controller of trust property, with an express trustee for all purposes including limitation.  These older cases need to be read with Millett LJ’s remarks in Paragon Finance, alluded to in § 50 above, in mind.

58.In the light of the above, we do not agree with the judge’s conclusion that prior to the Trustee Act 1888, a dishonest assister to the first type of constructive trustee could not rely on limitation as a defence.  His conclusion at § 652 that section 8 of the 1888 Act did not apply to a knowing assister of a primary trustee in his dishonest and fraudulent design, premised as it was on the correctness of his analysis of the position prior to the 1888 Act, is also not sustainable for the same reason.

59.The judge also came to the conclusion that if section 8 of the 1888 Act did not cover the case of an accessory, the new and wider wording of section 19 of the 1939 Act (on which section 20 of the Limitation Ordinance was modelled) brought about a change and had the effect of extending the scope of the exception contained in subsection (1)(a).  Section 8 of the 1888 Act applied only to an action “against a trustee or any person claiming through him” whereas section 19 of the 1939 Act referred to and covered “an action by a beneficiary … in respect of any breach of trust … ”.

60.If (as is our view) a dishonest assister could rely on limitation prior to the 1939 Act, the reason for a change in policy is not apparent and has not been explained.  But underlying the judge’s reasoning was his view (at § 663), with which we disagree, that under the then law the limitation defence was not open to a dishonest assister.  Approaching the question from his standpoint, it is easy to see the attraction of giving the new section 19 a wide interpretation so as to rescue the dishonest assister from being “an abandoned child in the hands of equity”.

61.Turning to more recent case law, the plaintiff relied on Barlow Clowes International Ltd & Others v Eurotrust International Ltd & Others (1998/99) 2 OFLR 42 where the Court of Appeal of the Isle of Man (the Staff of Government Division of the High Court) had to consider provisions identical in terms to section 21 of the English Limitation Act 1980.  The second and third defendants conceded that the action was by a beneficiary against the defendants in respect of fraudulent breaches of trust to which they were a party.  The breaches of trust were by BCI and Mr Clowes in respect of investors’ funds held by BCI.  Although the court held that on the facts pleaded the trust arose before the occurrence of the transactions impeached, it also held (affirming the decision of the First Deemster) that, inter alia, the rule in Taylor v Davies [1920] AC 636 (namely, that limitation was a defence to an action against the second type of constructive trustee) had no application to a person who knowingly assists in a fraudulent breach of a pre-existing trust.

62.It would appear from the judgment of Tattersall JA (at p.65i) that the court came to the conclusion that it did on the basis that the defendants fell within the category of persons within the second situation postulated by Kay LJ in Soar v Ashwell and set out in § 51 above.  But, as already explained, the matter before Kay LJ did not involve any ‘knowing assistance’ on the part of the solicitor: rather, the solicitor in that case was liable on the basis that he was the first type of constructive trustee.  Tattersall JA also mentioned the passage in Viscount Cave’s judgment in Taylor v Davies (at 651) where reference was made to persons who, like ‘express trustees, were disabled from taking advantage of the time bar.’  Read in context, that was again a reference to the first type of constructive trustee.  In any event, Taylor v Davies also was not ‘knowing assistance’ case.  In our view, Barlow Clowes is of no assistance to the plaintiff.  It is to be noted that Millett LJ made a passing reference to this aspect of the Barlow Clowes decision in Paragon Finance but did not consider its correctness since it was of no relevance to his case, not being a ‘knowing assistance’ case.

63.Danny Lau himself was clearly the second type of constructive trustee and, contrary to the judge’s conclusion, such a constructive trustee had always been able to rely on limitation as a defence.  Whilst accepting Millett LJ’s categorisation of constructive trusts, the judge considered that Paragon Finance was not primarily concerned with the position of a dishonest assister.  That may be so but in his exposition of the second type of constructive trust, the language used (at 409e-f) was plainly apt to apply to a dishonest assister:

“

The second class of case is different.  It arises when the defendant is implicated in a fraud.  Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity.  In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be ‘liable to account as constructive trustee’.  Such a person is not in fact a trustee at all, even though he may be liable to account as if he were.  He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff.  In such a case the expressions ‘constructive trust’ and ‘constructive trustee’ are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are ‘nothing more than a formula for equitable relief’: Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 2 All ER 1073 at 1097, [1968] 1 WLR 1555 at 1582 per Ungoed-Thomas J.”

64.It is perhaps less explicable why the judge made no reference to the more recent House of Lords’ decision in Dubai Aluminium Co Ltd v Salaam and others [2003] 2 AC 366, which concerned a dishonest assister to a constructive trustee of the first category.  In that case, plaintiff claimed that its chief executive, in breach of his fiduciary duty and with the dishonest assistance of various individuals (the wrongdoers) had misappropriated its funds and that a solicitor Amhurst had been instructed to draw and did draw the agreements which were used to carry out the fraudulent scheme.  Amhurst and the two successive firms of solicitors of which he had been senior partner at the relevant time were joined as defendants.  Payment was made in settlement of the claim against the firms’ partners other than Amhurst and in release of the claim against Amhurst.  The question which arose was whether the firms were entitled to a full indemnity from the wrongdoers in respect of their payment to the plaintiff.  The wrongdoers argued that it was no part of the business of a solicitor to constitute himself a constructive trustee, relying on what was said by the members of the Court of Appeal in Mara v Browne [1896] 1 Ch 199.

65.In his speech, Lord Millett revisited the topic of constructive trusts that he had considered earlier in Paragon Finance.  Importantly, he stressed (at § 135) that every statement in a judgment must be understood in the context in which it was made, particularly if it employs expressions such as “constructive trust” or “constructive trustee”, because not only do they have more than one meaning, the meanings have also been used loosely over time.  In his analysis of the sense in which Lord Herschell and Rigby LJ were using that expression, Lord Millett re-iterated the distinction he had made in Paragon Finance “between a trust which arose before the occurrence of the transaction impugned and a claim which arose only by reason of that transaction.”  He then went on (at § 141) to say this:

“

141.

…Mr Amhurst did not assume the position of a trustee on behalf of others.  He never had title to the trust fund or claimed the right to deal with them on behalf of those properly entitled to them.  He acted throughout on his own or his confederates’ behalf.  The claim against him is simply that he participated in a fraud.  Equity gives relief against fraud by making any person sufficiently implicated in the fraud accountable in equity.  In such a case he is traditionally (and I have suggested unfortunately) described as a “constructive trustee” and is said to be “liable to account as a constructive trustee”.  But he is not in fact a trustee at all, even though he may be liable to account as if he were.  He never claims to assume the position of trustee on behalf of others, and he may be liable without ever receiving or handling the trust property.  If he receives the trust property at all he receives it adversely to the claimant and by an unlawful transaction which is impugned by the claimant.  He is not a fiduciary or subject to fiduciary obligations; and he could plead the Limitation Acts as a defence to the claim.”

66.This was a clear statement that a dishonest assister to a fraud practised by persons including the first type of constructive trustee (which the chief executive of the plaintiff plainly was) could rely on limitation as defence.  Mr Scott SC who appeared for the plaintiff sought to distinguish Dubai on the basis that Dubai was not a case about the limitation of actions, that the passage from Lord Millett’s speech quoted above was “unconsidered obiter”, and finally that Barlow Clowes had not been cited.  For the reasons already stated, Barlow Clowes is of no assistance to the plaintiff and in our view citing the case would not have made the slightest difference.  While limitation itself did not arise in Dubai, Lord Millett there was plainly addressing the availability or otherwise of limitation as a defence to the second type of constructive trustee and stating his considered view.  He had Paragon Finance well in mind given the relevance and importance of the distinction between the two entirely different situations covered by the expression “constructive trust” and “constructive trustee”, a distinction he had drawn in Paragon Finance (a case that did concern limitation) and which he reaffirmed in Dubai.  There is no doubt that in the circumstances Lord Millett certainly did not overlook such cases as Soar vAshwell.

67.For completeness, mention also should be made of Cattley v Pollard [2007] 2 All ER 1086, a case directly in point where it was held that a dishonest assister to the first type of constructive trustee could rely on limitation as a defence.  That approach would appear to be a principled approach since to be made liable, the dishonest assister had to have been guilty of dishonesty.  His liability was not dependent on whether the trustee in breach was the first type or the second type of constructive trustee.  We can discern no valid reason to render the availability of a limitation defence dependant on the type of constructive trusteeship of the trustee to whom assistance was rendered.

68.In conclusion, we are of the view that a dishonest assister to the first type of constructive trustee may rely upon limitation as a defence.

Postponement of the limitation period?

69.The next question in this case is whether the plaintiff can rely upon the provisions of the Limitation Ordinance to postpone the commencement of the running of the period of limitation.  There was no serious dispute in this case that if the limitation period under section 4 of the Ordinance applied in respect of an action against Danny Lau, the provisions of section 26(1) and (3) apply to the effect that the period of limitation would not begin to run until “the plaintiff had discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.”

70.It is not in dispute that Peconic and those in control at Peconic were not aware of Chio’s fraud and Danny Lau’s involvement in it until a time well within six years of the commencement of the second action.  Hence the issue in the case was whether Peconic and those in control of Peconic at the relevant times could, with reasonable diligence, have discovered Chio’s fraud and Danny Lau’s involvement.

71.As already noted, the judge below relied heavily on the plaintiff’s closing submissions, partly, no doubt, because the judge had already held that the limitation periods in the Ordinance were not applicable to Danny Lau and, hence, the question of the deferment of the limitation period was not relevant.  It is not an unfair characterisation of the plaintiff’s closing submissions to say that they focused on the route by which the plaintiff did in fact become aware of Chio’s fraud and subsequently Danny Lau’s involvement.  Although reference is made, for example, to a search, which was not made, at the Companies Registry what would have been revealed by that was not considered in any detail.

72.The judge cited from Millett LJ’s judgment in the Paragon Finance case, namely the sentence quoted above.  We would prefer to approach it on the basis of the whole passage not merely one sentence.  The case involved a mortgage fraud.  The judge had held that the plaintiffs in that case had reason to suspect the bona fides, if not also the existence, of the borrowers.  Instead of following those matters up the plaintiffs concentrated on bringing proceedings for possession.  They had some enquiries made but were not forthcoming as to what the results of those were.  The judgment continued (at pp.417j - 418d):

“	The first plaintiffs have deposed that while they may have been alerted much earlier to the fraudulent nature of the mortgage applications, they did not in fact discover that the defendants were implicated in the fraud until they obtained the completion documents in the course of discovery in the action.  These showed that while the whole of the mortgage advance was paid to or to the direction of the sub-vendor, the balance of the purchase price ostensibly payable by the borrower was never received by the defendants from their clients as one would normally expect.  This suggests that they were either aware that it was not paid at all or dishonestly shut their eyes to the possibility that this was the case.  The question is whether the first plaintiffs could not with reasonable diligence have discovered these facts much earlier.
	The second plaintiffs have filed no evidence on this question at all.  It is difficult to see how they can have discharged the burden of showing that they come within the section.
	The first plaintiffs submit that they acted reasonably throughout.  They cannot be criticised for their decision to concentrate on the repossession actions in the first instance, nor for their delay in instructing their present solicitors until October 1991.  There was no need for urgency; they had almost six years in which to bring proceedings.
	In my judgment this reasoning is misconceived.  The question is not whether the plaintiffs should have discovered the fraud sooner; but whether they could with reasonable diligence have done so.  The burden of proof is on them.  They must establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take.  In this context the length of the applicable period of limitation is irrelevant.  In the course of argument May LJ observed that reasonable diligence must be measured against some standard, but that the six-year limitation period did not provide the relevant standard.  He suggested that the test was how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency.  I respectfully agree.”

73.When considered in its full context, one can see that Millett LJ viewed the matter as one where the party seeking to establish that it could not with reasonable diligence have discovered the relevant matters had the onus of proving that in the circumstances which then existed.  He approached the matter on the basis that although the plaintiffs might have had their own reasons for not being more assiduous, the real question was could they, reasonably, have done more.  What is possible and reasonable for one party and in some circumstances may not be possible or reasonable for another in other circumstances and vice versa.

74.In the present case Peconic was a special purpose investment company directed to one project only.  It was set up by a bank that was capable of investing $500 million at very short notice.  In other words there is no cause to consider there was any difficulty in finding finance for any investigation.  By 1993 it was well aware that it had paid 2½ times as much for the same land than Asiagreat had paid simultaneously.  Not only that, but the land was undevelopable and could not even be used as a golf course.  No estimate was proved as to what the value of that land was at that time in that condition but it can only be supposed that it was unlikely to have had any value in excess of what Asiagreat had paid for it.  The Bank had seemingly lost at least $300 million, if not more, even supposing it could find a buyer for the land, which given its nature would have been problematic to say the least.  Hence it would be reasonable to expect a company of this nature, with substantial resources at its disposal, to make every effort to recover what on any reckoning would have been a considerable sum for any bank to lose.

75.It is in those circumstances that one looks to see what in fact Peconic and the Bank did.  Mr Huang was sent down to Hong Kong to sort the matter out.  The matter was left entirely to him.  As § 17 of his statement which is referred to above makes clear, he simply accepted the position put forward by Chen and Chio that it had been necessary to pay the price that Peconic did.  Mr Huang himself says that he did not consider that the price paid was reasonable.  He did not consider that the method of payment used, presumably the use of Asiagreat as an intermediary, was reasonable.  Yet he did nothing.

76.There were things that could have been done.  The first matter that was obvious would have been to make enquiries as to what Asiagreat was and who the people behind it were.  That would not have been difficult.  A half-hour visit to the Companies Registry would have revealed that the third, fourth and fifth defendant’s were the company secretary and the two directors respectively.  It would have revealed that the company had indeed been set up by Danny Lau’s firm.  The fact that the addresses for the secretary and one of the directors of the company was a room on the first floor of a building in Tung Chau Street, Shamshuipo would hardly inspire confidence that it was a company capable of financing the purchase of the property.

77.It is no answer for the plaintiff to say that it would have required close examination of the conveyancing documents to find that Elsie Chan’s name appeared on some of the receipts.  Peconic was in the position of having lost a great deal of money.  The Bank was a bank of substance.  Reasonable efforts would have clearly included a careful examination of all the conveyancing documents.  An examination of the documents would have revealed that various receipts issued by the second defendant in the second action to JSM gave the ledger name Elsie Chan.  This could and should have raised a query at the time and certainly later when the conveyancing files should have been scrutinized.  Thorough investigation of Chen, Chio and Asiagreat was clearly called for.  Before the purchase Chio had told the Bank that there were Taiwanese buyers, but the Bank seemingly accepted that the buyers were no longer interested without so much as a careful investigation of the matter with Chio and Chen. 

78.It is inconceivable that a bank, having seemingly lost as much on a transaction as it had within a short time of paying out $500 million, would not even have taken the rudimentary steps of obtaining copies of the documents filed at the Companies Registry and scrutinising the conveyancing documents thoroughly with a view to discovering who it had been dealing with.  Since Elsie Chan’s connection with Chio was well known to the Bank the whole matter of Chio’s fraud might have been unravelled very quickly.  That is even without the employment of an investigator to discover the identities of the fourth defendant, with her unprepossessing address, and the fifth defendant with her address which would have revealed the office address in Jubilee Commercial Building in Fenwick Street, Wanchai.  That in itself would no doubt have led to Elsie Chan.  Once that happened Danny Lau’s connection with the transactions including his role in relation to the setting up of Asiagreat and his drafting of the relevant documents and given the bank’s knowledge of the connection between Elsie Chan and Chio sufficient elements of dishonest assistance on the part of Danny Lau would have become known to the plaintiff.

79.It is clearly correct that the obvious steps that Peconic and the Bank should have taken, had they used reasonable diligence, would not necessarily have immediately revealed everything that is referred to in the judgment as being assistance on the part of Danny Lau.  Nevertheless, sufficient facts would have become known to Peconic and the Bank that would have required an explanation from Danny Lau.  In the absence of the plaintiffs having taken those rudimentary steps, whether through Mr Huang or otherwise, that would have constituted reasonable diligence, it is impossible to discount that a great deal more would have been revealed at a very early stage.

80.In short nothing was done and the plaintiff has come nowhere near showing that it could not with reasonable diligence have discovered the fraud and the matters complained of.

Vicarious Liability

81.At § 467 the judge recorded that there was by the close of the case no further argument regarding the vicarious liability of the two solicitors firms for Danny Lau’s primary liability.  By its notice of appeal, the second defendant in the second action sought to raise the question of vicarious liability.  The way that it was put in argument by Mr Lee SC was that if Danny Lau had been fraudulent it could not be said that his acts fell within section 12 of the Partnership Ordinance Cap. 38, which provides that a firm would be liable for any wrongful act or omission of any partner acting in the ordinary course of the business of that firm.  It was said that if and in so far as Danny Lau had acted as a knowing assister to a fraudulent breach of trust, that was so far outside the ordinary course of business of the firm that the firm should not be liable.

82.There is, of course, a certain practical attraction to such argument.  Nevertheless, Mr Scott SC, on behalf of the plaintiff, argued first of all that the point should not be open to the second defendant in view of the course taken in the court below which had led to the judge not making any necessary findings in relation to that argument.  In the second place, it was pointed out that simply because a solicitor might be guilty of deliberate and dishonest conduct did not necessarily mean he is not acting in the ordinary course of the business of the firm.  In drawing the various agreements and conducting the transaction on behalf of Asiagreat, Danny Lau was acting as a solicitor and charging the usual fees of a solicitor which no doubt went into the profit costs of the firm.  Reference in this case was made to what was said by Lord Nicholls at § 39 in the Dubai case and Lord Millett at § 112 and § 143 of the same case.  In the event the argument was not pursued to any great extent and the matter was left open so that the second defendant might seek to take it if this matter went further.

The appeal by the fourth defendant in the first action

83.The fourth defendant sought to challenge the judge’s findings of dishonest assistance in Chio’s obtaining secret profits.  It was said that there was no evidence as to her knowledge that Chio was obtaining such profits or commissions and that the judge was wrong to hold that the fourth defendant had been secretive in the way in which money had been handled by the fourth defendant.  It was said that in view of the judge’s holding at § 312, that he was not prepared to go so far as to conclude that the fourth defendant was co-conspirator with Chio and Elsie Chan, that, in itself, pointed to the fact that there was an absence of proof of her knowledge.

84.Quite simply, the receipt of $81.8 million from the second defendant in the second action and the payment out of nearly the whole of that sum to Chio some three days later in October 1991 called for a clear explanation from the fourth defendant.  Likewise the receipt by the fourth defendant of $10.5 million from Chio, which was paid into a joint bank account of the fourth defendant and her common-law husband in June 1992, again called for explanation.  In the absence of any credible explanation by the fourth defendant the only inference which the court could draw was that the fourth defendant must at the very least have suspected that Chio’s receipt of all but the minimal portion of the $81.8 million paid out of the bank account but recently opened in the fourth defendant’s name must have been illegal.  Moreover the receipt by the fourth defendant herself in conjunction with her common-law husband of the $10.5 million from Chio was only sought to be explained at the trial without any previous notice.  The fourth defendant’s defence had merely denied the receipt.  As the judge explained in § 295-6, the fourth defendant’s explanations did not hold water.  More than that, the judge was clearly entitled to reject the fourth defendant’s evidence given the fact that crucial parts of it were contradicted by the statement that the fourth defendant had made to the ICAC.  In our view there are no grounds on this case for disturbing the judge’s finding of fact that the fourth defendant knew that she was helping Chio to receive and channel money to himself that did not belong to him and that he had no right to receive or keep.

85.When asked by the court as to the fourth defendant’s position on the issue of limitation, counsel for the fourth defendant explained that the point had not been taken below because the proceedings against the fourth defendant had been issued in 1999 which appeared to be within the six-year period.  As the judge did not make any finding as to the exact time when Peconic acquired the requisite knowledge for the commencement of the running of the limitation period, neither the fourth defendant’s notice of appeal nor her skeleton submission made any reference to limitation as a defence.  When pressed by one member of the court, Ms Wong added that if the commencement of the running of the limitation period were to be in 1991 or 1992, she would seek to take the limitation point on behalf of her client and adopt the arguments of the defendants in the second action.  Ms Wong did not address this court at all on the issue of limitation and made no attempt to identify the all important point from the fourth defendant’s perspective as to when the six-year period would have commenced.  In our view, if the fourth defendant seriously meant to take the limitation point, the court should have been addressed on those matters.

Conclusion

86.We would set aside the judgment in the second action below and allow the appeals in CACV 245 and 248 of 2006.  We would propose that there be an order nisi of costs here and below in favour of Danny Lau and the two firms of solicitors.

87.We would dismiss the appeal in CACV 247 of 2006 and propose that there be an order nisi of costs in favour of Peconic.

Hon Stone J:

The background

88.I have had the advantage of reading in draft the joint judgment of Rogers VP and Le Pichon JA, and I gratefully adopt the detailed account of the primary facts as set out therein.

89.There is no doubt – indeed there is no contention to the contrary – but that Asiagreat was the vehicle specifically set up by Chio and his cohorts in order to extract very significant sums of money from Peconic by means of the purchase by that joint venture, at vastly exaggerated prices, of the various agricultural lots which had been cheaply acquired by Asiagreat, such purchase monies thereafter being channelled out of Asiagreat and dissipated into various accounts controlled by Chio and those dishonestly assisting him.

90.In his lengthy and highly detailed judgment, the learned judge in the court below has attached to that judgment appendices illustrative of the consequential flow of money out of Asiagreat as the result of a successful fraud ultimately perpetrated upon the Agricultural Bank of China, which had provided the funds to make the purchases in question in the anticipation, illusory as it turned out, of turning a very substantial profit by way either of resale or redevelopment of the properties in question.

91.As my lord and lady have outlined in their judgment, this fact situation duly stimulated two actions: the first in time being HCA 16255 of 1999, wherein Peconic, which was a joint venture between the bank and Chio established solely for this project, and Star Glory, the bank’s investment arm in Hong Kong, sued six individual defendants whom it had identified as being involved in the fraud which by that stage it had divined had been perpetrated upon it.

92.Of these individual defendants thus sued, the architect of the scheme, the ‘chief fraudster’ for want of a better term, Chio Hong Cheong (aka Chan Kai Kit), the 1^st defendant, and Chen Jun-Yi, the 6^th defendant and former general manager of the Foshan Sub-branch of the Agricultural Bank, have fled, as also had the 3^rd defendant, Wong Hing Hang, who had worked as the assistant of the 4^th defendant, Elsie Chan Yik-Sze, a lady whom hitherto had enjoyed some prominence as a local artiste.

93.The second action, HCA 3083 of 2002, is a suit by Peconic against the solicitor at the heart of this scheme, Mr Lau Kwok Fai, who throughout has been referred to as ‘Danny Lau’, and the two firms of solicitors in which Mr Lau had been a partner at the time of the sale and purchase transactions of the various agricultural lots; in such capacity Mr Lau had been responsible, inter alia, for establishing Asiagreat and for conducting the conveyancing transactions of the various relatively worthless parcels of land which had been sold to Asiagreat with the assistance/influence of one Poon Kam (an elderly relative by marriage of Danny Lau), and thereafter, at wildly exorbitant prices, on to Peconic.

94.After a trial lasting some 39 days, wherein the two actions were heard together, the learned trial judge, Mr Justice A Cheung, in an exhaustive judgment of 235 pages (plus appendices) and 742 paragraphs, found in favour of Peconic in the two actions.

95.In the first action, HCA 16255 of 1999, the learned judge ordered that judgment be entered for Peconic against the 2^nd defendant, Elsie Chan, in the sum of HK$350,534,416, against the 4^th defendant, Leung Hiu Ling (the common law wife of Chio’s brother) in the sum of HK$92,307,341.70, and against Wong Shiu-wai, the 5^th defendant, in the sum of HK$27,800,000.

96.In the second action, HCA 3083 of 2002, judgment was entered against Danny Lau, the dishonest solicitor at the heart of the fraudulent scheme to defraud the Bank, in the sum of HK$350,534.416.

97.The learned judge also entered judgment for Peconic, in terms of anticipated agreement between the parties upon the relevant figures, against the two firms of which Danny Lau had been a partner, Messrs Albert KK Luk & Co, and KF Lau & Co, which I understand is the firm Danny Lau set up in his own name after leaving Albert KK Luk & Co.

The scope of the appeals

98.Not all parties involved in these actions have appealed:  the appellants fall into three groups, the latter two running essentially similar arguments in terms of limitation.

99.    Civil Appeal No 247 of 2006 is the only appeal against the judgment in the first action, HCA 16255 of 1999, and that is moved on behalf of the 4^th defendant therein, Madam Leung Hiu Ling.

100.In terms of the Notice of Appeal this is a discrete appeal as to fact, albeit after specific query by the court, counsel for Madam Leung, Ms Catherine Wong, indicated that, in so far as may be necessary, she would wish to adopt the arguments as to limitation as pursued in the other two appeals.

101.    Civil Appeal No 245 of 2006 is the appeal by Albert KK Luk & Co against the judgment entered against that firm in HCA 3083 of 2002, and Civil Appeal 248 of 2006 is the appeal by the 1^st and 3^rd defendants in that action, namely Danny Lau, the solicitor, and the firm that bears his name, KF Lau & Co.

102.The common theme in these latter two appeals is that of the applicability of the statutory provisions as to limitation in terms of dishonest assistance and the concept of concealed fraud, although Mr Martin Lee SC, who appears on behalf of Albert KK Luk & Co, also seeks to mount a subsidiary argument based upon the vicarious liability of his client for the defalcations of that firm’s erstwhile partner, Danny Lau.

103.I deal in turn with each appeal.

Civil Appeal No 247 of 2006

104.In his judgment the learned trial judge considered at some length the factual case against the 4^th individual defendant, Madam Leung Hiu Ling (at paragraphs 264 to 313).

105.He carefully reviewed the basic facts as they had been led against her, noting that Madam Leung was one of the first directors of Asiagreat, that she had become a shareholder of Asiagreat as nominee for Elsie Chan, and that she had been directly involved in the transfer of proceeds of sale from Asiagreat to Chio, in particular on 18 October 1991 receiving into her newly opened OTB account the sum of HK$81.8 million from the client account of Arthur KK Luk & Co, from which three days later she had transferred the sum of $81.265 million to Chio’s account, with the balance of slightly over $0.5 million going into the account of herself and her common law husband.

106.In the event the learned judge did not believe Madam Leung’s explanation of the innocent manner in which she claimed she had been caught up in this state of affairs, namely that she had been asked by Elsie Chan, a celebrity, to assist and to become a nominee director on her behalf, and that she had made few if any inquiries about what was happening, although she was aware that Chio was involved in the buying and selling of properties in what then was a ‘hot’ property market; she has also been told, she said, that Danny Lau had asked her to act in accordance with Elsie Chan’s instructions, and also had asked her to open the OTB account in her sole name.

107.She also said in evidence that she could not recall who had asked her to transfer over HK$81 million from that account to Chio, a name that she said she did not recognize.

108.Her explanation was that the sum of $0.5 million had been used on her office refurbishment, and that as regards the sum of HK$10.5 million which had also gone through her joint account with her common law husband, this was said to be money belonging to a Thai friend, He Ah Dee.

109.It appears that after she had completed her evidence, an ICAC statement had come to light, which recorded an interview with Madam Leung by an ICAC officer who had visited her home in the early morning of 10 September 1998, a visit that had involved an unrelated fraud case involving letters of credit.

110.In light of the content of this statement, Madam Leung was recalled to the witness box to give further evidence (judgment, paragraph 284), in particular her admission in this statement that she recalled that Chan Kai Kit (Chio) had asked her to go to a solicitor’s firm to sign some documents in order to facilitate the transfer of commission on land sales to him in the order of HK$80 million.  Chan Kai Kit, she had said in the ICAC statement, was one of her ‘own’, given that her husband was his elder brother.

111.Cross-examined about the discrepancies between the earlier ICAC statement and her evidence at trial, Madam Leung continued her denial that she knew she was transferring over $81 million to Chan Kai Kit, or that she was aware that this gentleman also was known as Chio Ho Cheong, the named transferee; she had said that her answers to the ICAC officer was when she had been taken by surprise and were not accurate.

112.Perhaps unsurprisingly in light of the content of her earlier version of events, the learned judge was unconvinced, observing (at paragraph 286) that he did not believe that “Leung was as innocent or ignorant as she portrayed herself to be in the box”, and further noting (at paragraph 287) that whilst her initial evidence in the box “had looked plausible until the ICAC statement surfaced”, he now concluded that what she had earlier told the ICAC officer was nearer the truth than her version as given to the court at trial.  The judge observed that “quite clearly, she knew where the money was coming from and where it was going to”, and that despite her vigorous denial in the witness box, he did not believe her evidence “that Chio Ho Cheong was in fact Chan Kai Kit” (at paragraph 289) and that such denial could not stand with what she had said in her ICAC statement, nor could her assertion that she had thought that Asiagreat was Elsie Chan’s business be reconciled with the content of the ICAC statement.

113.Accordingly, the learned judge took the view (at paragraph 290) – it seems to me with ample justification – that not only did Madam Leung know that Chio was earning a huge commission out of the land transaction involving Asiagreat, of which she was a nominee director and shareholder, but also that her claim to have a better recollection at trial than she had had some seven years earlier was risible.  He also noted (at paragraph 294) that the reference the Thai friend, He Ah Dee, had emerged in evidence with no prior warning, having never been mentioned either in the witness statement or in the defence.

114.Thus, the judge concluded (at paragraph 297) that he could not believe this lady’s evidence, and after warning himself (at paragraph 301) of the standard of proof required in terms of such serious allegations, and having carefully borne in mind Madam Leung’s demeanour – together with declining to give any weight to the prejudice of a conviction in an unrelated fraud – he specifically found (at paragraph 309) that Madam Leung had sufficient knowledge of the transaction to constitute, on an objective test, a dishonest state of mind, and, at the lowest, he concluded that she had demonstrated ‘blind eye dishonesty’, and that her liability in terms of dishonest assistance in relation to the sums of HK$81 million and $10.5 million was established.

115.The judge rejected the claim against Madam Leung in terms of the conspiracy allegation (at paragraph 312), but, consistent with his earlier findings, and in so far as was necessary, he further concluded on the evidence that Madam Leung was guilty of dishonest receipt of the sums in question.

116.When faced with the detailed and reasoned findings of the ‘seeing and hearing’ judge at trial, the task of Ms Catherine Wong, appearing on this appeal for Madam Leung, could be considered to be fraught with difficulty, given that the primary (and apparently sole) basis of her appeal on behalf of her client was that the learned judge had erred in his evaluation of the evidence.

117.The outline of Ms Wong’s argument, which if I may say so she propounded with spirit and determination, was that there was a lack of evidence before the court to merit the conclusion that Madam Leung had had the knowledge or suspicion that Chio was earning a secret commission out of the transaction, second, that the judge had placed “excessive reliance” upon the ICAC statement, and third, upon the entirety of the evidence, that he had failed to justify the finding of knowledge or suspicion on the part of her client relating to Chio’s nefarious activities.

118.Despite the enthusiasm with which Ms Wong invested her task, which broadly involved the approach of painting her client with the brush of a naïf abroad who innocently had been taken in by Elsie Chan and Danny Lau, and simply had acted as instructed in a spirit of goodwill and familial kinship, I regret that I was wholly unpersuaded by her submissions.

119.The conclusions of learned judge below, who had had the opportunity of observing Madam Leung in the witness box, and who carefully described and evaluated the evidence marshalled against her, cannot be criticized in terms of the case against Madam Leung.

120.In this regard, therefore, I entirely agree with the view of the Vice President and Le Pichon JA (at paragraph 80 herein) that there are no grounds for disturbing the judge’s findings of fact that the 4^th defendant knew that she was helping Chio to receive and channel monies to himself that did not belong to him and that he had no right to receive or keep.

121.However, this conclusion in itself is not fully dispositive of this appeal; as earlier noted, although there had been no reference to a limitation argument within the Notice of Appeal or in counsel’s skeleton argument, upon being pressed during her submission, Miss Wong indicated to the court that in so far as may be necessary she would adopt the ‘limitation arguments’ which formed the focus of the other appeals before the court.

122.Accordingly, it is to these appeals, and to these particular arguments, to which I now turn.

Civil Appeal No 245 and Civil Appeal No 248 of 2006

123.The two camps in these appeals are united in their view that the trial judge was in error in his treatment of the limitation position.

124.For the appellant in Civil Appeal No 245, namely Albert KK Luk & Co – the 2^nd defendant in HCA No 3083 of 2002, and the firm of solicitors with which Danny Lau was a partner for the greater part of the material period under scrutiny in this case – Mr Martin Lee SC maintains that the learned judge below was in error in holding that the claim of dishonest assistance against the 1^st defendant in that action, Danny Lau, was subject to no limitation period, and that if this submission was held to be correct, and assuming that the 6 year limitation period is applicable to the defalcations of Mr Lau, the issue became whether Peconic could have taken advantage of the provisions of section 26(1) of the Limitation Ordinance, Cap 347, by contending that it could not, with reasonable diligence, have discovered the fraud/breach of fiduciary duty prior to 12 August 1996, when the action otherwise would have become time-barred.

125.To this latter question Mr Lee SC firmly maintains that, on the evidence before the court, Peconic cannot discharge the burden which the statute places upon it, and thus the result of the case should have been that the action against his client – the liability of which is derivative from the actions of its partner, Danny Lau – must fail.

126.For the appellants in Civil Appeal No 248 of 2006, namely Danny Lau individually and his firm KF Lau & Co – the 1^st and 3^rd defendants respectively in HCA No 3083 of 2002 – Mr Jin Pao echoes the like argument solely in terms of limitation; he mounts no other argument on behalf of his clients.

127.In addition, there is one further submission which requires to be considered, and which is discrete to Mr Lee’s case.  He maintains that, irrespective of the limitation position, his client Arthur KK Luk & Co ought not to have been found to be vicariously liable for the nefarious activities of Danny Lau.

(i) The limitation argument: the status of Danny Lau

128.In the court below the learned judge extensively rehearsed the involvement of Danny Lau in this fraudulent scheme and (at paragraph 445), he stated that he had “no difficulty in concluding” that in the circumstances as found by him that Mr Lau was dishonest.

129.In terms of the limitation position – extensively analysed by the learned judge (at paragraph 569 et seq) Cheung J considered the application of section 20 of the Limitation Ordinance, and noted in particular (at paragraph 579) the exceptions to the standard 6 year period contained within section 20(1)(a) and (b), so that in such instances – the fraudulent breach of trust to which a trustee was party or privy, and the recovery from the trustee of the trust property in the trustee’s possession or converted to his use – that no limitation period was applicable.

130.He then proceeded to consider with great care (at paragraphs 587 et seq) the position of Chio and Danny Lau, and whether these persons could be considered as ‘constructive trustees’, and whether in the circumstances Peconic could be considered as making a claim as a ‘beneficiary’ to recover trust property “in respect of a breach of a trust”, having earlier noted that section 2(1) of the Limitation Ordinance stipulates that the expressions ‘trust’ and ‘trustee’ extend to an “implied and constructive trust”.

131.After rehearsing the contrary arguments of counsel, and after making specific reference to the two classes of constructive trust outlined by Millett LJ (as he then was) in Paragon Finance v DB Thakerar [1999] 1 All ER 400, at 408-414, and noting the importance of the distinction between these two classes in terms of the application of limitation periods, the learned judge arrived at the further conclusion (at paragraph 606 et seq) that the fraudster, Chio, was a constructive trustee of the ‘first category’, to adopt the characterization of Millett LJ.

132.Having reached this primary conclusion as to the legal classification to be accorded to Chio, Cheung J proceeded to consider (at paragraphs 625 et seq) the position of the ‘dishonest assister’, Danny Lau, and in particular whether, “on the analysis of the distinction between the two classes of constructive trust by Millett LJ in Paragon Finance”, Lau was to be characterized as a constructive trustee of the first or second category.

133.In this once again he was confronted by diametrically opposing contentions of counsel, Mr Shieh SC, appearing below for Danny Lau and his firm, arguing that Lau was “a typical constructive trustee of the second category” (and in the context of such argument praying in aid the academic views of Dr Charles Mitchell and Mr William Swadling in the 2002 edition of Birks and Pretto on ‘Breach of Trust’), and as such fell outwith the provisions of section 20 of the Limitation Ordinance.

134.To the contrary, Mr Scott SC for Peconic founded his argument on the basis of dicta in Soar v Ashwell [1893] 2 QB 390 – in particular the views of Lord Esher (op cit, at 394-395) to the effect that where a person knowing assisted a nominated trustee in a fraudulent and dishonest disposition of trust property “such a person will be treated by a Court of Equity as if he were an express trustee of an express trust, of Bowen LJ (at 396), who observed that “the rule as to limitations of time which has been laid down in reference to express trusts has also been thought appropriate to cases where a stranger participates in the fraud of the trustee: Barnes v Addy”, and of Kay LJ (at 405), who stated that the stranger to the trust who has “concurred with the trustee in committing a breach of trust cannot set up the Statute of Limitations as a defence”.

135.In his submission on the point Mr Scott SC also had relied on a passage in Lewin on Trusts (at paras 44-44 to 44-45), whose conclusion was that “accessories fall outside the category of constructive trustee who is always entitled to raise a defence of limitation notwithstanding section 21(1)(a) of the English 1980 Limitation Act” and that the consequence is “probably that the accessory remains always unable to plead a defence of limitation, since his dishonesty will suffice to bring him within section 21(1)(a)…”

136.In his judgment Cheung J went on to note that the “key to resolving the issue is to remember that Paragon Finance…was not a case on dishonest assistance or the limitation position of a dishonest assister”, and took the view (at paragraph 644 et seq) that the matter could be resolved as a question of statutory construction of the legislative history, namely section 8 of the 1888 Act, wherein he decided (at paragraph 652) that section 8 did not cover the case against an accessory, because “such a case was well taken care of by the Courts of Equity, which would not allow a limitation defence to stop a claim against a knowing assister of a primary trustee in his dishonest and fraudulent design: Soar v Ashwell, supra”.

137.As to Mr Scott’s alternative argument resting upon a wide construction of the term ‘in respect of’ in section 19 of the 1939 Limitation Act, which had replaced section 8 of the 1888 Act (and upon which section 20 of our Ordinance is modelled), the learned judge took the view that Peconic’s argument was that its action against Danny Lau indeed was an action “in respect of” of the fraud or fraudulent breach of trust committed by Chio as a ‘first category’ constructive trustee, and thus that the present claim fell within exception (a) in section 20(1)(a), and that on this basis also no limitation period was applicable, an argument which the judge noted also had the specific support of Dr Charles Mitchell in Birks and Pretto, op cit at 210.

138.The judge also considered (at paragraph 665) that a wide construction of the words “in respect of” would achieve the ‘principled system of limitation’ to which Millett LJ had referred in Paragon Finance, and concluded (at paragraph 668) that from the viewpoint of limitation, he did not see:

“

… why it is unjust, unfair or illogical to deny an accessory any limitation defence in the situation where, and only where, not only he himself was dishonest, but the primary trustee was also fraudulent…in such a case, the primary trustee…would not have any defence either.  On the other hand, if the primary trustee was not fraudulent, the dishonest assister’s liability to the victim will be subject to a limitation period, just like the position of the primary trustee.”

139.Accordingly, Cheung J arrived at the view (at paragraph 680) that a claim against a dishonest assister for equitable compensation falls within section 20 of the Ordinance by reason of the phrase “in respect of”, with the result that if the primary trustee was not fraudulent, a limitation period of 6 years would be applicable: section 20(2), but that if the primary trustee was fraudulent, no limitation period is applicable: section 20(1)(a).

140.Moreover, said the judge, if he was wrong in terms of the argument which depended upon a liberal construction of the term “in respect of”, section 20 would not be engaged at all: “in that case, there is no limitation period directly applicable under the Ordinance to a claim against the dishonest assister…” (paragraph 681).

141.Thus, to return to the instant facts, the learned judge found (at paragraph 683) that on the evidence “Danny Lau as a dishonest assister in Chio’s fraudulent and dishonest breach of fiduciary duty as a director (and thus breach of constructive trust of the first category) does not have any limitation defence to Peconic’s claim against him”, and accordingly that any reliance upon the limitation defence must fail.

142.I have endeavoured to summarise the main planks of the learned judge’s reasoning regarding the absence of any limitation defence to be afforded to Danny Lau not only to recognize the scholarship therein, but because, with respect to the detailed reasoning of the learned judge, I find myself unable to agree with his conclusion that no such limitation defence prima facie is available to Danny Lau.

143.In my view, the issue of whether the assister of a dishonest primary trustee can seek to avail himself of a limitation defence does not, and as a matter of principle should not, depend upon whether the trustee has, or has not, acted fraudulently in the breach of trust of which complaint is made and in respect of which suit is brought – which appears to be the inevitable consequence of the learned judge’s analysis.

144.In other words, in my opinion the benchmark for the invocation of the statutory defence of limitation does not depend upon the classification reached as to the fraudulent (or innocent) behaviour of the primary trustee.

145.At this juncture I confess that I have found myself reflecting upon whether on the facts of this case Chio is in any event correctly to be classified as a primary trustee, since it strikes me that it is odd, to say the least, to characterise Chio, whose fraud/ fraudulent representations were the very genesis of the transactions at issue, including the formation of the Peconic joint venture, his subsequent status as a director, and his stimulation of the purchase of the fishponds at the hugely inflated cost to Peconic (and hence the bank), as a ‘trustee’ in the true sense for the purpose of considering the application of the limitation provisions.

146.This, I apprehend, was the thrust of the additional argument made by Mr Lee SC at the supplemental hearing called in this appeal, who submitted that it is “unreal and artificial” to say that Chio was a trustee of Peconic’s property which “includes all the money applied for the purchase of the land”, given Chio’s position in planning the fraud on the bank “which was commenced even before Peconic became a relevant entity.”

147.Thus, opined Mr Lee, the true factual analysis is that money was furnished by the Bank to Asiagreat (via Star Glory, using Peconic as the purchasing vehicle) by virtue of an unlawful transaction, namely the fraud of Chio, which was impeached by Peconic in this claim, and thus that “the so-called trust relationship between Chio and Peconic arose as a result of (and subsequent to) the unlawful transaction, not prior to it (nor did the trust relationship provide the opportunity for the unlawful transaction).” 

148.Thus, leading counsel concluded, this placed Chio squarely into the second category of constructive trustees, the ‘secret profit’ obtained by Chio having been received not by Chio on behalf of Peconic but “as a fraudster for his own benefit”, which rendered Chio a second category constructive trustee, and it followed, therefore, that section 20(1)(a) of the Limitation Ordinance did not apply to a claim against Chio, and, by extension, against his clients, the firm of solicitors which was 2^nd defendant in HCA 3083 of 2002.

149.For my own part, in the particular circumstances of this case I have been tempted to accept this analysis, although ultimately this particular debate is arid given my further view that, even if this view is held to be wrong, and if Chio is to be arrogated the status of a ‘first category’ constructive trustee, this fact in itself is not to be considered determinative of the status to be accorded to Danny Lau.

150.To the contrary, I respectfully differ from the view of the learned judge below, and have formed the firm view that Mr Lau is to be considered as a ‘second category’ constructive trustee.

151.In this regard I have read and agree with the careful historical analysis in the judgment of Rogers VP and Le Pichon JA, together with their reference to the recent cases of Dubai Aluminium, op cit. (which appears to have been overlooked by the learned judge below), and to the very recent case of Cattley v Pollard, op cit, and agree with their conclusion (at paragraph 65, supra), to the effect that the dishonest assister to the first type of constructive trustee may rely upon limitation as a defence.

152.To this analysis, and to the approach of the modern cases in this area – in which context it cannot be doubted but that the views of Lord Millett in Paragon Finance and Dubai Aluminium provides the genesis of the modern reclassification of constructive trusts – I would seek to add only that it did not strike me that Soar v Ashwell, op cit., which purportedly constituted the bedrock of Mr Scott’s argument, provided the strength of support for his position that he suggested: Soar v Ashwell, wherein the receipt of monies by a solicitor was from a lawful transaction, was not a dishonest assistance case but a ‘category one’ case, the actual ratio of the case being that Mr Ashwell was in a pre-existing fiduciary relationship to the trustees, and hence no limitation period was applicable.

153.It must follow also that such observations as were made in Soar v Ashwell as to dishonest accessories were obiter, whilst the reference by Lord Esher to Barnes v Addy (which itself was not a limitation case) does not justify the propositions as to limitation propounded in Soar v Ashwell, since that which was said about limitation appears to have been based on a misapprehension of Barnes v Addy. 

154.In the circumstances, therefore, I am minded to agree with Mr Jin Pao’s characterization of Soar v Ashwell as an “heresy perpetuated over time”; all that that case decided was that in a ‘category one’ constructive trusteeship no limitation period is applicable, and nothing more than that.

155.Nor am I able to accept Mr Scott’s urging to construe the words “in respect of” within section 20(1)(a) of the Limitation Ordinance as, in effect, to mean “anything to do with” any fraud or fraudulent breach of trust to which the trustee was a party or privy, and I further accept the submission of Mr Jin Pao that the more appropriate meaning of this phrase is simply the word “for”; if Mr Scott were to be correct in his suggested construction not only would anything to do with a fraudulent breach attract no limitation period at all, but that unless “in respect of” is taken to mean “for”, a potential anomaly would be created in terms of the possibility of differing limitation periods for different dishonest assisters.

156.In my view by necessary implication the appropriate construction to be accorded to section 20(1)(a) is that the ‘target’ of the particular claim must be the trustee himself.

157.Although some judicial support for his construction argument may be gleaned by Mr Scott from the case of  GL Baker Ltd v Medway Building and Supplies Ltd [1958] 1 WLR 1216, it is noticeable from from the observations of Dankwerts LJ in that case that in his view the position is far from clear cut; in this regard that eminent judge said (op cit., at 1221):

“

The [Limitation] Act is one which I understand was drafted by a very eminent Chancery lawyer, but none the less it is one which gives considerable difficulties of interpretation whenever the court is concerned with its application.  Paragraph [19(1)] (a) does not in terms refer to an action against a trustee, and the first question to consider is: is it a provision which only deals with proceedings against a trustee who was guilty of fraud, or does it also apply to a person who was not the original trustee but one who has acquired the trust property or payment which was fraudulently made out of the trust property?  It does not in terms refer to actions against trustees, but the words used are “in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy.”  It seems to me that the words “in respect of any fraud or fraudulent breach of trust” may be capable of referring to a case where the action of the plaintiffs is based upon the fact that their moneys were fraudulently paid away and have reached the hands of an innocent party.  That is a possible construction, but the matter whether or not it is the right one is not at all clear…”  (emphasis added)

158.    GL Baker, op cit., was cited by Deputy Judge Sheldon QC in Cattley v Pollard, op cit.,  (at paragraph 85, page 1106), who pointed out that in GL Baker the view expressed by Dankwerts LJ in that case “was somewhat tentative”, that in any event that the learned justice of appeal had gone on to hold in that case that the particular applicable period of limitation was to be postponed, and that whilst that particular decision had been the subject of an appeal it was on a different point. 

159.Ultimately Judge Sheldon’s view was that the suggestion by Dankwerts LJ cannot be reconciled with the analysis of Millett LJ in Paragon Finance and in Dubai Aluminium, op cit, and that in neither of those cases had GL Baker been cited; accordingly his conclusion on the point, with which I respectfully agree, was that (at paragraph 86):

“

It seems to me to be clear to follow from the judgments in the above cases that the references to “breach of trust and trustee in  s 21(1)(a) to a ‘breach of trust’ and ‘trustee’ cannot apply to category 2 cases.  These must be a reference to express trustees and those who are treated as express trustees ie those in category 1 and to breaches of trust by such persons.”

160.Notwithstanding Mr Scott’s criticism of Cattley v Pollard, op cit., I respectfully consider that the decision of the learned Deputy Judge was correct, both in terms of the wider point – where in reliance upon the dicta in Paragon Finance and Dubai Aluminium he held that in a situation wherein there had been no pre-existing trust relationship on the part of the defendant which had arisen before the transactions which had been impeached occurred, in relation to a ‘dishonest assistance’ claim the defendant in that case could not be treated as an express trustee and thus the provisions of section 21(1)(a) [our section 20(1)(a)] did not apply, and thus the period of 6 years from the date of the accrual of the cause of action applied –  and also in terms of the secondary ‘construction’ argument.

161.For my part I have little hesitation in deciding the like issues in this case in the same manner, and, contrary to the view of Cheung J below, to hold that Danny Lau is a ‘category 2’ constructive trustee to whom it is open to invoke the limitation provisions within the Limitation Ordinance.

(ii) The ‘postponement issue’

162.If the foregoing be correct, this raises the correlative issue which has always struck me as representing the most significant point in this interesting case, namely, whether in light of the primary conclusion as to the applicability of the 6 year limitation period, it nevertheless remains open to Peconic, and thus to the Bank, to pray in aid the postponement provisions within section 26 of the Limitation Ordinance, section 26(1) providing that wherein the action is based on the fraud of the defendant and/or any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant and/or the action is for relief from the consequences of a mistake, “the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.” (emphasis added).

163.One of the consequences of the conclusion of the court below to the effect that no limitation period was relevant in the case of Danny Lau, is that the learned judge dealt relatively briefly (at paragraphs 694- 715 of his judgment) with the question of postponement, which, as I have indicated, I consider ultimately to be the decisive issue in this case.

164.On this aspect, of course, both in the court below and in this appeal, the two camps present diametrically opposing contentions.

165.Cheung J notes (at paragraph 698) that for Peconic in the court below Mr Scott’s argument was that “if ever there was an applicable limitation period…time was postponed until the ICAC investigations”, whilst Mr Shieh SC – who then held the brief for the 1^st and 3^rd defendants in HCA 3083 of 2002 – maintained that first, the officials of the bank ought to have discovered the fraud earlier, and second, that pursuant to Mainland banking regulations (a facet of the argument no longer pursued in this appeal), the bank officials were under a continuing duty to comply therewith, and that if this had occurred, they could with reasonable diligence have discovered the fraud which had been practiced by Chio on Peconic and the bank, and thereby also with reasonable diligence have discovered the dishonest assistance rendered in respect of this fraud by Danny Lau.

166.In the event the learned judge reviewed the evidence of the bank officials (at paragraph 701) – and in particular the evidence of Mr Huang, who had been in charge of Peconic since 1993 and whose evidence he had “no difficulty in accepting” – and came to the conclusion (at paragraph 703) that “on the entire evidence before me, that he and Peconic have not failed to exercise reasonable diligence in discovering the fraud”, and thus (at paragraph 715) that “as a matter of law and evidence he rejected the limitation defence raised by all the defendants in the two actions.”

167.Substantially similar lines of opposing argument were propounded in this appeal.

168.Mr Lee SC and Mr Jin Pao argued that Peconic/the bank had done nothing of substance in investigating a situation which, with the passage of time, increasingly must have begun to smell of corrupt/fraudulent activity.

169.Mr Jin Pao noted that on the evidence Mr Huang had made some inquiries, both within and without the bank, and had been given “weak explanations” which he had appeared to accept and that thereafter come to the conclusion that in the circumstances there was “nothing I could do”.

170.In his address on this appeal he detailed five matters which, he said, ought to have been known, and which thus would have led to the realization that there was far more to this whole situation than met the eye and that Peconic had been caught in a fraud: in this connection he cited the fact that, contrary to Chio’s representations, there turned out to be no Taiwanese buyer of these parcels of land, that the Town Planning applications made as to change of user of the land had been rejected, the fact of the huge price differential (of in the order of some HK$354 million) which had been earned by Asiagreat acting qua confirmor in a very short period of time, the fact that the plaintiffs knew of the close relationship between Elsie Chan and Chio, and finally that the plaintiffs must have had ample cause to suspect that Elsie Chan was behind Asiagreat, in which context they should have instructed their solicitors to scrutinise the title documents, which should have included receipts issued by Elsie Chan. 

171.In addition, Mr Lee SC further laid considerable stress on factual matters which had emerged in another case, HCA 4555 of 2001, in which Peconic  pursued (and indeed continues to pursue) its former solicitors, Messrs JSM and Paul Yu, in negligence on the basis, inter alia, that there were in JSM’s file at least 6 receipts issued by Elise Chan, the 2^nd defendant in HCA 16255 of 1999, dating between 7 October 1991 and 2 March 1992 which showed Elsie Chan to have been the client in the confirmor sales of Asiagreat to Peconic, and that specifically it had been pleaded therein that these constituted suspicious matters which would have alerted an honest solicitor in the position of the 1^st defendant to the likelihood that the transaction had involved a fraud on the 1^st plaintiff and/or the 2^nd plaintiff.

172.Thus, concluded Mr Lee, Peconic could not have its cake and eat it: if on Peconic’s case in that parallel litigation its own solicitors should have seen the receipts by 1992 at the latest, it could not in the same breath maintain that it could not with reasonable diligence have discovered the dishonest assistance rendered by Chio prior to 12 August 1996.

173.In this connection Mr Lee pointed out that in CACV 285 of 2005 – an unreported decision of the Court of Appeal wherein an appeal was allowed against the decision of Deputy Judge Gill, who had been persuaded to strike out Peconic’s claim in HCA 4555 of 2001 – Cheung JA had expressed the view in his judgment in that strike out appeal that the “objective evidence” had indicated that Peconic could have found out the truth much earlier if it had tried and “if it had conducted a proper inquiry”, but that the bank had adopted “a head in the sand response” and had chosen not to investigate the background of the sale.

174.Faced with these arguments, Mr Scott SC for Peconic adamantly maintained that the learned judge below had been entirely correct in his conclusion that on the facts of this case the running of time was postponed until December 1998 at the very earliest by virtue of section 26(1) of the Limitation Ordinance.

175.In the course of his submission, Mr Scott emphasized that in this appeal no challenge had been made to any of the findings of primary fact as made by the learned judge, and that in particular, there was no dispute that Danny Lau had been guilty of dishonest participation in an elaborate scheme to defraud the plaintiffs of some $350 million – the argument put forward on Danny Lau’s behalf had been conducted solely on the basis of limitation.

176.He emphasized that section 26(1)(a) provides that in the case of an action based on fraud, the limitation period “shall not begin to run” until the plaintiff could with “reasonable diligence” have discovered the fraud, and that for present purposes it was the fraud of solicitor Danny Lau which was the principal focus of the inquiry on this appeal, and that it was his fraud/fraudulent conduct, and his only, which was of relevance in terms of the limitation arguments as run by Mr Lee SC and Mr Jin Pao.

177.Mr Scott accepted, as he had to, that it is true that Peconic, in the person of Mr Huang, by mid-1993 had discovered the enormous price differential between the price paid by Peconic to Asiagreat and the price paid by Asiagreat to the individual landowners, and that it also was true not only that hope had been dashed in terms of a quick and profitable resale to Taiwanese landowners, but equally that the patent lack of development potential would have come to light in 1993 – indeed the plaintiff’s own expert had made no bones about the situation – and in any event by virtue of the first rejection of the review application by the Town Planning Board at the end of March 1993.

178.Counsel insisted, however, that in order to mount that claim as presently mounted against Danny Lau and his firms of solicitors, Peconic also would have had to know first, of the fraud perpetrated by Chio, Chen, and Elsie Chan via the intermediary of Asiagreat and its nominee shareholders and directors and second, of the role played by Danny Lau in dishonestly assisting in the commission of that fraud – and that in broad terms these were matters which could not reasonably have come to the knowledge of Peconic at any time before December 1998 at the earliest, or, more probably, until in or around August 2000.

179.In the context of this argument Mr Scott accepted that the burden lay upon the plaintiff to satisfy the court that it could not with reasonable diligence have discovered the situation of which it now complained, nor did he dispute the test, as adumbrated by Millett LJ in Paragon Finance, op cit, (at 418d),  that the legal benchmark is “how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency.”

180.Against this backdrop Mr Scott submitted that, as the trial judge had observed (at paragraph 326 of his judgment), the key item of evidence in terms of unravelling the involvement of Danny Lau in this fraud was the bill of Arthur KK Luk & Co containing reference to a joint deed of indemnity given by Elsie Chan  and Chio in favour of Poon Kam (whom, it will be recalled, was the village elder who had orchestrated the sales of the various lots to Asiagreat), and that this was a bill which had been rendered by that firm to Asiagreat and would not have come to Peconic nor to Johnson, Stokes and Master, the then solicitors acting for Peconic.

181.In fact, said Mr Scott, this particular revelatory document had been seized by the ICAC from the files of Arthur KK Luk & Co during the course of criminal investigations in 1998, and had been provided to Peconic only in 2001 in the course of discovery in the other civil action, together with all documentary evidence used by the prosecution in the criminal trial; he further stressed that the learned judge below had observed in his judgment (at paragraph 704):

“

In particular, I accept that as far as Danny Lau’s role is concerned, without full knowledge of the existence of, for instance, the bill of 25 October 1991 referring specifically to a deed of indemnity given not only by Elsie Chan but also Chio to Poon Kam, it is quite difficult to pin Danny Lau on liability.  Peconic simply lacked the investigative powers to unearth the fraud and particularly the actual role played by Danny Lau in it.  It is noteworthy that even the ICAC overlooked the significance of the reference to the deed of indemnity by Elsie Chan and Chio to Poon Kam in the bill of 25 October 1991, and Danny Lau was never asked anything about it by the ICAC.  Needless to say, the ICAC never charged Danny Lau for anything.”

182.It strikes me that there is considerable force in this line of argument, and it is in the particular context of the position of Danny Lau that most regrettably I find myself differing from the conclusion of Rogers VP and Le Pichon JA (supra, at  paragraphs 72-76) to the effect that the plaintiff “has come nowhere near showing that it could not with reasonable diligence have discovered the fraud…”

183.For the purpose of this appeal and the application of section 26(1) of the Limitation Ordinance, clearly it is the fraud of Danny Lau which is the ball upon which to keep one’s eye, a consideration in my view quite distinct from whether, for example, Peconic and/or the bank could with reasonable diligence have earlier discovered the fraud perpetrated by Chio, Elsie Chan and the other non-professional defendants.

184.It strikes me as inherently unattractive for a ‘dishonest assister’ such as Danny Lau, a professional lawyer of apparently good reputation embedded within a firm of solicitors of equally unblemished reputation, and a man who clearly had taken every precaution against discovery of his professional defalcations, now to maintain to the court that by reason of the limitation provisions he is able to avoid the consequences of his nefarious actions because Peconic/Mr Huang of the bank should have done more to uncover precisely the dishonest and fraudulent modus operandi that he had spent a good deal of time and effort both in devising and in seeking to obscure from view.

185.Accordingly, I do not think that this court should be too astute to accord to him the statutory protection he now seeks, and to find that the plaintiff should have discovered his fraud (or, more accurately, begun to suspect his participation in this fraud) far earlier that in fact it did – and then only via the side wind of the good offices of the ICAC, with its massive investigatory resources.

186.It seems to me in this context that the persuasive submissions of Mr Lee and Mr Jin Pao are informed not only by the pervasive wisdom of hindsight, but that their arguments as to discovery by reasonable diligence would be far better suited to the activities of Chio and Elsie Chan rather than to the apparently respectable lawyer working quietly in the background who then was putting into place the legal framework without which this fraud very well may not have been successfully accomplished.

187.I am unsympathetic, for example, to the appellants’ theory that the revelatory bill would have come to light independently of the ICAC investigations prior to August 1996 provided that JSM had spotted the ‘Elsie Chan receipts’ (and had appreciated their significance), and that had Peconic then pursued a claim for dishonest assistance against Elsie Chan as the person behind Asiagreat that this bill would have been disclosed in the ordinary course of discovery; as Mr Scott observed, there is no justification for the blithe assumption that Elsie Chan even had retained a copy of the solicitor’s bill so as to give discovery thereof in any action that may have been brought against her.

188.On this supposition I also agree with the argument of Mr Scott SC that this is a theory predicated on assumption and which is wholly unrealistic without the benefit of hindsight, which, as is well known, imparts the considerable advantage of 20/20 vision.  As Mr Scott put it, this theory assumes that Peconic was alive to the possibility that it was the victim of a fraud, as opposed to something which, for a lengthy period, simply was regarded within the bank as an extremely bad investment decision – which itself would not have justified a detailed forensic analysis of the conveyancing files – and that even in that eventuality the hypothetical investigator (perhaps even the ‘private investigator’ which Mr Lee SC suggested should in the circumstances have been utilised by Peconic) – would not have realized the significance of the receipts unless it was also appreciated that there was a personal connection between Elsie Chan and Chio.

189.As to Chio, the progenitor and prime mover behind the fraud, the learned trial judge accepted (at paragraph 701 of his judgment) that although Mr Huang had felt that JSM must have taken care of Peconic’s interests, nevertheless in mid-1993 he did ask a second firm of solicitors to review the papers relating to the transactions, but that nothing suspicious was reported, whilst the judge also found that at this point, and indeed for some time afterwards, Mr Chen of the Agricultural bank – “an experienced and well-trusted banker within the bank” – and indeed Chio himself, had remained above suspicion; in fact, on the evidence until relatively late in the day Chio had remained wholly trusted within the bank, and had continued to consult with the bank regarding the bank’s seemingly commercially disastrous purchase of this land.

190.There is, entirely correctly, no suggestion put forward that any observation of the Court of Appeal in the judgment reversing the strike out decision of Deputy Judge Gill constitutes any form of res judicata, and clearly at that stage (nor to the present day) has there been any adjudication on the merits of Peconic’s assertions in that case, so that Mr Scott is correct in contending that nothing in those proceedings lends analytical support to the appellant’s contentions upon this ‘reasonable diligence’ issue.

191.After reflecting upon the matter in round, I am against the appellants’ arguments on this issue, and agree with the contentions made on behalf of Peconic by its senior counsel.

192.The short point is that it took the investigative powers and resources of the ICAC to uncover the underlying fraud of Danny Lau, and then effectively by a side-wind.  As has been pointed out, that which Peconic learned regarding Danny Lau’s involvement came directly from the results of those investigations partially made known to Peconic in 1998 and 1999, together with Danny Lau’s testimony given in the criminal proceedings in 2002, and that it was only then that there began to swim into focus the fact of this solicitor’s active concealment of those behind Asiagreat, his knowledge that Chio was the actual purchaser of the land and the provider of the Macau cheques tendered in that purchase, and the trail through numerous bank accounts of the proceeds of the sale by Asiagreat to Peconic.

193.Accordingly, although the learned judge considered the issue of postponement of the limitation period out of an abundance of caution, given his primary classification that no limitation period was applicable to Danny Lau qua dishonest assister of Chio, I agree with and accept his contingent conclusion (judgment, paragraph 703) that the relevant fraud could not with reasonable diligence have been discovered by Peconic until 1998 at the earliest, and thus that the relevant period of limitation would be postponed until then, and thus that the action was commenced in time.

194.It follows therefore, that in terms of the limitation arguments launched exclusively on behalf of Danny Lau and his firm, and as the main plank of the argument propounded on behalf of Arthur KK Luk & Co, Lau’s predecessor partnership, I would reject these arguments, and hold that the action was not statute-barred.

195.Before leaving the subject of limitation, in this context I revert briefly to the position of the 4^th defendant in HCA 16255 of 1999.

196.As noted at the outset of this judgment, the substance of the appeal launched on behalf of Leung Hiu Ling, the only other remaining appellant, was almost exclusively fact-based, and resulted in an argument unanimously rejected by this court.

197.If and in so far as Ms Wong, counsel appearing for Madam Leung, in fact maintained a limitation point – a point which, as I have earlier noted, was not taken in the court below, and which formed no basis of the Notice of Appeal of the 4^th defendant, nor had received mention in Miss Wong’s skeleton argument on this appeal, notwithstanding her assertion that “if necessary” she wished to ‘adopt’ the limitation arguments propounded on behalf of the other appellants – in submission she did no more than that, and in his reply to Madam Leung’s appeal submissions Mr Scott SC did not perceive the need even consider the issue of limitation.

198.In any event, for the avoidance of doubt, if and in so far as the limitation issue properly can be considered ‘live’ in terms of the appeal of Madam Leung, and if argument had been (implicitly) propounded to the effect that the case against her was statute-barred by reason of the fact that with reasonable diligence the plaintiff ought to have discovered her role in the fraud practiced at the behest primarily of Chio and Elsie Chan, I should also have found in favour of the bank upon any such argument. 

199.All that a company search of Asiagreat would have uncovered would have been that Madam Leung was a director of Asiagreat, and absent knowledge of the background familial relationship with Chio, and her agreement to act, at Chio’s behest, upon the instruction of Elsie Chan, whom at the time apparently maintained a certain celebrity cachet, there would have been no reason whatever to link Madam Leung with the fraud as it was perpetrated.  It follows, therefore, that in my judgment any limitation argument, if formally taken, would not assist Madam Leung either.

(iii) Vicarious liability

200.This argument by Mr Lee SC on behalf of his solicitor client, Arthur KK Luk & Co, received considerable play in his skeleton argument filed upon this appeal, notwithstanding that the point was not taken by counsel below – in fact, it was accepted by counsel that Arthur KK Luk and Co was vicariously liable for the first 18 transactions – and thus was not a matter addressed by the learned trial judge (judgment, paragraphs 466 and 467).

201.If Mr Lee is able to resuscitate the argument, upon which in submission before this court he did little more than to trail his coat and ensure that the point remained open, I agree with what has fallen from the Vice President and Le Pichon JA (supra, at paragraphs 77 and 78).

202.Whilst I confess that I should have liked to have classified the facts so as to find that Danny Lau was acting upon what used to be called a ‘frolic of his own’ outwith the usual course of business, thus ensuring that his entirely innocent former partners remain untainted by his venality, and thus are not to be found to be vicariously liable, it seems to me that this is an argument that has little chance of success in light of the provisions of the Partnership Ordinance and the statement of the law in this area as laid down by the Court of Final Appeal in Ming An Insurance (HK) Ltd v Ritz Carlton Ltd (2002) 5HKCFAR 569, with the adumbration therein of the ‘close connection’ criterion.

203.Moreover, as Mr Scott SC pointed out, observations in Dubai Aluminium, op cit., are very much against Mr Lee on this aspect: see Lord Nicholls (at paragraphs 32 and 39) and Lord Millett (at paragraphs 112, and in particular at paragraph 143), wherein his Lordship observed:

“

Given that a solicitor may be guilty of deliberate and dishonest conduct while acting within the ordinary scope of his practice, there is no conceivable reason why his firm should not thereby incur vicarious liability for loss caused by the conduct which constituted him a constructive trustee of the second kind…”

204.Accordingly, I do not consider that in these particular circumstances – wherein I note, also, that Arthur KK Luk and Co in fact submitted a not inconsiderable bill to the client, and presumably was paid for the services rendered by Danny Lau – that an argument that this firm was not vicariously liable can succeed (or could have succeeded), and thus must also be rejected.

Conclusion

205.For my part I respectfully consider that in his meticulous judgment in the court below the learned trial judge reached the correct conclusions, albeit for primary reasons with which I find myself unable to agree.

206.Whilst I am conscious that, in part at least, I am in the unfortunate position of differing from the very strong judgment of the Vice President and Le Pichon JA, it follows from the foregoing that I am unable to come to any decision other than that all the appeals before this court should be dismissed, with an order nisi that costs follow the event.  I would so order.

Hon Rogers VP:

207.There will therefore be orders as follows.

CACV 245 and 258 of 2006
1.	The appeals be allowed.
2.	The judgment below set aside.
3.	There be an order nisi that the costs here and below be to the defendants.
CACV 247 of 2006
1.	The appeal be dismissed.
2.	There be an order nisi that the costs of this appeal be to first plaintiff to be taxed if not agreed.

Mr John Scott SC (5-7 November 2007) & Mr C W Ling, instructed by Messrs Raymond T.Y. Chan, Victoria Chan & Co., for the Plaintiff/Respondent

Mr Jin Pao & Ms Ann Lui (5-7 November 2007), instructed by Messrs Robin Bridge & John Liu, for the 1^st & 3^rd Defendants in HCA 3083/2002/Appellants in CACV 248/2006

Mr Martin Lee SC & Ms Wing Kay Po, instructed by Messrs Andrew Law & Franki Ho, for the 2^nd Defendant in HCA 3083/2002/Appellant in CACV 245/2006

Ms Catherine K K Wong & Ms Evelyn Lee, instructed by Messrs David Y.Y. Fung & Co., for the 4^th Defendant in HCA 16255/1999/Appellant in CACV 247/2006