Higashigi Industrial Co Ltd v. Leung Luen Kai and Another

HCMP 2114/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2114 OF 2010

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D E C I S I O N

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1.This is the plaintiff’s application to strike out parts of the defence and counterclaim of the 2^nd defendant that plead a “sham transaction”.

The background to the present proceedings

2.The plaintiff is a limited company whose shareholder and director is Mr Li.  He was a friend of the 1^st defendant.

3.The 1^st defendant (“the husband”) and the 2^nd defendant (“the wife”) have pending divorce and ancillary relief proceedings in the Family Court under FCMC 13114 of 2009 (“the matrimonial proceedings”).  The petition was filed by the husband on 19 October 2009.  The wife filed a Form A on 18 January 2010 seeking various reliefs including settlement and transfer of property order, specifically naming the matrimonial home (“the property”) which was solely registered in the name of the husband.  Form A was registered at the Land Registry on the following day. 

4.Two months later, the plaintiff allegedly lent a sum of $2,000,000 in cash to the husband secured by a charge over the property, pursuant to a written agreement dated 26 March 2010 (“the loan agreement”).  The husband acknowledged receipt of the loan in writing.  The loan was interest free and repayable within 30 days by 25 April 2010.  The husband failed to repay.  The plaintiff registered the loan agreement at the Land Registry on 15 July 2010 after the loan has become due. 

5.There then appeared parallel proceedings on the same subject matter.  One is the present proceeding (converted into writ action) against the husband seeking repayment of the loan and delivery up of vacant possession of the property, with the wife joined as a party.  The other is a summons taken out by the wife in the matrimonial proceedings pursuant to section 17(1)(b) of the Matrimonial Proceedings and Property Ordinance, Cap. 192 (“MPPO”), for setting aside the disposition of the property made by the husband; the plaintiff has been joined as a party.

6.The husband has filed an acknowledgement of service indicating that he did not intend to contest this action.

7.The wifefiled a defence and counterclaim that sought, amongst others, a declaration that the loan agreement was void and contained a “sham” transaction.  The following paragraphs in her pleading (“the offending paragraphs”) are in issue:

“9(c) in [the] circumstances, the Loan Agreement is obviously a disposition with the intention of defeating the claims made by the 2^nd Defendant and on behalf of the Child for financial provision under MPPO;”

“10. Further or in the alternative,

a. the loan purported in the Loan Agreement is otherwise a sham transaction with a view to enabling the 2^nd Defendant to defeat the claims for ancillary relief made by the 2^nd Defendant and on behalf of the Child in the Matrimonial Proceedings;

b. the Plaintiff is put to strict proof that the loan in sum of HK$2,000,000 purported in the Loan Agreement had been actually provided by the Plaintiff to the 1^st Defendant in consideration of the security by way of the Property provided by the 1^st Defendant under the Loan Agreement;

c.  in particular, the 2^nd Defendant will in due course seek specific discovery of documentary proof of the details of the paying out [of] the said amount from the pocket of the Plaintiff.”

“11. In such circumstances, the Plaintiff is not entitled to enforce the Loan Agreement.”

“15(i) (being a counterclaim sought by the 2^nd defendant against the plaintiff and the 1^st defendant) a declaration that the Loan Agreement is void or otherwise unenforceable for that the same contains a disposition of the Property with the intention to [defeat] claims for financial provision made by the 2^nd Defendant and on behalf of the Child under the Notice in the Matrimonial Proceedings and/or that the same contains a shame (sic) transaction.”

8.The plaintiff requested for further and better particulars of paragraphs 9(c) and 10(a) as follows:

“1. Of the sham transaction, identify each and every act on the part of the 1^st Defendant, the Plaintiff and other persons (if any), with dates, times and places, how they conspired with each other to pervert the course of justice in defeating the claims made by the 2^nd Defendant.

2.  Give sufficient particularities (sic) regarding the Plaintiff’s knowledge of dishonesty.”

9.By a 3-page letter (“the letter”), the wife’s solicitors explained why there was at least a prima facie case of a sham transaction. 

The application

10.The plaintiff considered that the wife has not provided particulars as to dishonesty and thus took out this application to strike out the offending paragraphs, on the grounds that they were:

(i)  scandalous, frivolous or vexatious in that the serious allegation of “sham transaction” was wholly imaginary and hence a groundless defence; the Bar’s Code of Conduct (para 113) prohibits a plea of dishonesty unless counsel has before him reasonably credible material which establishes a prima facie case of dishonesty; or

(ii)  an abuse of process in that nobody should have an allegation of dishonesty leveled against him in a pleading unless it can be backed up by credible material and there was none in the present case.

11.“Sham” is “a person or thing that is not what they are purported to be”; “pretence”, “bogus, false: The Concise Oxford Dictionary, 10^th ed.; “to cheat, trick, deceive, delude with false pretences; to impose upon, take in, hoax”: The Oxford English Dictionary, 2^nd ed.

12.Mr Butt submits that the averment of “sham transaction” carries with it the implication of the loan agreement being bogus and intended to deceive the court that it was genuinely made between the plaintiff and the husband.  It was incontestably a plea of dishonesty.

13.Mr Chow, counsel for the wife, concedes that dishonesty is an element of a “sham” transaction.  The wife, however, opposes the application on the grounds that the letter had provided the particulars and that there had been delay in taking out this application.

The principles for striking out

14.Striking out is only for plain and obvious cases which cannot be remedied by amendment: Hong Kong Civil Procedure 2012, para 18/19/4.

15.A plea of dishonesty must be pleaded with full particulars.

“43. It is trite that a plaintiff who alleges dishonesty must plead and establish facts at trial to show that the defendant was dishonest and not merely negligent. The court will not infer dishonesty from facts which have not been pleaded or from facts which have been pleaded but which are consistent with honesty.

44. In Three Rivers District Council v. Governor and Company of the Bank of England (No. 3) [2003] 2 AC 1, Lord Millet said at p.291:

It is well established that fraud or dishonesty (and the same must go for the present tort) must be distinctly alleged and as distinctly proved; that it must be sufficiently particularized; and that it is not sufficiently particularized if the facts pleaded are consistent with innocence: see Kerr on Fraud and Mistake (7^th ed, 1952), p.644; Davy v. Garrett (1878) 7 Ch D 473, 489; Bullivant v. Attorney-General for Victoria [1901] AC 196; Armitage v. Nurse [1998] Ch 241, 256.  This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.”

De Krassel v. Chu Vincent [2010] 2 HKLRD 937, at 945

16.Sufficient facts have to be pleaded although it is not necessary to use the word “dishonest”: Armitage v. Nurse [1998] Ch 241, at 256F-257B, per Millett LJ.

“It is not necessary to use the word ‘fraud’ or ‘dishonesty’ if the facts which make the conduct complained of fraudulent are pleaded; but, if the facts pleaded are consistent with innocence, then it is not open to the court to find fraud. As Buckley LJ said in Belmont Finance Corporation Ltd v. Williams Furniture Ltd [1979] Ch 250, 268:

‘An allegation of dishonesty must be pleaded clearly and with particularly. That is laid down by the rules and it is a well-organized rule of practice. This does not import that the word ‘fraud’ or the word ‘dishonesty’ must be necessarily used … The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatal; the allegation of its dishonest nature will not have been pleaded with sufficient clarity.’

That case is authority for the proposition that an allegation that the defendant ‘knew or ought to have known’ is not a clear and unequivocal allegation of actual knowledge and will not support a finding of fraud.  It is not treated as making two alternative allegations, i.e. an allegation (i) that the defendant actually knew with an alternative allegation (ii) that he ought to have known; but rather a single allegation that he ought to have known (and may even have known – though it is not necessary to allege this).”

17.Counsel has a duty not to plead fraud or dishonesty unless he has clear and sufficient evidence to support it: paragraph 113, Bar Code.

The plaintiff’s contention

18.Mr Butt submitted that the effect of the averment in paragraph 10(a) of the defence was that the loan agreement was bogus and was intended to deceive the court that it was genuinely made between the plaintiff and the husband.  It involved an element of dishonest meeting of minds between the plaintiff and the husband in defeating the wife’s application for ancillary relief.  The sham transaction necessarily involved meticulous planning and elaborate implementation, requiring the husband and Mr Li of the plaintiff to work together continuously over a period of more than 2 years from March 2010 to the present.  In Mr Butt’s view, the wife expressly questioned “whether the loan in the sum of HK$2,000,000 purported in the Loan Agreement had been actually provided by the Plaintiff to the husband …”  (emphases of Mr Butt).  He considered that to be an allegation that the loan agreement was a “false instrument” within the meaning of section 69 of the Crimes Ordinance, Cap 200.  The sham transaction defence contained a very serious implication against Mr Li and the husband of an offence of conspiracy to pervert the course of justice or making or using a false instrument even though the name of Mr Li was not mentioned and the word “dishonest” was not used.

The circumstances of the loan

19.Although the husband did not contest the present action, he has filed an affirmation that has the effect of supporting the plaintiff’s case.  Allegedly, he used to safe-keep money and invest in stocks for his friend, Chan Chiu.  In early 2010, the husband came to know Mr Li.  On 25 March 2010, the husband saw Chan Chiu in Macau and learned of his gambling debt.  Some moneylenders told them that if they did not repay HK$2,000,000, they would not live to leave Macau.  Chan Chiu claimed that he could get $2,000,000 to repay the debt within 3 days if he could return to Shenzhen; he asked the husband to obtain cash to solve the problem urgently.  Seeing that his safety was under threat, the husband borrowed from Mr Li and declined his advice that he should leave instead of rendering help.  The cash loan was used to repay the moneylenders.  Chan Chiu did not repay the husband and could not be contacted. 

20.The facts relied on by the wife in support of the plea of sham transaction were set out in pages 1 & 2 of the letter:

• The loan agreement was made subsequent to Form A (“fact 1”);
• The plaintiff took notice of the registration of Form A (“fact 2”);
• The money was advanced in cash (“fact 3”);
• The plaintiff, being a limited company, not being a licensed money lender, and money lending not being its ordinary business, lent such a large amount to the husband (“fact 4”);
• The plaintiff failed to produce documentary evidence to prove the alleged loan (“fact 5”);
• There was no board resolution, accounting records or bank statements as to how the loan was withdrawn from the plaintiff’s bank accounts or how it was booked in the accounts (“fact 6”);
• As to the circumstances under which the loan was made, there was inconsistency between what is pleaded in paragraph 9(2) of the reply (that the husband was trying to help out a friend who had a gambling debt in Macau) and the recital in the loan agreement (“因需資金解決債務問題, … … 梁聯啓先生在澳門的債務問題”, as if the money was needed by the husband to solve his own debt) (“fact 7”);

21.The wife also relies on the presumption under section 17(3) MPPO.  In addition, the plaintiff’s solicitors stated,

“Our client has not proposed to go anyhow beyond s.17 of the Ordinance or to suggest anything more serious than that. In the premises, it is also pitiful our client’s pleading is misconceived and exaggerated to an unnecessary degree.”

22.Facts (1) to (6) were described by the wife’s solicitors as “suspicious circumstances”.  Mere suspicion is of course insufficient to sustain a plea in “sham transaction” but one must look at the substance rather than the label, bearing in mind that it is sometimes difficult to find direct proof of dishonesty.

23.Fact (1) is not disputed. 

24.Fact (2) stated that the plaintiff took notice of Form A.  It is not clear if this meant that the plaintiff had actual notice or should have notice of Form A.  It is equivocal within the meaning of Armitage vNurse and ought to be clarified by the wife.

25.Fact (3) is not disputed by the plaintiff. 

26.Fact (4) is not disputed.  Mr Butt submits that the averment that the plaintiff was and is not a licensed money lender was consistent with innocence.  With respect, this misses the overall picture that the plaintiff, being a limited company whose business was not money lending would have lent money to the husband to repay what was known to Mr Li a gambling debt of the husband’s friend.  Mr Li had known the husband for less than a month by the time of the loan agreement. These were what brought suspicion to bear on the genuineness of the loan agreement. 

27.Fact (5) refers to 2 letters issued by the wife’s solicitors before the statement of claim and defence respectively seeking proof from the husband as to the genuineness of the loan.  In my view, such failure to provide discovery could hardly be used to establish dishonesty.

28.Fact (6) is not disputed.  The only board resolution which purported to ratify the loan agreement was dated 6 February 2012, made 5 days after the wife pointed out its absence in her affirmation in opposition.  The cash for the loan did not come directly from the bank account of the plaintiff. The plaintiff allegedly received repayment of a loan from its own debtor in cash on 25 March 2010 and HK$2,000,000 out of it was delivered to the husband in cash. (See paragraphs 9(4), (5) of the reply.)  To date, there was nothing to show how the loan was booked in the plaintiff’s accounts.

29.Fact (6) shows an inconsistent story as to the purpose of the loan. Allegedly due to error in description of the property charged, the loan agreement was amended and signed sometime in April 2010.  However, the inconsistent story was never corrected. This inconsistency could undermine the credibility of the plaintiff’s case, having also regard to the fact that the decision to grant the loan was purportedly made within one day by Mr Li who had known the husband for less than one month by then, had no apparent basis to believe that the husband had the ability to repay within 30 days and there being no evidence that Mr Li had ever checked on the net worth of the property.  (According to the husband’s Form E filed in the matrimonial proceedings, the market value of the property was just under HK$2.5 million and the premium to be paid to the Housing Authority on sale was about $1.1 million.)

Section 17 MPPO

30.The wife relies on section 17 MPPO:

“(1) Where proceedings for relief under any of the relevant provisions of this Ordinance (hereafter in this section referred to as "financial provision") are brought by a person (hereafter in this section referred to as "the applicant") against any other person (hereafter in this section referred to as "the other party"), the court may, on an application by the applicant –

(a) (inapplicable);

(b) if it is satisfied that the other party has, with the intention aforesaid, made a disposition to which this paragraph applies and that if the disposition were set aside financial provision or different financial provision would be granted to the applicant, make an order setting aside the disposition and give such consequential directions as it thinks fit for giving effect to the order (including directions requiring the making of any payment or the disposal of any property);

(c) if it is satisfied, in a case where an order under the relevant provisions of this Ordinance has been obtained by the applicant against the other party, that the other party has, with the intention aforesaid, made a disposition to which this paragraph applies, make such an order and give such directions as are mentioned in paragraph (b);

and an application for the purposes of paragraph (b) shall be made in the proceedings for the financial provision in question.

(2) Paragraphs (b) and (c) of subsection (1) apply respectively to any disposition made by the other party (whether before or after the commencement of the proceedings for financial provision), not being a disposition made for valuable consideration (other than marriage) to a person who, at the time of the disposition, acted in relation to it in good faith and without notice of any such intention as aforesaid on the part of the other party.

(3) Where an application is made under this section with respect to a disposition which took place less than three years before the date of the application or to a disposition or other dealing with property which is about to take place and the court is satisfied –

(a) in a case falling within subsection (1)(a) or (b), that the disposition or other dealing would (apart from this section) have the consequence, or

(b) in a case falling within subsection (1)(c), that the disposition has had the consequence,

of defeating the applicant's claim for financial provision, it shall be presumed, unless the contrary is shown, that the other party disposed of the property with the intention aforesaid or, as the case may be, is, with that intention, about to dispose of or deal with the property.

(4) In this section –

"disposition" (財產處置) does not include any provision contained in a will or codicil but, with that exception, includes any conveyance, assurance or gift of property of any description, whether made by an instrument or otherwise;

"the relevant provisions of this Ordinance" (本條例的有關條文) means any of the provisions of sections 3, 4, 5, 6, 6A, 8, 11 (except subsection (6) ) and 15;

and any reference to defeating an applicant's claim for financial provision is a reference to preventing financial provision from being granted to the applicant, or to the applicant for the benefit of a child of the family, or reducing the amount of any financial provision which might be so granted, or frustrating or impeding the enforcement of any order which might be or has been made at the instance of the applicant under the relevant provisions of this Ordinance.

(5)  The provisions of this section shall not apply to a disposition made more than three years before the commencement of this Ordinance.”

31.Mr Butt is correct to say that the statutory presumption under section 17(3) MPPO (“the presumption) can only be invoked in the ancillary relief proceedings currently before the Family Court but not in the present action in the High Court: section 17(1). 

32.Mr Butt refers to the remark of the wife’s solicitors in the letter that the wife “has not proposed to go anyhow beyond section 17 of the Ordinance or to suggest anything more serious than that.”  He submits that since the presumption is not available to the wife, the sham transaction defence loses all foundation and should be struck out.

33.I respectfully disagree.  Although the wife cannot rely on the presumption under section 17 in this High Court Action, there is nothing to stop her from assuming the higher burden of setting up a positive case against the plaintiff and/or the husband for acting with intent to defeat her claim in ancillary relief.  The “overt acts” for the “conspiracy” between the husband and the plaintiff took the form of the loan agreement and alleged advance of $2,000,000.  Taking the 6 facts together (except fact (4)), I am unable to say that they did not constitute particulars of dishonesty/sham.

34.If I am wrong, the plaintiff has always been aware of the wife’s intention to rely on this section and the parties have always considered “consolidation” of the 2 sets of parallel proceedings.  The wife’s pleading is remediable upon such consolidation.

35.Mr Butt then submits that the loan agreement was not a “disposition” under section 17 MPPO.  It was the plaintiff, not the husband, who had made a disposition of HK$2,000,000. 

36.Again, I disagree with Mr Butt.  Whilst it is true that the loan was a disposition by the plaintiff, the charge made by the husband was capable of being a disposition: Whittingham v Whittingham [1979] Fam 9.  The loan was the consideration for that charge. 

37.Still further, Mr Butt relies on paragraph 17(2) MPPO.  He submits that in the wife’s theory, the plaintiff could not be a person who acted in relation to the disposition “in good faith and without notice of the intention (ie on the part of the husband) of defeating the claim for financial provision”.  With respect to Mr Butt, if paragraph 17(2) is applicable, the burden is on the plaintiff to show that it fell within the description of those words in quote.

38.At the hearing, Mr Butt conceded in no uncertain terms that the wife has higher priority to the property than the plaintiff in the light of the sequence of registration of Form A and the loan agreement.  He queried how it could be said that the plaintiff had the intent to defeat the wife’s claim for financial provision. In my view, it could, for a bogus loan will purport to be a head of liability of the husband and liability is what the Family Court can take into account when deciding what ancillary relief to grant.

Summary

39.Paragraph 9(c) correctly described the Loan Agreement (defined in accordance with the statement of claim as including the charge) as a disposition.  For paragraph 9(c) and 10(a), as I have said, taking the 6 facts above at their highest, it is not plain and obvious that they cannot support a plea of dishonesty.  Paragraph 10(b) merely puts the plaintiff to strict proof of the making of the loan in consideration of the charge; it does not contravene rules of pleading.  The wife is entitled to challenge whether consideration had been provided for the charge.  Paragraph 10(c) stating that the wife will seek specific discovery is an unnecessary plea.  Paragraph 15(i) stands and falls with paragraphs 9(c) and 10(a).  In summary, the letter has set out sufficient particulars in support of the element of dishonesty.  It cannot be said that the allegation of “sham transaction” was imaginary, groundless or an abuse of court process.  I am not satisfied that the draconian measure of striking out should be applied to the offending paragraphs. The defence and counterclaim can be remedied by setting out the particulars in line with the letter in a more succinct fashion.

Delay

40.The striking out application was taken out on December 2011, 7 months after the defence and counterclaim was filed.  Although it could have been taken out more promptly, I am not satisfied that the delay was such that the court should refuse to entertain the application.

The way forward

41.I dismiss the application for striking out.  The next question is how the matter should go forward and when should the amendments be filed.  The latest direction from the learned Registrar on 3 October 2011 was as follows:

“By consent of the parties, for the reasons that the Plaintiff had been joined as an Intervener in the matrimonial proceedings FCMC 13114/2009 between the 1^st Defendant and 2^nd Defendant, raising similar claims and issues against the 2^nd Defendant as in these proceedings, this matter is adjourned to a date to be fixed by the Plaintiff, who shall fix a date within 14 days from the date hereof to appear together with the Defendants before the Family Court for a direction as to the proper venue for the resolutions of all the issues between the parties.”

42.Till now, there does not appear to be any affirmative direction as to which court should take up this claim.  In the meantime, at least 2 summonses have been taken out by the plaintiff – the present striking out summons and another to enter default judgment against the husband.  The latter summons was adjourned pending sorting out of the venue for these parallel proceedings.

43.Having parallel proceedings for 18 months (since the section 17 MPPO summons was issued) is most undesirable from the point of view of case management.  I am told by counsel that the hearing of a decree nisi between the husband and wife will take place on 8 May 2012.  Given that the first appointment will take place on 15 May, it is thus of importance to seek directions from the Family Court as to how the ancillary relief proceedings, including the section 17 MPPO application, will go forward.  Directions on case management, including when the wife should amend her defence and counterclaim can be given after an affirmative decision is made on the venue for proceeding.

Costs

44.Cost should follow the event. I make an order nisi that the plaintiff should bear the wife’s costs of this summons (including costs reserved) to be summarily assessed at $35,000 for the solicitors and $35,000 for counsel.  I have presumed that by submitting the costs statement for summary assessment, the wife’s solicitors have given up their right to common fund costs although this has not been stated on the costs statement.  If this is not the case, they should apply in the usual way to vary this costs order nisi.

45.I thank counsel for their assistance.

Mr Anthony Butt, instructed by K Y Woo & Co, for the plaintiff

The 1^st defendant, absent

Mr Enzo W.H. Chow, instructed by Leung, Tam & Wong, for the 2^nd defendant