Korean Exchange Bank, Hong Kong Branch and Another v. Sscp Holdings (Hong Kong) Ltd and Others

HCA 146/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 146 OF 2013

____________

BETWEEN

____________

__________________

D E C I S I O N

__________________

I. INTRODUCTION

1.The 1^st and 2^nd plaintiffs (“P1” and “P2”) were/are banks each of which had lent money to a Hong Kong company the 1^st defendant (“D1”).  The 2^nd defendant (“D2”) is D1’s Korean parent company.  The 4^th and 5^th defendants (“D4” and “D5”) were/are Hong Kong companies originally owned by D1.  The 3^rd defendant (“D3”) was a company incorporated in the British Virgin Islands that provided professional merger and acquisition advisory services.

2.In October 2012, P1 and P2 obtained money judgments against D1 in Hong Kong (“Judgments”). 

3.P2 claimed D1 held (a) a direct 70% shareholding interest in D4 and (through D4) indirect 70% shareholding interest in D4’s subsidiaries, and (b) 70% direct interest in D5 and (through D5) indirect shareholding interest in D5’s subsidiaries.  Shortly before P1 and P2 were awarded the Judgments, ie in September 2012, D1 transferred certain shares they held in D4 and D5 (collectively, “Transfer Shares”) to D3. 

4.P2 claimed the Transfer Shares were D1’s only valuable assets, and by reason of such transfer their attempts to enforce the Judgment in their favour against D1’s interest in the Transfer Shares failed.  Other than the Transfer Shares that D1 transferred to D3, P2 successfully obtained a charging order against some remaining shares in D5 under D1’s name.

5.On 24 January 2013, P1 and P2 commenced the present action against D1, D2, D3, D4 and D5.  D1 and D2 did not enter any appearance.  By the order of Master Hui dated 17 April 2014, D4 and D5 were excused from further attendance of further court hearings in the present action. By a consent order dated 8 September 2014, P1’s claims in the present action against D3, D4 and D5 were dismissed.  In the present action, the claim was essentially fought between P2 and D3.

II.  P2’s AMENDED STATEMENT OF CLAIM

6.According to P2’s pleaded case, in/about 2006 they advanced to D1 a loan in the sum of US$5,000,000 under a term loan facility.  In/about 2007, they granted to D1 a revolving credit facility up to the sum of US$8,000,000.  Since 2007, P2 granted to D1 further revolving credit facility under which the amounts due to them were usually refinanced:

(a) P2 and D1 entered into a revolving credit facility on 30 March 2012 with credit amount of US$5,000,000 and repayable on or before 3 July 2012.  On the same day, D2 entered into a deed of guarantee to guarantee to P2 payments under such facility.  D1 failed to make repayment by 3 July 2012.  On 7 August 2013, P2 issued a demand letter to D1; but the plan ultimately was to refinance the loan amount.

(b) P2 and D1 entered into a revolving credit facility on 29 August 2012 with credit amount of US$4,900,000 (by that time D1 had repaid US$100,000 to P2) and repayable on or before 4 October 2012. The advance under such revolving credit facility was to refinance previous advances.  On the same day, D2 entered into a deed of guarantee to guarantee to P2 payments under such facility.

7.On 8 September 2012, after finding out that D1 was trying to dispose of the Transfer Shares, P1 liaised with P2 and referred P2 to the email by D1’s director Mr Joung Byoung Jin (“Mr Joung”) to P1 enclosing the Instruments of Transfer and Bought and Sold Notes for the purported sale of the Transfer Shares.  P2 made enquiries with Mr Joung who said that even though the Transfer Shares had been sold, there was a possibility the sale could be reversed.  On 11 and 13 September 2012, P2 wrote to D1 to demand an explanation about the purported sale of the Transfer Shares, but there was no reply.  On 13 and 17 September 2012, P2 wrote to D1 to declare that events of default had occurred and to demand for repayment of all outstanding indebtedness.  There was no response. 

8.On 17 September 2012, P2 commenced HCCL9/2012 against D1.  On the following day, they applied for a worldwide Mareva injunction.  Since D1 did not enter any appearance, the Judgment in favour of P2 was entered against them on 12 October 2012.  On 12 November 2012, P2 was granted a charging order nisi on inter alia the shares in D4 and D5 held by D1.  D4 and D5 sought to intervene in the proceedings.  On 14 December 2012, P2 failed in their application to seek a charging order absolute over the Transfer Shares.

9.P2 claimed that D1’s transfer of the Transfer Shares to D3 constituted a disposition of property with intent to defraud P2 under section 60 of the Conveyancing and Property Ordinance Cap 219 (“CPO”). Further, P2 claimed D1, D2 and D3 made such transfer with intent to defraud them as creditor and to put D1’s assets out of P2’s reach, which resulted in P2 being unable to obtain full payment or satisfaction under the Judgment in their favour.  P2 therefore sought to set aside such transfer and to re-vest the Transfer Shares to D1 together with damages and other consequential reliefs.

III.  D3’s DEFENCE

10.D3 claimed that by a letter agreement dated 7 February 2011 between D2 and D3 (“Agreement”), D3 was engaged to provider merger and acquisition advisory services in respect of the intended disposal of the coating business of D1 and D2, which involved the sale of their shareholding in a listed company Schramm Holdings AG (“Schramm”) and D2’s Coating Division. Under the Agreement, D3 was entitled to charge D2 monthly advisory fees and a success fee with penalty interest for late payment.  Upon completion of the sale in late 2011, D3 claimed they were entitled to charge a success fee, and part of the success fee for sale of the shareholding of D1 and D2 in Schramm (“Schramm Fee”) was to be paid from the purchase price to be received by D1 for sale of the shareholding in Schramm.  An amount representing the Schramm Fee was paid into an escrow account held by Norton Rose LLP (Germany) as escrow agent.  D3 received part but not the balance of Schramm Fee. 

11.On/about 27 or 28 October 2011, at the request of D2’s chief executive officer Mr Oh Jung Hyun (“Mr Oh”), a sum of HK$46,000,000 was released from the escrow account to D1.  So as of November 2011, D2 owed D3 the outstanding Schramm Fee and part of the success fee for the sale of D2’s Coating Division (“Coating Division Fee”).

12.Between November 2011 and August 2012, D3 made repeated requests/demands to D2 for payment of the outstanding fees for advisory services.  In early September 2012, Mr Oh proposed to D3 to make payment to D3 by (a) transferring to D3 the Transfer Shares that were worth in total about US$4,500,000, and (b) paying the remaining outstanding amount by instalments.

13.By a Contract on Transfer of Obligations dated 4 September 2012 between D1/D2 and D3, D2 acknowledged the debt due to D3 and agreed to transfer receivables from D1 in the amount of US$4,500,000 to D3 in partial settlement of the outstanding liability owed to D3.  By two Share Sale and Purchase Contracts both dated 4 September 2012 between D1 and D3, D1 agreed to sell the Transfer Shares to D3 for the total price of US$4,500,000.  The formalities for such transfer were completed by 7 September 2012.  D1 denied any intention to reverse such transfer of the Transfer Shares, and D3 had no such agreement with Mr Oh, D1/D2 or anyone else.

14.D3 claimed that the transfer of the Transfer Shares from D1 to D3 had been duly approved by D1, and it was for actual and valuable consideration, and was transacted in good faith in discharge of an obligation under the Agreement incurred in early 2011 (ie before the completion of the transfer in September 2012 and before the Judgments were obtained in October 2012).  D3 further claimed that D1 did receive financial benefit from the transfer of the Transfer Shares in the form of the reduction of a liability.  D3 denied the transaction was not at arm’s length.

15.Even if D1 transferred the Transfer Shares with intent to defraud their creditors (which was denied), D3 averred that (a) such transfer was for valuable or good consideration and in good faith, (b) D3 had no notice of such intent on D1’s part, and (b) by virtue of section 60(3) of the CPO, section 60 thereof did not apply to such transfer.

16.In the premises, D3 denied P2 was entitled to set aside the transfer of the Transfer Shares or to claim any damages or any relief at all.  However, D3 admitted their Mr Stanley Lee (“Lee”) (a) signed the Instruments of Transfer and Bought and Sold Notes for the transfer of the Transfer Shares, (b) was D1’s director during the periods from December 2003 to December 2005 and from April 2006 to July 2007, (c) was interested in D1’s shares (under its former name Samsung Bestview Hong Kong Limited) through his interest in Point Victory Limited, which ceased to be a shareholder of D1 about end of 2006.  Save as aforesaid and as pleaded in D3’s pleadings, Lee and/or D3 had no interest in D1/D2 and no involvement in their management.

IV.  P2’s REPLY

17.P2 raised a number of matters in the Reply.  First, it was averred that a Korean court had rejected D3’s claim against D2 for the alleged outstanding Schramm Fee, and hence there was no consideration for the alleged Contract on Transfer of Obligations dated 4 September 2012 and for the transfer of the Transfer Shares from D1 to D3.

18.Secondly, if it were proved at trial that the Schramm and Coating Division Fees were outstanding as alleged (which P2 did not admit), P2 averred that in any event such debts should not be recoverable by D3 as the Agreement was an illegal contract and therefore void and/or unenforceable.  I will return to this contention below.

19.Thirdly, if it were proved at trial that the Schramm and Coating Division Fees were outstanding as alleged and the Agreement was not an illegal contract (which P2 did not admit), P2 noted D3’s admission that such amounts were owed by D2 (and not D1) to D3.

20.Fourthly, P2 denied it was Mr Oh who first proposed the alleged transfer of the Transfer Shares to D3. P2 averred it was D3 who structured and created the alleged transfer of the Transfer Shares in that it was D3 that drafted or procured the proposed drafts of the alleged transfer documents.

21.Fifthly, P2 denied the Contract on Transfer of Obligations (which was not signed by D2) and the Share Sale and Purchase Contracts all dated 4 September 2012 were valid and enforceable contracts.

22.Sixthly, P2 claimed the transfer of the Transfer Shares formed part of a scheme for the disposition of property with intent to defraud P2, and hence was void under section 60 of the CPO.

V.  SUMMONS

23.On 8 August 2014, D3 applied by summons (“Summons”):

(a) to strike out paragraph 4 of the Reply (“Impugned Plea”)[1] under Order 18 rule 9 of the Rules of the High Court (“RHC”) and the inherent jurisdiction of the court on the ground that it (i) discloses no reasonable cause of action, (ii) is frivolous or vexatious, (iii) may prejudice, embarrass or delay the fair trial of the action and/or (iv) is otherwise an abuse of the process of the court on the basis that “even assuming the truth of the other matters pleaded in [the Impugned Plea], the contention that the [Agreement] was illegal and/or void and/or unenforceable is unarguable and without merits as a matter of law”;

(b) for items 3, 4 and 5 of the Interrogatories without order served by P2 on D3 on 25 July 2014 (“Impugned Interrogatories”), which arose out of the Impugned Plea, be withdrawn pursuant to Order 26 rule 3(2) of the RHC;

(c) insofar as would be necessary, the time within which any of the Impugned Interrogatories were to be answered be extended by a period of 28 days from the date of the disposal of the Summons.

VI.  IMPUGNED PLEA

24.The unamended version below is the Impugned Plea as pleaded in paragraph 4 of the Reply:

“Without prejudice to paragraph 3 above, if it is proved at trial that the Schramm Fees and the Coating Division Fees were outstanding as alleged, which is not admitted by [P1 and P2], [P1 and P2] will further rely on the fact that aver that such debts should not in any event be recoverable by [D3] as the [Agreement] is an illegal contract and therefore void and/or unenforceable.

PARTICULARS

(a) As admitted in paragraph 18, [D3] undertook to provide “merger and acquisition advisory service” to [D1 and D2] in connection with the sale of their respective shareholdings in Schramm, a company listed on the main board of the Hong Kong Stock Exchange Limited and also the Coating Division of [D2].

(b) [P1 and P2] aver that the types of advisory activities purported to have been provided by [D3] under the [Agreement] were regulated by the Securities and Futures Commission (“SFC”) and subject to the Securities and Futures Ordinance (“SFO”), in particular section 114 and Schedule 5 thereof.

(c) [D3] and its managing director, [Lee] did not at the material times or any material time have the required licence(s) from the SFC to conduct such regulated activities.

(d) Further, [D3] has allegedly provided merger and acquisition advisory services to [D1 and D2] under the [Agreement] in Hong Kong, and it also has maintained an office at 303 Dannie House, 20 Luard Road, Wanchai, Hong Kong initially and later at 907 Dannie House, 20 Luard Road, Wanchai, Hong Kong. [D3] however has failed to (i) register under Part XI of the Companies Ordinance as required by section 333 of the Companies Ordinance, and (ii) apply for a business registration from the Inland Revenue Department as required by section 5 of the Business Registration Ordinance. [D3] has therefore committed offences under section 340 of the Companies Ordinance and section 15 of the Business Registration Ordinance.

(e) In the premises, the Defendant [sic] avers that the [Agreement] is an illegal contract and therefore void and/or unenforceable.”

25.In summary, the Impugned Plea pleaded that the Agreement was illegal, and therefore void and/or unenforceable and D3 should not be able to recover the success fee on the following grounds:

(a) the Agreement concerned activities regulated under the Securities and Futures Ordinance Cap 571 (“SFO”), but there was a breach of the licence requirement under section 114 of the SFO;

(b) D3 provided their services in Hong Kong but had failed to register under Part XI of the Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap 32 (“CO”), which was a breach of section 333 of the CO and an offence under section 340 of the CO;

(c) D3 failed to apply for a business registration with the Inland Revenue Department, which was a breach of section 5 of the Business Registration Ordinance Cap 310 (“BRO”) and an offence under section 15 thereof.

26.Mr Man (and Mr Lam with him), counsel for D3, submitted that the Impugned Plea was unarguably bad and liable to be struck out, and it followed that the Impugned Interrogatories must also be withdrawn.  It was contended that even if the relevant provisions in the SFO, CO and BRO applied[2] and had been breached, the Agreement remained valid and enforceable.  Since the only basis of illegality P2 relied on was the breach of the aforesaid statutes, the question is ultimately one of statutory construction.[3]

27.In respect of breach of section 114 of the SFO, which Mr Man submitted was a consolidation of similar predecessor provisions in the repealed Commodities Trading Ordinance Cap 250, the repealed Securities Ordinance Cap 333 (“SO”) (in particular sections 48-50), and the repealed Leveraged Foreign Exchange Trading in Ordinance Cap 451, it was argued that case law on the predecessor provisions consistently held a transaction that involved a breach of the registration requirements remained valid and enforceable,[4] and that there was no reason why these authorities should not apply to a breach of section 114 of the SFO, especially when there are other provisions in the SFO that do expressly provide for civil consequences in case of a breach[5] whilst section 114 does not.

28.In respect of breach of section 333(1) of the CO, Mr Man submitted that whilst a company in breach would be liable to a fine, there is no provision dealing with any civil consequence or the effect on any contract entered into by a non-Hong Kong company.  He referred to Curragh Investment Ltd v Cook,[6] where the vendor company (incorporated in the Isle of Man) entered into a written contract to sell property in Surrey, and the purchaser maintained that the vendor company was not entitled to complete since it had not delivered to the registrar of companies any documents required by sections 407 and 416 of the Companies Act 1948.  The vendor company claimed they were not required to do so because they had not established a place of business in England or Scotland.  It was held that for a contract to be illegal as being made in contravention of some statutory provision there had to be a sufficient nexus between the statutory requirement and the contract, and where the statutory requirements were not linked sufficiently, or at all, to the contract no question of its illegality arose.  In that case, even if the vendor company was in breach of the aforesaid statutory provisions, there was no justification for the purchaser’s failure to comply with the vendor’s notice to complete.

29.Megarry J said as follows:

“…… The central matter seems to me to be Mr Sunnucks’ argument on his third point, illegality or unenforceability. …… He referred me to certain passage in Chitty on Contracts, 23^rd ed. (1968), vol. 1, pp. 428, 429, which discussed the cases in which a transaction in breach of a statutory prohibition was struck with illegality even though the statute did not in terms say so but only imposed some criminal sanction for the breach. So here, he said, failure to comply with the statute struck the sale and so the covenants for title with illegality or perhaps unenforceability.

With respect, that argument seems to me to be completely fallacious. I accept, of course, that where a contract is made in contravention of some statutory provision then, in addition to any criminal sanctions, the courts may in some cases find that the contract itself is stricken with illegality. But for this to occur there must be a sufficient nexus between the statutory requirement and the contract. If the statute prohibits the making of contracts of the type in question, or provides that one of the parties must satisfy certain requirements (e.g. by obtaining a licence or registering some particulars) before making any contract of the type in question, then the statutory prohibition or requirement may well be sufficiently linked to the contract for questions to arise of the illegality of any contract made in breach of the statutory requirement. But it seems to me a far cry from that to the breach of statutory requirements which are not linked sufficiently or at all to the contract in question. There are today countless statutory requirements of one kind or another, yet I cannot believe that an individual or a company who is in breach of any of these requirements (for example, under the Factories Acts) is thereby disabled from making a legal contract for the sale of land or validly entering into covenants for title. To take an example that was mentioned in argument, I do not think that it could seriously be contended that every contract made by an English company, whether for the sale of land or otherwise, is illegal if, when it is made, the company is liable to prosecution and fine for failing to comply with some provision of the Act of 1948, for example, for not filing its annual returns in due time. Such a doctrine, for which I can see no justification, would result in chaos. If in the present case I assume that the vendor is in demonstrable breach of sections 407 and 416, I am still quite unable to see how this provides any ground for contending that the covenants for title that the vendor must give will be impaired by illegality. The breach of the law and the covenants for title seem to me to be wholly unconnected. Furthermore, the illegality on which the purchaser is relying appears to be somewhat delicately adjusted; for in order to sustain the purchaser’s case it must invalidate the covenants for title which the vendor must give and yet leave unaffected the contract for sale itself, on which the purchaser must rely to support his caution on the land register. Such an illegality is too selective in its nature to be true.” (my emphasis)

30.In respect of breach of section 5(1) of the BRO, Mr Man submitted there is no provision in the BRO creating any civil consequence for breaches of its provisions, and none of the sections is directed at any contract entered into by a business.  Since the purpose of registration under the BRO would be similar to registration with the Companies Registry, it was argued that the contentions in paragraph 27 above would equally apply mutatis mutandis to breaches under the BRO.

31.In her written submissions, Ms Chan, counsel for P2, submitted that P2 should be allowed to proceed to trial on the Impugned Plea “as it currently stands” or alternatively, P2 would be prepared to amend the Impugned Plea as in the amended version set out in paragraph 24 above (“Revised Impugned Plea”), the effect of which was to delete the words “void” and “unenforceable” wherever they appeared in the Impugned Plea.

32.However, faced with Mr Man’s forceful submissions, at the hearing of the Summons on 20 October 2014 (“Hearing”), Ms Chan abandoned her primary stance of supporting the Impugned Plea “as it currently stands”, and urged the court to allow the amendments to the Impugned Plea as per the Revised Impugned Plea.  But that did not satisfy Mr Man, and he maintained the Revised Impugned Plea was still unarguably bad and liable to be struck out.

VII.  LEGAL PRINCIPLES

33.The principles governing a striking out application are well established.  Hong Kong Civil Procedure 2015 provides inter alia as follows:[7]

“…... It is only in plain and obvious cases that the court should exercise its summary powers to strike out …… any pleading under this rule. …… Disputed facts were to be taken in favour of the party sought to be struck out. Nor should the court decide difficult points of law in striking out proceedings. The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out. …… The mere fact that the case is weak and not likely to succeed is no ground for striking it out ……

It is for the party seeking to strike out …… pleading to demonstrate that the case is a plain and obvious one in which the other party’s claim is bound to fail. ……

…… This rule also empowers the court to amend …… any pleading. If a statement of claim does not disclose the cause of action relied on, an opportunity to amend may be given, …… even though the formulation of the amendment is not before the court …… However, unless there is reason to believe that the case can be improved by amendment, leave will not be given. Or where the amendments would be far‑reaching and so radical as to amount to a totally new pleading which would probably provoke a fresh application to strike out, the correct course is to strike out. ……”

34.In Total Lubricants Hong Kong Limited & ors v Christophe de la Cropte de Chanterac & ors,[8] Poon J said as follows:

“14. First, if a pleading is capable of being cured by amendments, it should not be struck out. An opportunity to amend should be given instead. However, if the pleading is so defective that no amendment can cure it or if the proposed amendment is incapable of improving the defects, the pleading is liable to be struck out and the proposed amendment should be refused.

15. Second, when a party seeking to amend his pleadings in order to save it from being struck out, the proposed amendment should be properly and exactly formulated, includes all necessary averments or mandatory particulars and constitutes a full and complete plea of a reasonable cause of action.”

VIII.  DISCUSSION

35.As a starting point, Ms Chan submitted that since the Revised Impugned Plea was intended to be pleaded in the Reply and not in the Amended Statement of Claim, such averment did not constitute a cause of action but “were only intended to be relied on as facts in support of P2’s claim under section 60 of the [CPO] ……”

36.But upon careful reading of the Revised Impugned Plea (having removed the words “void” and “unenforceable”), it plainly puts forward an alternative proposition in response to D3’s defence, ie the assertion that the Agreement “is an illegal contract”, and the breaches of the provisions in the SFO, CO and BRO were pleaded as particulars of such proposition and not as stand-alone averments.  The question therefore is whether such proposition (ie the Agreement is an illegal contract) grounded on the aforesaid statutory breaches is wholly unsustainable or unarguably bad, and liable to be struck out.

37.Ms Chan submitted she had not come prepared to address such issue at the Hearing because Mr Man’s written submissions focused on whether the Agreement attracted civil consequences and/or whether it was void and unenforceable.  Having removed the words “void” and “unenforceable” by the Revised Impugned Plea, she did not expect Mr Man at the Hearing would challenge P2’s averment that the Agreement is an illegal contract.  In my view, such submission needs only to be stated for it to be dismissed. 

38.First, when Mr Man prepared his written submissions the target of his attack was the Impugned Plea.  He had no idea P2 would put forward the Revised Impugned Plea until he received Ms Chan’s written submissions.  It was Mr Man rather than Ms Chan who had to quickly deal with an altered case by the other side.  I cannot see how he can be blamed for making submissions to deal the newly proposed Revised Impugned Plea thrown at him following P2’s late abandonment of the Impugned Plea.

39.Secondly, Mr Man’s stance in objecting to the averment that the Agreement is an illegal contract is nothing new.  In the Summons, P2 made clear that the striking out application is mounted on the premise that “even assuming the truth of the other matters pleaded in [the Impugned Plea], the contention that the [Agreement] was illegal …… is unarguable and without merits as a matter of law”.  P2 can hardly say they are in any way surprised.

40.Thirdly, as seen below, the legal arguments that Mr Man relied on to demonstrate it is unarguable to assert that the Agreement is an illegal contract are drawn from authorities already referred to in his written submissions and list of authorities.

41.Having disposed of this preliminary complaint by Ms Chan, I am not persuaded there is any arguable basis to support the proposition that the Agreement is an illegal contract.  All Ms Chan said is that because there have been breaches of the SFO, CO and BRO, it follows as a matter of trite principle that the Agreement is an illegal contract even though it is not void or unenforceable.

42.Mr Man submitted that such contention was not understood because P2 was unable to say what consequence in law would follow from the suggested illegality of the Agreement if it were not vitiated but remained enforceable between the parties.  Mr Man was unable to discern any useful meaning from such contention, which he said was embarrassing, irrelevant and/or unnecessary. 

43.In South China Securities Ltd v Lam Kwen Yuen,[9]  DHCJ Lisa Wong SC at p 546 cited Cope v Rowlands[10] in which Parke B said:

“…… the sole question is, whether the statute means to prohibit the contract? … the question for us now to determine is, whether the enactment of the statute 6 Ann c 16 … is meant merely …… to render the person acting as a broker liable to a penalty ……? Or whether one of its objects be the protection of the public, and the prevention of improper persons acting as brokers? On the former supposition, the contract with a broker for his brokerage is not prohibited by the statute; on the latter, it is; for it cannot be permitted to a person to recover a compensation for an act which the law interdicts him from doing.”

44.In Richardson Greenshields of Canada (Pacific) Ltd v Chow Paul,[11] illegality was pleaded,[12] but Bokhary J held that “[the] object of the contract in [that] case, which is dealing in securities, is not illegal.  What happened was that in the carrying out of that object, including the signing of a standard contract form agreement to govern the rights and obligations of broker and customer – unregistered persons functioned in capacities in which it is laid down by statute that unregistered persons should not function – and in which it is, by statute, made punishable for such persons to function.  In my judgment, the question in such a case is whether or not the statute, on its true construction, renders rights acquired and obligations incurred pursuant to the contract unenforceable” (my emphasis).[13]

45.DHCJ Lisa Wong SC in South China Securities Ltd at p 547 cited the above observations from Richardson Greenshields of Canada (Pacific) Ltd with approval when discussing the question of civil consequences (if any) of contravention of section 50(1)(a) of the SO.

46.As discussed in paragraphs 28-29 above, in Curragh Investment Ltd, Megarry J held that for a contract to be stricken with illegality by reason of contravention of some statutory provision, there must be sufficient nexus between the statutory requirement and the contract.  The learned judge held that breaches of the requirements to deliver documents to the registrar of companies under the Companies Act 1948 were not linked sufficiently or at all to the contract in question to ground the contention that the contract was thereby impaired by illegality.

47.The above demonstrates there is no basis for saying that the Agreement is an illegal contract by reason of the breaches of the SFO, CO and BRO.  P2 is unable to establish any arguability that the object to the underlying transaction in respect of the Agreement is illegal or there is sufficient nexus between the subject matter of the Agreement and the statutory breaches.  That being the case, the Revised Impugned Plea is unarguably bad and liable to be struck out had it been pleaded.

48.However, Ms Chan in her submissions went further.[14]  She submitted that in respect of P2’s claim under section 60 of the SFO, “[crucial] questions …… arise as to whether there was indeed a debt (or receivables) of USD4.5 million truly owing from D1 to D2 to justify the Contract on Transfer of Obligations, whether the true value of D4 and D5 shares were at USD4.5 million, and whether the Transfer by D1 had been in breach of the terms of the loan agreement with P2”.  As a backdrop to this claim, Ms Chan reminded that although D3 in their Defence claimed it was Mr Oh who initiated the transfer of the Transfer Shares from D1 to D3, Lee as D3’s director was heavily involved in the Agreement and in the transfer of the Transfer Shares, and the assertions in Lee’s earlier affirmation filed on 14 March 2013 “gave the impression that he was the key player in the Transfer, possibly the mastermind behind it dictating how it happened” (even though there were subsequent retractions from this in the Defence and Lee’s witness statement).

49.Ms Chan argued that, practically speaking, the present action was defended by D3 alone since D1 and D2 did not put up any defence.  Since it was incumbent on (but not easy for) P2 to prove the apparent consideration provided by D3 to D1 for the transfer of the Transfer Shares reflected an actual intent by D1 to defraud creditors, and to rebut D3’s defence under section 60(3) of the CPO (ie the transfer of the Transfer Shares from D1 to D3 was made in good faith, for valuable consideration and without notice of D1’s intention to defraud creditors), P2 “will need to rely on every bit of evidence to prove [their] case on actual fraudulent intention on the part of D1” so as to invite the trial judge “to draw inference from all available evidence (Tradepower v Tradepower (2009) 12 HKCFAR 417, 418J to 419B)”. On such basis, Ms Chan argued that (a) D3’s participation in the transfer of the Transfer Shares and their knowledge of the financial affairs of D1 and D2 would be highly relevant, and (b) as an active participant of such transfer on behalf of D3 Lee’s testimony would be subject to close scrutiny and his credibility would be carefully weighed. 

50.Ms Chan then concluded from the above that D3’s breaches of the provisions in the SFO, CO and BRO would be “relevant to show to the Court that D3 was capable of being unscrupulous with propensity to break the law in order to achieve its purpose.  …… Even in that event, the Court will only be invited by P2 to look at the broad picture have regard to the legal principles applicable to illegality arising from breach of statutory provisions”.  “By asserting the breaches by D3 in the Reply, P2 did not intend to raise illegality as a cause of action.  The illegality was all along meant to be relied on as a fact or facts that will form part of the total circumstances available to the Court at trial to make the necessary inference.”

51.The first difficulty with such contention is that it has not been pleaded either by way of the Impugned Plea or even the Revised Impugned Plea.  The essential assertions in the original and the draft amended averment are respectively (a) the Agreement is an illegal contract and therefore void and/or unenforceable and (b) the Agreement is an illegal contract.  The breaches of the SFO, CO and BRO have been pleaded merely as particulars of those essential assertions, and not as “facts that form part of the total circumstances”.

52.Ms Chan suggested that P2 should be allowed to re‑formulate their amendments.  But Mr Man submitted it was not easy to follow P2’s contention that although the “illegalities” being breaches of the SFO, CO and BRO did not have civil consequences, they would somehow demonstrate that D3 did not enter into the Agreement in good faith.  He submitted the “unbridgeable chronological gulf” discussed in paragraphs 54-55 below suggested that such contention was unarguable.  Given such problems, Mr Man said the correct approach was to strike out the Impugned Plea and leave P2 to decide how best to re‑group and (if they can) to re‑apply to amend their pleadings by putting forward a proper plea in relation to the statutory breaches. 

53.Bearing in mind the guidance in Total Lubricants Hong Kong Limited & ors discussed in paragraph 34 above, it is plainly incumbent on P2 to properly formulate the necessary averment, and not for the court to speculate how the impugned plea should be further revised.  P2 has taken the opportunity to reflect on the need for amendment as apparent from the Revised Impugned Plea, and if that falls short, it is not for the court to grant leave to P2 to attempt to put together a further revised plea the particulars of which are as yet unknown, especially in face of the problems highlighted by Mr Man.

54.Mr Man next submitted that although section 60 of the CPO required P2 to establish the state of mind of D1 (ie intent to defraud creditors) at the relevant time, there was no averment either in the Revised Impugned Plea or in Ms Chan’s submissions that D1 had any knowledge of the breaches of the SFO, CO and BRO at the material time such that they might have coloured its mind with fraudulent intent for the purpose of the claim under section 60 of the CPO.  Mr Man particularly reminded that the Agreement was made between D2 and D3 in February 2011, and at the request of D2, D3 released monies to D1 from the escrow account in October 2011, ie long before the transfer of the Transfer Shares from D1 to D3 in September 2012 and the entry of the Judgments in October 2012. 

55.Ms Chan submitted that such timeline showed that by 2011 D3 knew D1 was financially embarrassed since D3 had to come to D1’s aid by releasing monies from the escrow account and there were difficulties in securing repayment, so it was argued that D3 (as transferee of the Transfer Shares imbued with such knowledge) ought to have made enquiries, and in failing to do so D3 could not have been a bona fide purchaser without notice.  But Mr Man argued such timeline clearly refuted any suggestion of artificiality in respect of the debt (incurred in 2011) owed to D3 and the entry into the Agreement way back in 2011.  Mr Man submitted the conspiracy theory put forward by P2 was, quite simply, logically irrelevant, and he failed to see anything sinister in a creditor demanding for payment when repayment was delayed and/or accepting payment in money or in kind made upon such demand.

56.In my view, it is not for me to determine these matters at this stage of the proceedings.  But even if these matters, including Lee’s alleged role as the “key player” and “mastermind” of the transfer of the Transfer Shares, and D3’s creation of an allegedly artificial debt without making proper enquiries, have to be canvassed at trial for the determination of the ultimate dispute, it still begs the question why the statutory breaches are pertinent.

57.Ms Chan’s argument boils down to the assertion that D3’s statutory breaches may demonstrate a propensity on their part to be “unscrupulous”, or, to put it in any way, D3 (an “unscrupulous” fraud who has failed to abide by the statutory requirements) is like the proverbial leopard that does not change its spots and hence likely to have participated in the transfer of the Transfer Shares with ill intent.  Mr Man submitted that such argument was obviously bad and unsustainable.  He reminded this was not how the Impugned Plea and/or Revised Impugned Plea were pleaded, and Ms Chan’s suggestion that the statutory “illegalities” tended to demonstrate a fraudulent intent on D1’s part was very much an afterthought with a view to salvage a hopeless plea.

58.Mr Man further argued that, even if the statutory breaches went to show a propensity on the part of D3 to be “unscrupulous”, this would only go to the question of credibility, which are therefore not material facts that would lead to any legal consequence and hence they had no place in the pleadings,[15] irrespective of whether they could be adduced as evidence at trial.

59.In my view, the starting point is that pleadings should contain a concise statement of material facts on which the party relies but not the evidence by which those facts are to be proved, but fraud must be specifically pleaded.  Whilst it is not easy to draw a bright line between material facts, particulars and evidence when crafting a pleading, it must be remembered that rules of pleading are intended to define, identify and limit the issues in order to promote effective exposition of the truth at trial by enabling the court to understand the dispute and the parties to have notice of the case to be met.  Portions of a pleading inserted merely for colour should not be allowed. 

60.In my view, the allegation that the statutory breaches on the part of D3 show propensity for fraudulent intent or misconduct is problematic because it raises the spectre of grafting onto this litigation and the eventual trial matters which are extraneous to the subject matter in dispute.  I can see that in an appropriate case where it is absolutely essential and the interests of justice requires it expansion of the litigation may be permitted, but here it is, at the very least, questionable whether facts that merely show alleged propensity (and there is serious doubt whether the statutory breaches of the SFO, CO and BRO on the part of D3 that are removed from the alleged artificial debt do show propensity at all) are material to the issues in dispute, and there is real concern that the added complexity by such allegations outweighs the potential probative value.  Without a properly formulated plea, it is simply unknown how such statutory breaches will be probative and material to the issues in dispute, and how fair notice can be given to D3 on how they form part of the case at trial. 

61.It is also important not to confuse pleading rules (which require allegations the party intends to establish and rely upon to be properly pleaded) with evidentiary rules (which concern the direct or indirect proof required to convince the tribunal that the allegations are true). Again, without a properly formulated plea, it is not possible to even begin to understand how the statutory breaches by D3 are material facts and not mere evidence. In the absence of a formulated plea, and bearing in mind the statutory breaches are quite removed from the subject matter of the dispute in the present action, there is much force in Mr Man’s suggestion of insufficient nexus or commonality with the pleaded dispute to demonstrate their materiality and probative value.  In all the circumstances, it is inappropriate to grant general leave for P2 to re-plead. 

62.In my view, having rejected the Impugned Plea that attacked the viability of the Agreement, it follows that the Impugned Interrogatories must also be withdrawn in the absence of a proper plea that supports them. 

IX.  CONCLUSION

63.In the circumstances, I grant the following order:

(a) the whole of paragraph 4 of the Reply (ie the Impugned Plea) is struck out;

(b) within 14 days from today, P2 shall file and serve Amended Reply with paragraph 4 thereof crossed out in red;

(c) items 3, 4 and 5 of the Interrogatories without order served by P2 on D3 on 25 July 2014 be withdrawn.

64.For reasons discussed above, I am not satisfied the Revised Impugned Plea is sustainable, and I am not prepared to allow P2 to amend their pleadings to such effect.

65.On the question of costs, there is no reason why costs should not follow event.  I therefore grant a costs order nisi that P2 do pay to D3 costs of and occasioned by the Summons (with all costs reserved, if any) to be taxed if not agreed.  Whilst I do not doubt the assistance given by Mr Lam to Mr Man in arguing the Summons, the issue before me is not a complex one, and I am not persuaded that I ought to grant certificate for two counsel.

66.Ms Chan suggested that since the Impugned Plea was not pleaded as a stand-alone cause of action, there is no basis for striking out on the ground that it discloses no reasonable cause of action.  Nevertheless, the averments in the Impugned Plea that the Agreement is an illegal contract and/or is void and unenforceable are unsustainable and unarguable as a matter of law.  Further, even if Ms Chan is right, I am unable to see how it has any impact on costs incurred by D3.

Ms Winnie Chan, instructed by Wat & Co, for the 2^nd plaintiff

Mr Bernard Man and Mr Keith Lam, instructed by Anthony Siu & Co, for the 3^rd defendant