SHUN HING HOLDINGS CO LTD AND OTHERS v. LI KWOK PO DAVID AND OTHERS

CACV 211/2016
and CACV 212/2016
(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 211 OF 2016

(ON APPEAL FROM HCA NO 2417 OF 2014)

________________________

_______________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 212 OF 2016

(ON APPEAL FROM HCA NO 664 OF 2012)

_______________________

BETWEEN

_______________________

(HEARD TOGETHER)

__________________________________

REASONS FOR JUDGMENT

__________________________________

Hon Lam VP (giving the Reasons for Judgment of the Court):

1.  On 30 September 2016, A Chan J [“the Judge”] struck out the claims brought by the Plaintiffs in HCA 2417 of 2014. The Plaintiffs claimed against the Defendant [“Wong”] in respect of $280 million given by the late Dr William Mong [“Mong”] to Wong. Wong was the second wife of Mong. Mong passed away in July 2010. The Plaintiffs are members of the Shun Hing Group and Mong was the founder of the Group. Before his demise, Mong was an authorized signatory with single signatory power in respect of the bank accounts of the Plaintiffs. Between November 2008 and April 2009, Mong transferred funds in the total sum of $280 million from the Plaintiffs’ accounts to his personal accounts. He then gave the monies to Wong by three cheques drawn from his personal accounts.

2.  In the statement of claim of 6 November 2015, after pleading that the transfers of funds from the Plaintiffs’ bank accounts to the personal accounts of Mong were unauthorized, and the onward transfers of funds from Mong’s accounts to the Defendant, the Plaintiffs averred that Mong acted in breach of his fiduciary duties to the Plaintiffs and in breach of trust in effecting those transfers.  The Plaintiffs then advanced these pleas against Wong at [17] to [21] of the statement of claim:

“ 17. The Defendant received the Unauthorised Transfer Sums with knowledge of the following facts which put her on inquiry as to the source of the Unauthorised Transfer Sums and the Deceased’s authority (or the lack thereof) to transfer the same to her:-

PARTICULARS OF KNOWLEDGE

(1) Each of the Unauthorised Transfer Sums was transferred by the Deceased to the Defendant in addition to the household expenses which the Deceased regularly gave the Defendant every 2 to 3 months in the range of HK$300,000 to HK$600,000 (“the Household Expenses”)

(2) The value of each of the Unauthorised Transfer Sums was substantially and significantly larger than the Household Expenses which the Defendant received from the Deceased from time to time.

(3) The Unauthorised Transfer Sums, in the total amount of HK$280,000,000, were transferred to the Defendant within a short period of 5 months.

(4) The Defendant had never received such a large sum of HK$280,000,000 from the Deceased within 5 months.

(5) The Deceased was the founder of the Shun Hing Group, and had the power to withdraw monies from the companies within the Group. Having regard to the substantial amounts involved, it was highly likely that the sums came from companies within the Shun Hing Group.

(6) The Defendant never gave consideration for any of the Unauthorised Transfer Sums; and had no right to receive any monies from any of the companies within the Shun Hing Group.

18. In the circumstances, the Defendant should have made inquiries on:-

(1) the source of the Unauthorised Transfer Sums, in particular, whether they came from any of the companies within the Shun Hing Group; and

(2) if so, whether the Deceased had obtained proper authority from the companies in question to make those payments to her.

19. Nonetheless, the Defendant turned a blind eye by wilfully and recklessly failing to make any inquiry or take any such steps as were reasonable to verify the source of the Unauthorised Transfer Sums and ascertain whether the Deceased had the requisite authority to transfer the same to her.

20. In the circumstances, it was irrational for the Defendant to assume or believe, when she received the Unauthorised Transfer Sums, that the Deceased was entitled to transfer the Unauthorised Transfer Sums to her without first obtaining the requisite authority from the entities where those sums came from; or that such authority had in fact been given.

21.  Accordingly, the Defendant’s state of knowledge when she received the Unauthorised Transfer Sums, as pleaded in paragraphs 17 to 20 above, was such as to make it unconscionable for her to retain the benefit of the same.”

3.  In an earlier action, HCA 664 of 2012, the Plaintiffs (amongst other plaintiffs in that action) claim against the various defendants in respect of the breach of trust and breach of fiduciary duties of Mong and the $280 million was also part of those claims.  Wong is also a defendant in HCA 664 of 2012 but she was sued in the capacity as a residuary legatee in the Will of Mong.  The relief claimed in HCA 664 of 2012 are directed against the estate of Mong and the Executors of the Will are named as the 1^st Defendants in that action.  

4.  Based on a letter of 29 April 2015 from the solicitors for Wong in HCA 664 of 2012, the Plaintiffs advanced these pleas at [24] to [26] of the statement of claim in HCA 2417 of 2014:

“ 24. In a letter dated 29^th April 2015 concerning HCA 664 of 2012 and sent to Messrs. Hom & Associates, solicitors for the Plaintiff Companies herein and in HCA 664 of 2012 (in which the Plaintiff Companies are the 2^nd and 3^rd Plaintiffs respectively), Messrs. CWL Partners (now known as Messrs. Nixon Peabody CWL), solicitors for the Defendant in HCA 664 of 2012 (in which the Defendant is the 4^th Defendant), stated inter alia as follows:-

‘ … we note that the 2^nd and 3^rd Plaintiffs (SHEH and SHET) in this action [HCA 664 of 2012] have in another claim – High Court Action No. 2417 of 2014 – sought to claim against our client for “knowing receipt” of three sums are supposed to which form part of the Disputed Transfers now claimed by SHEH and SHET …’

25. Despite being aware of the Plaintiff Companies’ claim in this action as revealed in paragraph 24 above, the Defendant has still failed to account to any of the Plaintiff Companies for the Unauthorised Transfer Sums, or at all.

26.  In any event and by the latest, upon realizing the Plaintiff Companies’ claim in this action as revealed in paragraph 24 above, the Defendant must have become aware that the Unauthorised Transfer Sums were transferred by the Deceased to her in breach of his fiduciary duties, and hence, she would have become a constructive trustee of the sums or their traceable proceeds from that time.”

5.  The Defence of Wong filed in HCA 2417 of 2014 on 16 December 2015 primarily contended that the proceedings in this action should be stayed pending the determination of HCA 664 of 2012 since the issues relating to the $280 million are being litigated in the earlier action.  At the very end of the Defence, there was a general denial at [11]:

“ 11. Without prejudice to any stay application referred to above, if and insofar as it is necessary to do so, the Defendant adopts herein the contents of the RRA Defence and save as and subject to what is admitted or averred therein and in this pleading, no admissions are made to paragraphs 1 to 28 of the Statement of Claim. In particular it is denied that the Deceased acted in breach of fiduciary duty and/or of trust to either of the Plaintiffs as alleged or at all or that any of the funds transferred to or by the Deceased were “unauthorized” or that they belonged to the Plaintiffs as alleged or at all or that there is any basis for alleging “knowing receipt” against the Defendant. It is further denied that the Defendant was put on notice or that she is liable as a constructive trustee or otherwise to account to the Plaintiffs or on any other basis as alleged or at all.”

6.  On 6 April 2016, solicitors for Wong took out a summons seeking these reliefs:

“ 1. That the Action herein or alternatively claim for knowing receipt thereunder (§§17 to 28 inclusive of and together with the prayer in the Statement of Claim) along with such parts of the General Indorsement of Claim relating to the same and all related or consequential relief be struck out on the ground that the claim is frivolous vexatious or otherwise an abuse of process.

2. Further or alternatively, that there be a stay of the proceedings herein pending the disposal of High Court Action No. 664 of 2012, or until further order of the Court.

3. Further in the alternative and without prejudice to the aforesaid, that pursuant to RHC Order 24 rule 2(5)(a), the Defendant shall until further order of court make discovery of such documents or classes of documents only with regard to issues arising from paragraphs 13 to 16 of the Statement of Claim herein.

4. Further or alternatively such consequential or other directions relating to the conduct of the proceedings or such parts thereof as are not struck out or stayed as the court thinks just and expedient.”

7.  On 21 April 2016, the plaintiffs in both actions took out a summons seeking to have both actions to be heard and tried together and discovery against Wong.

8.  On 23 August 2016, solicitors for Wong took out another summons to strike out the pleas relating to breach of fiduciary duty and breach of trust in HCA 664 of 2012.  That summons was abandoned by counsel for Wong at the hearing before the Judge[1]. 

9.  The summonses were heard by the Judge on 13 September 2016.  The Judge understood the arguments before him as resting within a narrow compass. The issue was identified by him at [14] of the judgment as follows: whether the Plaintiffs have a viable claim that Wong had knowledge of the alleged breach of fiduciary duty or breach of trust on the part of Mong. 

10.  The Judge held that the Plaintiffs failed to plead a viable case of knowledge of Wong in this regard.  His reasoning can be found at [18] to [23] of the judgment:

“ 18. In addition to the pleas in the SOC, there is uncontroverted evidence that Mong was a man of immense wealth.  As an indication of his wealth, he paid his ex-wife HK$1 billion to settle the ancillary relief claim.  The 3 payments in question were all made by way of cheque from Mong’s personal bank account.  They were, according to para 11 of the SOC, made on 2 December 2008, 4 February 2009 and 27 April 2009.  Mong was very ill in early 2009 and he died in July 2010 at the age of 82.

19. Given the timing of these payments, it is plain common sense that they were made with the view to secure the future of Wong and Perlie, who was about 15 years old at the time.

20. With respect, I have great difficulty understanding the basis for the second sentence in para 17(5) of the SOC.  By that plea, it is alleged that because the sums given to Wong were substantial, it was highly likely that they came from the Shun Hing companies.  First of all, all 3 payments came from Mong’s personal account.  Secondly, it is the plaintiffs’ own case that Wong had no involvement with any of the companies in the Shun Hing Group.  Thirdly, it is an empty assertion with no identifiable basis.

21. I am unable to agree with Mr Lam that the court is, for purpose of the present strike out application, bound to accept the pleaded case of SHEH and SHET.  I see no reason to accept an untenable plea. The whole point of the present exercise is to strike out such pleas. 

22. Despite Mr Lam’s attractive submissions, I am unable to see any reason why the receipt of HK$280m from her immensely wealthy husband during a period of 5 months at the time when he was very ill would have raised any suspicion on Wong’s part, let alone the suspicion that he might have misused the money of his companies.

23. If the case of SHEH and SHET is taken to its logical conclusion, every time when a wife receives an unusually substantial gift from her immensely rich husband, she will have to inquiry if he had committed a wrong against his company.  There is no support in either common sense or law for such proposition.” 

11.  On that basis, the Judge ordered that HCA 2417 of 2014 be struck out on the ground that the claim is frivolous, vexatious or otherwise an abuse of process.

12.  By a notice of appeal of 27 October 2016, the Plaintiffs appealed against the order of the Judge.

13.  By a respondent’s notice of 17 November 2016, Wong sought to uphold the striking out of the claim on additional grounds.  Wong further sought a stay of HCA 2417 of 2014 pending the determination of HCA 664 of 2012 in any event.

14.  Before us, Mr Lam SC (appearing together with Mr Lung and Ms Seto for the Plaintiffs) candidly admitted that so far the Plaintiffs had focused on the personal claim of knowing receipt without advancing any proprietary claim by way of tracing in the statement of claim.  The Judge struck out the action based on the unsustainability of the plea of knowledge to support a case of knowing receipt.  He contended by way of a fallback position that even if the personal claim of knowing receipt was not sustainable, the Plaintiffs should be allowed an opportunity to advance a proprietary tracing claim in respect of the $280 million.  For that purpose, counsel also accepted that the statement of claim has to be amended and he contended that the Court should not dismiss the action so that the Plaintiffs could apply for leave to amend.  The proprietary claim, as we understand it, is based on the fact that these funds were transferred to Wong without any consideration[2] and she was in a position of a volunteer instead of a bona fide purchaser without notice. 

15.  Mr Chang SC (appearing with Ms Po for Wong) submitted that the Plaintiffs had not advanced any proprietary tracing claim before the Judge.  He had yet to the see the draft amendment and in his supplemental submissions counsel indicated that Wong could rely on other arguments (not before the Judge) to demonstrate that the tracing claim is not arguable. 

16.  At the beginning of the hearing of the appeal, we indicated to the parties that since there was no application for leave to amend before us, we would not entertain the argument based on proprietary tracing.  Instead, the proper course is for the Plaintiffs to make that application in the Court of First Instance.  To preserve the position of the Plaintiffs, we proposed not to dismiss the action even if we were to reject Mr Lam’s appeal based on the personal claim of knowing receipt.  Instead we would give the Plaintiffs a chance to make an application for leave to amend within 14 days to the Court of First Instance.  The fate of the action would be determined by the Court of First Instance, depending on the outcome of that application. 

17.  We therefore proceeded to hear the appeal with the focus solely rested on the personal claim of knowing receipt. 

18.  On the plea of knowledge, Mr Lam submitted that by virtue of Order 18 Rule 12(1)(b), it was unnecessary for the Plaintiffs to give particulars of knowledge in the statement of claim, citing Peconic Industrial Development Ltd v Yu Ka Hong Paul [2006] 4 HKC 406 at §§36 and 37.  In that case, Cheung JA applied the observation of Peter Gibson LJ in Rigby v Decorating Den Systems [1999] Lexis Citation 1791, 15 March 1999, and held in that case that the judge was wrong to strike out a cause of action on knowing receipt as the defendant had not asked for particulars of knowledge. 

19.  It is necessary read the judgment in Rigby v Decorating Den Systems, supra, with care.  It was a case in which there was a plea of actual knowledge of the falsity of certain representations in the context of allegations of fraud.  After referring to several authorities, Peter Gibson LJ said:

“ Further, there is authority that for a pleading of fraud it is sufficient simply to plead knowledge. … It is also to my mind clear …. that a pleading of knowledge in a fraud plea is one which can stand even though no particulars are given …”

His Lordship then referred to particulars of knowledge which may be ordered, and carried on:

“ But that is not say that it is a requirement of the rules that they must be pleaded, provided that actual knowledge is unequivocally pleaded, nor is it suggested that the pleading can be struck out if it does not contain such particulars of knowledge. Of course, if there is a pleading that a person ‘knew or ought to have known’ particular matters, then that rolled-up plea should be particularized … It does not seem to me a necessary requirement for a pleading of this nature, where it is quite clear that fraud is being alleged and where the pleading expressly states that the defendants had the relevant knowledge, that particulars of knowledge must be given. That to my mind is sufficient to enable the plea to withstand an application to strike out. It was, of course, open to the defendants to seek further particulars of that pleading of knowledge, and if they had not been provided it may be that the defendants could have proceeded to seek some sanction….”

20.  Thus, averment of actual knowledge is not the same as averment of “ought to have known”.  The latter does not come within the exception in Order 18 Rule 12(1)(b) and particulars should be given in a statement of claim. Secondly, the observations of Peter Gibson LJ in that case were directed towards actual knowledge of the falsity of certain representations which supported an allegation of fraud against the person having that knowledge.  It may be less straightforward in the context of an allegation of knowing receipt.  Thirdly, in cases where particulars were actually given (as in the present case), the court could examine if such particulars were adequate to support the plea of knowledge.

21.  Though Peconic Industrial Development Ltd v Yu Ka Hong Paul, supra, was a case on constructive trust, the relevant cause of action against the defendants was dishonest assistance rather than knowing receipt.  The issue of knowledge was relevant in the context of the plea of dishonesty based on actual knowledge of certain suspicious facts and matters, see §§10, 11 and 34. It was in such context that Cheung JA applied the observations of Peter Gibson LJ.  

22.  In the present case, the plea in para 17 of the statement of claim was that Wong received the funds “with knowledge of the following facts which put her on inquiry” as to the source of the funds and Mong’s lack of authority.  As we shall explain below, the crucial issue in this appeal is not whether sufficient particulars of knowledge had been given.  The crucial issue is whether the facts and matters pleaded by the Plaintiffs, seen in light of other uncontroverted circumstances surrounding the transfers, are capable of supporting an averment that a reasonable person in the position of Wong would embark on an inquiry as to the propriety of the transfers. 

23.  Some facts were set out in the particulars of knowledge, e.g. items (1) to (4). However, item (5) is not a bare averment of fact.  To recap, para 17(5) pleads:

“ The Deceased was the founder of the Shun Hing Group, and had the power to withdraw monies from the companies within the Group. Having regard to the substantial amounts involved, it was highly likely that the sums came from companies within the Shun Hing Group.”

24.  Whilst it could be said that the first sentence is an averment of fact, the second sentence is an inferential statement.  As such, in substance, it is an averment that Wong ought to have drawn the inference that the funds came from companies within the Shun Hing Group.

25.  The Judge had difficulty with such inferential statement, see [20] of the judgment.  Mr Lam submitted that the Judge’s assessment was wrong because Wong did not allude to Mong having any significant source of income independent of the Shun Hing Group and it is at least arguable that Wong “knew or suspected” that it was highly likely that the funds came from the Shun Hing Group.  Counsel also said all the particulars (including the huge amounts involved within such a short period against the background of the previous level of maintenance payments) should be taken into account in assessing whether the second sentence was sustainable.

26.  Bearing in mind that this is a strike out application, the correct test is whether it is reasonably arguable for such inference to be drawn.  The Judge had actually addressed the quantum of the funds as compared with the previous level of maintenance at [19] of the judgment.  It was also common ground that Mong was seriously ill and frequently hospitalized at the time.  Given the immense wealth of Mong and his position in the Shun Hing Group, we are unable to see anything arising from the quantum of the transfers such as to trigger reasonable inquiry by Wong. 

27.  As regards the lack of reference by Wong to other sources of income of Mong, it has to be examined against the background that even on the Plaintiffs’ case Mong was an immensely wealthy and resourceful person.  Before his demise, Mong held the position of Founder and Chairman of the Shun Hing Group and was a Permanent Director of the Plaintiffs.  He controlled substantial parts of their shares.  In light of these, we do not accept that the Plaintiffs could improve their case in this respect by reference to Wong’s inability to allude to other sources of income.  It was perfectly within Mong’s power and resource to put in place legitimate arrangements between the companies (binding on the Plaintiffs) and himself to enable his drawing monies from the companies for personal or domestic purposes.  The facts and matters pleaded by the Plaintiffs are not sufficient to give rise to any suspicious circumstances calling for inquiry on the part of Wong.

28.  The Judge took the law on knowing receipt from the judgment of the Court of Final Appeal in Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 3 HKCFAR 479.  In that case, Lord Neuberger NPJ (with whom other members of the Court of Final Appeal agreed) was content to proceed (without deciding) on the basis that the approach of Nourse LJ in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 at 455 on knowing receipt was correct.  The requisite state of mind is as follows:

“ The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt.”

29.  Mr Lam placed reliance on Lord Neuberger NPJ’s judgment at §134 that it can be unconscionable for a party to retain property in circumstances which do not involve dishonesty, but which do involve irrationality. 

30.  Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2), supra, was decided in the context of a commercial transaction and the party who sought to retain property was a bank which had advanced a loan on the strength of an unauthorized security.  Whilst we agree in principle that for the purpose of establishing liability for knowing receipt, circumstances rendering it unconscionable for a recipient to retain a benefit could encompass cases where there was no dishonesty on the part of the recipient, one must have regard to the context of the transaction in question. 

31.  Snell’s Equity 33^rd Edn at §30-072 had this to say:

“ … The degree of knowledge which might make the defendant’s conduct unconscionable varies with the context. This allows the court to set a standard that is appropriate to exigencies of the transaction in question. …”

32.  In the present case, the Plaintiffs’ case on knowing receipt, as found in paras 17 to 21 of the statement of claim, was built on the premise that the facts and matters known to Wong put her on inquiry.  This was the basis on which the Plaintiffs pleaded that she had turned a blind eye by wilfully and recklessly failing to make any inquiry (at para 19), that there was irrationality (at para 20) and thus it was unconscionable for her to retain the benefit (para 21).

33.  The Judge did not strike out the claim of knowing receipt by reason of lack of particulars.  Particulars were given in the statement of claim.  He struck out the claim on the basis that the particulars do not support a case of Wong being put on inquiry as to the misuse of the Plaintiffs’ funds by Mong, see [22] of the judgment.  Hence, as stated earlier, the crucial issue in the appeal regarding the claim of knowing receipt is whether the judge was correct in this regard.

34.  We have already adverted to the Judge’s difficulty with the inferential statement in the second sentence of para 17(5) and Mr Lam’s submissions on the same.  As that second sentence cannot be regarded as a statement of fact, the Judge was entitled to consider if such inference is capable to be drawn in the context of a strike out application.  We agree with the Judge’s assessment that the averment that Wong should have inferred that the monies had to come from Shun Hing Group in an irregular manner is untenable.  In the absence of any knowledge (actual or constructive) as to irregularities in the transfers from the Plaintiffs’ accounts to the bank accounts of Mong, Wong was entitled to take the money drawn from Mong’s personal accounts as his money beneficially. 

35.  Thus, knowledge of the fact in the first sentence is not, in our view, capable of giving rise a reasonable suspicion that the monies could have come from Shun Hing Group to Mong’s accounts through unlawful or improper means.

36.  Mr Lam submitted that the Judge had embarked on a mini-trial when he took account of Wong’s evidence that these transfers were made when he was very ill with a view to secure the future of Wong and their young child Perlie. 

37.  On the other hand, Mr Chang submitted that the uncontradicted evidence rendered the result contended for by the Plaintiffs untenable.  Simply put, counsel said there was no case for any suspicion in light of the immense wealth of Mong, his generosity to Wong and Perlie as well as members of the first family, his repeated assurances to Wong to secure her and Perlie’s future and the cheques were given at the time when he was seriously ill.  There was nothing to put Wong on inquiry. 

38.  We agree with Mr Chang.  Bearing in mind the circumstances in which these transfers were made and the other matters we have alluded to above, we cannot discern any reasonably arguable basis to support the plea that Wong had been put on notice of matters which should have caused her to doubt the propriety of these payments.  As we have said, Wong was entitled to proceed on the basis that proper arrangement had been made between Mong and the Shun Hing Group, including the Plaintiffs, to give him access to funds for personal or domestic use in light of Mong’s wealth and position in the Group. 

39.  This being the case, the pleas in [18] to [21] of the statement of claim cannot be sustained. 

40.  For these reasons, the Judge was correct in striking out the only claim advanced by the Plaintiffs before him based on knowing receipt. 

41.  Therefore, subject to the indulgence indicated at [16] above, we dismissed the appeals with costs without prejudice to the Plaintiffs’ application for leave to amend to advance a claim based on proprietary tracing.  Since the original statement of claim is struck out, it is more accurate to describe the new application as an application to file and serve a fresh statement of claim.  As mentioned, we gave the Plaintiffs 14 days to file and serve the application.

42.  In respect of the application by Wong for the stay of the action, we directed that it is to be heard by the Court of First Instance together with the application for leave to file a fresh statement of claim.

43.  Since the Judge struck out the only claim before him in HCA 2417 of 2014, he also dismissed the summons of 21 April 2016 seeking to have both actions to be heard and tried together and for discovery against Wong.  In view of our conclusion above on the knowing receipt claim, we did not disturb the Judge’s dismissal of that summons.  If the Plaintiffs manage to obtain leave to file a fresh statement of claim in HCA 2417 of 2014, it is up to them to issue a fresh summons for both actions to be heard together and for discovery.  That application would have to be considered by the Court of First Instance in light of the fresh statement of claim.