DINGWAY INVESTMENT LTD (Provisional Liquidators Appointed) v. CHINA CITY CONSTRUCTION & DEVELOPMENT CO. (HONG KONG) LTD AND OTHERS

HCA 309/2022

[2022] HKCFI 1893

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 309 OF 2022

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DECISION

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A.  INTRODUCTION

1.  This is P’s application for leave to appeal against the order that I made on 6 May 2022 whereby I dismissed P’s summons dated 14 April 2022 (“the Order”) (see [2022] HKCFI 1312 (“the Decision”)).

2.  There is no dispute that under s.14AA(4) of the High Court Ordinance (Cap. 4), leave would not be granted unless the intended appeal has a reasonable prospect of success; or it is, for some other reasons, in the interest of justice to be heard by the Court of Appeal.

3.  I turn to consider the proposed grounds of appeal set out in the draft Notice of Appeal attached to P’s present summons.

B.   GROUND 1: FAILING TO DEAL WITH THE BASES OF P’s DISCLOSURE SUMMONS OTHER THAN THE TRACING CLAIM

4.  Under Ground 1, P contends that a tracing claim is not a necessary requirement for the court to exercise its jurisdiction under the Norwich Pharmacal principles or s.21 of the Evidence Ordinance (Cap. 8). P argues that, in dismissing P’s summons on the ground that there is no reasonably arguable tracing claim, I have ignored that the court may grant third party disclosure orders to police compliance with the mareva injunctions granted against the defendants and to ensure that the injunctions are effective (Yaron Brown and others v Lexinta Ltd and others [2018] HKCFI 2302, §16(1)). P now contends that, at the very least, P should be provided with information on the current balance of the accounts of D1, D6 and D7 maintained with BoC and BoComm.

5.  While I agree with the general legal principles cited by P, the problem is that this was not how the matter was argued before me. As I stated in §6 of the Decision, P’s application was made expressly to give effect to the freezing injunctions and facilitate P’s tracing and following claims to recover the sale proceeds of the Land.

6.  Furthermore, D1 is not subject to any mareva injunction. As to D6 & D7, it is well established that where a case does not involve proprietary claims, “Absent any evidence of abuse such as non-compliance with the Mareva injunction, the court will normally refuse to order further disclosure in addition to the standard disclosure” (Pacific King Shipping Holdings Pte Ltd v Huang Ziquang [2015] 1 HKLRD 830, §§31-32).  There was no allegation of any such abuse on the part of D6 & D7. I disagree with P’s submission that the said principle does not apply to thirty party disclosure orders. In §28 of the judgment in Pacific King Shipping Holdings Ptd Ltd, Poon J (as he then was) held that “What concerns this appeal specifically are those principles which govern disclosure against a third-party bank in the context of a domestic mareva injunction in aid of some foreign proceedings…” (emphasis added) (see also §30 of the judgment where the learned judge referred again to “disclosure against a third- party bank”).

7.  For these reasons, I do not find the proposed Ground 1 reasonably arguable.

C.   GROUND 2: ERRED IN HOLDING THAT P DOES NOT HAVE A REASONABLY ARGUABLE CASE OF TRACING CLAIM

8.  Under ground 2(a), P argues that there is no legal basis to justify the “reasonably arguable test” used by me in §9 of the Decision. Indeed, in §21 of the Decision, I concluded that “I am not satisfied that it is reasonably arguable that P can trace the sale proceeds of the Land.” P submits that it should be sufficient to show that there is “a serious issue to be tried”.

9.  First, there does not appear to be any direct authority which shows that I have adopted the wrong test. Second, I am unable to discern any material difference between the two tests in the present context, or how it would have made any difference to my conclusion. A serious question to be tried requires a real prospect of success (see Hong Kong Civil Procedure 2022, vol. 1, §29/1/10 at pp. 791-792). If a claim is not reasonably arguable, I fail to see how it will have any “real” prospect of success.

10.  Under ground 2(b), P is, in effect, trying to repeat the same arguments which I have rejected. In particular, P contends that I did not identify the “original property” correctly in considering the tracing claim. It is correct that, in §18 of the Decision, I identified the “original property” to be the Land. P argues that the original property over which P asserts a proprietary claim is the 100% shareholdings in CCCC Holdings LLC (“the Shares”). For reasons I explained in detail in the Decision, this is exactly where P has gone wrong. In short, the sale proceeds came from the Land; not the Shares. P refers to Lewin on Trusts (20^th ed.), vol. 2, §44-098(2) where the authors state “Since tracing is concerned with the identification of the value inherent in one asset in another asset, identification of that value in the other asset does not necessarily depend upon a transfer of the asset or an interest or share of the original asset. And so where a trustee in breach of trust procures that a company, with only one issued share which is owned by the trust, issues 99 new shares in the company to the trustee or a third party without any consideration being paid for the new shares, so that 99 per cent of the value of the original share is transferred into the new shares, the new shares are the traceable product of the original share owned by the trust.” This passage is concerned with an entirely different legal issue i.e. there is no need for any “transfer” properly-so-called between the original property and the new/substitute property; another good example is tracing monies which have gone through different bank accounts when in fact there is no actual “transfer” of any money at all. The fallacy in P’s argument is that, putting aside the commercial reality, in law, one cannot “trace” the Land back to the Shares because the Shares did not give any proprietary interests in the Land to P at all in the first place.

11.  P argues, in the alternative, that even if the sale proceeds of the Land are not to be regarded as the fruit of the Shares, they are plainly the fruit of D4’s constructive trusteeship and hence are themselves trust property. This is because it was only by virtue of D4’s control of the Shares (arising from its constructive trusteeship) that the Land was sold by D5, giving rise to the sale proceeds now received in the hands of D1/6/7. I assume for the present purpose that D4 held the Shares on constructive trust for P; but D4 still would not have any proprietary interest in the Land or the sale proceeds thereof. The fact that D4’s legal ownership of the Shares enabled it to dispose of the Land is neither here or there for the purpose of considering the viability of the tracing claim. By procuring the disposal of the Land wrongfully, it may be argued that D4 had also wrongfully depleted the value of the Shares, which it held on constructive trust for P. But it does not follow that P has the right to go after the sale proceeds. In this respect, P cites Swain v The Law Society [1982] 1 WLR 17 at 36E-F which referred to the rule that “a trustee must not put himself in a position in which his own interests and those of his beneficiary conflict, and sometimes as merely an application of the principle that that which is the fruit of trust property or of the trusteeship is itself trust property”. It is clear that the facts of that precedent were materially from those in the present case. That precedent stands for the proposition that, if a person in a fiduciary position commits a breach of duty by putting himself in a conflict position, the property that he has obtained as a result of such breach will be subject to a trust. It is wrong to take the phrase “fruit of trust property or of the trusteeship is itself trust property” out of context.

12.  Under the proposed Ground 2(b), P contends that its proprietary claim can also be supported on the ground of unjust enrichment. P accepts that this was not a ground argued before me. In principle, it will be wrong to grant leave on a ground which has not been advanced.

13.  I do not find it necessary to deal with the other authorities cited by P, which do not take the matter any further. For these reasons, I am not satisfied that the proposed Ground 2 is reasonably arguable.

D.   LEAVE SHOULD BE GRANTED FOR “SOME OTHER REASONS”

14.  In P’s Skeleton Argument, P submits that leave should be granted for “some other reasons” because it is extremely common that a company is incorporated for the single purpose of holding a landed property, and also very often that a trust is created over the shares of such a company; and if the trustee of the shares procure the sale of the landed property and dissipates the sale proceeds, it is a question of general and public importance as to whether the beneficial owner of the shares can directly assert a proprietary claim over the sale proceeds.

15.  Leave to appeal should only be granted “for some other reasons” if there are truly exceptional circumstances in the interest of justice to do so. What P describes may well be a common scenario. But the fundamental principles of company law that I relied on in the Decision must apply equally irrespective of whether the company is a single purpose company holding landed property or not.

E.   CONCLUSION AND ORDERS

16.  For all the above reasons, I dismiss P’s application for leave to appeal against the Order.

17.  Having considered the statements of costs of D1, D6 and D7, and P’s submissions in response thereto at the hearing, I assess summarily the costs that P shall pay to them as follows:

(a)  D1: $180,000;

(b)  D6: $100,000;

(c)  D7: $130,000.