CHEUNG YUK FUNG v. YIP CHI KEUNG AND ANOTHER

DCCJ 259 & 306/2019 (Consolidated)

[2022] HKDC 1208

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 259 OF 2019

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IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 306 OF 2019

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(Consolidated by Order of Master Raymond Chow dated 4 March 2019)

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DECISION

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INTRODUCTION

1.  By Summons dated 27 April 2022, the 1^st and 2^nd defendants sought leave to appeal to the Court of Appeal against the judgment I handed down in this action on 31 March 2022 (“the Judgment”).

2.  In the Judgment, this court found that both the 1^st and 2^nd defendants were liable to return $97,618 to the plaintiff.

FACTS

3.  The facts are more thoroughly stated in the Judgment, but I will recap very briefly here.

4.  The plaintiff and the 1^st defendant entered into a joint venture agreement (“the Oral Agreement”). The plaintiff would contribute $400,000 in cash, and the 1^st defendant would contribute $400,000 in kind by renovating the office of the new company (“the Company”).

5.  Pursuant to the Oral Agreement, the plaintiff deposited $400,000 into the 2^nd defendant’s bank account at the 1^st defendant’s direction. It was one of the terms of the agreement that, out of that $400,000 cash, $5,000 would be used to pay for the plaintiff’s 50% share capital in the Company, and the remaining $395,000 would be used for the Company’s working capital (“the Agreed Specific Purposes”).

6.  Dispute arose as to whether the defendants had injected the plaintiff’s funds into the Company.[1] This issue was hotly contested at trial. The defendants had produced an Excel Sheet setting out all the transactions in showing how the funds were used to defray the Company’s expenses. As a result, only $50,000 was left by the time the Company’s bank account was opened in three months.

7.  Towards the end of hearing evidence at the trial, it had emerged that quite a number of items in the Excel Sheet booked as extra works for the renovation of the Company were in fact double-charging items, totalling $79,618. In closing submissions, the defendants’ trial counsel conceded that those items should be taken away from the Excel Sheet.[2]

8.  This court found that the defendants are jointly and severally liable to return to the plaintiff a total of HK$97,618, being the double-charged expenditures of $79,618 plus a shortfall of $18,000, and so ordered.[3]

PROPOSED GROUNDS OF APPEAL

9.  The defendants put forward six proposed grounds of appeal which can be summarized as follows:

(1)  This court was wrong in granting relief against the 2^nd defendant as the 2^nd defendant was not a party to the Oral Agreement. (This proposed Ground 1 is related to the 2^nd defendant only).

(2)  There was no valid legal basis for this court to have ordered a refund of HK$97,618 by the 1^st and 2^nd defendants to the plaintiff where there was no pleaded cause of action for unjust enrichment or otherwise.

(3)  The Order made by this court offended the rule against ‘reflective loss’ in company law.

(4)  This court was wrong in finding that there was no agency relationship between the Company and the 2^nd defendant.

(5)  This court was wrong to disregard the Blessing Receipt in accepting the BTB Receipt.

(6)  This court was wrong in finding that the $400,000 was paid by the plaintiff to the 1^st and 2^nd defendants in accordance with the Oral Agreement, contrary to the defendants’ submission on agency (see Ground 4).

DISCUSSION

Ground 1: Privity of Contract and Unjust Enrichment

10.  Mr C W Ling (appearing for the defendants in this application but had not appeared at the trial) submitted that while this court had found the Oral Agreement existed between the plaintiff and the 1^st defendant, it was wrong for this court to have ordered against the 2^nd defendant for returning the money as the 2^nd defendant was not a party to the contract.

11.  In my view, however, Mr Ling has failed to note that the Order made by this court against the 2^nd defendant was not based on contract, it was based on Counsel’s concession and unjust enrichment. At the conclusion of the trial, I found that it was just and equitable to make the Order against the 2^nd defendant.[4]

Concession

12.  In his written closing submissions, the defendants’ trial counsel started by suggesting deducting the double-charged items from the Excel Sheet.[5] He compiled a table summarizing the double-charged items totalling $75,418.

13.  During the oral hearing for closing submissions, this court specifically asked the defendants’ counsel twice to clarify his position. First, I asked the defendants’ counsel what he wanted this court to do with the double-charged items. The defendants’ counsel replied “if those items are so clear to such extent that they must be overlapping items, then I will suggest those items be taken out from the summary table and those will not be counted towards the expenses of the Company.”  During the exchanges between counsel and the court, there was also discussion about the deficiency (the shortfall) of the balance of the Excel Sheet and other double-charged items.

14.  In order to ascertain a clearer position from the defendants’ counsel after the exchanges, this court asked the defendants’ counsel for a second time what his suggestion or submission was in relation to those items. The defendants’ counsel directly answered “My suggestion is that it would be taken away from the summary table (the Excel Sheet).”

15.  The defendants’ counsel was well aware that the plaintiff’s claim was for the return of money (see the pleading point below). By asking the court to take away the double-charged items from the Excel Sheet, the defendants’ counsel was, in effect, making an admission of no defence to such portion of the $400,000 claimed by the plaintiff.

16.  It was, therefore, understood between the parties and acknowledged by the court that the concession was that if the court found there were double-charging items causing deficiencies to the $400,000, the defendants were willing to return the misappropriated amount found by this court to the plaintiff.

17.  Such concession did not exclude the 2^nd defendant.

Unjust enrichment

18.  In the course of giving the Judgment, this court had also considered the law of restitution (more particularly unjust enrichment) to decide whether the concession made by the defendants’ trial counsel was legally sound.

19.  In Goff & Jones, The Law of Unjust Enrichment, (9^th Edn, 2016), paras 3-72 & 3-74, the learned authors discussed the topic of Contract and Unjust Enrichment in Multi-party Cases:-

“3-72 A second and overlapping concern was that C should not be afforded a clam in unjust enrichment against D, if this would illegitimately relieve C of risks that he assumed when transacting with X. …

3-74  Note that a difficult question inevitably arises as to what facts might displace this objection. For example, could C avoid it by proving that his decision to contract with X, and/or his decision to benefit D pursuant to the contract, was materially impaired, for example by some causative mistake? … Alternatively, could C avoid this objection by proving conduct on D’s part, which disables D from arguing that C should bear the relevant risk? Consider a case where D encourages C to confer the benefit in the belief, for which D is responsible, that C could look to D to pay him, if C’s counterparty, X, should fail to do so [footnote 189].”

20.  The learned authors invited practitioners to consider the latter situation by referring (in footnote 189) to the case Mike Glynn & Co v Hy-Brasil Restaurants Inc 914 NE 2d 103 (2009), a case decided by the Massachusetts Appeals Court in the United States.

21.  In Mike Glynn, it was an appeal by the defendants from a judgment entered after trial that held both the defendants jointly and severally liable on the basis of quantum meruit to pay the plaintiff-subcontractor for its services. The background of that case is that the plaintiff-subcontractor continued to provide renovation works to the employer after the main contractor failed to perform the contract. The plaintiff sued the employer company and its chief officer as defendants. The salient feature, in that case, was that the trial judge concluded that there was no written or oral contract between the plaintiff and the defendants, and used additional evidence to decide the issue of whether the plaintiff expected to be repaid by the defendants.

22.  Justice Dreben, on behalf of the Massachusetts Appeals Court, delivered the judgment as follows:-

“Before discussing the reasons why we consider recovery appropriate in this case, we note that although the trial judge distinguished the plaintiff’s claim for unjust enrichment from that of quantum meruit, the terms are not as separate as he suggests (see note 2, supra). In the oft-cited case of Salamon v. Terra, 394 Mass. 857, 859, 477 N.E.2d 1029 (1985) (Salamon), the court stated:

‘A quasi contract or a contract implied in law is an obligation created by law “for reasons of justice, without any expression of assent and sometimes even against a clear expression of dissent. … [C]onsiderations of equity and morality play a large part … in constructing a quasi-contract …” 1 A. Corbin, Contracts § 19 (1963). It “is not really a contract, but a legal obligation closely akin to a duty to make restitution.” Bloomgarden v. Coyer, 479 F.2d 201, 210 (D.C.Cir. 1973). “A person who has been unjustly enriched at the expense of another is required to make restitution to the other.” Restatement of Restitution, § 1 (1937). The underlying basis for awarding quantum meruit damages in a quasi-contract case is unjust enrichment of one party and unjust detriment to the other party.’

…

In sum, we consider the judge correct in concluding that the plaintiff expected the defendants to pay and that the defendants reasonably should have expected to pay for the plaintiff’s work. …

Our decision is based on present Massachusetts case law, which often cites the first Restatement of Restitution (1937). We note that the result we have arrived at here (except for the subtraction of $5,000) is more easily reached under the black letter Tentative Draft § 29 set out in the margin. See also comment a, and illustrations 1 and 2. Of interest is the following comment in the Reporter’s Note to that draft, at 62:

‘[Where there is] a claim against a defendant who stands to retain the performance for which he contracted, and without paying anybody for it – denial of restitution is today a distinct rarity. Concededly, there remain jurisdictions in which the subcontractor’s claim will be rejected out of hand. A decision like that in Henning v. Security Bank, 564 N.W.2d 308 (Iowa 1997), may still state baldly that a subcontractor not in privity with the owner can recover only by enforcement of a mechanic’s lien. But the lingering impression that unpaid subcontractors not in privity can rarely recover in restitution no longer reflects the tendency of the decisions. [Footnote 13: the following cases, among others, allow unpaid furnishers of labor and materials to recover from property owners not in privity of contract with them].”

23.  I had noted that the decision of the Appeals Court in MA was based on Massachusetts case law which often adopted the first Restatement of Restitution (1937), and the judges had taken into account the Tentative Draft No 3 (March 22, 2004) while the American Law Institute was in the process of updating the second Restatements. The above comment in the Reporter’s Note to the draft had been adopted the same into the Third Restatement of Restitution and Unjust Enrichment (2011). The Restatement clearly shows the trend in common law by restating the common law principles and the equitable rules of law.

24.  I think the authorities cited in Goff & Jones, especially Mike Glynn, are very instructive.  In the course of giving my Judgment, I had considered that there was no reason why I should not adopt the same equitable principle of unjust enrichment against a non-party to the agreement.

25.  As in our present case, I had taken into account the BTB Receipt, which confirmed the funds would be applied as the Company’s working capital.[6] Further, the Excel Sheet (prepared by the 2^nd defendant) was produced by the defendants to the court to justify how the $400,000 had been spent. Once the court had found that there were false entries in double charging and deficiencies (shortfall) in the total amount of $97,618, I did not see why the 2^nd defendant could keep that amount “in its own pocket”[7] without repaying to the plaintiff. Based on the counsel’s concession and the law of unjust enrichment, I found it just and equitable for the 2^nd defendant to return the said amount to the plaintiff.

26.  Mr Ling submitted that, as in Mike Glynn, the authorities seemed to suggest that there was a requirement that the non-party claimant had to be “motivated” or “encouraged” by the defendant to provide the benefit and, as such, the claimant would reasonably expect the defendant to pay.

27.  I think, however, there is no such requirement of encouragement, nor was there any requirement of request, for money had and received. If we go back to the history of the law of restitution, there is a clear distinction between money paid (money had and received) and services rendered (quantum meruit). The rationale for the difference was explained in Goff & Jones, The Law of Restitution, (7^th Edn, 2007), paras 1-018 & 1-019:-

“1-018 The most common example of a positive benefit is money, which has the peculiar character of a universal medium of exchange. The mere receipt of money is therefore a benefit to the recipient. It is for this reason that restitutionary claims for money had and received are so frequent. Such claims are generally personal rather than proprietary ….

“1-019  The receipt of money always benefits the defendant. But services may not do so. From their very nature services cannot be restored; and the defendant may never have wished to receive them or, at least, to receive them if he had to pay for them. As Pollock C.B. laconically once remarked: ‘One cleans another’s shoes. What can the other do but put them on?’  For that reason the common law originally concluded that a defendant could be said to have benefited from the receipt of services only if he had requested them. …”

28.  In our present case, perhaps more importantly in my view, the agreement made between the plaintiff and the 1^st defendant was not to confer any benefit upon the 2^nd defendant. If the contract between the plaintiff and the 1^st defendant had failed, the 2^nd defendant should have reasonably expected to repay the money to the plaintiff (Mike Glynn, p 109).

29.  Mr Tsui submitted that the essential question to ask is whether the arrangement of directing the plaintiff to pay the 2^nd defendant in discharge of his contractual obligation vis-à-vis the 1^st defendant per se is a result of the parties’ choice of risk allocation in a certain way. He said the answer must be “no” and quite to the contrary, the plaintiff did so on the mere direction of the 1^st defendant. He also pointed out that the 2^nd defendant was under the sole ownership and control of the 1^st defendant. As such, he submitted that the Order against the 2^nd defendant was rightly made.

30.  I entirely agree.

31.  For local authorities, see Yew Sang Hong Ltd v Housing Authority [2008] 3 HKLRD 307, per Reyes J, at para 23:-

“One must examine each situation. Where allowing restitution would subvert a contractual (or statutory) regime whereby risks have been allocated in a particular manner, restitution will be excluded as a matter of principle. However, where no relevant regime of risk allocation can be identified, there may well be scope for the grant of restitution.” (Emphasis added)

32.  In view of the concession made by the defendants’ counsel at trial, there is no merit on this ground.

Ground 2: Pleading Point

33.  Mr Ling challenged that unjust enrichment was not pleaded and therefore there should not be any restitutionary remedy. This was not a point raised at trial.

34.  The only challenge to the pleadings raised by the defendants’ counsel at trial was that this action should have been brought by the Company (which is not a party to this action), not by the plaintiff. In his oral closing submissions, the defendants’ counsel had clearly acknowledged “the plaintiff was asking for the return of his money,” and he urged the plaintiff to accept being bound by such pleadings.

35.  In fact, the defendants had put forward an affirmative defence in response to the plaintiff’s allegation of failure of the Agreed Specific Purposes:-

Paragraph 14 of the Amended Defence reads:-

“a) since June 2018, the 1^st Defendant had caused the 2^nd Defendant to apply such part of the Deposited Sum to defray the costs and expenses of the Company from time to time, including but not limited [to] rental deposit, office set up costs, furniture supplies, administration costs, etc;

…

e)  by September 2018, all of the Deposited Sum had been fully used up by the Company to defray its costs and expenses or such other sums as may be required for the operation of the Company.”

36.  That went into the crux of the issue at trial.

37.  The defendants even produced an Excel Sheet setting out all the expenditures that allegedly expended the whole $400,000.

38.  The plaintiff’s pleaded, among other things, for restitution relief as follows:-

The Re-Amended SOC reads:-

“2. The 2^nd Defendant is a limited company incorporated in Hong Kong, where the 1^st Defendant is and was at all material times the sole shareholder and director.

9. Pursuant to the Agreed Specific Purposes and or the Oral Contract, the Plaintiff advanced and/or transferred the Funds of HK$400,000 to the D2’s Bank Account on 15 June 2018.

14. However, as it turned out, the Funds paid by the Plaintiff have never been applied by the 1^st Defendant in accordance with the Agreed Specific Purposes. The 1^st Defendant also has no intention whatsoever to apply the Funds to the Agreed Specific Purposes. As such, the Agreed Purposes failed.

15. In this connection, the bank account of the New Company was set up on 13 September 2018. However, the account only has a balance of HK$50,150 as the minimum deposit. The Funds of HK$400,000 had never been deposited into this bank account by the 1^st and/or 2^nd Defendants.

17. The 1^st defendant has therefore committed breach of the Quistclose trust and/or a breach of the Oral Contract. By reason of the 1^st defendant’s breach of the Quistclose trust and/or the Oral Contract:

(a) The 1^st Defendant has made profits out of the breach.

(b) Further and/or alternatively, the Plaintiff has suffered loss and damage.

22. By reason of the 2^nd Defendant’s knowing and/or unconscionable receipt:

(a) The 2^nd Defendant has made profits out of the knowing and/or unconscionable receipt.

(b) Further and/or alternatively, the Plaintiff has suffered loss and damage.”

39.  Counsel for the plaintiff submitted that Paragraph 22(a) “made profits out of the knowing and/or unconscionable receipt” covered the elements of unjust and enriched on the part of the 2^nd defendant, and that Paragraph 22(b) “the Plaintiff has suffered loss and damage” covers the element of at the plaintiff’s expense. I agree.

40.  However, I think Paragraph 23 and the Prayer of the Re-Amended SOC are also important.

  Paragraph 23 of the Re-Amended SOC reads:-

“23. In these circumstances:

(a) The Plaintiff is entitled to seek an account of profits from the 2^nd Defendant.

(b) Further and/or alternatively, the Plaintiff is entitled to claim damages and/or equitable compensation against the 2^nd Defendant as knowing receipt.

(c) Further and/or in the alternative, the Plaintiff is entitled to claim for a return of the HK$400,000.” (Underline added)

The Prayer prays:

“AND THE PLAINTIFF CLAIMS AGAINST THE 1^ST DEFENDANT:

(1)  The sum of HK$400,000.

…

AND THE PLAINTIFF CLAIMS AGAINST THE 2^ND DEFENDANT: [which corresponds to Para 23(a) & (b)]

(4)  Damages and/or equitable compensation for knowing or unconscionable receipt;

(5)  Further and or in the alternative to (4) an order that the 2^nd Defendant account to the Plaintiff all direct or indirect profits, benefits … on the ground of knowing or unconscionable receipt’

AND THE PLAINTIFF CLAIMS AGAINST THE 1^ST and 2^ND DEFENDANTS: [which corresponds to Para 23(c)]

…

(7)  An order requiring each of the 1^st and 2^nd Defendants to forthwith return and/or transfer, …. the respective sums transferred to each of them … to the Plaintiff.” (Underline added)

41.  In the course of giving the Judgment, I found that, by reading the pleading as a whole, the Re-Amended SOC had pleaded facts sufficient to support a claim for restitution against the defendants.

42.  Mr Ling, however, submitted that the express words of “unjust enrichment” had to be used and that the plaintiff could not just plead the material facts without specifying the cause of action in its legal term.

43.  I disagree. Although the plaintiff did not expressly use the words “unjust enrichment,” I found that the claim for restitution was sufficiently clear by reading the pleading as a whole. In any event, I had found that the pleading itself and the exchanges between the court and counsel would have allowed me to make reimbursement against the defendants to the plaintiff.

44.  Recently in respect of the pleading point of “unjust enrichment”, Chu JA had this to say in the Court of Appeal judgment in Ng Po Yu v Lam Kai On [2021] HKCA 263 at paras 42-43, 48-49 & 52: (see also Hong Kong Civil Procedure 2022, note 18/8/38)

“42. Mr Li, who together with Ms Chung appeared for Daughter argued there is no rule or form prescribing how the claim founded on unjust enrichment should be pleaded, and that the relevant consideration is whether the facts necessary for the claim have been pleaded. He referred to Goff & Jones, The Law of Unjust Enrichment, 9^th ed at [1-37] which stated:

“When pleading claims in unjust enrichment, all that is required for a claimant to state the nature of the claim and the facts on which he relies, and that can be done without mentioning the old forms of action.”

43. It is Mr Li’s submission that the necessary material facts have been pleaded in [32] and [35] of the ASOC, and a claim for reimbursement has been set out in paragraph 6 of the Prayer.

…

48. Counsel are in agreement that a plaintiff cannot plead a general plea of unjust enrichment. As held in Charles Uren v First National Home Finance Limited [2005] EWHC 2529 at [16] and [18], he has to plead facts that are capable of bringing the case within one of the established restitutionary claims or some justifiable extension of them. But if the facts were sufficient it would not matter that there is no pleading of some particular category of restitutionary claim.

49. As accepted by Mr Li, the drafting of the ASOC (for which he is not responsible) is far from being satisfactory. I, however, agree with him that on a fair reading of it, the necessary facts to support a claim of unjust enrichment have been pleaded.

…

52. Further, although unjust enrichment is not expressly referred to in the pleading, having regard to the parties’ written opening and closing submissions as well as the exchanges between counsel and the Judge at the trial, it cannot be said that the defendant was taken by surprise or that there was no opportunity for the defendant to meet the claim.”

45.  I would also draw counsel’s attention to Goff & Jones, The Law of Unjust Enrichment, supra, at paras 1-34 & 1-35:-

“1-34 Most remedies for unjust enrichment are restitutionary. Compensation remedies for wrongdoing are sometimes described as restitutionary, meaning that they are awarded in order to restore the claimant to the position that he would have occupied if the wrong had not been committed. That is not the sense in which the term ‘restitutionary’ is used in this book: we use the term to describe remedies which reverse transfers of benefits from claimants to defendants.

1-35 In most cases, claims are made for a personal restitutionary remedy, ie for an order that the defendant account for and pay over a sum of money that represents the value of his unjust enrichment at the claimant’s expense.” (Emphasis added)

Restitution

46.  Counsel for the defendants has put forward a few more points in challenging the restitutionary remedy granted by this court. However, none of those points had been taken by the defendants at the trial before me. I shall nevertheless briefly deal with those points.

47.  First, Mr Ling asserted that there was an undisputed Oral Agreement to each invest $400,000 into the new joint venture company in return for “50% shareholding” and control. He submitted, in that regard, there could be no complaint of any breach of contract. The logic he relied on is that the plaintiff got what was agreed, and he had to pay the agreed price for it.

48.  With respect, counsel for the defendants has failed to note the difference between the share capital and the Company’s net worth. It was not disputed that only $5,000 out of the $400,000 was for the Company’s share capital, and that the remaining $395,000 was for the working capital of the Company. I had made a note of such distinction in paragraph 31(4) of my Judgment that, while the plaintiff would be in due course entitled to 50% shares of the Company, the Company delivered to him ought to be an $800,000 worth of company (ie having $395,000 working capital contributed by the plaintiff and $400,000 worth of renovation contributed by the 1^st defendant).

49.  The plaintiff’s complaint, as clearly understood by the defendants, was that the defendants had never deposited the $395,000 into the new company. In this respect, I had held, in paragraphs 41 & 44 of the Judgment, that the plaintiff gave the money to the 1^st defendant on the faith that the money would be applied as the Company’s working capital. So, the main question turned on whether the defendants had indeed injected the funds into the Company, or before they were able to do so, they had already exhausted the whole funds to pay for the Company’s expenses (see paras 63–66 of the Judgment). In paragraph 66 of my Judgment, I had emphasized that if the 1^st and/or 2^nd defendants had never applied the funds to pay for the expenses of the Company but spent for his own benefit, that would mean the funds had never reached the Company. That would be a breach of the terms of the Oral Agreement, and the funds ought to be returned.

50.  As the evidence unfolded, and upon my finding on evidence after trial, I found that there were double-charged items, which meant that part of the money had never been applied as the Company’s working capital. I found that the money remained “in the 1^st or 2^nd defendant’s pocket” (para 88 of the Judgment). I had also recorded the concession made by the defendants’ counsel on this point (paras 90 & 91 of the Judgment). Nevertheless, I continued to hold that such portion of the funds had never been paid to the Company, and I ordered that it should be returned to the plaintiff (para 92).

51.  In so concluding, I do not agree with Mr Ling that the plaintiff had got what he had been paying for. I had already found that the 1^st defendant had failed to deliver an $800,000 worth of company to the plaintiff (namely, failing to inject the plaintiff’s funds into the Company), and that was a breach of contract. It was understood between the plaintiff and the defendants that restitution was the ultimate claim of the plaintiff, whether in furtherance or as an alternative to the claim of Quistclose trust or breach of contract.  

52.  Second, Mr Ling argued that the plaintiff had failed to plead that the 1^st defendant owed the plaintiff a personal contractual duty to ensure the funds were “properly” expended and to account for any improper expenditure. He submitted that any breach of such duty would not give rise to a restitutionary remedy in the form of a refund of the unexpended (or improperly spent) portion of the plaintiff’s money.

53.  I disagree. I found that what was pleaded in paragraph 14 of the Re-Amended SOC was sufficient. Attention should be drawn to the fact that I had already found that the Agreed Specific Purposes were one of the terms of the Oral Agreement.

54.  On the other hand, Mr Tsui submitted that Mr Ling’s complaint was based on a misreading of the plaintiff’s pleaded case and the evidence. Mr Tsui submitted along the line I had stated above. He further submitted that it is trite law that restitution could be a measure of damages in case of breach of contract. He referred to the term of “restitution interest” in Chitty on Contracts, (34^th Edn, 2021), paras 29-022 (& 29-029):-

“It is pointed out that the victim of a breach of contract has a number of interests which may be protected by an award of damages. First, he may have paid money or conferred some other benefit on the other party, and he will have an interest in recovering the money on the value of the benefit conferred. This has been termed the ‘restitution interest’ and there is a very strong moral argument for protecting it, as it represents both a loss to the claimant and a corresponding gain to the defendant.”

55.  I agree with Mr Tsui’s submissions on Chitty. “Restitution interest” was the basis on which I ordered the restitutional damages in favour of the plaintiff against the 1^st defendant.

56.  In reply, Mr Ling modified his first argument slightly differently. He submitted that a restitutionary claim would only be possible upon proof of a total failure of consideration (Khan v Malik [2011] EWHC 1319 (Ch), at paras 130 & 132). He said the plaintiff had received his 50% shareholding of the Company; $5,000 of his contribution was counted as share capital; and the $395,000 had been “partially” used as the Company’s working capital. It was therefore submitted that there was no total failure of consideration.

57.  I do not accept Mr Ling’s submission that there was no total failure of consideration. Various passages in Chitty had been referred to me by both counsel at this hearing. However, I would draw counsel’s attention to Chitty, supra, Footnote 142 in para 29-025, that:-

“It seems that it suffices if there has been a total failure in respect of a part of the contract if the price is divisible or can readily be apportioned, as in Dawood Ltd v Health Ltd [1961] 2 Lloyd’s Rep. 512: below para 32-072”

58.  In para 32-072, supra,

“A claim in restitution to recover part of the money already paid to the defendant will sometimes lie where the contract can be regarded as divisible, and some part of the basis relating to a divisible part of the contract has wholly failed. Lord Porter has said:

‘If a divisible part of the contract has wholly failed, and part of the consideration can be attributed to that part, that portion of the money so paid can be recovered.’”

59.  I believe the part that had been found being double-charged by the defendants was clearly divisible. In respect of that part, total failure of consideration had been caused by the defendants’ conduct of double charging and misappropriation.

60.  Finally, Mr Ling submitted that the court should not have granted in effect an early partial repayment of the plaintiff’s shareholder’s loan ahead of the 1^st defendant and all other creditors of the Company, but should have let the defendants keep the money to continue to use it for other working capital purposes of the Company (although the Company had been in liquidation). He submitted that, alternatively, the court should have ordered specific performance against the 1^st defendant to put the money back into the Company’s bank account. Although he later acknowledged that specific performance was not pleaded by the plaintiff and not what the plaintiff wanted, he submitted specific performance is still possible and is the appropriate remedy that this court should have granted. He said, nevertheless, to order the return of the double-charged money to the plaintiff would make the plaintiff become “better off” than what the plaintiff originally bargained for, ie the plaintiff agreed to invest the money and “should expect not to see the money again (unless and until the date of dividend).”  The plaintiff was, submitted Mr Ling, bypassing the whole process of the insolvency regime by seeking judgment from the court.

61.  With respect, I find it difficult to accept Mr Ling’s submission. Not just I consider that the submission was somewhat overstated, but I also want to point out that I did not make any finding of “shareholder’s loan” in my Judgment.

62.  In the Judgment, this court was dealing with causes of action that arose before the closure of the Company’s business (to be exact, the causes of action arose before the defendants said that there was only $50,150 left to be deposited into the Company’s bank account in September 2018). As stated in Goff & Jones, The Law of Unjust Enrichment (quoted above), in granting restitutionary remedy, I was “reversing the transfer of the benefits from claimants to defendants.”  Accordingly, I disallowed the wrongful defendants to keep the money and ordered them to return it to the plaintiff. More importantly, the Order made by this court would not prejudice any rights of the Company (or its liquidator) if the Company considered it had rights (if any) to seek recovery of the shortfall of the investment contribution from the parties.

63.  There is one more point that Mr Ling took to challenge the Order, but was not stated in the proposed grounds of appeal. He said the Order made by this court should not be “joint and several liabilities” against the defendants. He said that for joint and several liabilities, it had to be referred to a single or same cause of action.

64.  With respect, I think Mr Ling had failed to pay heed to the fact that there was a concession. The concession made, without any qualification, had to be taken as corresponding to the plaintiff’s statement of claim. The plaintiff specifically asked for the return of money against each of the 1^st and 2^nd defendants (see the pleading point above).  The concession was an acceptance to return the double-charged amount whether jointly or severally. In any event, the relief this court granted was restitution in nature. I believe that I was entitled to have made the Order “joint and several” against the defendants.

65.  All in all, I do not find that the defendants have any reasonable prospect of success in challenging the pleading of the plaintiff’s claim. I refuse to grant leave on this ground.    

Ground 3: Reflective Loss

66.  Mr Ling submitted that the Order I made offended against the “no reflective loss” rule, which debarred a shareholder from suing to recover a loss that was merely a reflection of the loss suffered by the company of which he was a shareholder. He said that if the loss could be made good if the Company enforced its right against the defendants, the plaintiff’s loss was a reflective loss, and the plaintiff’s claim should be struck out to prevent double recovery. He referred to Landune International Ltd v Cheung Chung Leung Richard [2006] 1 HKLRD 39.

67.  I think Mr Ling has failed to notice that the Company did not have the $400,000 to start with. My finding in the Judgement was that the funds had never reached the Company (save those that had been properly expended). The defendants committed the wrong when they withheld the funds for their own benefit. There was no evidence that the funds had been injected into the Company.

68.  To suggest that the plaintiff’s loss was a reflective loss of the Company was like putting the cart before the horse. It was this court’s finding that the Company had never received the funds (representing the double-charging items and the shortfall of the balance). As such, there could not be any company’s loss, and the plaintiff’s loss cannot be a mere reflective loss.

69.  I am not persuaded by Mr Ling’s argument. With respect, this ground has no merit.

Ground 4: Agency

70.  It is Mr Ling’ submission that the court was wrong in rejecting the defendants’ submission that the 2^nd defendant was an agent of the Company in receiving the $400,000.

71.  Mr Ling started by criticizing the submission made by the defendants’ trial counsel that the 2^nd defendant received the funds as the Company’s agent as a “red herring”. Mr Ling said the real question to be asked should be whether, as between the plaintiff and the 1^st defendant, the 2^nd defendant intended to hold the funds for the Company temporarily.

72.  However, although Mr Ling was trying very hard to argue differently, such a new line of arguments was contrary to how the trial counsel ran the defendants’ case. The defendants’ trial counsel said “the 2^nd defendant was acting as an agent of the Company in receiving the money for the Company”. Conversely, Mr Ling said that there was nothing in law or commercial practice to prevent the investors or would-be shareholders from agreeing to “park” a sum of money in a third-party bank account that would be injected into the joint venture company at a future date. He said that if and when the company is later formed or acquired, the money held by the third party would be held by it on behalf of the company as the latter’s agent.

73.  With respect, I find it hard to reconcile Mr Ling’s submissions with the defendants’ case run at the trial. In any event, I have not been provided any authorities that there would be such an “automatic conversion” for the alleged agency relationship.

74.  In my view, Mr Ling’s suggestion that “parking the sum of money in a third-party account pending to be injected into the joint venture company account at a future date” was precisely the same as the circumstance which the plaintiff had stipulated. It is also in line with the finding I made in the Judgment.[8]

75.  I do not find this ground meritorious.

Ground 5: Receipt

76.  Mr Ling submitted that the court was wrong to disregard the Blessing Receipt in accepting the BTB Receipt. He suggested that the court should have read the two receipts together. He said that by reading them together, it would have meant the funds were received by the 2^nd defendant on behalf of the Company.

77.  I do not agree. Two matters should be of note. First, it was never the defendants’ pleaded case that the two receipts should be read jointly to ascertain any aggregated effect. During closing submissions, the defendants’ counsel made a correction to paragraph 11 of the Amended Defence that the BTB receipt was signed on behalf of “the 2^nd Defendant”, not on behalf of “the Company”, to acknowledge receipt of the funds.

78.  Secondly, the defendants’ counsel submitted in closing that, in considering the two receipts, “the BTB Receipt was neutral,” and he suggested that “if the court would have to give weight to any of these receipts, it would be the Blessing Receipt.”  He had never suggested that these two receipts had to be read together.

79.  I repeat the reasons for rejecting the Blessing Receipt given in the Judgment.[9]

80.  There is no merit on this ground, either.

Ground 6

81.  Ground 6 was not pursued.

82.  None of the proposed grounds has any reasonable prospect of success, nor is there any other reason in the interests of justice why the appeal should be heard (DCO, s 63A(2)).

CONCLUSION

83.  For the above reasons, I would refuse to grant leave to appeal. I dismiss the defendants’ application.

84.  I order that the 1^st and 2^nd defendants shall pay the costs of the plaintiff in the Summons, such costs to be summarily assessed with certificate for counsel.

85.  The plaintiff shall lodge and serve its statement of costs within 7 days, and the defendants shall lodge and serve their statement of objection (if any) within 7 days thereafter. The summary assessment of costs will be conducted on paper.