CHINACHEM CHARITABLE FOUNDATION LTD v. CHAN WAI TONG CHRISTOPHER AND OTHERS

HCCL 6/2020

[2021] HKCFI 1347

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 6 OF 2020

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REASONS FOR DECISION

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1.  This is an application by the defendants for an order to strike out parts of the statement of claim. At the end of the hearing, I granted the application. These are my reasons for the decision.

Background

2.  In 2007, after the death of Mrs Nina Wang, the plaintiff herein, Chinachem Charitable Foundation Ltd (“Foundation”), commenced a probate action (HCAP 8/2007) against, among others, Mr Chan Chun Chuen (aka Tony Chan).  In that action the Foundation sought to propound a will of Mrs Wang made in 2002 which, the Foundation said, named it as beneficiary, while Mr Chan counterclaimed to propound a purported will of Mrs Wang made in 2006, which named him as the sole beneficiary.  Within that action, in December 2007, the court appointed two partners of Deloitte Touche Tohmatsu as joint and several administrators pendente lite (“Deloitte administrators”) of Mrs Wang’s estate (“Estate”).

3.  In February 2010, the Court of First Instance pronounced in solemn form for the 2002 will.  The Court of Appeal dismissed Mr Chan’s appeal in February 2011, and on 24 October 2011 the Appeal Committee of the Court of Final Appeal refused leave for a further appeal.

4.  At that time, it was the Foundation’s belief upon advice that the effect of the 2002 will was to bequeath the Estate to it as beneficial owner.  The Secretary for Justice, representing the interests of charity for the public benefit, took a different view and commenced proceedings in May 2012 against, among others, the Foundation, seeking the court’s construction of the will.  In February 2013, the Court of First Instance held that the Estate was not bequeathed to the Foundation beneficially, but to the Foundation to be held on trust upon the provisions of the 2002 will for charitable objects.  The Foundation’s appeal was dismissed by the Court of Appeal in April 2014, and again by the Court of Final Appeal in May 2015.

The alleged “Under‑The‑Table Agreement”

5.  Meanwhile, according to the Foundation, in about 2011, it had concerns that the Deloitte administrators were over‑charging fees to the Estate.  There were also disputes between the Foundation and the Deloitte administrators as to how the Estate, which comprised a very large property development group, the Chinachem Group, should be managed.  These led to the Foundation’s decision to seek to have the Deloitte administrators replaced. 

6.  The Foundation says that while it was trying to identify potential candidates to replace the Deloitte administrators, a close acquaintance of Dr Kung Yan‑sum (“Dr Kung”), a governor of the Foundation, introduced to him Mr Howard Lau (“Mr Lau”), the 4^th defendant herein, who was a former partner at Ernst & Young in Macau.  Mr Lau represented to Dr Kung that (i) he had a very strong and extensive business network; (ii) he was very closely acquainted with Mr Silas Yang (“Mr Yang”), the then Senior Partner and Chairman of PricewaterhouseCoopers Hong Kong (“PwC”); and (iii) he could secure representatives from PwC to act as replacement administrators for the Estate.

7.  The Foundation alleges that, to address its concerns about potential disputes with the future administrators from PwC (“PwC administrators”), Mr Lau proposed certain conditions in return for the Foundation’s support and application to have the Deloitte administrators replaced by the PwC administrators.  These conditions were, as pleaded in paragraph 18(c) of the statement of claim and named “Under‑The‑Table Agreement”, as follows:

“ (i) Notwithstanding the successful appointment of the PwC Replacement Administrators:

(1) Dr Kong would only have to deal with Howard Lau alone for the administration of the Estate.

(2) Howard Lau would ensure that the PwC Replacement Administrators would comply with and give effect to the instructions given by the Foundation through Dr Kong as to how the Estate was to be administered.

(ii) In order to give effect sub‑paragraph (i) above, Howard Lau would and in fact did enter into a written agreement (‘the Private Written Agreement’) with the then Chairman of PwC Hong Kong (representing PwC) confirming that Howard Lau would have full power and authority to represent the PwC Replacement Administrators in dealing with Dr Kung for and on behalf of the Foundation and would ensure the full compliance with and the giving effect to the instructions given by Dr Kung for and on behalf of the Foundation.  In this connection, there was a lunch occasion in or about late 2011 amongst, inter alios, Dr Kung, Mr Silas Yang and Howard Lau at the Chinese restaurant of the Jockey Club at Shan Kwong Road, Hong Kong on which Mr Silas Yang did orally confirm to Dr Kung personally about the Under‑The‑Table Agreement.”

8.  It is said in paragraph 19 of the pleading that solely in reliance upon the Under‑The‑Table Agreement and the Private Written Agreement, the Foundation proceeded to apply for the replacement of the Deloitte administrators with the PwC administrators.

Replacement of administrators

9.  With the conclusion of the litigation between the Foundation and Mr Tony Chan on 24 October 2011, the office of the administrators pendente lite of the Estate ceased.  This was confirmed by the order of Chu JA (sitting as an additional judge of the Court of First Instance) on 26 March 2012, which however also confirmed that the Deloitte administrators continued to be vested with the Estate pursuant to section 36 of the Probate and Administration Ordinance (Cap 10).  The court also made an order appointing Mr Rainier Lam and Mr Jong Yat Kit (the 3^rd defendant herein), both of PwC, as additional administrators of the Estate pursuant to section 36, with provisions for them to call upon the Deloitte administrators to resign after the grant of representation had been formally amended and for Mr Yu Sai Hung, also of PwC, to be appointed as an additional administrator upon their removal.  It appears that the Deloitte administrators were eventually removed on 5 July 2012, and that Mr Yu was appointed on 2 August 2012.  The PwC administrators at that point were therefore Mr Rainier Lam, Mr Jong Yat Kit and Mr Yu Sai Hung.

10.  On 26 June 2014, Mr Rainier Lam and Mr Yu Sai Hung were replaced by Mr Christopher Chan and Mr Alvin Wong (the 1^st and 2^nd defendants herein), both also of PwC, as joint and several administrators of the Estate.  The 1^st to 3^rd  defendants have since acted as such administrators.  They are referred to as the “JAs” in the statement of claim.

Alleged implementation of the Under‑The‑Table Agreement and the Private Written Agreement

11.  In paragraph 20(a) of the statement of claim, the Foundation alleges that pursuant to the Under‑The‑Table Agreement and the Private Written Agreement, from about March 2012 to late 2015 (after Mr Yang’s retirement as Senior Partner and Chairman of PwC):

(1)  Dr Kung and Mr Lau met regularly one or two days before the monthly executive committee meetings of the Chinachem Group.

(2)  At these regular meetings, Mr Lau would prepare an agenda for all relevant matters for determination at the forthcoming monthly executive committee meetings and seek the Foundation’s instructions and decisions.

(3)  Mr Lau then caused and procured the PwC administrators formally to give effect to the Foundation’s instructions and decisions at the monthly executive committee meetings.

Alleged receipt of money by Mr Lau

12.  Paragraph 20(b) of the statement of claim then sets out the critical allegation central to the claim which I quote in full below:

“ It is not possible for Howard Lau, who was not part of PwC, to carry out substantial work for the Estate for free and he must have received remuneration from some entity. Subject to discovery and/or the administration of interrogatories, it is averred that:

(i) Based upon the private arrangements between PwC and Howard Lau, PwC was to remunerate Howard Lau with about 10% of the fees charged by PwC for successfully securing the appointment of the PwC Administrators and his continuous participation acting for and on behalf of PwC Administrators in dealing with the Foundation in accordance with the Under‑The‑Table Agreement.

(ii) The sums paid to Howard Lau were subsumed in the JAs’ fees, which were inflated from the work actually carried out by the JAs to create the additional 10% to be paid to Howard Lau.  As a result, the JAs wish to avoid providing any detailed contemporaneous records of time spent on work in administering the Estate as pleaded in paragraphs 15 and 16 above.”

13.  In paragraph 21 of the statement of claim, the Foundation concludes:

“ By reason of the matters pleaded above and subject to discovery and/or the administration of interrogatories, it is averred that Howard Lau received significant sums from the Estate through the JAs’ inflation of fees pursuant to the Under‑The‑Table Agreement. As a result:

(a) The JAs acted in breach of their fiduciary duties pleaded in paragraph 4 above.

(b) Howard Lau is liable for knowing receipt as (i) he received such sums from the Estate from the JAs’ breaches of fiduciary duties and (ii) his state of knowledge through his personal involvement in the Under‑The‑Table Agreement makes it unconscionable for him to retain the benefit of such sums.

(c) The JAs and/or Howard Lau are liable to account to the Estate for such sums and/or their traceable fruits or proceeds (if any).

(d) The Estate has suffered loss and damage and the JAs and/or Howard Lau are liable to compensate the Estate for the same in the amount of the sums received by Howard Lau.”

14.  Paragraphs (6) to (9) of the prayer for relief relate to the above allegations and seek, inter alia, orders for account and payment.

The defendants’ summons

15.  By summons of 8 July 2020, the defendants seek an order to strike out the Foundation’s claim relating to the alleged wrongful payments to Mr Lau as set out above, on the grounds that the paragraphs in question (i) disclose no reasonable cause of action; (ii) are scandalous, frivolous and vexatious; (iii) may prejudice, embarrass or delay the fair trial of the action; and/or (iv) are otherwise an abuse of the process of the court.

16.  The statement of claim contains another claim by the Foundation against the 1^st to 3^rd   defendants, alleging that they, as administrators of the Estate, had failed to maintain proper and contemporaneous records of their charges, and seeking an order to set aside the Foundation’s previous approvals of the periodic bills rendered by the JAs.  This claim is not the subject of attack under the present application.

17.  By a late summons and affirmation both dated 28 April 2021, the Foundation seeks leave to rely upon a letter from Mr Yang to Dr Kung dated 24 October 2011 for the purpose of the defendants’ applications.

Discussion

18.  As can be seen from the pleading, the Under‑The‑Table Agreement, although given a pejorative name, is not itself said to have given rise to any breach of fiduciary duty on the JAs’ part and was, indeed, an agreement to which the Foundation itself was party through Dr Kung, though the Foundation’s allegation of this agreement seems to me probably tantamount to admitting that it misled the court when it applied for the appointment of the PwC administrators in substitution for the Deloitte administrators.

19.  Rather, the gravamen of the Foundation’s claim is that the JAs (allegedly) secretly inflated their fees to create an additional 10% which was paid to Mr Lau.  Since the JAs’ fees were based on time spent at fixed hourly rates set out in the order appointing them, the allegation means that they added fictional hours of work into their bills.  The statement of claim, indeed, says the fees were “inflated from the work actually carried out”.

20.  In their affidavit evidence, the defendants categorically deny that there was any such inflation of fees.  They say that in around September 2011, it was agreed that Mr Lau would become Senior Adviser to PwC for the Greater China Region; that this was formalised on 6 October 2011 when Mr Lau, through his personal company, entered into a Consultancy Agreement with PwC agreeing to provide consultancy services; that the only remuneration paid to Mr Lau in connection with these services was the fixed annual sum paid in 12 monthly instalments as set out in the Consultancy Agreement; and that neither the JAs nor PwC paid any remuneration to Mr Lau linked or calculated by reference to the fees charged by the PwC administrators to the Estate.

21.  The plea of inflated fees is a most grave allegation involving the charge of dishonesty and, quite probably, an accusation of serious criminal conduct.  If it were assumed to be true, it would of course give rise to a civil cause of action.  But the pleading is not only challenged as disclosing no reasonable cause of action, but also objected to on the grounds that it is frivolous and vexatious and an abuse of process. For the purposes of those grounds it is permissible to look beyond the pleading.  As was said in Lam Kit Sing v Chungshan Commercial Association, Hong Kong (HCA 2011/2014, 29 June 2016), at §18:

“ [Counsel] argued that on a strike-out application, the factual allegations in the pleading in question must all be taken as true. While that may be the proper approach in most applications, Ms Lam’s proposition is in my view too widely stated. There are authorities that show that the court’s power to strike out a pleading can be exercised where it is plain and obvious that the plaintiff’s case has no factual basis: Oh Jae‑Hoon, Eugene v Richdale [2004] 4 HKC 315, at paragraph 15, or has no ‘solid basis capable of proof’ and is a ‘myth’ with ‘no substantial foundation’, per Lord Herschell in Lawrance v Lord Norreys (1890) 15 App Cas 210, 220, or presents ‘a tissue of improbabilities which ought not to be sent to proof’, per Lord Watson at page 222; see also Overseas Trust Bank v Coopers & Lybrand [1990] 1 HKLR 568 at 583. Thus if a plaintiff pleads as a fact something which can clearly be shown to be incontrovertibly false, then on an application to strike out on that basis the court is not bound to accept the allegation as true and to proceed on a fictional basis.”

22.  Where fraud or serious dishonest conduct is being alleged, it is especially important to examine the foundation of the pleading.  It is the well‑established approach of the courts that such pleas are to be scrutinised with care.  As Cotton LJ said in Lawrance v Lord Norreys (1888) 39 Ch D 213, the court may find a case based on fraud vexatious and dismiss it on that basis “when there is good reason for concluding that the allegations which prevented the statement of claim from being demurrable are made without substantial ground, and arise only from the imagination of the person who instructs counsel to draw the statement of claim” (p 231), or when it is an “improbable story about the fraud alleged to have been committed … brought forward without any reasonable grounds” (p 233).  Bowen LJ said in the same case that the court would expect the pleader to show “some ground for the faith that was in him, to satisfy them that the case of fraud was not a simple creation of his own imagination” (p 235).  Their decision was upheld on appeal by the House of Lords ((1890) 15 App Cas 210), in which Lord Herschell said the evidence confirmed that “the case has not a solid basis capable of proof, but that the story told in the pleadings is a myth” (p 220), and Lord Watson said “the statement of claim presents to my mind a tissue of improbabilities which ought not to be sent to proof” (p 222).  In Lin Zhen Man trading as Yet Chong Electric Co v Topfine Machinery Co Ltd (CACV 122/2004, 29 November 2005) at §25, the Court of Appeal said:[1]

“ Litigants also have to understand that the court will require very strict proof before allegations of a serious nature are accepted. Because of that all solicitors and counsel recognize that before putting forward these serious allegations, they must have sufficient evidence so as to advance the related contentions before the court. This responsibility applies not only to submissions. Without sufficient evidence, solicitors and counsel should not raise allegations of fraud, deception or those of equally serious nature in pleadings or other court documents. There are authorities showing the court might in exercise of its inherent power strike out such unfounded pleadings if a litigant raised such serious allegations without sufficient evidence in support, because the court would not tolerate a litigant directing unreasonable insults at the other party in the name of litigation, thereby abusing the legal process (see Tam Chi Kok Gabriel v Fok Eugina, HCA 1859/1992, 12 June 2003; ‘The Gagich’ HCAJ 361 of 1995, 7 January 1997; C S Low Investment Ltd v Freshfields [1991] 1 HKLR 12 at 23A-D).”

In Choy Bing Wing v Chief Executive of HKSAR & others [2006] 1 HKLRD 666 at §9, Johnson Lam J said:

“ The Writ contained very serious allegations which should not be advanced without cogent evidence supporting the same. It is well established that the court will not allow allegations of such nature to be made without proper evidence and if they were made irresponsibly, it will exercise its inherent jurisdiction to strike out the same”.

Needless to say, this power is to be exercised with the greatest care, lest the plaintiff be wrongly deprived of his right to a trial, but it is also proper to have regard to the requirements of fairness to the defendant for, as Deputy Judge Carlson said in Global Bridge Assets Ltd & others v Sun Hung Kai Securities Ltd (HCA 317/2008, 12 May 2011) at §43, the underlying notion is that no one should have an allegation of fraud levelled against him in a pleading unless it can be backed up by credible material. 

23.  All this should be familiar to pleaders from the Bar, for its Code of Conduct prohibits barristers from alleging fraud unless he has clear instructions to do so and he has before him “reasonably credible material which, as it stands, establishes a prima facie case of fraud” (paragraph 10.23 of the current edition): see Tam Chi Kok Gabriel v Fok Eugina (HCA 1859/1992, 12 June 2003) at §§83‑85 per Deputy Judge A Cheung; Hui Yin Sang & another v Tsoi Ping Kwan & another [2010] 1 HKC 585 at §15 per Au J; Kerry Francis Moore v Jennex Corporation Ltd & others (HCMP 2109/2015, 3 November 2016) at §§30‑40 per Deputy Judge Kwok SC.  I should add that the statement of claim here was not signed by counsel.

24.  No lower standards are expected of solicitors when they sign pleadings, as they did in the present case.  In C S Low Investment Ltd & others v Freshfields (a firm) [1991] 1 HKLR 12, 23A‑D, Fuad VP, referring to an allegation in a pleading that a solicitors firm had taken secret fees and profits, said:

“ It became perfectly clear during argument that these very serious allegations against a well‑known firm of solicitors were totally without foundation. Quite apart from their duty to their client, taking a secret profit might be a criminal offence and will certainly amount to professional misconduct. Had counsel settled the pleading he would have been obliged to sign it; here counsel did not and so it was signed by the plaintiffs’ solicitors (O.18, r.6(5)). The notes in paragraphs 18/6/1 of the White Book cite from the judgment of a case decided well over 100 years ago where it was said that the signature of counsel ‘to which the court [pays] the greatest possible respect, is to that extent a voucher that the case is not a mere fiction.’ I hope it will not be thought impertinent if I ask whether solicitors signing a pleading would wish to be judged by any lesser standard of responsibility. It was an appalling error of judgment in the circumstances of the case to include paragraph 10 in the statement of claim. Solicitors must not allow themselves to be the instrument of their clients to settle a pleading containing groundless allegations of that sort.”

25.  Now what is the foundation for the pleading in this case that the PwC administrators inflated their bills to create an extra 10% for the secret remuneration of Mr Lau?

26.  Dr Kung, in his first affirmation, said:

“ 31. … As I recall, during one or two of those social occasions in about 2012, Mr Lau was teased and jeered by our common acquaintances to have made a huge fortune by securing the instructions for PwC enabling them to have become the administrators pending suit for the Estate; and in response, Mr Lau only modestly conceded to have earned the usual introduction fees. When he was confronted by our common acquaintances he earned at least 10% of the relevant fees as earned by PwC as the introduction fees according to the industry practice, Mr Lau did not deny so.”

27.  The Foundation also prays in aid several letters from PwC to the Foundation all dated 24 October 2011, which concerned a proposal at that stage for PwC to be appointed as adviser to the administrator of the Estate in the event that the Foundation or Dr Kung himself became appointed as the new administrator.  Among these is a letter from Mr Yang, Executive Chairman of PwC at the time, to Dr Kung stating:

“ Further to our letter to you earlier dated 24 October, I confirm that Mr Howard C. P. Lau will be in charge of all our services as described in our previous 2 proposals of the same date to be provided to the Chinachem group and Chinachem Charitable Foundation Limited pursuing to the court of Final Appeal decision today.” [sic]

It is said that this letter, which is the subject matter of the Foundation’s late summons for filing further evidence, shows that Mr Lau was actually involved in the administration of the Estate and contradicts the defendants’ evidence that he only acted as an intermediary.  However, as is common ground, neither the Foundation nor Dr Kung has ever been appointed the administrator of the Estate. Instead, the relevant partners of PwC were appointed administrators themselves, and they were appointed on the basis of their proposal to act as such administrators dated 29 September 2011.  Being an adviser to the administrator and being the administrator are very different capacities with very different responsibilities.

28.  It can be readily seen that the Foundation’s plea is problematic in many respects.  First, it is not explained by the Foundation anywhere whether the alleged 10% for Mr Lau extends to all the fees charged by PwC for so long as PwC partners are administrators of the Estate (and thus even to this date), despite its reliance on the evidence concerning “introduction fees”.  Nor has the Foundation explained why the 1^st to 3^rd defendants who are the current administrators are being sued when the “introduction fees” might well have been paid before June 2014 at a time when the 1^st and 2^nd defendants were not yet in office.  On behalf of the defendants, Mr Shieh SC further points out that it is inexplicable that neither the Foundation nor Dr Kung did anything about it despite their knowledge in 2012, on their own case, of Mr Lau’s secret remuneration.  There was also an elaborate mechanism for the assessment of the PwC administrators’ bills under the order for their appointment, so that any inflation of fees by PwC would risk being challenged and exposed by the stakeholders including the Secretary for Justice.

29.  Quite apart from these illogicalities in the plea and the improbabilities highlighted by Mr Shieh, the fatal problem, as it seems to me, is that try as one might, one can simply find no factual basis at all to allege that the JAs’ fees were inflated so as to create an extra 10% for Mr Lau.  This is so, in my view, even if one (i) takes paragraph 31 of Dr Kung’s affirmation at face value and assumes that such social banter is evidence that Mr Lau received from PwC a substantial introduction fee specifically for this engagement; (ii) assumes that Mr Lau did a considerable amount of work pursuant to the Under‑The‑Table Agreement as alleged, for which he would reasonably expect to be remunerated and was actually remunerated beyond the fixed fees under the Consultancy Agreement; and (iii) takes into account the assumed fact that the JAs had failed or refused to provide detailed breakdown of their fees requested by the Foundation since around April 2020 in the context of the assessment mechanism under the court order appointing the administrators.  On behalf of the Foundation, Mr Man SC also submits that the defendants’ evidence denying payment of any remuneration to Mr Lau other than the fixed annual sum under the Consultancy Agreement cannot be conclusive at this interlocutory stage.  But at the end of the day, the matters available, whether taken singly or in combination, are, in my judgment, quite incapable of supporting the crucial plea.  There is simply not an iota of evidence tending to show that the JAs dishonestly inflated their bills in order to pay 10% to Mr Lau.  The allegation is based on nothing but speculation.  The reference in paragraph 20(b) of the statement of claim to discovery and interrogatories does not assist the Foundation, for it is an abuse to start a case without a solid foundation hoping that something will turn up from these procedures: The New China Hong Kong Group Ltd (in creditors’ voluntary liquidation) & another v Ng Kwai Kai Kenneth & others (HCA 519/2010, 11 February 2011), §70.

30.  In my judgment, the paragraphs in question of the statement of claim make serious allegations of wrongdoing and dishonesty against professional men without any foundation.  They should not have been put forward.  Now that they had regrettably been put forward, they should not be allowed to remain, and should be struck out as being frivolous and vexatious and an abuse of process.

31.  I should mention that at paragraph 20(c) of the statement of claim is an allegation that the JAs paid “hush money” to a former chief executive of the Chinachem Group for him not to expose the Under‑The‑Table Agreement.  No claim is made relating to that sum of money.  The allegation is not a fact material to the pleaded claims and should therefore be struck out in any event as being scandalous.

32.  For these reasons, an order was made for the relevant paragraphs of the statement of claim to be struck out and for the Foundation’s summons to adduce further evidence to be dismissed, with costs to be paid by the Foundation on the indemnity basis with a certificate for two counsel to be taxed if not agreed. 

33.  The defendants also advanced arguments that the allegation of the Under‑The‑Table Agreement is incredible and that the Foundation lacks legal standing to pursue the claim relating to the alleged payments to Mr Lau because Mrs Wang’s will leaves her Estate to the Foundation only as trustee for charitable objects, rather than as a legatee beneficially, but the Foundation has not yet been constituted trustee by the vesting of the Estate in it.  In light of my conclusion above, it is unnecessary to decide these questions.