CLARK QUANTUM KENT (formerly known as John Mohammad Clark and John Julius Tasca) v. HAI TIN LTD (formerly known as Allied Finance Asia LTd) AND OTHERS

CAMP 22/2020

[2021] HKCA 1846

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 22 OF 2020

(ON AN INTENDED APPEAL FROM HCA NO 961 OF 2017)

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J U D G M E N T

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Hon Barma JA (giving the Judgment of the Court):

1.  This was an application for leave to appeal against the decision of DHCJ Le Pichon (“the Judge”)  dated 7 November 2019, by which she set aside leave to serve out of the jurisdiction that had been granted to the plaintiff in respect of his claim against a number of defendants. For present purposes, the only relevant defendants are the 4^th and 5^th defendants.

2.  In his Statement of Claim, the plaintiff put forward three causes of action against the 4^th and 5^th defendants, namely: (1)  knowing receipt of proceeds of a breach of trust; (2)  dishonest assistance or participation in a breach of trust; and (3)  conspiracy.  These claims were said to arise in respect of four broad groups of complaints.  The first was in relation to what was called the Trust Cash Transfer Scheme (“CTS scheme”), the second was in relation to what was called the Titian Transfer Scheme, the third was in relation to certain “illiquid trust funds”, and the fourth related to allegedly excessive fees and charges.

3.  The underlying factual allegations were along the following lines.  The plaintiff was a beneficiary of a trust known as the “Monfred Trust”, of which the 1^st defendant was the trustee.  The 4^th defendant is one of the shareholders of the 1^st defendant.  It seems that the plaintiff wished to make investments in German real estate and, when considering the plaintiff’s requests for release of funds to do so, concerns arose on the part of the 1^st defendant relating to the plaintiff’s mental capacity, and also to the fact that it appeared that the plaintiff had, or had acquired, United States citizenship, which might prove problematic for various reasons concerned with taxation and disclosure.  The bank holding the trust funds at that time, Mirabaud & Cie, appeared thereupon to have decided to divest themselves of the plaintiff as a client.  As a result, a decision was taken that something had to be done to enable the plaintiff to continue to enjoy some form of financial planning or advisory services. 

4.  It seems that quite separately, the 4^th and 5^th defendants were concerned about existing clients of theirs (not including the plaintiff or the Monfred Trust, which were not clients of the 4^th and 5^th defendants at that time)  who had potential tax issues with the United States government, and were looking into how to deal with this concern.  The simplest solution would have been to ask the clients in question to take their business elsewhere.  However, the 4^th and 5^th defendants were also looking into ways to enable those clients to continue to use their services in a manner that might avoid the necessity to concern themselves with the tax status of those clients.  The particular method being considered was what was called a generic CTS scheme, which involved the transfer of funds through a number of offshore accounts with a view to anonymising the ownership of the funds, and thereby (it was thought)  avoiding the necessity for the 4^th and 5^th defendants to concern themselves with the tax status of the clients concerned.

5.  It was then said is that the 1^st, 2^nd, 3^rd, 6^th and 8^th defendants (principally the 8^th defendant)  took control of the Monfred Trust, and decided to use a CTS scheme with the ultimate objective of investing in a property investment fund known as the Rosmerta Fund, which was operated by an associated company of the 4^th and 5^th defendants, on the assumption that this might not require the 4^th and 5^th defendants or the actual fund operator having to be concerned about the beneficial ownership of the funds that were to be so invested in the Rosmerta Fund.  As a result, the Monfred Trust’s liquid funds were moved through a series of accounts, eventually ending up in the account of a company called Karim Ltd in Ras Al Khaimah, where, for reasons that are not entirely clear (but do not seem to be relevant), they were blocked, with the banks involved refusing to upshot was that they could not be moved (although whether or not this was in fact the case was disputed).

6.  In order to try to free up the allegedly blocked funds, the Titian Transfer Scheme (involving acquisition of an Old Master painting or the right to obtain it)  was devised.

7.  The ultimate outcome of these various transactions was that the Monfred Trust and the plaintiff claim to have suffered the loss of most of the funds in the trust. The remaining complaints, relating to the illiquid funds and the excess charges were distinct complaints unrelated to the main complaint described above.

8.  The Judge set aside the leave that had been granted to the plaintiff to serve the proceedings out of the jurisdiction against the 4^th and 5^th defendants on the basis that the plaintiff had failed to demonstrate the existence of a good arguable case on any of the causes of action asserted against those defendants.

9.  For the purposes of this application for leave to appeal, Mr Todd (appearing for the plaintiff)  put forward four main grounds of appeal:

(1)  The first ground was that the Judge, having correctly noted that the approach to be adopted in deciding whether or not to leave to serve out should be granted was often described as being in the nature of an Order 14 (summary judgment)  test, should have held that because the claims made involved allegations of fraud, the court should not seek to investigate their merits (even with a view to ascertaining whether or not a good arguable case had been made out)  as it was well established that summary judgment under RHC Order 14 was not available in cases involving fraud.

(2)  The second ground was that the Judge erred in coming to the view that no good arguable case in relation to the underlying claim had been disclosed in the statement of claim and the supporting evidence.

(3)  The third ground related to the appropriate test to be applied in relation to dishonesty.

(4)  The fourth ground, which would only arise if the 4^th and 5^th defendants contended that the Judge was wrong to conclude that the plaintiff’s claim (assuming contrary to her conclusion that a good arguable case was made out)  would have come within the Order 11 gateways identified by the Judge, was that even if the Judge was wrong as to those gateways, the plaintiff’s claim would come within the contractual gateway under Order 11.

10.  The fourth ground can be briefly disposed of.  It is not suggested by the 4^th and 5^th defendants that the Judge was wrong to have found that the plaintiff’s claims could be brought within Order 11 gateways other than the contractual gateway.  In the circumstances, the need to consider the fourth ground of appeal relating to the applicability of the contractual gateway did not arise.

11.  As to the first ground, we are firmly of the view that it has no merit.  Although there are authorities that refer to “the Order 14 approach” in the context of applications for leave to serve out of the jurisdiction, this can only be understood as saying the court is only required to look at the matter on a prima facie case or good arguable case basis.  It cannot realistically be suggested that because the standard is similar to that which a defendant faced with Order 14 proceedings would have to meet that all the limits on Order 14 applications, such as the inability to bring Order 14 proceedings where fraud is alleged, must be brought in as well.

12.  Further, once it is accepted that in order to obtain leave to serve out it is necessary to establish the existence of a good arguable case, it seems to us paradoxical to suggest that the same requirement of a good arguable case being shown should not apply where allegations of fraud are made.  It would seem to us all the more important that a good arguable case should be shown in claims of fraud.

13.  In fairness to Mr Todd, he did not persist with this ground when the matters mentioned in [15] and [16] below were put to him in the course of argument.

14.  As for the second and third grounds, we are of the view that these are clearly interrelated, as the third ground feeds into the second, and insofar as they should be regarded as separate issues, the third ground does not add very much to the second.

15.  The Judge concluded that the plaintiff had failed to demonstrate the existence of a good arguable case in respect of the claims he sought to advance in these proceedings.  We therefore asked Mr Todd to demonstrate the existence of material that would at least arguably support the existence of a good arguable case against the 4^th and 5^th defendants.  In our view, he was unable to do so, for the reasons explained below.

16.  In order to have the beginnings of an arguable case, it would be necessary for the plaintiff to show that the 4^th and 5^th defendants had knowledge of the Monfred Trust, and of its relevant terms which are said to have been breached.  It would also be necessary to plead and establish that actions had been taken by the 1^st and/or the 8^th defendants that amounted to breaches of trust, and that the 4^th and/or 5^th defendants received trust property knowing that it had been dealt with in breach of trust for the first cause of action in knowing receipt, or alternatively, that the 4^th and/or 5^th defendants had, with the requisite knowledge, done acts that could be characterised as dishonest, and which amounted to assistance in the alleged breaches of trust.  This would have to be shown in relation to one or more of the four broad areas of complaint (the CTS scheme, the Titian Transfer Scheme, the illiquid funds claim, or the excessive fees and charges claim).

17.  However, from what can be seen in the Statement of Claim, the relevant paragraphs do not actually contain any complaint against the 4^th and 5^th defendants in respect of those matters, apart from a general reference in paragraph 23 of the Statement of Claim alleging that the 4^th and 5^th defendants knowingly participated, which says, without any particulars or details, that they took part in breaches of trust and became constructive trustees and, as such, owed to the plaintiff all the duties that were owed by the actual trustee (the 1^st defendant)  and the immediate constructive trustees (the 2^nd, 3^rd, 6^th and 8^th defendants). 

18.  For the plaintiff, Mr Todd provided us (at our request)  with a short submission seeking to identify the relevant allegations in the Statement of Claim that concerned the 4^th and 5^th defendants. However, the Statement of Claim (at least as far as the 4^th and 5^th defendants are concerned)  largely consists of assertion, with no particularisation or supporting evidence by way of affidavit.  Although Mr Todd heavily emphasised the difficulties that his client faced in obtaining information to enable him to make good his case, and we recognised that this might be a problem for the plaintiff, it nonetheless seemed to us that, in order to get be in a position to obtain leave to serve out, the plaintiff must be able to put forward a properly formulated case against the relevant defendants.

19.  At the end of the day, the fundamental question for present purposes came down to whether or not the plaintiff was able to show a serious question to be tried in relation to the claims that he puts forward against the 4^th and 5^th defendants, in knowing receipt of trust funds that were applied in breach of trust, knowing dishonest assistance in a breach of trust, and conspiracy. 

20.  The claim for conspiracy can be dealt with shortly.  We entirely agree with the Judge that the plaintiff’s pleading as it stands contains none of the particulars that are needed to support a claim of conspiracy and therefore, on the basis of the pleading alone, the claim of conspiracy is not one that raises a serious question to be tried.

21.  Unlike in the court below, the focus of the argument before us was more on the question of knowing assistance.  The issue that has emerged in argument before us essentially comes down to this: It does not appear to be seriously disputed that the 4^th and 5^th defendants were involved in devising a scheme (i.e. a Cash Transfer or CTS scheme)  of a generic nature, which was designed to enable their customers to effectively anonymise the ownership of those customers’ funds.  The plaintiff suggests that such a scheme involved dishonesty, and in particular that it involved an attempt to deceive or defraud the United States revenue authorities. 

22.  Assuming, for present purposes, that this was the case, Mr Todd submitted that this was sufficient in the sense that it was sufficient for the plaintiff to be able to show that there was such a dishonest scheme which was utilised in the course of a breach of trust that was contrary to the interests of the plaintiff.  Mr Todd quite properly acknowledged that the plaintiff did not at present have sufficient material to be able to say that the 4^th and 5^th defendants actually (or constructively)  knew of a breach of trust on the part of the trustee of the trust (the 1^st and/or 8^th defendants), of which the plaintiff was a beneficiary.  He suggested that there was some material to show that the 4^th and 5^th defendants were aware of the existence of the Monfred Trust, although not necessarily of a breach of it in the extraction of funds from the trust for use in a CTS scheme and other transactions.

23.  In other words, Mr Todd urged us to accept that it would be sufficient for there to be generalised dishonesty in relation to the inherent nature of the scheme and that such a scheme provided the basis on which a breach of trust was (or could be)  carried out and implemented, but that it was not necessary for the defendants to actually appreciate that there had been a breach of trust in relation to the trust in question.

24.  As Mr Fung (appearing for the 4^th and 5^th defendants)  pointed out, this did not seem to be the way in which the matter was put before the Judge below, but even allowing it to be put in that way before us, Mr Fung went on to point out that it is not a basis of claim that is reflected in the plaintiff’s pleading. 

25.  We agree with Mr Fund that a knowing assistance claim in this form is not pleaded in the Statement of Claim.  But, more fundamentally, even if the pleadings were to be amended to reflect the claim now put in this particular way, it seems to us that such a claim is not one that is seriously arguable as a matter of law.

26.  It seems to us that, for the purpose of accessory liability in the form of dishonest assistance in a breach of trust, it is essential for the dishonesty to relate to the breach of trust in question.  To put it in another way, the liability is for assisting in a breach of trust in a manner that is dishonest. In order for such dishonesty to be capable of arising, it seems to us that there must exist an appreciation of the existence of the trust and the fact that what is being done is a breach of it.  If there is no such appreciation, it is hard to see how the alleged assister can be said to be dishonest.  Even if there were some indications that might suggest that there could have been a breach of trust, absent knowledge, this would at best amount to negligence on the part of the assister, for failure to recognise that there had been a breach of trust.  It is well established that negligence cannot be equated to dishonesty, and thus cannot suffice.  Still less would be there be an arguable case of knowing assistance if there were no basis for the assister to think that what he was doing involved a breach of the trust (of which the plaintiff was a beneficiary)  in any shape or form.

27.  In the present case, whatever may be said of the appropriateness or legality of the scheme that was devised as a Cash Transfer Scheme, we are of the view that there is quite simply no material in which from which it can be said that the 4^th and 5^th defendants appreciated (or must have appreciated)  that any funds that might have been removed from the Monfred Trust had been taken from it in a manner that constituted a breach of that trust.

28.  In those circumstances, it seems to us, as it also seemed to the Judge, that there is no proper basis on which it can be said that there is a serious question to be tried in relation to the claim for dishonest assistance in a breach of trust.

29.  The same seems to us to be the case in relation to the claim for knowing receipt of trust property.  That too, in our view, requires knowledge of the fact that there is trust property and that it has been misapplied.  That is clearly missing in the present case.  We entirely appreciate the evidential difficulties in which the plaintiff finds himself, given his lack of knowledge and given his status as an outsider to these schemes, but that does not seem to us, with respect, to be a basis for lowering the standard (which is already a fairly low bar to be crossed)  that must be met in order to enable the claim to be brought.

30.  For the foregoing reasons, it seemed to us that there was no realistic prospect of success in this appeal, which is not reasonably arguable.  We therefore refused to give leave to appeal, dismissed the plaintiff’s application with costs to the 4^th and 5^th defendants, to be assessed on a gross sum basis, and gave directions to enable that assessment to take place.