TOP POINT LTD v. K&L GATES (A FIRM OF SOLICITORS)

HCA 1088/2011

[2020] HKCFI 234

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1088 OF 2011

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(By Main Action)

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(By Counterclaim)

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D E C I S I O N

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1.  This is an application by the Plaintiff in the Main Action and the Defendants in the Counterclaim by summons dated 18 January 2018 (“the Summons”) to strike out the following pleas in the Re-Amended Defence and Counterclaim (“RAD&C”) of K&L Gates (a firm of solicitors) (“the Firm”) which is the Defendant in the Main Action and the Plaintiff in the Counterclaim:

(i)  the words “or ought reasonably to have known” in the 5^th and 8^th to 9^th lines of §13; and

(ii)  the words “or ought to have known” in §32(2).

Background

2.  The background of this case has been set out in my earlier Decisions dated 13 September 2016.[1]

3.  This action is one of the many concerning the deposit of various “escrow funds” in the client account of the Firm. Unfortunately, one of the Firm’s lawyers, Mr Navin Aggarwal (“Aggarwal”), committed a massive fraud and as a result considerable sums of “escrow funds” went missing from the Firm’s client account.

4.  The Plaintiff in the Main Action, Top Point Limited (“Top Point”), sues as the assignee of the rights of the 1^st and 2^nd Defendants in the Counterclaim, Geminis Funds SPC and Capital Cosmos Financial Ltd respectively, under 2 escrow agreements pursuant to which a total “escrow fund” of US$4.5 million was paid into the Firm’s client account in May 2011 but was never repaid.

5.  Top Point applied for summary judgment which was heard by DHCJ L Chan (as he then was) on 6 December 2011.  It transpired that Top Point and the 1^st to 7^th Defendants in the Counterclaim are all offshore corporate vehicles owned and controlled by Mr James Yang (“Yang”), the 8^th Defendant in the Counterclaim.  These corporate vehicles are collectively referred to as “Yang’s Companies” and together with Mr Yang “the Top Point Parties”.

6.  According to the Firm, Yang’s Companies had signed 51 “escrow agreements” with Aggarwal and received payments thereunder from January 2009 to May 2011.  Over HK$88 million in purported fees and interest (excluding principals) were paid from the Firm’s client account to them, and they were paid more than HK$55 million over and above what they paid to the Firm.  Those which signed the “escrow agreements” were not necessarily those which deposited monies into the Firm, or those which received the enormous fees and interests.

7.  The Firm was given unconditional leave to defend, with costs.

8.  The Firm then amended the Defence and added a Counterclaim against the Top Point Parties with leave on 17 September 2012. The Firm’s case is that the purported escrow agreements are sham.  In any event, they are not binding on the Firm as Aggarwal had no actual or ostensible authority to execute them, and they do not fall within the Firm’s ordinary course of business.

9.  In the Counterclaim, the Firm has advanced the following causes of action against the Top Point Parties:

(i)  Aggarwal and the Top Point Parties had conspired to injure the Firm by unlawful means;

(ii)  the Top Point Parties had unlawfully assisted Aggarwal in his dishonest breaches of duties owed to the Firm, including misappropriating trust monies from the Firm’s client account by using the escrow agreements as a means to cover up;

(iii)  the Top Point Parties were in knowing receipt of monies which were paid to them by Aggarwal in breach of his fiduciary duties; and

(iv)  the Firm is entitled to restitution of monies dishonestly transferred to Yang’s Companies as money had and received.

10.  On the other hand, it is the Top Point Parties’ case that Aggarwal told Yang that he had some Mainland clients interested in acquiring substantial stakes in Hong Kong listed companies and required what is commonly referred to as “fund proof” to demonstrate that they had readily available funds, or ability to arrange funds within Hong Kong to finance the acquisitions. Yang then caused his companies to deposit monies into the Firm’s client account under the purported escrow agreements which enabled those “Mainland clients” to provide the requisite fund proof, in return of an “arrangement fee” for the provision of the funds.  It is their case that such fund proof was a normal and common arrangement in Hong Kong for substantial acquisitions by Mainland-based entities.

11.  This is disputed by the Firm.  According to it, proper fund proof in a general offer is regulated by the Securities & Futures Commission (“SFC”) under the Code on Takeovers and Mergers and Share Repurchase and nothing like the one depicted by the Top Point Parties.  In response, the Top Point Parties say that there are various types of fund proof in the financial market in Hong Kong, including the type Yang’s Companies were engaged in.

12.  Yang’s Companies had made various attempts to challenge the service of the Counterclaim outside jurisdiction.  All these challenges were rejected by the court.  In the Reasons for Decision handed down by DHCJ Seagroatt on 25 November 2013, the learned judge observed that the appeal lodged  by the Third Point Parties against the master’s decision was an “entirely unmeritorious appeal based on a pettifogging technicality which had already been corrected”[2], and the court found that the conduct of the Top Point Parties was “a waste of time and cost, entirely without merit, a cynical delaying tactic of the worst kind, an unacceptable abuse of the court process and a pointless attempt to circumvent the rationale and spirit of the Civil Justice Review.”[3]

13.  On 16 January 2015, Top Point obtained leave to re-amend its Statement of Claim.  The Firm filed the consequential RAD&C in February 2015.

14.  Expert directions were given on 11 August 2015. Discovery was completed in 2016.

15.  In the end of 2017, the Firm sought to progress the action by seeking to exchange expert reports and witness statements.

16.  The Top Point Parties issued the present Summons on 18 January 2018.  The Firm complains that the Summons was issued 6 years after the filing of the Amended Defence and Counterclaim where the phrase in question, “ought to have known”, first appeared.  The Firm contends that it is a belated attempt to take technical and meritless objections in an attempt to delay the trial of this action.

The relevant legal principles

17.  Having heard the parties’ submissions, there is no serious dispute about the legal principles relevant to the present application.

18.  First, it is only in plain and obvious cases that the court should exercise its power to strike out a pleading, and the burden lies on the applicant to establish that it is a proper case for striking out.

19.  Second, a “rolled-up plea”, i.e. plea which, on its face, alleges actual or alternatively constructive knowledge, is not treated as making two alternative allegations.  Instead, it is treated as a single allegation that a person ought to have known.[4] Therefore, where a claim involves an allegation of dishonesty or fraud which requires a plea of actual knowledge, and yet the pleader only makes a rolled-up plea, the claim is liable to be struck out for disclosing no reasonable cause of action or defence or being embarrassing.[5]

20.  Third, sham means “acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties the legal rights and obligations different from the actual legal rights and obligation (if any) which the parties intend to create.”[6]

21.  Fourth, for a claim of conspiracy, it must be shown that there was a subjective intention on the part of the defendant to injure the plaintiff.[7]  Further, when pleading conspiracy to injure, “the special rule that allegations of fraud must be pleaded distinctly and with the utmost particularity…arises”.[8]

22.  Fifth, mere negligence or carelessness on the part of the defendant cannot sustain a case on sham or conspiracy to injure the plaintiff.

23.  The difference between the parties lies on how to apply these principles to the pleading concerned in the present case.  As I see it, the dispute is a narrow one.

The plea in relation to the “sham” claim

24.  First, as part of its defence based on “sham”, the Firm pleads at §13 of the RAD&C as follows:

“Further or in the alternative, [the Firm] avers that each and every one of the Purported Escrow Agreements was a sham which was never intended to take effect in accordance with its written terms. Geminis Funds and/or Capital Cosmos and/or [Top Point] and/or [Yang’s Companies] knew full well, or ought reasonably to have known, that they were lending to Aggarwal. They knew, or ought reasonably to have known, that Aggarwal was utilising the sums advanced, and that the money was not sitting in [the Firm’s] client account”.

25.  Mr Shieh, SC, counsel for the Top Point Parties, argues that such plea is bad, relying on the authorities relating to rolled-up plea and the meaning of “sham” as mentioned above[9].  It has further been laid down in Rossendale BC v Hurstwood Properties & Others[10] that “a transaction is only a sham if the parties to it had the common intention, which is necessarily a dishonest intention, that the transaction should not in fact create the legal rights and obligations which it gives the appearance of creating”.  Hence, Mr Shieh submits that, to make good the sham allegation, the Firm must unequivocally plead subjective and actual intention on the part of Aggarwal and the Top Point Parties to create different legal rights and obligations from those appearing from the escrow agreements.  A party cannot create a sham through negligence or carelessness.  The mere rolled-up plea cannot, therefore, sustain the sham allegation.  The plea is also embarrassing and liable to be struck out.

26.  On the other hand, Mr Sussex, SC, counsel for the Firm, submits that the Top Point Parties have misunderstood the Firm’s case.  The Firm is not seeking to establish its claim on sham against the Top Point Parties based on negligence.  In §13, the Firm has clearly pleaded that “each and every one of the Purported Escrow Agreements was a sham which was never intended to take effect in accordance with its written terms.” By making such express averment, there can be no doubt about the Firm’s case: Aggarwal and the Top Point Parties intended to give the impression that they agreed to the purported escrow agreements, whilst in fact they shared the common intention of not honouring their respective obligations or enjoying their respective rights under them.

27.  According to Mr Sussex, the phrase “ought reasonably to have known” therefore must mean something else.  The only requisite common intention of Aggarwal and the Top Point Parties was that they didn’t mean to create the legal relationship as stated in the purported escrow agreements, but wanted to create an impression for third parties that they did.  Apart from that, their actual intention needed not align.  They intended some other arrangement to bind them, but they could have intended different things.

28.  The second and the third sentences at § 3 plead what the Firm says was in the Top Point Parties’ mind to be the real arrangement (which was different from the arrangement as stated in the purported escrow agreements).  They knew, or ought reasonably to have known, that they were lending to Aggarwal.

29.  Mr Sussex maintains that it is not the Firm’s case that “the escrow agreements are sham agreements in that both contracting parties knew or ought reasonably have known that the escrow agreements would not in fact be performed”.  The Firm’s case is that the purported contracting parties positively knew that the escrow agreements would not in fact be performed, and hence the plea “never intended to take effect in accordance with [their] written terms”.  Moreover, in assessing the evidence, the court looks at not only the documents but the external evidence.  Therefore, the actual and constructive knowledge of the Top Point Parties concerning what the real arrangement was, is relevant to the court’s assessment.  In other words, the exercise in ascertaining such constructive knowledge will not be a futile line of investigation as suggested by the Top Point Parties.

30.  In my judgment, if that is the meaning of the Firm’s case, it should have been made clear in the pleading itself.  It is true that the Firm has pleaded that the each of escrow agreements “was a sham which was never intended to take effect in accordance with its written terms”, but the same paragraph goes on to say that the Top Point Parties knew and ought reasonably to have known that they were in fact lending to Aggarwal and Aggarwal was using the monies himself.  It certainly gives the impression to the reader, or at least it is one of the possible constructions of §13 of the RAD&C, that constructive knowledge of the “real” purpose of the escrow agreements, i.e. to lend money to Aggarwal himself, is sufficient to establish the subjective intention that the Top Point Parties had never intended the escrow agreements to take effect as per their written terms.

31.  It is now clear from Mr Sussex’s submissions that constructive knowledge of the “real” purpose of the arrangement was only an evidential matter to be relied upon by the Firm to establish by inference the subjective fraudulent intention of the Top Point Parties regarding the “sham” escrow agreements.  But without qualifying the phrase “ought reasonably to have known”, it gives at least a misleading impression that carelessness or negligence on the part of the Top Point Parties is, by itself, sufficient to substantiate the “sham” allegation.  As laid down in Aktieselskabetdansk Skibsfinansiering v Wheelock Marden & Co Ltd & Ors[11],allegations of fraud “must be pleaded distinctly and with the utmost particularity”.  Though that was a case on conspiracy to injure, the same principle applies.

32.  Undoubtedly, the subjective intention and knowledge of the Top Point Parties regarding the escrow agreements are one of the main issues in the present case.  As the Firm’s case is, to a great extent, built upon the fraudulent intention of the Top Point Parties, allegations of fraud need to be expressly pleaded, so that the Top Point Parties know exactly the case that they have to meet at the trial.

33.  At the very least, §13 of the RAD&C will have to be amended to clarify the Firm’s case as now contended for by Mr Sussex.  I therefore strike out both phrases “or ought reasonably to have known” in §13, but I also grant general leave to the Firm to amend §13 to particularize its case as formulated by Mr Sussex, if necessary, within 21 days.

The plea in relation to the conspiracy claim

34.  As part of its counterclaim for conspiracy to injure by unlawful means, the Firm pleads at §32(2) that:

“32. In the circumstances, on or before 19^th January 2009 Aggarwal, Mr James Yang and Mr Yang’s Companies conspired together to injure [the Firm] by unlawful means, the conspiracy can be inferred from the following overt acts:

Particulars of overt acts

… … …

(2) By reason of the unusual nature of the Purported Escrow Agreements, Mr James Yang and/or Mr Yang’s Companies knew or ought to have known that he / it was / they were dealing with Aggarwal personally, who was taking loans from Mr Yang’s Companies wholly unconnected with his professional status as a solicitor or with the business of the Defendant”.

35.  Mr Shieh relies on the authority mentioned in §21 above to show that, for the tort of conspiracy to injure, the intention must be one of actual subjective intention to injure.  Further in Total Lubricants Hong Kong Limited v Christophe de la Cropte de Chanterac[12], the Court of Appeal accepted the proposition that:

“the tort of conspiracy by unlawful means requires an intention to cause loss by unlawful means and that a defendant may avoid liability on the basis that it did not have the requisite intent to injure the plaintiff on the basis that it believed it was entitled to act as it did, even if it knew it would cause loss.”

36.  By incorporating the phrase “ought to have known”, Mr Shieh submits that the plea in §32(2) of the RAD&C is bad because the Firm is suggesting that carelessness or negligence is sufficient to establish the necessary subjective intention for the tort of conspiracy to injure.

37.  On the other hand, Mr Sussex argues that it is clearly the Firm’s case the Top Point Parties had the actual intention to injure.  It is pleaded at §32 that they “conspired together to injure [the Firm] by unlawful means”.  What are pleaded in §32(2) are the overt acts from which the court can infer the conspiracy, namely, the Top Point Parties had actual or “blind-eye” (Nelsonian or constructive) knowledge that they were dealing with Aggarwal personally, who was taking loans from them unconnected with his professional status as a solicitor, or the business of the Firm.

38.  According to Mr Sussex, the relevant state of mind of the conspirator in a claim of conspiracy to injure by unlawful means can include “blind-eye” knowledge, which involves a deliberate decision not to inquire into matters which were obvious and specific, and that approximates to knowledge.

39.  In support of such proposition, he refers me to the cases of De Krassel v Chu Vincent[13], and Bank of Tokyo-Mitsubishi UFJ Ltd & Anor v Baskan Gida Sanayi Ve Pazarlama AS & Ors[14], both citing the following passage in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd[15]:

“’Blind-eye’ knowledge approximates to knowledge. … … It is, I think, common ground – and if it is not, it should be – that an imputation of blind-eye knowledge requires an amalgam of suspicion that certain facts may exist and a decision to refrain from taking any step to confirm their existence. … … a person who refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind – I suspect there is something wrong, and if I ask questions and make further inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover. Lord Blackburn added ‘I think that is dishonesty’.”

40.  It is the Firm’s case that the Top Point Parties had at least “blind-eye” knowledge that their dealings with Aggarwal were unconnected with the Firm or Aggarwal’s professional status.  Indeed, the Top Point Parties gave misleading and inaccurate representations to the SFC about their dealings involving the purported escrow agreements and the exorbitant fees and interest they received from the Firm’s client account.

41.  Mr Sussex further submits that, even if the relevant state of mind of the conspirator in a claim of conspiracy to injure by unlawful means does not include “blind-eye” knowledge, the plea that the relevant parties ought to have known by reason of the facts pleaded is relevant to the court’s assessment, or inference, as to whether any actual knowledge existed.  The court would be entitled to conclude that any reasonable person in the position of the Top Point Parties ought to have known that they were dealing with Aggarwal personally, and from that to infer (in the absence of any evidence that they were somehow disabled from drawing a conclusion which any reasonable person would draw) that they did in fact know.  If there is any doubt or uncertainty on the law as to the quality of the knowledge required to establish a claim in unlawful means conspiracy, it is inappropriate to strike out the claim given that it is in an area of the law which is in the process of developing, relying on the case of Tadjudin Sunny v Bank of America, National Association[16].

42.  In my judgment, the same criticism can be made against the plea in §32(2).  If it is the Firm’s case that it would rely on “blind-eye” knowledge and not just carelessness or negligence on the part of the Top Point Parties, it should have been made clear in the pleading.  As mentioned above, the Firm’s case against the Top Point’s Parties is, to a great extent, built upon the allegation of fraud.  It is contended that they conspired with Aggrawal in a fraudulent way to injure the Firm.  The case of Aktieselskabetdansk Skibsfinansiering v Wheelock Marden & Co Ltd & Ors[17] has made it clear that, when pleading conspiracy to injure, allegations of fraud “must be pleaded distinctly and with the utmost particularity”.

43.  There is certainly a great difference between the phrase of “ought to have known” (which suggests carelessness and negligence) and “blind-eye” knowledge (which suggests something like recklessness or turning a blind-eye to something that is quite obvious).  For the purpose of the present application, I am prepared to accept the Firm’s case that “blind-eye” knowledge may “[approximate] to knowledge”.  However, to avoid confusion and embarrassment, the pleading should be amended to make to clear that the Firm is not relying on mere constructive knowledge, or carelessness or negligence, to support the claim on conspiracy to injure.

44.  Hence, I also strike out the plea of “ought to have known” in §32(2).  Likewise I grant general leave to the Firm to amend §32 to particularize its case as now formulated by Mr Sussex, if necessary, within 21 days.

Delay

45.  I agree that there was substantial delay in the making of the present striking out application.  However, I accept the submission of Mr Shieh that where a claim or defence is unsustainable as a matter of law, the timing of the application to strike out is less critical.[18] In Ko Hon Yue v Chiu Pik Yuk[19], Ma CJ said the following:

“Obviously, where a claim or defence is unsustainable as a matter of law, the timing of the application to strike out is less critical…[on the other hand] where proceedings may constitute an abuse on the basis that it would be vexatious for a court to try the case, the sooner this is dealt with the better; otherwise the very evils sought to be avoided (the wastage of time and resources causing vexation or harassment of the other party) would continue to accumulate”

46.   The Chief Justice further observed that[20], where a striking out application is made on the basis that no reasonable cause of action or defence existed, “a court may well find it appropriate to deal with the application” even if discovery has already taken place, the parties’ witness statements have been exchanged and all other preparations have been made for the trial.

47.  On the basis of such dicta, the factor of delay should not carry any significant weight.  In any event, the case is yet ready for trial and this application does not affect any milestone date.

48.  I therefore make the order as mentioned in §§33 and 44 above. The Top Point Parties would be at liberty to make a further striking out application if the amendments are not in line with the Firm’s case as now formulated by Mr Sussex.  If the Firm does further amend the RAD&C, the Top Point Parties would have leave to file consequential amendments within 14 days thereafter.

49.  Taking into account the delay, I make a costs order nisi that the costs of and occasioned by the Summons, including the costs of the amendments of the pleadings, be the Top Point Parties’ costs in the cause, which shall be made absolute 21 days after the date of the handing down of the Decision.

50.  As discussed in the hearing, I also direct the parties to fix a case-management conference before me with 30 minutes reserved.