CHINA MEDICAL TECHNOLOGIES, INC (In Liquidation) AND OTHERS v. THE BANK OF EAST ASIA, LTD

HCA 1741/2018 & HCA 303/2022

[2024] HKCFI 1180

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1741 OF 2018 &

ACTION NO. 303 OF 2022

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BETWEEN

(Consolidated by the Order of Honourable Mr Justice Ng dated 10 May 2021)

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JUDGMENT

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Introduction

1.  By Summons dated 17 December 2021 (“Strike Out Summons”), the Defendant applied to strike out the Statement of Claim in its entirety and to dismiss this Action. The relevant claims sought to be struck out were:

1.1 The claim based on dishonest assistance.

1.2 The claim based on knowing receipt.

1.3 The claim based on want of authority.

1.4 The claim based on fraudulent trading.

1.5 Any claim beyond the amount of US$181.5 million that passed through the Defendant’s accounts.

2.  In paragraph 2 of the Strike Out Summons, as an alternative, the Defendant sought a direction that certain questions be tried as points of law under RHC Order 14A or as preliminary issues under RHC Order 33 r 3. At the hearing, Mr Man SC did not press for a direction under RHC Order 14A. But he did proceed to argue for a trial of preliminary issues and provided this court with a Draft Order, paragraph 1 of which stated:

a. Whether the Plaintiffs’ claim based on dishonest assistance has become barred by operation of the Limitation Ordinance, Cap 347 (“LO”) as the alleged fraud could have been discovered by the Plaintiffs with reasonable diligence more than 6 years before the commencement of HCA 1741 of 2018 on 27 July 2018; and

b. Whether the Plaintiffs’ claim based on knowing receipt has become barred by operation of the LO as the alleged fraud could have been discovered by the Plaintiffs with reasonable diligence more than 6 years before the commencement of HCA 1741 of 2018 on 27 July 2018.

3.  By Judgment dated 8 September 2023 (“Judgment”), this court dismissed paragraphs 1.1, 1.2 and 2 but allowed the Defendant’s application as to paras 1.3, 1.4 and 1.5.

4.  However, the Defendant only succeeded in arguing at the hearing that the claim based on fraudulent trading ie para 1.4 should be struck out. As noted at the beginning of the Judgment, the claim based on want of authority was conceded by the Plaintiffs in their skeleton submissions. The Plaintiffs also conceded in the 1st Affidavit of Mr Borrelli dated 4 March 2022 (“Borrelli 1”) at [72] that they did not seek recovery of loss in excess of the amount that passed through the Defendant’s accounts ie US$181.5 million.

5.  At paragraph 111 of the Judgment, this court ordered, on a nisi basis, that costs of the Strike Out Summons be to the Plaintiffs to be taxed if not agreed and paid forthwith, certificate for senior counsel (“Order Nisi”).

6.  This is the hearing of the Defendant’s application by Summons dated on 22 September 2023 to vary the Order Nisi (“Costs Summons”) by adding “the Defendant shall be paid one-third of its costs of the Strike Out Summons, to be taxed if not agreed and paid forthwith, with a certificate for two counsel, and two-thirds of the Plaintiffs’” after the words “On a nisi basis,”.

7.  Putting it simply, the Defendant is asking this court to vary the Order Nisi such that:

a. The Defendant shall be paid one-third of its costs of the Strike Out Summons, to be taxed if not agreed and paid forthwith, with a certificate for two counsel.

b. Two-thirds of the Plaintiffs’ costs of the Strike Out Summons be to the Plaintiffs to be taxed if not agreed and paid forthwith, with certificate for senior counsel.[1]

Deliberation

8.  In essence, the Defendant submits that it was partially successful in striking out the fraudulent trading claim[2] and this should be reflected in the costs order in respect of the Strike Out Summons.

9.  At [72] – [81] of the Judgment, this court gave the following reasons for striking out the fraudulent trading claim as follows:

“Fraudulent trading

72. The plea is made at paras 166 and 167 of the Statement of Claim:

‘F3. Fraudulent Trading

166. Further or alternatively, by reason of its conduct as pleaded herein, the Defendant was knowingly a party to the carrying on of the business of the First Plaintiff with intent to defraud creditors of the First Plaintiff, with reckless indifference as to whether or not the creditors of the First Plaintiff were defrauded and/or whether or not the business of the First Plaintiff was carried on for a fraudulent purpose.

167. In the premises, the Third Plaintiffs seek remedies against the Defendant under s. 275 of the Companies Ordinance in respect of the debts and other liabilities of the First Plaintiff in the amount of at least US$181.5 million or as the Court may direct.’

73. Section 275 (1) of the Companies Ordinance Cap 32 provides that:

‘If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court, on the application of… the liquidator… of the company, may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.’ (emphasis added)

74. It is accepted by the Defendant that liability under section 275 can extend to third parties or outsiders who deal with the company. But the focus of the section is on those who were ‘parties to the carrying on of the business’.

75. The meaning of this phrase was discussed by Pennycuick VC in Re Maidstone Buildings Provisions Ltd [1971] 1 WLR 1085 at 1092F-G:

‘The expression ‘parties to the carrying on of the business’ is not, I think, a very familiar one, but so far as I can see, the expression “party to” must on its natural meaning indicate no more than “participates in,” “takes part in” or “concurs in.” And that, it seems to me, involves some positive steps of some nature. I do not think it can be said that someone is party to carrying on a business if he takes no positive steps at all. So in order to bring a person within the section you must show that he is taking some positive steps in the carrying on of the company’s business in a fraudulent manner.” (emphasis added)

76. In the present case, the Defendant submits it is difficult to see why the Defendant is a party to the carrying on of the 1st Plaintiff’s business when it is not even the banker of the 1st Plaintiff.

77. In the BOC Action, the Plaintiffs’ case on fraudulent trading was elaborated at para 34 of the BOC Decision as thus: (i) The 1st Plaintiff’s business involved the acquisition of inter alia technologies to complement its existing business; (ii) the business operations of the 1st Plaintiff were conducted by inter alia Tsang and/or Wu; (iii) the FISH and SPR Transactions, presented to the Board and public as legitimate arm’s length transactions, were not arm’s length transactions made for proper commercial purposes; (iv) by procuring and carrying out the FISH and SPR Transactions, Tsang and/or Wu intended to defraud the creditors of the 1st Plaintiff, or were recklessly indifferent as to whether those creditors were defrauded or otherwise acted for a fraudulent purpose; (v) BOC participated in the carrying on of the 1st Plaintiff’s business by executing all payment instructions from Tsang and/or Wu.

78. The Defendant submits its position is completely different – it was never a banker of the 1st Plaintiff and has no direct dealings with it (or with the 2nd Plaintiff for that matter). It never received or executed any payment instructions from the 1st Plaintiff or the 2nd Plaintiff, and was never involved in the payments for the FISH or SPR Transactions. Rather, the Defendant’s dealings were with Supreme Well, the counterparty to the FISH and SPR Transactions and the recipient of the misappropriated funds.

79. This court agrees. It is difficult to see how the Defendant can be said to be knowingly a party to the carrying on of the 1st Plaintiff’s business in entering into the 2 transactions as pleaded at para 166 of the Statement of Claim, or had taken any positive steps in respect of the same.

80. At para 70.5 of Borrelli 1, the Plaintiffs argue that the Defendant participated in the carrying on of the business of the 1st Plaintiff in a fraudulent manner by assisting in the breaches of duty by inter alia Tsang and Wu. This is clearly misconceived as submitted by the Defendant. As the Defendant puts it in para 94 of its skeleton, which this court agrees, liability under section 275 requires the Defendant carrying on the business of the 1st Plaintiff. In principle, this should not to be equated with rendering dishonest assistance to the delinquent directors’ breaches of duties. A director who steals money from the company’s safe would be in breach of his duties to the company, but it cannot be said a bank who receives the stolen money from the director by reason of such act alone is carrying on the company’s business. For clarity of thoughts, liability of the bank should in those circumstances be framed in terms of dishonest assistance or knowledge receipt, if the requisite ingredients of the 2 causes of action are present.

81. For these reasons, the claim of fraudulent trading against the Defendant should be struck out. There is no need to go into the other submissions about insufficient of the plea of knowledge.”

10.  It can be seen from the above that the fraudulent trading claim was quite unarguable. There was thus no serious need to advance the submissions that the Plaintiffs had failed to sufficiently plead that the Defendant had actual or blind eye knowledge of any fraudulent trading, ie the Lack of Knowledge Point in Mr Lam’s skeleton, and hence this court did not go into them. Nevertheless, only 2 paragraphs in the Statement of Claim were deleted and the bulk of the Plaintiffs’ claims remain after the striking out application.

11.  The Plaintiffs, on the other hand, submit that the Order Nisi reflects the overall justice of the strike-out application in that:

a. The Plaintiffs substantially succeeded in resisting the application; and

b. The Defendant’s conduct in bringing the application was unreasonable, in that the Defendant: (1) brought the application in lieu of filing a Defence, in breach of an unless order; and (2) rehashed many of the same arguments which this Court had already rejected in the Bank of China Action in HCA1742 of 2018 (“BOC Decision”)[3].

12.  The parties are not in serious dispute as to the applicable legal principles.

a. In dealing with the costs of the Strike Out Summons, the Court has a wide discretion.

b. Under RHC Order 62 r 3(2A) which deals with costs of interlocutory applications, the Court may “order the costs to follow the event or make such other order as it sees fit.”

c. The Court is entitled to take into account all the circumstances of the case, including those set out in RHC Order 62 r 5, to make such order as it thinks fit.

d. The circumstances that the Court can and shall take into account under RHC Order 62 r 5 include inter alia:

i. the underlying objectives set out in Order 1A, rule 1;

ii. the conduct of all parties;

iii. whether a party has succeeded on part of his case, even if he has not been wholly successful.

e. The aim of the Court is always to make an Order that reflects the overall justice of the case.

13.  In this court’s view, the Plaintiffs’ argument that they substantially succeeded in resisting the application is the opposite side of the same coin as the Defendant’s argument that it was partially successful in respect of the Strike Out Summons. Both arguments do not take the matter any further.

14.  In the Plaintiffs’ skeleton submissions at Section D, Ms Xu submits that the Defendant’s conduct in connection with its application was unreasonable in two respects such that the Order Nisi reflected the overall justice of the case.

15.  First, the Defendant made the strike-out application on the same day by which it had been ordered, on an ‘unless’ basis, to file its Defence in the Action. The Defendant did not file its Defence in compliance with the Unless Order, but instead chose to make the strike-out application.

16.  Second, before the Defendant issued the Strike Out Summons on 17 December 2021, this court had already heard and largely dismissed the application by the Bank of China to strike out the Plaintiffs’ claims in HCA 1742 of 2018: China Medical Technologies, Inc & Ors v Bank of China [2021] HKCFI 3042 dated 15 October 2021 ie the BOC Decision. On 4 January 2022, the Plaintiffs’ solicitors sent to the Defendant’s solicitors a copy of the BOC Decision and highlighted that many of the same issues raised in the Defendant’s application to strike out had already been determined and that the application therefore served no useful purpose aside from delaying the proceedings. The Defendant continued with its application and the Court was caused to waste time and costs hearing and deciding many of the same points already decided in the BOC Decision, with substantially the same outcome, save for the claim in fraudulent trading.

17.  The points made by Ms Xu are valid and had indeed been part of this court’s consideration when making the Order Nisi. However, on reflection after considering Mr Lam’s submissions, this court does not think they justify giving no credit in terms of costs at all to the Defendant’s partial success in striking out the fraudulent trading claim.

18.  First, as Mr Lam submits, the breach of the Unless Order attracted its own costs consequences under the Relief Summons. It should not result in further jeopardy to the Defendant, or “double counting” in Mr Lam’s words, when it comes to costs in the Strike Out Summons.

19.  Second, as Mr Lam also submits, raising grounds already covered by the BOC Decision (when Bank of China was represented by a different legal team) should not lead to any additional consequences other than that the Defendant should pay the Plaintiffs their costs in relation to those same grounds which failed. In this court’s view, the Defendant’s legal team were entitled to raise their own arguments with their own authorities, additional or otherwise, and tried to persuade this court to reconsider the BOC Decision. They had not succeeded in doing so but that was not something this court should hold against the Defendant in terms of costs.

20.  For these reasons, this court is minded to award a portion of the costs of the Strike Out Summons to the Defendant. The question is how much.

21.  The parties have submitted their own estimation of the length of their written submissions and time taken for their oral submissions on the fraudulent trading claim. Their estimations differ. As this court’s aim is to make an Order which reflects the overall justice of the case, a broad brush approach is appropriate in the circumstances. Doing the best it can, this court is of the view that the Defendant should be entitled to 15% of its costs for the application.

Disposition and costs order nisi

22.  This court hereby orders that the Order Nisi should be varied as follow:

a. The Defendant shall be entitled to 15% of its costs of the Strike Out Summons, to be taxed if not agreed and paid forthwith, certificate for two counsel.

b. The Plaintiffs shall be entitled to 85% of their costs of the Strike Out Summons – save as aforesaid, what remains of para 111 of the Judgment is unchanged.

23.  As for the costs of the Costs Summons, including the 22 February 2024 hearing, there shall be an Order nisi that there be no order as to costs. This is to reflect that each side is equally and partly successful in seeking or resisting the variation to the Order Nisi.