LI NGAN KWAN AND ANOTHER v. GAO LI HUI AND OTHERS

CAMP 35/2022, [2023] HKCA 781

On Appeal From [2021] HKCFI 2878

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 35 OF 2022

(ON AN INTENDED APPEAL FROM HCA NO 933 OF 2007)

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J U D G M E N T

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

A.  INTRODUCTION

1.  By a decision dated 29 September 2021 (“the Decision”), Au‑Yeung J (“the Judge”) dismissed the plaintiffs’ summons (“the Amendment Summons”) for leave to amend their Statement of Claim filed on 8 May 2007 (“the SOC”).  The plaintiffs later sought leave to appeal against the Judge’s order of 29 September 2021 (“the Order”) in dismissing the Amendment Summons insofar as it relates to their claims against the 1^st and 5^th defendants.  On 13 January 2022, the Judge refused to grant leave to appeal[1].

2.  On 26 January 2022, by way of Summons (“the Leave Summons”), the plaintiffs renewed their leave to appeal application before us, and we gave directions for there to be a rolled-up hearing of the plaintiffs’ renewed leave application.  At the end of the hearing, we reserved our judgment to be handed down.  This is what we do now.

B.  BACKGROUND

3.  The relevant background was set out by the Judge in detail in [9] ‑ [37] of the Decision, and the following summary will suffice for present purposes.

4.  This action was commenced on 8 May 2007.  The subject matter of the action is the shareholding in the 5^th defendant (“Excel Gainer”) and a property known as Unit 09 on the 17^th Floor of the Office Tower, Convention Plaza, No 1 Harbour Road, Hong Kong (“the Premises”).  The Premises was held by Excel Gainer but was later sold to a third party.

5.  In broad terms, the plaintiffs contend that the 1^st to 3^rd defendants[2] perpetrated a fraud on them to misappropriate the one share in Excel Gainer (“the Excel Gainer Share”) and the sale proceeds of the Premises (“the Proceeds”).  The plaintiffs claim that both the Excel Gainer Share and the Premises belonged to the 1^st plaintiff beneficially[3], and they pleaded the following matters in the SOC:

(1)  On 9 June 2000, the 1^st plaintiff purchased the Premises, which was then registered in the name of Billion Houses Properties Ltd (“BHP”), a company which was at all material times beneficially owned by the 1^st plaintiff: §§1 and 6 of the SOC.

(2)  In early 2004, acting on the 1^st plaintiff’s instructions, the 1^st defendant (who was the 1^st plaintiff’s personal assistant) acquired Excel Gainer and caused the 2^nd plaintiff (who is the 1^st plaintiff’s nephew) to become the sole director and shareholder.  The 2^nd plaintiff held the Excel Gainer Share on trust for the 1^st plaintiff.  The Premises was also sold to Excel Gainer at around the same time: §§2, 4, 9 ‑ 10, 15 ‑ 16 of the SOC.

(3)  The 1^st defendant induced the 2^nd plaintiff to sign an undated English Declaration of Trust (“the Purported DOT”) by fraudulently misrepresenting to him that the 1^st plaintiff had asked him to sign that document.  The Purported DOT declared that the 1^st defendant was the beneficial owner of the Excel Gainer Share: §§11 ‑ 12 of the SOC.

(4)  On 28 April 2006, pursuant to the 1^st plaintiff’s instructions, the 2^nd plaintiff procured Excel Gainer to enter into an agreement to sell the Premises to a third party at the price of HK$16 million: §22 of the SOC.

(5)  Thereafter, as part of a fraudulent scheme to misappropriate the proceeds arising from the sale of the Premises, the 1^st and 2^nd defendants prepared or procured to be prepared a number of documents including inter alia the following:

(a)  A Letter of Resignation, which purports to have been, but was not in fact, signed by the 2^nd plaintiff, stating that the 2^nd plaintiff had resigned from his office as the only director of Excel Gainer (“the Letter of Resignation”): §26(a) of the SOC.

(b)  An undated instrument of transfer (“the Purported Instrument”), purportedly signed by the 2^nd plaintiff, which recorded that the Excel Gainer Share was transferred to the 1^st defendant: §§25, 26(b) and 30(b) of the SOC.

(c)  A purported Notification of Change of Secretary and Director (Appointment/Cessation) (Form D2A) dated 15 May 2006, which records that the 2^nd plaintiff had resigned as the director of Excel Gainer and that the 2^nd and 3^rd defendants were appointed in his stead on 14 May 2006 (“the Form D2A”): §26(c) of the SOC.

(d)  A set of minutes dated 14 May 2006 (“the Board Minutes”), which records that the directors of Excel Gainer resolved that the 4^th defendant, a firm of solicitors, be employed to act for Excel Gainer in the sale of the Premises in place of its existing solicitors, Messrs YL Yeung & Co, and that they be authorised to execute all documents for the sale of the Premises: §27(a) of the SOC.

(6)  On 15 June 2006, the 4^th defendant sent copies of the Purported DOT, the Purported Instrument, the Letter of Resignation, the Board Minutes, and the Form D2A to Messrs YL Yeung & Co.  The 4^th defendant then replaced Messrs YL Yeung & Co, completed the sale of the Premises, and later released the Proceeds to someone other than Excel Gainer on the 1^st and 2^nd defendants’ instructions: §§29, 33 ‑ 36 of the SOC.

(7)  As the beneficial owner of the Premises, the 1^st plaintiff has suffered loss, namely the loss of the Proceeds.  The plaintiffs also claim that the 1^st and 2^nd defendants are liable as constructive trustees as they had intermeddled with the Proceeds: §§38 ‑ 39 of the SOC.

(8)  The plaintiffs sought damages against the 1^st and 2^nd defendants for fraud, fraudulent misrepresentation and conversion and they also sought a declaration that the Purported DOT and the Purported Instrument are null and void in the prayer of the SOC.

6.  After this action was commenced, it was ordered to be heard on the same list and before the same judge hearing HCA 276/2007, a related action.  That action was adjourned part-heard on 29 July 2008.  Thereafter, the plaintiffs took no steps to prosecute this action or to restore the related action until 2018 because the 1^st plaintiff suffered from various illness such that he was allegedly unable to give any instructions.

7.  On 10 July 2018, the plaintiffs, acting in person, filed their Notice of Intention to Proceed in this action.  The plaintiffs then took some time to engage a new legal team and to take various steps for the continuation of the present action.

8.  On 26 May 2020, some 13 years after the commencement of the action, the plaintiffs by way of the Amendment Summons sought leave to amend their SOC as put forward in the draft Amended Statement of Claim (“DASOC”).  The following proposed amendments in the DASOC are relevant for present purposes:

(1)  The plaintiffs no longer claim that the 1^st plaintiff is the beneficial owner of all the issued share capital of BHP.  Whilst the plaintiffs pleaded that BHP was held by two corporate shareholders, there is no plea that the 1^st plaintiff was the beneficial owner of any of these entities.  On the other hand, it is now pleaded that BHP held the Premises on resulting trust for the 1^st plaintiff and he was therefore the beneficial owner of the Premises: §§1, 5A and 6A of the DASOC.

(2)  The plaintiffs pleaded a new forgery claim in relation to the Purported DOT (“the DOT Forgery Claim”) as an alternative to the misrepresentation claim.  They claim that the 2^nd plaintiff could not remember whether he had signed the Purported DOT, and that the Purported DOT was forged by the 1^st defendant insofar as it was not signed by him: §§11C ‑ 11E of the DASOC.

(3)  The plaintiffs have also expressly set out the causes of action they rely on against the 1^st defendant[4] which include the 1^st plaintiff’s claims based on constructive trust, unjust enrichment and breach of fiduciary duties, and the 2^nd plaintiff’s claims based on fraudulent misrepresentation and non est factum: §§37A ‑ 37M of the DASOC.

(4)  The plaintiffs also seek a declaration that the Purported DOT, the Purported Instrument, the Letter of Resignation, the Board Minutes and the Form D2A are null and void and of no legal effect.

C.  THE DECISION

9.  The Judge dismissed the plaintiffs’ application for leave to amend their SOC.  Her reasoning may be summarised as follows.

10.  First, the Judge held that there had been inordinate and inexcusable delay on the part of the plaintiffs in taking out the amendment application in that the application was only taken out 13 years after the filing of the SOC.  The Judge was of the view that delay in and of itself justified the dismissal of the Amendment Summons: [50] ‑ [69] of the Decision.

11.  Secondly, the Judge held that the 1^st plaintiff’s case on beneficial ownership of the Premises was a new claim based on a new and unsustainable basis, and that it was liable to be struck out.  The Judge later used this as a reason for refusing to grant the plaintiffs leave to put forward many of the proposed amended causes of action in the DASOC: section F1 of the Decision.

12.  Thirdly, the Judge refused to allow the DOT Forgery Claim on the basis that it was a new claim and was contradicted by contemporaneous evidence.  The rejection of the DOT Forgery Claim also formed the basis of the Judge’s reasoning for rejecting all of the proposed amended causes of action save for the claims based on non est factum and unjust enrichment: section F2 of the Decision.

13.  For completeness, the Judge then in any event further considered each of the proposed amended causes of action by applying the well-established three-stage test, which was summarised in Shenzhen Futaihong Precision Industry Co Ltd v BYD Company (unreported, HCA 2114/2007, 18 July 2016) at [16] (as set out in [43] of her Decision)[5] and refused to grant leave to the plaintiffs to so amend.  As alluded to above, in rejecting the proposed amended causes of action, the Judge largely relied on her reasoning in sections F1 and F2 of her Decision.  See: sections G ‑ K of the Decision.  We will examine this in greater detail later when we discuss the proposed causes of action.

D.  WHETHER LEAVE TO APPEAL IS REQUIRED?

14.  As mentioned, by way of the Leave Summons, the plaintiffs re-applied to this court for leave to appeal against the Order insofar as it relates to the refusal of those amendments summarized at [8] above.

15.  On 20 June 2022, this court wrote to the parties and directed them to address the court in their respective skeletons to be filed for the rolled-up hearing, among others, the issue of whether leave to appeal was required in relation to the judge’s rejection of those amendments.  The parties’ attention was also drawn to the point that if leave was not required, the court would have no jurisdiction to grant leave, and in that connection there would be no appeal to deal with as the time for service of a notice of appeal as of right had expired.

16.  After receiving the court’s above letter, on 23 June 2022, the plaintiffs filed a further summons (“the EOT Summons”) seeking an extension of time to file a Notice of Appeal (on all or any of the grounds set out in the draft Notice of Appeal attached to the Leave Summons).

17.  In this respect, it is noted that an order refusing to allow an amendment of a pleading to introduce a new claim or defence or any other new issues is an order determining in a summary way the substantive rights of a party, and it is not necessary for a party to seek leave to appeal against such an order: Order 59, rule 21(1)(a) and rule 21(2)(i) of the Rules of the High Court, Cap 4A.

18.  The plaintiffs argued that the Judge’s order which dismissed their application to amend was not “strictly speaking” an order “refusing to allow an amendment of a pleading to introduce a new claim or defence or any other new issue” falling within Order 59, rule 21(2)(i) or it was not entirely clear whether it was.  On that basis, the plaintiffs decided to seek leave to appeal against the Decision.

19.  However, it must be noted that whilst the plaintiffs contend that most of the claims in the DASOC are not new claims, there are a number of claims which even on the plaintiffs’ own case are new claims.  For instance, the plaintiffs have accepted that the unjust enrichment claim and the claim based on breach of fiduciary duties are new causes of action at the hearing below ([104] and [137] of the Decision), and it follows that, at least on the plaintiffs’ own case, leave to appeal is not required in respect of these claims.

20.  Mr Mak[6] (counsel for the 1^st defendant) indeed submitted at this hearing that the plaintiffs did not need leave to appeal[7].

21.  Nevertheless, at the hearing before us, we invited the parties to focus their submissions on the merits and not to dwell on the question of whether leave to appeal is required.  As we see it, if leave to appeal is required, that question will largely turn on the merits of the proposed grounds of appeal.  On the other hand, if leave is not required such that the plaintiffs would require an extension of time to appeal, whether such extension should be granted will again depend on the merits.  The parties were rightly content to proceed in this way and focused their submissions on the merits of the appeal.  We will deal with the issue concerning whether leave to appeal is required at the end of this judgment.

E.  DISCUSSION

22.  As stated above, the Judge rejected the proposed amendments on three main grounds, namely (a) the 1^st plaintiff’s case on beneficial ownership of the Premises is a new claim on a new basis (section F1 of the Decision); (b) the DOT Forgery Claim is unsustainable (section F2 of the Decision); and (c) there has been inordinate and inexcusable delay (sections E and P of the Decision).

23.  The plaintiffs have set out various grounds in the draft Notice of Appeal to challenge the Judge’s respective conclusions in rejecting each group of the proposed amendments.  In gist and substance, the principal arguments raised by Ms Sara Tong SC, leading Ms Natalie So, in support of those grounds and to say why those proposed amendments should be allowed can be summarized as follows:

(1)  The Judge’s analysis in section F1 of the Decision and her conclusion that the 1^st plaintiff’s case on beneficial ownership of the Premises is a new claim on a new basis is wrong.  This is because the plea that the 1^st plaintiff was the beneficial owner of the Premises was made in the SOC and retained in the DASOC.  (“1^st Argument”)

(2)  Even assuming that the Judge was correct in rejecting the DOT Forgery Claim based on her analysis in section F2 of the Decision, the Judge was wrong to use that as a reason for rejecting the other proposed amendments which do not depend exclusively on the DOT Forgery Claim. (“2^nd Argument”)

(3)  The Judge failed to distinguish between prejudice occasioned by delay simpliciter and prejudice occasioned by the amendment application, and it is only the latter which is relevant.  Many of the causes of action in the DASOC are not new causes or are based on the same or substantially same facts as pleaded in the SOC.  As such, the proposed amendments would not have caused the defendants any prejudice.  (“3^rd Argument”)

24.  We will first look at each of these arguments relevant to the proposed amendments and the Judge’s reasons in rejecting them in turn.

E1.  1^st Argument

25.  The Judge’s conclusion that the 1^st plaintiff’s case on beneficial ownership in the Premises is a new claim under the DASOC is explained at [72] ‑ [78] of the Decision, the relevant parts are as follows:

“F1.    Change in bases of Li’s claim of beneficial ownership in the Premises

72.     The SOC pleads that Li was, amongst others,

(1) The beneficial owner of all the issued capital of BHP (§1);

(2) The beneficial owner of all the issued share capital of Excel Gainer such that the Excel Gainer Share was held by Sun on trust for Li (§1);

(3) The beneficial owner of the Premises from 15 June 2004 to the date of its assignment to the purchaser on 17 July 2006 (§1);

(4) It was Li who ‘purchased’ the Premises at $11.5 million registered in the name of BHP. Li injected his own money of $4.2 million into BHP for part of the purchase price; and the balance was financed by a first charge on the Premises and secured by the personal guarantee of of Li to the extent of $7.8 million (§6); and

(5) It was upon Li’s instructions that the Premises were transferred from BHP to Excel Gainer (§9).

73.     In layman terms, there was a transfer of an asset from Li’s left pocket to right pocket. Sun was supposed to hold the beneficial interest in the asset on trust for Li but somehow, due to Gao’s fraud, the beneficial interest was lost.

74.     But the DASOC pleads a different trust:

(1) The plea that Li was the beneficial owner of BHP is deleted.

(2) BHP was part of a BVI corporate web. Li does not assert that he was a beneficial owner of any of these BVI companies.

(3) Li was no longer the ‘purchaser’ of the Premises but BHP was. Li contributed $4.2 million towards the purchase price through BHP, with a mortgage arranged (not paid) by him and a personal guarantee provided by him. BHP held the Premises on resulting trust for Li as the beneficial owner.

(4) The trust was thus with BHP as resulting trustee or constructive trustee.

75.     Li’s claim is for the Proceeds, not eg loss in value of the Excel Gainer Share. The Court queries whether Li’s claim is in reflective loss in respect of an asset held in the name of a limited company.

76.     Lo Man Yau v Chiu Sung Fai & anor [2018] HKCA 387 concerned a property held by and in the name of a limited company but the purchase price partly came from the funds provided by its shareholder. The Court of Appeal approved of the legal principles governing how a resulting trust may arise laid down in the judgment of Madam Recorder Linda Chan, SC (as she then was) in Re Fortune King Trading Limited, HCCW 432/2012, unreported, 19 May 2017, at §§24-26 and 31:

…

77.     Applying Lo Man Yau, the DASOC is silent as to:

(1) Who of BHP had formed a common intention with Li at the time of the acquisition that beneficial interest in the Premises would vest in Li?

(2) How was it possible, not being a shareholder or director of BHP, for Li to give instructions to transfer the Premises to Excel Gainer?

(3) If there had been fraud by Gao as regards the Proceeds, how was it possible for Li to sue Gao directly without BHP (a trustee) being a party to the present proceedings?

(4) If Li contributed only part of the purchase price without alleging that he had repaid the mortgage, how is it possible for him to claim 100% of the Proceeds?

(5) How would Gao’s management of BHP (not owned by Li) give rise to fiduciary duties to Li?

78.     One can see from the amendments that Li’s case on beneficial ownership of the Premises is a new claim on a new and unsustainable basis: Arta Properties. Li has no locus to complain. The new claim is liable to be stuck out. Section F1 applies to all the proposed amended causes of action.” (original emphasis)

26.  With respect, we consider that the Judge has fallen into error in characterising the 1^st plaintiff’s claim in relation to the beneficial ownership of the Premises as a new one.

27.  In this respect, §1 of the SOC pleads as follows:

“1. At all material times, the 1^st Plaintiff was:

(a) the beneficial owner of all the issued capital of one Billion Houses Properties Limited, a company incorporated under the Companies Ordinance of Hong Kong with limited liability having a share capital through a web of BVI companies;

(b) the beneficial owner of all the issued capital of the 3^rd Plaintiff; and

(c) the beneficial owner of the land and premises known as Unit 09 on the 17^th Floor of the Office Tower, Convention Plaza, No.1 Harbour Road, Hong Kong (hereinafter called ‘the said office premises’).”

28.  The proposed amendments at §§1 and 6A of the DASOC are as follows:

“1. At all material times, the 1st Plaintiff was:-

(a) the beneficial owner of all the issued capital of one Billion House Properties Limited, a company incorporated under the Companies Ordinance of Hong Kong with limited liability having a share capital through a web of BVI companies;

(b) and is the beneficial owner of all the issued share capital of the 3^rd Plaintiff the 5^th Defendant (‘Excel Gainer’);and

(c) the beneficial owner of the land and premises known as Unit 09 on the 17^th Floor of the Office Tower, Convention Plaza, No. 1 Harbour Road, Hong Kong (hereinafter called ‘the said office premises’ the ‘Premises’), until 17 July 2006 when the Premises were assigned to Artflash Investment Ltd. (‘Purchaser’)as pleaded in paragraph 22 below.

…

6A.      At all material times from 9 June 2000 until BHP’s transfer of the Premises to Excel Gainer on 15 June 2004 (as pleaded in Section F below), BHP held the Premises on resulting trust for, and on behalf of, the 1^st Plaintiff, and the 1^st Plaintiff was accordingly the beneficial owner of the Premises.”

29.  It is clear from §1 of the SOC that there was always a plea that the 1^st plaintiff was the beneficial owner of the Premises, which was materially retained at §1 of the DASOC.

30.  Admittedly, the original plea was that the 1^st plaintiff purchased the Premises which was subsequently registered in the name of BHP and the plaintiffs now claim that it was BHP that purchased the Premises.  However, the plea that the 1^st plaintiff was the beneficial owner of the Premises is retained in the DASOC, save that it is now further expressly pleaded at §6A of the DASOC that the Premises was held under a resulting trust by BHP for the 1^st plaintiff.

31.  In other words, the plea that the 1^st plaintiff was the beneficial owner of the Premises has always been there.  What the plaintiffs have done was simply putting an express label on the trust (ie, resulting trust) that was already implicit in the original pleading.  In this respect, it is pertinent to note that when asked by the court at the hearing, Mr Mak (for the 1^st defendant) rightly agreed that even under the original plea of the SOC and without the proposed amendments, it would still be open to the plaintiffs to argue at trial that BHP held the Premises on trust for the 1^st plaintiff.

32.  On the other hand, Mr Mak sought to argue that this would be insufficient to “prove” the resulting trust itself, as the plaintiffs have sought to plead “resulting trust” based on the allegations at §6 of the DASOC that the 1^st plaintiff had himself paid through BHP only part of the purchase price and settled the rest through a mortgage arranged by him (and also acting as a guarantor) with a bank.  However, as pointed out by G Lam JA at the hearing, without saying whether the submissions are correct, this is in any event a separate point since this would still not support the Judge’s analysis under section F1 that the plea was a new claim, and the Judge’s reliance on that as a basis to reject the other amendments.

33.  In the premises, we agree with Ms Tong that the Judge erred in concluding that the DASOC introduces a new claim on a new basis in respect of the 1^st plaintiff’s beneficial ownership of the Premises.

E2.    2^nd Argument

34.  We also consider that the Judge has erred in rejecting a number of proposed amended causes of action (including constructive trust, unjust enrichment and breach of fiduciary duties) based on her rejection of the DOT Forgery Claim.

35.  Whilst we agree with the Judge that the plaintiffs should not be allowed to raise the DOT Forgery Claim (for the reason which will be elaborated below), we do not think that the rejection of the DOT Forgery claim should automatically lead to a complete rejection of the plaintiffs’ proposed causes of action based on constructive trust, unjust enrichment, and breach of fiduciary duties when those claims do not depend exclusively on the DOT Forgery Claim.

36.  Even if one rejects the DOT Forgery Claim, there is still a substratum of other complaints on which the cause of action based on constructive trust, unjust enrichment, and breach of fiduciary duties can be premised, and many of those complaints had already been pleaded in the SOC or otherwise arise from the same facts pleaded in the SOC.  We will discuss this when we deal with each of the proposed amended causes of action below.

E3.    3^rd Argument

37.  In the Decision, after concluding on the facts that the plaintiffs had been in inordinate and inexcusable delay in taking out the Amendment Summons[8], the Judge held at [69] of the Decision that delay itself was a sufficient reason to dismiss the Amendment Summons as follows:

“69. In summary, I am of the view that there has been inordinate and inexcusable delay in taking out the Amendment Summons. That is sufficient to dismiss the Amendment Summons.”

38.  However, if one accepts that most of the claims put forward in the DASOC that are the subject of this appeal are based on facts that have already been in substance pleaded in the SOC, it is difficult to see what impact the delay would have and why this would be a reason for refusing the proposed amendments.  Save for the DOT Forgery Claim, the 1^st defendant would always have had to recall events and communications that occurred some time ago and to produce relevant evidence to deal with these allegations regardless of the proposed amendments.

39.  Mr Mak contended that as the plaintiffs were seeking the Judge’s exercise of discretion to allow the amendments, the long and unexplained delay in making the application must be a relevant factor that the Judge could take into account in deciding whether or not to allow the amendments.  The Judge’s approach therefore cannot be faulted. However, in our view, although delay is a relevant factor that the Judge could take into account, Ms Tong is right to say that one must focus on the prejudice, if any, that would be caused to the defendants by the amendments as a result of the delay before the court could decide how to exercise that discretion.  This should thus be assessed by looking at each of the proposed amendments instead of referring to the long delay per se as a general reason for not allowing all the amendments.

40.  Accordingly, we are of the view that the Judge erred in her analysis in dismissing the Amendment Summons as a whole based solely on the ground of delay without assessing the amendment-specific prejudice, if any, that would be caused to the defendants as a result of the delay by reference to each category of the proposed amendments.

41.  For completeness, we also note that in the context of discussing the relevant principles governing the amendment of pleadings, the Judge made the following observation at [41] of her Decision:

“An application to amend will be refused if it is clear that the proposed amendment has no real prospect of success. The test to be applied is the same as that for summary judgment under Order 14, RHC. The applicant has to have a case which is better than merely arguable …” (emphasis added)

42.  This observation is with respect erroneous.  The relevant test when deciding whether an amendment to be allowed is as noted by the Judge in [40(2)] of the Decision: leave to amend is readily granted before trial unless it can be shown that the proposed amendment is “bound to fail”.  It seems to us that the Judge’s observation at [41] of her Decision contradicts this and is incorrect.

F.  SPECIFIC PROPOSED AMENDMENTS

43.  After concluding that the delay basis and the new claim basis respectively set out under Sections E and F1 of the Decision cannot by themselves properly constitute a general underlying reason for rejecting the proposed amendments of the DASOC, we now turn to consider each of the proposed amended causes of action pleaded in the DASOC which are relevant for the purposes of this appeal.

F1.    DOT Forgery Claim (§§11C ‑ 11E of the DASOC)

44.  We agree that the DOT Forgery Claim is a new claim and is inconsistent with the original plea of fraudulent misrepresentation in the SOC.  We will explain why.

45.  In support of their fraudulent misrepresentation claim, the plaintiffs pleaded at §§11 ‑ 13 of the original SOC that the 2^nd plaintiff on a day unknown “executed the said Declaration of Trust” by reason of the 1^st defendant’s fraudulent misrepresentations (pleaded at §11) but not otherwise.

46.  By these pleas, there is plainly an implied (if not express) admission that the 2^nd plaintiff himself indeed signed the Purported DOT, albeit under the alleged misrepresentations. Hence, if the plaintiffs were permitted to introduce the DOT Forgery Claim by way of amendment (which alleges that the 2^nd plaintiff did not sign it and the document was forged by the 1^st defendant[9]), the plaintiffs would in effect be allowed to withdraw the admission that the 2^nd plaintiff had signed the Purported DOT.  The issue, therefore, boils down to whether the court should exercise its discretion to allow the plaintiffs to withdraw that admission.

47.  The principles governing the withdrawal of an admission are well established and were set out by Kwan JA (as she then was) in Lo Li Li Lily v Lui Fung He [2016] 2 HKLRD 1460, [19] ‑ [21].  In essence, in exercising its discretion, the court will consider all the circumstances of the case including but not limited to the reasons and justifications for the withdrawal which must be made in good faith.

48.  In this context, the need of the party seeking leave to put forward a convincing and credible explanation of the circumstances in which the admission was in fact made is an important (albeit not exclusive) factor.  The existence of a convincing and credible explanation also goes to the bona fides of the party seeking such leave: Lo Li Li Lily, [18].

49.  In the present case, the plaintiffs’ explanation[10] is that the 2^nd plaintiff was instructed by the 1^st defendant to sign on documents, a number of which were in English.  He did not understand those documents and those documents were not interpreted to him; on that basis, it is said that the 2^nd plaintiff could not be certain whether he did in fact sign the Purported DOT or not and that the proposed amendments better represent the 2^nd plaintiff’s recollection of events.

50.  We are not satisfied that this is an explanation, let alone a convincing and credible explanation, of why the 2^nd plaintiff made the admission in the first place.  It was the plaintiffs’ case all along that the 2^nd plaintiff did not understand English.  Hence, the 2^nd plaintiff’s English ability could not explain why the 2^nd plaintiff can now recall that he did not sign the Purported DOT when he had no such recollection 15 years ago when the SOC was filed.

51.  Further, if the plaintiffs were allowed to withdraw the admission, the 1^st defendant, as the party putting forward the Purported DOT, would have the burden of proving the authenticity of that document: Club Deluxe Ltd v Club Metropolitan Ltd [1995] 2 HKLR 69, 81 ‑ 82, per Litton JA (as he then was).  This would be a fundamental shift in the burden which would inevitably prejudice the 1^st defendant – she would have to prove the authenticity of a document which was executed some 18 years ago in circumstances where she was deprived of the opportunity of preserving evidence relevant to that issue.

52.  As rightly observed by the Judge, if the plaintiffs were allowed to introduce the DOT Forgery Claim, which is a claim that did not feature in the SOC, the 1^st defendant would be prejudiced.  For example, as reiterated by Mr Mak, it is unclear whether she could obtain sufficient samples of the 2^nd plaintiff’s signatures in 2004 ‑ 2006 for the experts to compare, and the lapse of time may have an impact on the ability of the relevant witnesses recalling anything about the signing of the Purported DOT: [177(1)] and [177(2)] of the Decision.

53.  For completeness, we also reject Ms Tong’s submission that the question of forgery of the 2^nd plaintiff’s signature has always been part of the plaintiffs’ pleaded case.  The short point is that no such complaint was made in the SOC in relation to the Purported DOT, which on the 1^st defendant’s case was executed sometime in 2004.  As pointed out by Mr Mak, the complaint of forgery in the SOC only concerns the Purported Instrument and Letter of Resignation, ie, documents which were prepared in 2006[11].

54.  In the premises, we consider that it would be unfair to the 1^st defendant for the plaintiffs to resile from their admission that the 2^nd plaintiff had signed the Purported DOT.  Accordingly, the plaintiffs should not be allowed to introduce the DOT Forgery Claim or any other amendment which may be inconsistent with the 2^nd plaintiff’s admission in the SOC that he had signed the Purported DOT.  We therefore uphold the Judge’s conclusion in refusing this part of the amendments.

F2.    Constructive Trust (§§37A ‑ 37C of the DASOC)

55.  The plaintiffs sought to introduce a constructive trust claim in relation to the Proceeds and the Excel Gainer Shares in the DASOC.  The Judge accepted that this claim was a new claim based on old facts: [100] ‑ [102] of the Decision.  However, she refused to grant the plaintiffs leave to introduce this plea based on her analysis in sections F1 and F2 of her Decision, ie, the 1^st plaintiff’s case on beneficial ownership of the Premises is a new claim, and the DOT Forgery Claim is unsustainable.

56.  We do not think the Judge was correct.

57.  As discussed above, the Judge erred in characterising the 1^st plaintiff’s claim in relation to the beneficial owner of the Premises as a new claim on a new basis.  This is not a new claim since it has always been the plaintiffs’ pleaded case that the 1^st plaintiff was the beneficial owner of the Premises.  Further, we also do not think that the rejection of the DOT Forgery Claim would automatically lead to the wholesale rejection of the constructive trust plea.  This is so as the other pleaded complaints regarding the alleged fraudulent scheme, which led to the signing of the Purported DOT and the transfer of the Excel Gainer Shares to the 1^st defendant, and the intermeddling with the Proceeds[12], could also form the bases upon which the plaintiffs can advance their claim on constructive trust. In other words, the proposed constructive trust plea, though a new claim, is only pleading an additional legal consequence based on facts already pleaded in the SOC.

58.  In the premises, the Judge had erred in principle in rejecting the proposed amendments relating to the constructive trust claim, and we would exercise the discretion afresh and allow the plaintiffs to introduce those amendments.

F3.    Unjust Enrichment (§37D of the DASOC)

59.  The plaintiffs also sought to introduce a claim based on unjust enrichment.  The unjust enrichment claim is similarly predicated on the alleged fraudulent scheme which led to the 1^st defendant’s enrichment through her receipt of the Proceeds and the Excel Gainer Share.  The Judge accepted that the unjust enrichment claim is a new cause of action based on old facts, and she held that but for the delay and her reasons in sections F1 and F2 of the Decision, leave to amend should be given: [109] ‑ [112] of the Decision.

60.  We have already explained why the Judge’s reasoning in section F1 of the Decision is erroneous.  Insofar as the reasoning in section F2 of the Decision is concerned, our observations above in relation to the constructive trust amendment apply with equal force to the unjust enrichment claim, that is, even if one rejects the DOT Forgery Claim, there are still a number of other already pleaded complaints upon which the unjust enrichment label can be premised, including the complaint that the 1^st defendant had misappropriated the Proceeds and the Excel Gainer Share.

61.  As regards delay, once it is accepted that the claim based on unjust enrichment is a new cause of action based on old facts, and is a matter that the 1^st defendant would have had to adduce evidence to address in any case, the said delay in pursuing the action itself does not cause any real or material prejudice to the 1^st defendant.  This cannot be a sufficient basis to refuse these amendments.

62.  For these reasons, the Judge has also erred in principle or is plainly wrong in rejecting the proposed amendments relating to the unjust enrichment claim.  We will give leave to the plaintiffs to introduce the proposed amendments relating to the unjust enrichment claim.

F4.    Fraudulent Misrepresentation (§§11F, 37E ‑ 37I of the DASOC)

63.  In the DASOC, the plaintiffs pleaded a claim based on fraudulent misrepresentation, viz the 2^nd plaintiff was induced to sign the Purported DOT because of the 1^st defendant’s fraudulent misrepresentation.

64.  The Judge recognized that the fraudulent misrepresentation claim is not a new claim, it has always been pleaded and the amendments relating to this claim arise out of the same facts or substantially the same facts as those originally pleaded in §§11 ‑ 14 of the SOC, though now with more particulars.  However, the Judge refused to grant leave to amend based on her reasoning in section F1 of her Decision and her view that there would be prejudice in that the 1^st defendant is deprived of the opportunity of preserving evidence as to the 2^nd plaintiff’s standard of English and his relationship with the 1^st defendant.  See: [114], [117] ‑ [118] of the Decision.

65.  We have explained above why the Judge has erred in her conclusion in section F1 of the Decision.  Insofar as prejudice is concerned, we do not think it is right to say that the 1^st defendant would be prejudiced by the relevant amendments:

(1)  It was pleaded at §13 of the SOC that the Purported DOT was in English and that the document had never been interpreted to the 2^nd plaintiff.  Therefore, the English ability of the 2^nd plaintiff could not be said to be a new issue.

(2)  Similarly, as the fraudulent misrepresentation claim was there from the outset, the question of reliance has also always been an issue.  This in turn would have called into question the relationship between the 2^nd plaintiff and the 1^st defendant.

(3)  Given that the issues of the 2^nd plaintiff’s English ability and his relationship with the 1^st defendant could not be said to be new, evidence going to these issues would have been relevant and should have been preserved regardless of the proposed amendments.  As such, the amendments would not cause any real or material prejudice to the 1^st defendant.

(4)  Indeed, the fact that the 1^st defendant has not even referred to this as a prejudice in her affirmation fortifies the view that the 1^st defendant is not prejudiced by the proposed amendments relating to this fraudulent misrepresentation claim.

66.  Accordingly, the Judge erred in rejecting the proposed amendments relating to the fraudulent misrepresentation claim, and we allow the plaintiffs to introduce these amendments.

F5.    Non est factum (§§11F and 37J ‑ K of the DASOC)

67.  The plaintiffs have introduced a claim of non est factum in the DASOC to contend that the Purported DOT is null and void.

68.  The non est factum claim as pleaded in the DASOC refers back to the fraudulent misrepresentation claim at §11F of the DASOC and is essentially premised on the same facts pleaded in support of that claim. Specifically, to support the contention that the 2^nd plaintiff was not careless when he signed the Purported DOT, the plaintiffs refer to the alleged explanations and representations made by the 1^st defendant which were allegedly relied upon by the 2^nd plaintiff when he signed the Purported DOT.

69.  The Judge refused to grant the plaintiffs leave to amend to introduce the non est factum claim as she found this to be a new cause of action based on a new plea of facts subject to limitation and, if allowed, would cause prejudice to the defendants.  She also held that her conclusion in section F1 applied.  See: [127] ‑ [134] of the Decision.

70.  In our view, the non est factum plea in any event does not serve any useful purpose.  As fairly accepted by Ms Tong at the hearing, if the plaintiffs succeed in proving their fraudulent misrepresentation claim, they would be entitled to set aside the Purported DOT and do not have to rely on non est factum.  On the other hand, if the plaintiffs fail to prove misrepresentation as pleaded, the case on non est factum would also fall away because the plaintiffs rely on the same matters pleaded in support of the misrepresentation claim to contend that the 2^nd plaintiff was not careless in signing the Purported DOT for the purposes of the non est factum claim.

71.  Since the non est factum claim does not serve any useful purpose, that claim is unnecessary and should not be allowed.  As such, although we may not agree with the Judge as to her views that this was a new claim based on newly pleaded facts and we have also held above that her conclusion in section F1 is incorrect[13], the Judge was right in refusing to grant the plaintiffs leave to introduce the proposed amendments relating to the non est factum claim.  We therefore will not allow the appeal in relation to these amendments.  We also wish to point out that although we allow the amendments for the fraudulent misrepresentation claim (see [66] above), as we disallow the amendments to introduce the non est factum claim, we will not allow the amendments at §§11F(d) ‑ (e) of the DASOC and the words “(which is not admitted)” pleaded at the second line of §37F which are made in support of the non est factum claim.

F6.    Breach of fiduciary duties (§§37L ‑ 37M of the DASOC)

72.  In the DASOC, it was pleaded that the 1^st defendant was in breach of her fiduciary duties owed to the 1^st plaintiff.  The claim based on breach of fiduciary duties as pleaded in the DASOC contains five limbs:

“(a) creating and forging, or procuring the creation and/or forgery of the [Purported DOT]… or alternatively, procuring the 2^nd Plaintiff to execute the [Purported DOT]… without the knowledge, authorization or consent of the 1^st Plaintiff;

(b) procuring sums of money from BHP’s bank account to be transferred to her bank account (as pleaded in paragraph 15C above). Without the knowledge, authorization or consent of the 1^st Plaintiff;

(c) procuring the purported transfer of the [Excel Gainer Share] to herself …. Without the knowledge, authorization or consent of the 1^st Plaintiff;

(d) procuring and causing the purported appointments of the 2^nd Defendant and Fu as directors of Excel Gainer in place of the 2^nd Plaintiff… without the knowledge, authorization or consent of the 1^st Plaintiff;

(e) receiving and benefitting from the Proceeds … thereby depriving the 1^st Plaintiff of the same…”

73.  As to limb (a), there are two parts.  The first part is based on the DOT Forgery Claim and the second part is based on the fraudulent misrepresentation claim.  It appears that the Judge has only dealt with the first part of this limb and has rejected the same based on her rejection of the DOT Forgery Claim, but she has not explained why leave should be refused in respect of the second part of this limb.  See: [135(1)] and [141] of the Decision.

74.  As discussed above, we will not allow the plaintiffs to introduce the DOT Forgery Claim by way of amendment. As such, any claim of breach of fiduciary duty based on that allegation falls away.  As to that part of the claim based on fraudulent misrepresentation, that is a new claim based on old facts, and the amendments relating to that part of the claim should be allowed.

75.  As to limb (b), this is based on a new plea in §15C that the 1^st defendant had transferred monies of around HK$10 million from BHP to her own personal account.  The complaint is that the 1^st defendant had misappropriated BHP’s money.  The Judge rejected limb (b) on the basis that this is a new allegation which the 1^st defendant could not have been expected to investigate under the SOC and that the 1^st plaintiff had no basis to complain about this given that he does not claim any beneficial interest in BHP in the DASOC.  See: [142] of the Decision.

76.  In our view, the Judge was correct to refuse the introduction of limb (b).  The money that was allegedly misappropriated was BHP’s money and there was no plea that BHP is the 1^st plaintiff’s company in the DASOC.  In any case, even if one assumes that BHP is the 1^st plaintiff’s company, there is still the problem of reflective loss.  The loss in question would be one that was caused by a breach of duty owed by the 1^st defendant as director and financial controller to BHP, and only BHP may sue in respect of that loss.  After we pointed these out to Ms Tong at the hearing, counsel rightly indicated that she would not push for this plea.  In the premises, the corresponding proposed §15C of the DASOC amendment should also be disallowed[14].

77.  As to limbs (c), (d), and (e), the Judge referred to her reasoning in section F1 of the Decision as the basis to reject these proposed amendments: [146] of the Decision.  We have held above that the Judge’s analysis in section F1 of the Decision is unsustainable.  It therefore follows that that the proposed amendments relating to limbs (c), (d), and (e) should be allowed.

78.  In the premises, we are of the view that the Judge erred in rejecting the proposed amendments relating to the breach of fiduciary duties claim.  We would allow the proposed amendments in relation to this claim save for the proposed amendments relating to the first part of limb (a) and limb (b) (together with §15C).

F7.    Declaratory relief (prayer of the DASOC)

79.  The plaintiffs seek a declaration that the Purported DOT, the Purported Instrument, the Letter of Resignation, the Board Minutes, and the Form D2A are null and void and of no legal effect in prayer (8) of the DASOC.

80.  The Judge declined to allow the plaintiffs to amend their SOC to seek such declaratory relief.  Her reasons for doing so were set out in [174] ‑ [175] of the Decision:

“174. In my view, this relief stands and falls with the proposed amended causes of action analyzed above. Further, in relation to the Letter of Resignation, Board Minutes and Form D2A, no reliefs have been claimed in the SOC. The requirement in section 35(5) and (6) of LO is not met, in that the declaration (if it constituted a cause of action) in relation to these 3 Documents does not arise out of facts in respect of which “relief has already been claimed in the action”. No leave to amend shall be granted.

175. In any case, one can hardly see the utility of declaring these 3 Documents void because the plaintiffs are not seeking to set aside the sale of the Premises. If the plaintiffs win on the substantive amended causes of action, Li can always re-appoint Sun as a director. There is no point in seeking a declaration. The plaintiffs can also seek rectification or removal of record under section 42 of the Companies Ordinance, Cap 622, subject to any representation of the Companies Registrar.”

81.  We are of the view that the Judge fell into error when she refused to allow the plaintiffs to amend their SOC seeking the relevant declaratory relief in relation to the Purported DOT, the Purported Instrument and the Letter of Resignation:

(1)  As regards the Purported DOT and the Purported Instrument, the plaintiffs have always sought a declaration that these documents are null and void and of no legal effect in prayer (1) of the SOC.  It could not be objectionable for the plaintiffs to seek the same declaration in the DASOC.

(2)  As to the Letter of Resignation, it has always been the plaintiffs’ case that this document was forged and that the document was prepared as part of the fraudulent scheme allegedly devised by the 1^st defendant to deprive the 1^st plaintiff of his entitlement to receive the Proceeds in respect of which the reliefs of damages and an account have been claimed: §§25 ‑ 26, 30 of the SOC.  Applying the three stage test summarised in Shenzhen Futaihong, the Judge should have allowed the proposed declaratory relief in respect of the Letter of Resignation.

82.  Insofar as the Board Minutes and the Form D2A are concerned, we agree with the Judge that declaratory relief is unnecessary:

(1)  The Board Minutes records two resolutions allegedly passed by the directors of Excel Gainer relating to the sale of the Premises.  The plaintiffs are not seeking to set aside the sale of the Premises, nor are they raising any challenge over the 5^th defendant’s authority to act for Excel Gainer in respect of the sale.  As such, it seems to us that the Judge was right to say that a declaration in respect of the Board Minutes would serve little purpose.

(2)  The Form D2A merely records that the 2^nd plaintiff had resigned as director and that the 2^nd and 3^rd defendants were appointed in his stead on 14 May 2006.  If the plaintiffs contend that the 2^nd plaintiff had never resigned and that the 2^nd and 3^rd defendant had never been validly appointed as directors, it is open to them to seek a declaration to that effect and to make an application under section 42 of the Companies Ordinance, Cap 622 to rectify or remove the Form D2A.  Seeking a declaration that the Form D2A is null and void does not serve much purpose.

83.  In the circumstance, we allow the plaintiffs to amend the SOC to seek the declaratory relief prayed for in the DASOC in respect of the Purported DOT, the Purported Instrument, and the Letter of Resignation.

F8.    Other proposed amendments

84.  The Judge did not explain the reason why she refused to allow the plaintiffs to introduce the various amendments in sections A to I of the DASOC.  Through these amendments, the plaintiffs plead further matters which relate to background facts.  The amendments tend to plead with more clarity and particularity those relevant factual background giving rise to the plaintiffs’ claims in this action.  There is no real or prejudice to the defendants if these amendments are allowed (and the defendants have also not raised any such prejudice).  We therefore also allow these amendments.

G.  DISPOSITION

G1.   Under CAMP 35/2022

85.  For the above reasons, in relation to the Leave Summons, for those grounds of appeal which relate to the proposed amendments which do not introduce a new claim, they are at least reasonably arguable and thus we grant leave to the plaintiffs to appeal against the Order in refusing those amendments.

86.  In relation to those grounds of appeal which relate to amendments that introduce a new claim, the question is whether the plaintiffs should be allowed to file the Notice of Appeal out of time as sought in the EOT Summons.  In this respect, Mr Mak contended that the court should not grant extension of time to the plaintiffs to file the Notice of Appeal as the plaintiffs have not provided any credible explanation for the delay in not filing it within time.

87.  In our view, given that (a) the delay in filing the Notice of Appeal is plainly caused by the views of the legal advisers that leave to appeal was required, (b) no real or serious prejudice (which is not compensatable by costs) can be said to be caused to the 1^st and 5^th defendants for granting time to the plaintiffs, in particular when the 1^st and 5^th defendants had notice of the plaintiffs’ grounds of appeal since the draft Notice of Appeal was served on her on 12 October 2021 (ie, within time), and (c) there are good merits in the appeal (as explained above), it is fair and just that extension of time to file the Notice of Appeal as sought under the EOT Summons should also be granted.

88.  In the premises, we further direct that the plaintiffs shall file and serve a Notice of Appeal in the form of the draft Notice of Appeal attached to the Leave Summons (which has included all the grounds of appeal whether or not leave to appeal is required as considered above) within 3 days from the date of this Judgment.

G2.    Under the appeal proper

89.  In relation to the appeal proper (with the appeal number to be assigned upon the filing of the Notice of Appeal), we allow the appeal and grant leave to the plaintiffs to amend the SOC in the form of the DASOC (other than those which we have disallowed as stated above and those that the Judge had refused and the plaintiffs have not sought to appeal against[15]).  We therefore set aside the Order in relation to those amendments for which we have granted leave to the plaintiffs to amend.

90.  We further direct the parties to lodge and serve written submissions on costs (not more than 5 pages) within 14 days of this judgment in relation to the costs under both CAMP 35/2022 and the appeal proper, as well as the costs below.  Unless otherwise further directed by this court, we will deal with costs on paper after the receipt of the written submissions.