KOT SEE FOR v. KUNG HO YIN AND OTHERS

HCA 2208/2019

[2025] HKCFI 483

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 2208 OF 2019

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BETWEEN

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D E C I S I O N

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INTRODUCTION

1.  This is the application of the 17^th defendant, Au Yeung Ho Sum (「歐陽可森」) (“D17”), by way of summons filed on 6 January 2020 to strike out the plaintiff’s (“P”) claim against him in the present proceedings (“the Summons”).[1]

BACKGROUND

General Background

2.  P, Kot See For (「葛師科」), who is 90 years old and a collector of Chinese ceramic antiques known as the “Tianminlou” (天民樓) collection, is the victim of a massive fraudulent scheme perpetrated during 2016 to 2018 (“Fraudulent Investment Scheme”). The present action was commenced against 17 defendants to try to recover the funds (and their traceable proceeds) that were purportedly misappropriated pursuant to the Scheme.

3.  P had also brought HCA 743/2019 (“HCA 743”) to recover physical possession of antiques in the Tianminlou collection that were pledged and thereafter assigned to raise funds for the Fraudulent Investment Scheme, as well as for the return of monies paid to purportedly discharge the loans underlying the pledge agreements.

4.  D17 is one of the two common defendants in HCA 743 (as the 3^rd defendant) and the present action.

5.  In HCA 743, D17 had sought and failed to strike out the claim against him on the ground that P’s case on the Fraudulent Investment Scheme was “incontrovertibly false” or faced an “unbridgeable evidential gulf”. The court rejected D17’s arguments which, it held, amounted to saying that P is concocting a case of fraud out of the many genuine commercial transactions which did exist, and which were entered into for reasons and in circumstances other than those pleaded. P says that he is entitled to have those matters fully considered in a trial.

6.  Notwithstanding the above, D17 pursues the Summons herein on the same ground of the alleged incontrovertible falsity of the Fraudulent Investment Scheme (“Incontrovertible Falsity Ground”), together with an additional contention that the present claim against him should be struck out on the basis that it is a “duplicate” set of proceedings with HCA 743 (“Duplicity Ground”) . P contends that these grounds are plainly unsustainable.

7.  D17’s application for striking out P’s claim against him in the present action is based on 2 grounds:

(a) There is a plain abuse of process for P to commence and maintain this “2^nd Action” (ie the present action) against D17, which seeks to litigate in parallel proceedings the same “London Gold Fraud” which is already the subject matter of the “1^st Action” (ie HCA 743) against D17. The public interest in avoiding any possibility of two courts reaching inconsistent decisions on the same issue is undoubted; litigants must not be exposed to the anxiety and expense of unnecessary legal proceedings, ie the Duplicity Ground.

(b) The pleaded fraudulent misrepresentations are incontrovertibly false as they are flatly contradicted by the WhatsApp record. Notwithstanding P’s duty to make full and frank disclosure in the 2^nd Action, he has never bothered to explain the contradictions, ie the Incontrovertible Falsity Ground.

P’s Pleaded Case

8.  Mr Lau Ka Kin (“Mr Lau”), counsel for D17, has summarised P’s pleaded case as follows:

(a) P is the victim of a “London Gold Fraud”. D17 was one of the “London Gold Fraud Recipients”: §5 of statement of claim (“SOC”).

(b) In June 2016, P was induced to make “Purported Gold Investment”. He opened the “Purported Investment Account”; he made an initial investment of HK$1 million, followed by HK$2 million i.e. HK$3 million in total: §9 of SOC.

(c) Since November 2016, Lam Man Cheung (「林萬璋」) (“Lam”), who is the 2^nd defendant in the present action and 1^st defendant in HCA 743, told P that he had managed to find interested buyers to buy the Purported Investment Account. Lam said P would have to pay “security monies” etc. in order for the sale of the Purported Investment Account to proceed: §16 of SOC.

(d) In July 2017, Lam made the “Additional Security Representations”, that, inter alia, he had identified a London company which was willing to pay HK$220 million to purchase the Purported Investment Account: §35 of SOC.

(e) In October 2017, Lam made the “1^st Activation Capital Representations”. In order to pay the price of HK$220 million, the buyer would require HK$260 million to set up a “working platform”. P was required to provide HK$160 million; “upon the successful establishment of the working platform, the purchase price of HK$220 million under the Purported London Transaction would be remitted to the Plaintiff within 70 days”: §37 of SOC.

(f) By the end of December 2017, P paid a total of HK$79.5 million, in reliance upon the 1st Activation Capital Representations. There was still a shortfall of HK$80.5 million: §§40, 41 & 43 of SOC.

(g) In January 2018, Lam repeated the “1^st Activation Capital Representations”. From 23 January to 7 February 2018, P paid a total sum of HK$82 million as the requisite activation capital: §44 of SOC.

(h) In April 2018, Lam told P that the said “working platform” was up and running but P had to pay US$15 million in order for the deal to proceed (“Operational Capital Representations”). P made further payments: §§47-48 of SOC.

(i) On 26 June 2018, D17 received HK$3,009,250.55 from E & C International Limited (“E & C”). E & C in turn had received HK$10 million from Wayshine Global, the 5^th defendant, on 7 May 2018: Annex 2, #5.3 to SOC.

(j) P asserts an equitable proprietary claim against D17, claiming that D17 holds the HK$3,009,250.55 on trust for P. Alternatively, D17 is liable for restitution for unjust enrichment: §§75-78, Relief (6).

P’s Primary Case

9.  P’s primary case can be summed up as follows.

10.  P says that the Duplicity Ground is without merit. There is no presumption against the bringing of successive actions and advancing claims separately. P asserts that D17 has failed to discharge his burden to show that the claim against him is abusive, in particular:

(a) The defendants in both actions are different, and the tracing claim against D17 is premised on transfers to two defendants in the present action who are not party to HCA 743. P says that it is neither efficient nor economical to add a multitude of defendants to HCA 743. P claims that D17’s claim could not have been realistically added to HCA 743.

(b) There are entirely legitimate reasons for HCA 743 to be brought first, and the present action to be commenced later, as P had to await full disclosure from the banks before seeking his tracing relief in one go.

(c) Ultimately, there is no infringement to the rationale underlying the abuse of process doctrine.

11.  Further, P says that the Incontrovertible Falsity Ground is likewise bound to fail. The same argument has already soundly failed in HCA 743, and D17 should not be allowed to re-litigate the same. Any “further evidence” not considered by the court in HCA 743 does not add to the merits of the Summons, as it does not change the fact that D17 is not contending that the Purported London Transaction is genuine, and he has provided no evidence on why P would have paid over substantial sums but for the pleaded fraud.

Relevant factual background as highlighted by P’s counsel

12.  In my view, the factual context in which D17 tries to strike out P’s claims against him in the present proceedings is very important. Hence, I consider it is imperative for the court to fully set out the factual background of this case as well as HCA 743 in order to put it in its proper context.

13.  Ms Esther Mak (“Ms Mak”), counsel for P, in P’s Skeleton Submissions (“P’s Submissions”) lodged with the court for the purpose of opposing the Summons, has highlighted the following facts, which was based on the facts deposed to by P in his affirmation filed for the ex parte injunction application in relation to the present action (“Kot 1^st”). I would like to borrow Ms Mak’s summary of those facts as contained in P’s Submissions hereinbelow, with changes made by me where appropriate.

The alleged HK$578 million fraudulent scheme

14.  Throughout the course of the Fraudulent Investment Scheme between June 2016 and October 2018, P was induced by various false representations made by the 1^st defendant (“D1”) to the 5^th defendant (“D5”) in the present proceedings to transfer a total of HK$578.65 million to various defendants. D17 is a third-layer recipient who received traceable proceeds of P’s funds, and against whom P asserts an equitable proprietary claim.

15.  Lam and Tang Kwok Pang (“Tang”), who is the 2^nd defendant in HCA 743, also conspired together to induce P into pledging and thereafter assigning 11 items of valuable antiques to Tang at gross undervalue, for the purported purpose of funding/facilitating a fictitious transaction which never existed.

Opening of the Purported Investment Account [2]

16.  In around May 2016, P was first contacted by D1 (“Kung”), who claimed to be a salesperson of D5 (“Wayshine Global”), in relation to an investment in financial products related to gold.

17.  On around 6 June 2016, Lam (a 20% shareholder of Wayshine Global prior to 12 May 2017) and Kung made representations to induce P to invest in alleged “London gold” investment products and gold-related investments (“Purported Gold Investment” and “Initial Investment Representations”).[3] As a result, P transferred HK$1 million to Wayshine Global on 10 June 2016 (“Initial Investment Capital”).

18.  Kung then notified P that he had successfully opened an investment account with Wayshine Global (“Purported Investment Account”).

19.  In mid-2016, Lam informed P that he would take sole charge of P’s account in place of Kung. Lam then represented to P many times that he had to increase his investment to cover liquidated losses and transaction fees (“Account Fees Representations”).[4] On 22 July 2016, P therefore transferred a further HK$2 million to the 4^th defendant (“Wayshine Corporation”). [5]

Payments to secure alleged prospective buyers[6]

20.  In around October 2016, Lam represented to P that there were buyers interested in purchasing P’s Purported Gold Investments (“Purported Sale”), and P had to put up some security monies which could be refunded after the Purported Sale (“Purported Sale Representations”).[7]

21.  From November 2016 to May 2017, Lam further made a series of representations to P that he managed to find interested buyers for the Purported Sale and that P would have to pay security monies for the Purported Sale to be concluded, including the “1^st Buyer Representations”[8], “2^nd Buyer Representations”[9], “3^rd Buyer Representations”[10] and “4^th Buyer Representations”.[11]

22.  In reliance on the Purported Sale Representations, as well as the 1^st, 2^nd, 3^rd and 4^th Buyer Representations, P paid a total of HK$70 million to Wayshine Corporation and Lam (“Purported Sale Monies”).[12]

23.  However, the Purported Sale did not take place and P never received any proceeds of sale nor refund of any of the monies he had paid.

Payments for the Purported London Transaction[13]

24.  Thereafter, Lam represented on various occasions to P that there were buyers in London willing to purchase the Purported Investment Account (“Purported London Transaction”).

25.  In around June 2017, Lam made the “1^st Security Representations”[14] and “2^nd Security Representations”[15] to P, alleging that he had identified buyers in London who had an interest in purchasing from P the Purported Investment Account. P would have to pay additional security monies for the Purported London Transaction to proceed (“Purported Security Monies”). The Purported Security Monies would be refunded to P after the Purported London Transaction was completed.

26.  On 12 June 2017, P then transferred HK$60 million to Lam as the Purported Security Monies.[16]

27.  In around July 2017, Lam again represented to P that he had identified a London company which was willing to purchase the Purported Investment Account and that P had to pay additional security monies, which would be refunded upon the completion of the sale (“Additional Security Representations”).[17]

28.  As a result, P transferred a further HK$40 million to Lam on 25 July 2017 (“Purported Additional Security Monies”).[18] Despite that, P only received from Lam a total sum of HK$2,999,992.50 on 12 October 2017.[19]

29.  In mid-October 2017, Lam made the “1^st Activation Capital Representations”[20] that P was required to provide the “Purported 1^st Activation Capital” to the London buyer to set up a working platform via Wayshine Global for transferring the monies to P, which again would be refunded to P. P then paid HK$79.5 million to Wayshine Global in December 2017 as Purported 1^st Activation Capital.[21]

30.  In around January 2018, Lam made the “2^nd Activation Capital Representations”[22] to P, instructing P to transfer additional sum for setting up the working platform. In reliance on which, between late January and early February 2018, P made payments of a total of HK$82,000,000 as “Purported 2^nd Activation Capital” to various recipients pursuant to Lam’s instructions, including the 6^th defendant and the 7^th defendant.[23]

31.  In around mid-April 2018, Lam made a further representation that P had to provide further operational capital to the London buyers for the Purported London Transaction, and that upon such payment, the London buyers would remit the purchase price and the security monies to P (“Operational Capital Representations”).[24] In reliance on such Representations, P then further transferred an aggregate sum of HK$103 million to Wayshine Global in May 2018 (“Purported Operational Capital”).[25]

32.  Thereafter, Lam also made the “Extra Funds Representations”[26] and “Purported Reimbursement Representation”,[27] pursuant to which P remitted a further HK$141.15 million to various recipients.[28]

Pledging and assignment of antiques

33.  In order to meet the alleged funding requirements for the Fraudulent Investment Scheme, P entered into pledge agreements and assignments with respect to his antiques, and parted with possession of them:

(a) In order to obtain the necessary funds to pay the Purported Security Monies, P pledged his antiques to Tang, who was introduced by Lam.[29]

(b) To raise funds for the Purported 1^st Activation Capital, P entered into two additional pledge agreements with Tang.[30]

(c) In purported discharge of his liability under one of the pledge agreements, and on the instructions of Tang, P paid (i) HK$11.6 million to Tang; and (ii) HK$34.6 million to D17 by cashier order.[31] P also paid HK$3.6 million to Tang as payment of interest under two pledge agreements.

(d) P subsequently entered into three assignments pursuant to which he (i) assigned the pledged antiques at gross undervalue in discharge of his purported liability under the pledge agreements; and (ii) assigned an additional antique, also at gross undervalue, to raise further funds.[32]

Commencement of legal actions

34.  In October 2018, P discovered that the Purported Investment Account, the Purported Sale and the Purported London Transaction were fictitious. Further, he never received the promised sale price or the promised refund of various security monies paid over to facilitate the purported sale.[33]

35.  Upon discovering the London Gold Fraud, P reported the incidents to the Police and issued applications for third-party discovery in order to trace his funds.[34] More specifically:

(a) On 4 December 2018, P applied for and obtained a Norwich Pharmacal order against the 11 banks to which he had made cheque payments. Disclosures were made by the banks of the first-layer recipients up to the end of March 2019.[35]

(b) After identification of various second-layer recipients of P’s funds, in May 2019, P obtained a further Norwich Pharmacal order against the banks to which his funds had been transferred by the first-layer recipients. Disclosures were made by the banks of second-layer recipients up to 10 October 2019, and P’s legal team required time to analyse such disclosures to trace the flow of P’s funds.[36] These disclosures also provided information as to third-layer recipients of P’s funds.[37]

(c) P’s solicitors have also carried out further investigations, such as company and vehicles searches,[38] before finalising the defendants against whom P has a valid claim and recovery efforts would be worthwhile.

36.  Relevantly for present purposes, the disclosures from the Norwich Pharmacal orders revealed that:

(a) E & C which is the 14^th defendant in this action, received a total of HK$10 million of P’s funds that were remitted to Wayshine Global,[39] which were transferred in reliance on the Operational Capital Representations.

(b) In turn, D17 received from E & C a sum of HK$3,009,250.55 remitted out of the HK$10 million representing P’s funds.[40]

37.  On 29 April 2019, P commenced HCA 743 against Lam, Tang and D17. The claims are focused upon the fraudulent acts of Lam/Tang that led to the P’s pledging and assignment of the antiques, as well as the involvement of D17 therein and his receipt of part of the proceeds related to the pledge agreements. In particular:

(a) P seeks rescission of the pledge agreements and the assignments, and the delivery up of the antiques consequent upon such rescission.

(b) P claims that D17 is a constructive trustee for the monies paid by P in purported discharge of one of the pledge agreements and in the mistaken belief as to its legality and validity. The grounds for the claim are, inter alia, that D17 had been closely involved with Tang in relation to the pledging and assignment of the antiques.

(c) The material events focus on the period between mid-2017 (when P entered into loan agreements as a means to provide security payments to potential buyers to exit his investments) and mid-2018 (when P remitted funds to Wayshine Global following his receipt of monies from the assignment of antiques).

38.  The present action was commenced on 29 November 2019 after the tracing exercise described in §35 above was fully completed:

(a) P had to wait until the appropriate second-layer and third-layer recipients were identified before commencing the present proceedings. P says that it would be inappropriate for him to bring the proceedings in stages as that may alert other potential defendants to whom the traceable proceeds may be transferred.[41]

(b) P’s claims in the present proceedings seek to recover the misappropriated sums from 17 defendants who are first, second or third layer recipients of traceable proceeds of P’s funds. The action covers a broader time frame from May 2016 to July 2018. The relevant payments made pursuant to each of the representations are mapped out in Annex I to P’s Submissions.

(c) On 26 November 2019, P applied for and obtained interlocutory injunctions against these defendants, upon the court being satisfied that there are serious issues to be tried in respect of P’s claims.

Dismissal of D17’s striking out summons in HCA 743

39.  Prior to issuing the Summons in the present proceedings, D17 (as 3^rd defendant in that case) had taken out a striking out application in HCA 743 (“the HCA 743 Summons”), one of the grounds being that the Fraudulent Investment Scheme is “incontrovertibly false”: see D17’s skeleton submissions filed for the HCA 743 Summons[42].

40.  On 17 June 2021, Registrar S. Kwang made an order that, inter alia, the Summons herein be stayed pending the determination of the HCA 743 Summons due to the overlap of the grounds for striking out and thus the issues to be determined for both summonses.

41.  P says that the HCA 743 Summons was effectively dismissed 3 times by the court:

(a) It was first dismissed by Master Winnie Tsui (as she then was) on 11 May 2020.

(b) D17’s appeal to a Judge was dismissed by Recorder Stewart Wong SC (“the Recorder”) on 19 April 2021 (“the Decision”).

(c) D17’s application for leave to appeal against the Recorder’s Decision was also dismissed by the Recorder himself on 2 July 2021 (“Leave Decision”). D17 has not sought to renew this application for leave to appeal to the Court of Appeal.

The Recorder’s Decisions

42.  The Recorder’s decisions in respect of the HCA 743 Summons can be summarised as follows.

43.  The Recorder first set out D17’s (as D3 in that case) ground for striking out that “[the plaintiff’s] case against him has no solid basis and is incontrovertibly contradicted by contemporaneous documentary evidence; it presents a tissue of improbabilities which ought not be sent to proof”.[43] He noted that D17’s arguments were as follows:

(a) D17 argued that the premise of the Fraudulent Investment Scheme was absurd, namely that P believed someone was willing to purchase his account for HK$220 million when he only injected HK$3 million.[44]

(b) D17 also contended that the way in which P was defrauded made little logical or commercial sense, and P’s case based on the “Activation Capital Representation” was incontrovertibly false.[45]

44.  The Recorder refused to strike out P’s claims on the ground of a lack of factual basis or that they were incontrovertibly false:

(a) The payments and transactions, which are evidenced by documents, were not suggested by D17 to be other than genuine commercial transactions and their existence was not challenged. D17’s allegations “involve saying that [P] is now concocting a case of fraud out of the many genuine commercial transactions which did exist and which were entered into for reasons and in circumstances other than those pleaded, in the course of over two years involving hundreds of millions of dollars”.[46]

(b) Even taking into account D17’s submissions on the WhatsApp messages from P, the messages did support the fact that P expected a payment to him of HK$260 million from London on 4 January 2018, as a result of remittances made by him (which are not challenged).[47] The messages also suggested that P was expecting a payment from London which could be supportive of his case that he was selling something to someone in London.[48]

(c) The assessment on whether P’s case is incontrovertibly false can only be made on a totality of evidence approach. As such, the Recorder also took into account the lack of evidence from D17 on the stated issues, including his involvement in and state of knowledge on the Fraudulent Investment Scheme.[49]

(d) As to D17’s argument that there were gaps in P’s evidence and P had failed to answer to the alleged contradictions and improbabilities, the Recorder held that such evidence gap would not in itself prove D17’s case of striking out, and was a factor in the Recorder’s decision to hold that the matter ought to go to trial.[50]

(e) In the premises, P had submitted in that case the alleged incontrovertible falsity of P’s case was not plain and obvious. P was entitled to have those matters fully considered in a trial and have the credibility of his explanations (if any) tested.[51]

D17’s delay in pursuing the Summons

45.  Notwithstanding the court’s holdings in the HCA 743 Summons, D17 not only refused to withdraw the Summons in the present action but also failed to prosecute the same in a timely manner, as a result of which the Summons was left hanging over P’s head for the past 3 years until P took steps to restore the same:

(a) The present Summons had been stayed pending the determination of D17’s application for leave to appeal in respect of the HCA 743 Summons, and if leave being granted, the outcome of such appeal.

(b) After D17 took no steps to renew his application for leave to appeal in HCA 743, P repeatedly wrote to D17’s solicitors in 2021 to bring forward the present Summons, inviting him to withdraw the Summons in light of the decisions in HCA 743[52]. D17 rejected such invitation[53].

(c) In 2023, P again wrote to D17’s solicitors twice, enquiring D17’s position on the Summons[54]. D17 took no steps to uplift the stay.

(d) It was P who wrote to the court on 23 February 2024 seeking the court’s uplifting of the stay, and on the court’s directions, took out a summons on 3 April 2024 for an order to restore the present Summons.[55]

(e) P says that D17’s attitude of “letting sleeping dogs lie”, and thereafter re-litigating the same arguments in HCA 743 when being forced to proceed to a resolution of the dispute, constitutes an abuse of process.

P’s Primary Submissions

46.  Based on the above factual foundation, P’s primary submissions in the present case can therefore be summarised as follow:

(a) P was induced by the Operational Capital Representations, made by Lam fraudulently, into transferring HK$103 million to Wayshine Global.

(i) Such Representations were false, in that the Purported London Transaction was fictitious and the alleged requirement to pay the various sums to facilitate the Transaction was also false.

(ii) Lam made the said representations fraudulently. Such knowledge could be inferred from the fact that the Purported London Transaction related to entirely fictitious matters made up by Lam (and others) to perpetrate the London Gold Fraud Conspiracy.

(b) The payments were intended to be used exclusively for specific purpose of paying the Purported Operational Capital. Such purpose was not fulfilled since the Purported London Transaction was fictitious.

(c) The mistaken basis upon which P made the transfers and/or the intended purpose of the transfers were known to Wayshine Global. Such knowledge could be inferred from the following:

(i) Lam made the various representations fraudulently or recklessly on behalf of, inter alia, Wayshine Global.

(ii) Wayshine Global was designated to receive funds from P, and it is to be inferred that it was acting under the control of and for the benefit of Lam. It also received substantial payments from P, with no consideration provided. There is no apparent basis for the receipt of the sum other than for the intended purpose.

(d) As a result, Wayshine Global held P’s payments on constructive and/or Quistclose trust in favour of P. P is entitled to trace into the sums transferred and assert a proprietary claim against D17 in relation to the traceable proceeds. P is also entitled to seek restitution of the sums paid to D17 on the basis that it was paid under a mistake of fact and/or there was a total failure of consideration.[56]

47.  In the present case, there is no dispute by D17 that he received HK$3,009,250.55 from E & C (being traceable proceeds of P’s funds). To date, D17 has not adduced a single shred of evidence on how he came to receive the said sum. There can be no basis for challenging P’s equitable tracing claim.

LEGAL PRINCIPLES

Applicable principles for striking out as highlighted by P

48.  The principles on strike-out are well established and not controversial. They have been succinctly summarised by P’s counsel Ms Mak as follows.

49.  In Hong Kong Civil Procedure 2025 (“HKCP”) at §18/19/4, it has been stated that:

(a) The court will only strike out a pleading when the applicant has shown that it is plain and obvious that the other party’s claim is bound to fail.

(b) There should be no trial upon affidavit. Disputed facts are to be taken in favour of the party sought to be struck out.

(c) The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out. The mere fact that the case is weak, and not likely to succeed, is no ground for striking out.

50.  It has been held that the court’s power to strike out can be exercised where it is plain and obvious that a plaintiff's case is a “myth” with “no substantial foundation”. Thus, if a plaintiff pleads as a fact something which can clearly be shown to be “incontrovertibly false”, then on a striking out application, the court is not bound to accept the allegation as true: Lam Kit Sing v Chungshan Commercial Association, Hong Kong (HCA 2011/2014, 29 June 2016) §18 per G Lam J (as he then was).

51.  In respect of the “frivolous or vexatious” and the “abuse of process” ground, the relevant principles are summarised in HKCP 2025 §§18/19/7, §18/19/9:

(a) To amount to an “abuse of process”, the applicant must demonstrate that the pleading is a sham or entirely without substance. It is not enough that the facts are improbable or false, since to enter upon the question of their truth or falsehood would be trying the action prematurely.

(b) Vexatiousness implies the doing of something over and above that which is necessary for the conduct of the litigation, and suggests some desire to harass the other side or some improper motive.

(c) To decide that a litigant has been frivolous or vexatious and abused the process of the court is a serious finding to make, since it will generally involve bad faith. The discretion would be exercised sparingly.

Legal principles for equitable tracing as highlighted by P

52.  P’s claim against D17 in the present action is in relation to HK$3,009,250.55 of P’s funds which were received by D17 as a third-layer recipient. Ms Mak submits therefore that P’s causes of action against D17 are valid and plainly arguable on the pleaded facts, which the court should assume to be true for the purpose of the striking out.

53.  The relevant legal principles on this have been summarised by Ms Mak as follows:

(a) When property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient, so that the money is recoverable and traceable in equity. If the recipient is not a party to the fraud, if his state of knowledge is such as to make it unconscionable for him to retain the money, the claimant has a tracing remedy: Guaranty Bank and Trust Co v Zzzik Inc Ltd (unrep., HCA 1139/2016, 18 July 2016), §§28-34.

(b) A Quistclose trust arises where a payment is made to a payee for a specific purpose and the payee is not free to apply the money for any other purpose. Where a Quistclose trust arises, the money remains the property of the lender unless and until it is applied in accordance with his directions, and it must be returned to him insofar as it is not so applied: China Energy Reserve and Chemicals Group Overseas Company Limited v China Life Trustees Limited [2024] HKCFA 15 §§20-32.

(c) A beneficiary of a trust is entitled to a continuing beneficial interest in the trust property and its traceable proceeds. His interest binds everyone who takes the property except a bona fide purchaser for value without notice: Foskett v McKeown [2001] 1 AC 102 p127.

Applicable principles for striking out as highlighted by D17

54.  On the other hand, Mr. Lau for D17 has highlighted the fact that the power to strike out is to be exercised only in “plain and obvious” cases: Convoy Global Holdings Ltd v Kwok Hiu Kwan [2022] 1 HKC 551 (“Convoy (CA)”) at §28.

55.  The Court of Appeal (Kwan VP, Cheung JA, G Lam JA) affirmed Coleman J’s decision ([2020] 4 HKLRD 222 (“Convoy (CFI)”) to strike out a second action for abuse of process. Kwan VP said at §62:

“A cause of action is a factual situation which can give rise to a remedy. (Letang v Cooper [1965] 1 QB 232 at 242G to 243A) It is clear that the same factual situation has been pleaded and asserted in the Main Action and the SFO Action” (emphasis added).

56.  In Convoy (CFI), the learned Judge applied (at §87) the often-cited Judgment in Buckland v Palmer [1984] 1 WLR 1109:

“As it was put by the Master of the Rolls in Buckland:

Whilst I dislike procedural technicality technicality and, on the facts of the instant appeal, the defendant’s argument might be thought to have no other justification, in reality there are wider issues involved. The public interest in avoiding any possibility of two courts reaching inconsistent decisions on the same issue is undoubted and this alone would suggest that two actions based upon the same cause of action should never be allowed. Equally clear is the public interest in there being finality in litigation and in protecting citizens from being ‘vexed’ more than once by what is really the same claim.” (Emphasis added)

57.  That “two actions based upon the same cause of action should never be allowed” was repeatedly emphasised by our courts, including Choi Gain Chee v Kowloon Development Co Ltd CACV 371/2005, 13 June 2006 at §65; Upper Like Investments Ltd v Sino-Rank International Ltd, HCA 17637/1999, 19 November 2012 per Recorder Ambrose Ho at §28; Taihan Electric Wire Company Limited v Lee Chi Yuen Arctic HCA 454/2013, 17 December 2013 per DHCJ Lok (as he then was) at §15; China Health Group Ltd v Chiu & Partners [2023] HKCFI 2995 per Anthony Chan at §40(1).

58.  In Buckland, Griffiths LJ said at p.1116G:

“It may therefore seem to be over technical to refuse to permit them to claim that damage in a separate action. But the rule against multiplicity of proceedings in respect of a single cause of action is soundly based on considerations of public policy designed to prevent the harassment of litigants by exposing them to the anxiety and expense of unnecessary legal proceedings … I would not therefore think it right to make this case an exception to that general rule, particularly where there exists a procedure, namely the application for the removal of the stay, which will prevent any injustice resulting to the insurance company” (Emphasis added).

59.  The above was cited and applied by Recorder Ambrose Ho in Upper Like at §28 and Anthony Chan J in China Health at §40(2).

60.  It is well-known principle that “it is vexatious to commence a second action asking for relief which might have been sought or obtained in the first”: The Pertamina [1986] HKC 78 at 84B–C.

61.  The position, as summarised by Recorder Joseph Fok SC (as he then was) in Lam Pak Cheung v Lin Zhen Lue [2009] 1 HKLRD 35 at §38:

“… where proceedings are in existence based on a particular cause of action, it is prima facie an abuse of process to bring a second action based on the same cause of action and the latter action is liable to be struck out: see Buckland v Palmer [1984] 1 WLR 1109, applied in Hong Kong in Collin Navigation Co SA v Perusahaan Pertambangan Minyik Dan Gas Bumi Negara (The Pertamina) [1986] HKC 78.” (Emphasis added)

62.  Followed in Ho Suen Chang v Ho Hin Cheung [2020] HKCFI 1620 per Queeny Au-Yeung J at §23; China Health at §40(3).

63.  In Taihan, a fraud case (§3), DHCJ Lok (as he then was) struck out the second action and said at §22:

“It is trite law that a plaintiff cannot bring two claims against the same defendant for the same cause of action. Although TGH [the 2nd plaintiff] seeks to justify the institution of the Present Action by saying that the claims against Yuanzhi and Winful in the two actions do cover different periods of time (the 2011 Action relates to the period between June to September 2011, whereas the Present Action relates to the period from 2008 onwards), it cannot alter the fact that the complaints and the causes of action in the two actions are the same. It is certainly embarrassing for these defendants to defend two same actions against them, and I would have no hesitation in striking out the claims against Yuanzhi and Winful in the Present Action” (Emphasis added).

64.  DHCJ Lok referred to an earlier decision of Queeny Au-Yeung J in the same case at §21:

“Despite that, it is clearly an abuse of process to join Yuanzhi and Winful in the Present Action. In fact, Au-Yeung J made the same observation in §39 of her Reasons for Decision dated 15 April 2013 refusing the plaintiffs’ ex parte on notice application for a Mareva injunction:

‘With regard to Yuanzhi and Winful, who are parties to the 2011 action, the immediate question that springs to mind is why they are joined in the present action. A Mareva injunction is already in place against them. Here Mr Barlow SC points out that there is a complete duplication of action and an abuse of process. Yuanzhi and Winful have already pleaded to [TGH’s] case, engaged in multiple interlocutory hearings and Lee has filed 14 affirmations. It is an abuse of court process to sue them here, especially both actions are premised on similar facts.’” (Emphasis added)

65.  For case management reason alone, a second claim of fraud or dishonesty involving the same defendant should be struck out. As Linda Chan J said in Kwong Yi Ling v Lau Kwun Leung [2021] HKCFI 2303 at §22:

“Apart from duplicating the time and costs required by the parties to deal with the issue, it also carries the risk of inconsistent findings to be made by the Court on the same issue in parallel proceedings”

66.  For completeness, it has been repeatedly emphasised by the Court that consolidation is no answer to striking out duplicitous proceedings. In Upper Like, Recorder Ambrose Ho SC said at §31:

“in view of the objection against allowing duplicate proceedings to be maintained over the same subject matter, I fail to see how it would be proper to compound the error by consolidating the two sets of proceedings” (Emphasis added).

67.  Followed in Ho Suen Chang (§24). In similar vein:

(a) Coleman J said in Convoy (CFI) at §94:

“… I think that raises the question as to why the case management powers might be necessarily engaged at all. If there is an abuse, case management powers will not save it” (Emphasis added).

(b) Anthony Chan J concluded in China Health at §43:

“I consider it wrong in principle to allow 2 sets of identical proceedings to exist. There is no justification for the costs and trouble in consolidating the proceedings just to preserve what should not be allowed to continue” (Emphasis added).

DISCUSSSION

68.  Let me start by saying that I am not with D17’s submissions both based on the Duplicity Ground and the Incontrovertible Falsity Ground in this case.

69.  I shall set out my reasons below.

Under the Duplicity Ground

70.  First and foremost, I agree with Ms Mak that there is no presumption against the bringing of successive actions; and in a particular case there may be sensible reasons for advancing claims separately. In every case the burden rests on the defendant to establish that it is an abuse of process for him to be subjected to the second action: See Yifung Developments Ltd v Liu Chi Keung Ricky (unrep., HCA 3020/2015, 29 August 2016) per G Lam J (as he then was) at §43.

71.  In this regard, I agree with Ms Mak’s submission that it is incorrect for D17 to summarise the principle in a simple general statement that “two actions based upon the same cause of action should never be allowed”:[57]

(a) I agree with P that, rather, the authorities cited by D17 himself show that it is only prima facie an abuse of process to bring two actions against the same defendants in respect of the same cause of action. In any case, the court will assess whether there is any explanation for commencing the 2^nd action. See Choi Gain Chee §65; Taihan §§15, 17; China Health §40; Lam Pak Cheung §38.

(b) Further, as highlighted by DHCJ Lok in Taihan at §17, “the basic rule must be applied with caution. It does not necessarily follow that, because a matter could have been raised in earlier proceedings, the raising of it subsequently constitutes an abuse. The crucial question is whether in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it an issue which could have been raised before”.[emphasis added]

72.  In Dexter Limited v Vlieland-Boddy & Ors [2003] EWCA Civ 14 Clarke LJ (at §49) summarised the principles in Johnson v Gore Wood & Co (a firm) [2001] 2 WLR 72 in relation to actions brought against different defendants as follows:

(a) Where A has brought an action against B, a later action against B or C may be struck out where the second action is an abuse of process.

(b) A later action against B is much more likely to be held to be an abuse of process than a later action against C.

(c) The burden of establishing abuse of process is on B or C.

(d) It is wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive.

(e) The question in every case is whether, applying a broad merits-based approach, A’s conduct is in all the circumstances an abuse of process. [emphasis added]

(f) The court will rarely find that the later action is an abuse of process unless the later action involves unjust harassment or oppression of B or C.

73.  I entirely agree with the above summary made by Clarke LJ in Dexter and consider that in each case the question to ask is whether there was an abuse of process by applying a “broad merits-based approach”.

74.  Further, in Aldi Stores Ltd v WSP Group Plc [2008] 1 WLR 748 at 764F-G, Thomas LJ noted that “there is a real public interest in allowing parties a measure of freedom to choose whom they sue in a complex commercial matter and not to give encouragement to bringing a single set of proceedings against a wide range of defendants or to complicate proceedings by cross-claims against parties to the proceedings …”

75.  In an elaborate fraudulent scheme situation, it has been held that a subsequent action issued 10 months after the 1^st action did not amount to an abuse of process against the defendants therein: See Ubiquiti Networks International Ltd v Chan Kim Chuen (unrep., HCA 1606/2016, 26 May 2017).

76.  Hence, by applying a broad merits-based approach, I do not think D17 has discharged his burden to show that P’s conduct amounts to an abuse of process.

77.  In my view, there are good and sensible reasons why P had to issue separate proceedings against different defendants, including D17, in this case. As Ms Mak has submitted, of which I agree, HCA 743 and the present action are very different in nature:

(a) The former is a claim for the recovery of antiques consequent on rescission of loan agreements entered into to fund the Fraudulent Investment Scheme, as well as the recovery of money paid in reliance on the validity and legality of such contracts. The claim against D17 is for the recovery of sums paid in purported discharge of a loan agreement, and relates to D17’s involvement and/or constructive knowledge of the pledge agreements, as evidenced by his physical possession of the antiques.

(b) In contrast, the present action is a claim for the tracing and recovery of funds that were paid pursuant to the instructions under the Fraudulent Investment Scheme. The claim against D17 is a straightforward tracing claim consequent upon his receipt of traceable proceeds of P’s funds.

78.  In other words, the claim against D17 in the present action is premised on the Operational Capital Representations (§§31 & 46 above). The claim against D17 in HCA 743 is based on his receipt of P’s monies paid pursuant to the 3^rd pledge agreement, which was induced by the Activation Capital Representations.[58]

79.  In my judgment, given the fact that the claims against D17 in the two actions are very different, I do not think it is open for him to complain that he is being vexed twice in the same matter. In this respect, I agree with Ms Mak’s submission that commencing the present action by relying on evidential basis that overlaps with HCA 743 is not abusive. It certainly would not amount to an abuse of process if one applies a broad merits-based approach in my view.

80. Second, I agree with P that since the two actions have different defendants, it is not realistic or appropriate for the tracing claim for HK$3,009,250.55 against D17 to be included in HCA 743 for the following reasons:

(a) The tracing claim against D17 (as a third layer recipient) is premised on the transfer to Wayshine Global and to E & C, neither of whom are parties to HCA 743. It is not in the interests of efficiency and economy nor good case management to add into HCA 743 a multitude of defendants. Further, it would be inappropriate for the tracing claim against D17 to be raised in HCA 743 simply because D17 is already party to that action, with the result that the tracing claims are fragmented into two different actions.

(b) In the amended statement of claim for HCA 743, reference was made to the traceable proceeds received by D17 from E & C as background information only, for the purpose of inferring D17’s knowledge in the fraud alleged therein. This plea was added by way of amendment only in September 2019, as the tracing exercise had not been completed at the time that HCA 743 was commenced.

81.  Third, I agree with Ms Mak that there are entirely legitimate reasons for P to bring HCA 743 against Lam, Tang and D17 (as D3 in that case) first, and only later commence the present action against Lam, D17 and 15 other defendants.

82.  At the time HCA 743 was commenced, P had yet to obtain third-party discovery orders in respect of the second-layer recipients of funds, and there was no clarity as to the whereabouts of P’s funds. Like in Ubiquiti Networks International Ltd, it was only rational and logical for P’s legal team to await the full disclosures from the banks of the first-layer, second-layer and third-layer recipients to identify the proper defendants to this action, and to commence the present proceedings seeking tracing and recovery in one go.[59]

83.  Thus, when taking all the above circumstances into account, I do not consider that there was any abuse of process on the part of P in issuing separate proceedings against D17 in this case.

Cases relied on by D17

84.  Last but not the least, I would like to briefly deal with the cases relied on by Mr Lau in D17’s Submissions under this issue.

85.  D17 relies on the CA’s judgment in Choi Gain Chee for the proposition that “two actions based upon the same cause of action should never be allowed”: See §6 of D17’s Submissions.

86.  Yeung JA at §65 of that judgment stated the following:-

Prima facie, it is an abuse of the process of the court to bring two actions against the same defendants in respect of the same cause of action. “The public interest in avoiding any possibility of two courts reaching inconsistent decisions on the same issue is undoubted and this alone would suggest that two actions based on the same cause of action should never be allowed” (per Sir J Donaldson MR in Buckland v Palmer [1984] 3 All E R 554 at 558j).

87.  However, that is a statement of law applies to cases where a plaintiff has brought two action against “the same defendants in respect of the same cause of action” [emphasis added]. In our case, there were different defendants and the claims were based on different causes of action in both proceedings.

88.  In Upper Like Investments Ltd, it claimed against the defendant Sino-Rank for repayment of a loan (§3). There had been earlier proceedings under O.88, also commenced by Upper Like, against Sino-Rank and one Mr Lau, seeking payment of monies due under a deed of mortgage, with the subject matter of the application being the same loan (§§7-9). Save that Mr Lau was additionally a party to the 1st proceedings, the two actions effectively had the same parties. The court further held that there was no explanation why Upper Like had considered it necessary or proper to commence the second action over the same subject matter (§29).

89.  The present case can be distinguished from Upper Like Investment Ltd in 2 ways: (i) HCA 743 and the present action have different parties; and (ii) there were other sensible and legitimate reasons for the commencement of this action separately and later in time as explained above.

90.  Likewise, in Taihan Electric Wire, the commencement of new proceedings against the parties to the 1^st action were held to be an abuse of process because they concerned the same complaints and causes of action (§§21-22). However, in our present case, the two claims against D17 are different in nature and based on different complaints. There are also good reasons why the tracing claim against D17 has to be brought together with the other 16 defendants who form part of the same tracing exercise.

91.  In my view, the facts in China Health and Ho Suen Chang can also be distinguished from our present case in that both the parties and the relief sought are different.

Conclusion on D17’s application based on Duplicity Ground

92.  All in all, I find the cases cited by Mr Lau do not really assist D17 in overcoming the burden to establish that, when applying a broad merits-based approach, there was an abuse of process when P issued two separate claims against D17 in this case. I therefore hold that D17 has failed in his application insofar as he relies on the Duplicity Ground.

Under the Incontrovertible Falsity Ground

93.  I also find the Incontrovertible Falsity Ground relied on by D17 to strike out P’s claim without any merit.

94.  First and foremost, this issue had already been ruled by the Court 3 times. First by Master Winnie Tsui (as she then was) in HCA 743. Then by the Recorder not only once but twice. On all 3 occasions, the findings were against D17 (who was the D3 in that case). So the present application is like D17 having “the fourth bite of the cherry”.

95.  In the Decision and the Leave Decision, the Recorder has already held that the Fraudulent Investment Scheme was not one which can be said to be incontrovertibly false, and the proper approach was therefore to “proceed on the basis that the facts pleaded in the Amended Statement of Claim are all true”: (see the Decision §§32-33).

96.  I agree with Ms Mak that it is incorrect for D17 to allege that the Recorder’s reasoning was encapsulated in the Leave Decision §13: (See D17’s Submissions at §37). It is clear that the learned Recorder’s holding was not only based on the evidence filed in HCA 743, but was also grounded in an analysis on “what [D17’s] case amounts to”, [60]namely that “[P] is now concocting a case of fraud out of the many genuine commercial transactions which did exist”.[61] Thus, on this ground alone, I have no hesitation to reject P’s submissions, which is based on exactly the same premise of D17’s ground for striking out in HCA 743.

97.  Also, what D17 through his counsel tries to do in the present action is to pick and choose some WhatsApp messages exchanged between P and Lam towards the end of December 2017 and says that P’s pleaded case is incontrovertibly false.[62]

98.  In my judgment, it is an abuse of process for D17 to rely on the same contradictions from the HCA 743 Summons, [63]and seek to re-litigate the same. The Recorder expressly stated that he has not overlooked the many features of the case which D17 says are “absurd or tissues of lies, including the WhatsApp messages about the working platform”.[64] In fact, the numerous grounds now relied on by D17 were expressly recited in the Decision, but even after taking them into account, the Recorder determined that the matter ought to go to trial.

99.  I cannot agree more with the above findings made by the learned Recorder in the Decision and Leave Decision. I echo with everything he said in those decisions insofar they are relied on by him to reject D17’s application for striking out P’s claims in HCA 743. If there are any “contradictions” between his pleaded case and the WhatsApp messages exchanged between P and Lam, they are matters to be resolved at trial. In my judgment, they are certainly not sufficiently “plain and obvious” for P’s case to be struck out based on those alleged contradictions.

100.  Further, I agree with P’s counsel that, once the above is appreciated, any “further evidence” which the Recorder did not have the benefit of considering in HCA 743 does not add anything to the merits of the present Summons. Such “further evidence” comprises of the audio files and image files embedded in the WhatsApp message records while the related WhatsApp message records had already been before the court in HCA 743.

101.  In D17’s Submissions, the only piece of “new evidence” that is properly analysed and relied upon is the alleged inconsistency between the Additional Security Representations and the documentary evidence (See D17’s Submissions §§60-61).

102.  I agree with Ms Mak that none of the alleged “further evidence” changes the fact that:

(a) D17 is not contending that the Purported London Transaction is genuine.

(b) He has provided no evidence as to why P would have paid over these substantial sums if it were not for the fraud perpetrated on him, nor does he suggest that P received anything in return for such payments.

(c) He has provided no explanation as to why he received HK$3,009,250.55, nor does he suggest that he provided valuable consideration.

103.  In fact, as Ms Mak has pointed out in her submissions, P’s contemporaneous text messages with Lam indicate that the payments he made were in reliance upon Lam’s misrepresentations as regards the Purported London Transaction (which he believed to be true at the time):

(a) P made repeated enquiries on the Purported London Transaction, and when and how the London buyers would make payments to him.

(b) P’s bona fide belief in the validity and genuineness of the Purported London Transaction is reflected in his observations that the price of gold has risen and the Purported London Transaction was nearing completion (9/9/2017 11:07:31 am).

(c) P believed Lam’s various representations that, upon raising the required capital, he would be able to recoup his previous investments. P was therefore anxious to press Lam for the various remittances under the Purported London Transaction, so that he would be able to avoid accruing further interest (3/10/2017 2:52:05, 3:40:32 am).

(d) P clearly indicated that he had been told that he had to put in additional sums before the sale price or his previous investments could be remitted back to him (16/12/2017 3:05:18 pm); (28/12/2017 5:25:24 am).

104.  I agree with both the Recorder and P’s counsel that if D17 wishes to challenge the veracity of P’s evidence, this is a matter for trial.

D17’s allegations concerning full and frank disclosure

105.  Mr Lau in D17’s Submissions also alleges that when P applied for ex parte injunction, he had failed to make full and frank disclosure in that he had failed to explain the “contradictions and improbabilities” in his case: (See D17’s Submissions §§40-45).

106.  In my judgment, this is a completely red herring and totally irrelevant to D17’s application herein.

107.  First and foremost, this argument does not support or bolster the Incontrovertible Falsity Ground. As the Recorder had held, the evidence gap of P would not in itself prove D17’s case of striking out. I agree with Ms Mak that this in itself suffices to dispose of D17’s argument.

108.  Second, it is incorrect for D17 to allege that P’s duty of full and frank disclosure is a distinguishing factor between the Summons and the HCA 743 Summons (cf. D17’s Submissions §40, alleging that “by contrast, P had no duty to make full and frank disclosure in the 1^st Action”). As a matter of fact, as Ms Mak has pointed out in her submissions, the same argument was run in HCA 743 and rejected as irrelevant:

(a) In his submissions in support of the HCA 743 Summons, D17 had already relied on the argument that P had “an obligation to the court” to explain the glaring contradictions between his statement of claim and the contemporaneous evidence.[65] D17 submitted that because P had made an ex parte application for a Norwich Pharmacal order, which was a prelude to HCA 743, P was obliged to make full and frank disclosure.

(b) The learned Recorder noted D17’s argument on P’s alleged “obligations in his ex parte applications” to offer explanations for the gaps of his evidence.[66] The Recorder expressly dismissed such argument, holding that “whether P had discharged his obligations to make full and frank disclosure when he applied ex parte for a Norwich Pharmacal order is not directly relevant as the striking out summons was not an application to set aside the order” [emphasis added].[67]

109.  Third, in my view, there is no basis to allege that P failed to discharge his duty of full and frank disclosure in his ex parte application for injunctions.

(a) In D17’s 1^st affirmation made in opposition to the continuation of the ex parte injunction order against him, he contended that P failed to discharge his duty of full and frank disclosure by failing to make full disclosure of his WhatsApp communications with Lam (§§3(2), 22).

(b) Ultimately, the matter was dealt with by an undertaking on the part of D17 that he would not diminish the value of a landed property up to the value of the claim against him herein.

(c) Despite the lapse of 5 years since the giving of this undertaking, D17 did not seek to advance his allegations of material non-disclosure in the injunction context, so as to release himself from the undertaking. Nor did any court make any finding that there was such material non-disclosure.

110.  I agree with Ms Mak’s submissions that, in effect, D17 is seeking to turn his own failure to prove a case of striking out on its own head, and fish for information from P to assist his case. There is no basis for D17 to seek premature general discovery from P at this stage, which is in direct contradiction to the general practice “to refuse discovery before the close of pleadings save in exceptional circumstances”: HKCP §24/3/5.

Criminal prosecution faced by other defendants to this action

111.  Finally, the fact that various defendants in this action are facing criminal prosecution in respect of their involvement in the Fraudulent Investment Scheme further fortifies that the Scheme cannot be a “fiction”.

Conclusion on D17’s application based on Incontrovertible Falsity Ground

112.  Thus, in the aforesaid premises, insofar as D17’s application is based on the Incontrovertible Falsity Ground, that should fail also.

CONCLUSION

113.  Based on the above discussions, I find D17 has failed to establish his case for the striking-out application. Hence, the Summons is dismissed with costs in favour of P, such costs to be taxed if not agreed.

114.  It remains for me to thank counsel on both sides for their very helpful submissions.