TANG JIALIN v. SINOPAC SECURITIES (ASIA) LTD AND OTHERS

HCA 90/2018

[2019] HKCFI 2087

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 90 OF 2018

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DECISION

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INTRODUCTION AND BACKGROUND

1.  This is an unusual case. The facts, so far disclosed to the Court, are strange and inexplicable in many respects as will be detailed below.  This Court is left with a distinct impression that all parties to these proceedings, including the 1^st defendant, have yet to disclose all relevant material facts to assist this Court to understand what had really happened.

2.  The 2^nd defendant alleges that in August 2016, she was approached by one Mr Chiu who represented to her that Addchance Holdings Limited, a company listed on the Stock Exchange of Hong Kong (Stock Code: 3344) (“the Company”), was seeking to obtain further financing by the allotment and issuance of new shares.

3.  The 2^nd defendant produced a chain of emails from 3 November 2016 to 4 November 2016 between Mr Chiu and herself regarding the signing of a subscription agreement for new shares in the Company. 

4.  On 6 January 2017, the 2^nd defendant and the Company executed a share subscription agreement (“the Share Subscription Agreement”)under which the 2^nddefendant agreed to subscribe for 250 million new shares of the Company (“the 250 Million Shares”) at the consideration of HK$20 million.  Clause 4.1 of the Share Subscription Agreement provides that the consideration has to be paid by banker’s draft payable to the Company. 

5.  At the extraordinary general meeting of the Company dated 17 March 2017, the following relevant resolution was passed:

“ 5. THAT

(a)   Subject to the fulfillment of the terms and conditions set out in the share subscription agreement (the ‘Fourth Subscription Agreement’) dated 6 January 2017 (a copy of each of the Fourth Subscription Agreement has been produced to this meeting marked ‘D’ and initialled by the Chairman for the purpose of identification), and entered into between the Company and Mr. Li Shuanghui [the 2^nd defendant] (the ‘Fourth Subscriber’), in relation to the subscription of 250,000,000 new shares (the ‘Fourth Subscription Shares’) in the Company by the Fourth Subscriber, the Fourth Subscription Agreement and the transactions contemplated thereunder be and are hereby approved, confirmed and ratified.” 

6.  On 28 April 2017, three share certificates (numbered ADC00008270, ADC00008271 and ADC00008272) were issued by the Company to the 2^nd defendant which certify her to be the registered owner of a total of 250 million fully paid ordinary shares of the Company.  It appears that the said share certificates were collected by the Company’s authorised representative.

7.  On the same date, the Company made an announcement on the Stock Exchange of Hong Kong to the effect that:

“ The Board is pleased to announce that all the conditions precedent to the Fourth Subscription have been fulfilled and as at 28 April 2017, the completion of Fourth Subscription had taken place in accordance with the terms and conditions of the Fourth Subscription Agreement.

Immediately before the Fourth Completion, the Company had 5,146,730,909 Shares in issue.  Upon the Fourth Completion, an aggregate of 250,000,000 new Shares, representing approximately4.63% of the issued share capital of the Company as at the date of this announcement (as enlarged by the allotment and issue of the Fourth Subscription Shares), have been duly allotted and issued as fully paid to the Fourth Subscriber at the Subscription Price of HK$0.08 per Subscription Share.  Accordingly, immediately after the Fourth Completion, there are 5,396,730,909 Shares in issue.”

   (emphasis added)

8.  In the Company’s interim results announcement for the six months ended 30 June 2017, at the note under “Share Capital”, it is stated:

“ On 6^th January 2017, the Group entered into subscription agreement with four subscribers, Gold Train Investments Limited (the ‘First Subscriber’), Mr. Yuan Dongjie (the ‘Second Subscriber’), Mr Chen Chiquan (the ‘Third Subscriber’) and Ms. Li Shuanghui (the ‘Fourth Subscriber’), pursuant to which theFirst Subscriber has agreed to subscribe no less than 2,500,000,000new shares and no more than 3,800,000,000 new shares and each of the remaining subscribers have agreed to subscribe 250,000,000 new shares. The ultimate beneficial owner of First Subscriber is Mr. Poon Sum (who has been appointed as an executive director and chairman of the board of directors of the Company on 19^th April 2017) and the remaining Subscribers are independent third parties. All new shares under subscripting agreement would be at HK$0.08 each. All of these subscriptions have been completed and an aggregate of 4,550,000,000 shares have been issued by the Company. The gross and net proceeds from these subscriptions are approximately HK$364 million and HK$359 million, respectively. The net proceeds from the subscriptions werearrived after deduction of commission and other related expenses.” (emphasis added)

9.  I pause to note that although all the documentary evidence shows that the 2^nd defendant had paid for the 250 Million Shares, it is common ground between the 1^st defendant and the 2^nd defendant that, in fact, the 2^nd defendant had not paid for the said shares.

10.  Strangely, there is no explanation from the 2^nd defendant as to why she had not paid for the 250 Million Shares and yet was expecting the said shares to be delivered to her.  The 2^nd defendant’s case is that a company called Gain Act Limited, which she did not authorised and whose director and shareholder she does not know, was allegedly authorised to pay for those shares.  I find this very strange and difficult to understand.  

11.  However, the strangest and most inexplicable event was that on 5 May 2017, by a standard form of transfer purportedly signed by the plaintiff and the 2^nd defendant and witnessed by one Mr Cheng Pak Ho (“Mr Cheng”) of the 1^st defendant at the office of the 1^st defendant (“the Standard Form of Transfer”), the entire 250 Million Shares were somehow transferred to the plaintiff at nil consideration.  It is the 1^st defendant’s case that:

“ (a) Immediately prior to the transfer of the 250M Shares to the Plaintiff and since 28 April 2017, the 1^st Third Party had been the registered holder of 250 million shares of Listco by way of physical scripts with certificate numbers ADC00008270 for 100 million shares, ADC00008271 for 100 million shares and ADC00008272 for 50 million shares.

(b) The transfer of 250M Shares from the 1^st Third Party to the Plaintiff was effected by a Standard Form of Transfer duly stamped and signed by the 1^st Third Party and the Plaintiff dated 5 May 2017 (‘050517 Transfer Form’).

(c) The 250M Shares were transferred for no consideration, and consideration was not stated on the 050517 Transfer Form.

(d) The 050517 Transfer Form was signed by the 1^st Third Partyand the Plaintiff on the same date (5 May 2017) and at the samelocation (the Defendant’s branch office at Unit 2703, 27/F Tower 1 Admiralty Centre, 18 Harcourt Road, Hong Kong) and before the same witness, Mr Cheng Pak To (“Mr Cheng”).

(e)   I have made enquiries with other staff members of the Defendant and checked the Defendant’s written records and I verily believe that on 5 May 2017, neither the Plaintiff nor the 1^st Third Party was a customer of the Defendant, and at the time, the Defendant had no knowledge of this transfer.”  

(Paragraph 4 of the 3^rd Affirmation of Ho Tzu Chuan)
(emphasis added)

12.  First, the plaintiff has not explained why she was able to obtain the 250 Million Shares at nil consideration.  In her Amended Statement of Claim, she has not pleaded how she acquired title of the 250 Million Shares.

13.  Secondly, the 2^nd defendant strongly denied that she signed the Standard Form of Transfer.  The 2^nd defendant’s case is that the said form was executed by an imposter purported to be her, in the presence of Mr Cheng at the 1^st defendant’s office.  The 2^nd defendant has adduced her travel record to show that she was not in Hong Kong on 5 May 2017 and therefore it was impossible for her to have signed the Standard Form of Transfer before Mr Cheng of the 1^st defendant at the 1^st defendant’s office. 

14.  Thirdly and strangely, Mr Cheng of the 1^st defendant who witnessed the execution of the Standard Form of Transfer has not given any evidence to explain this purported transaction.  It is also strange that the 1^st defendant apparently has not asked Mr Cheng about this purported transaction.  At the hearing, Ms Cheung for the 1^st defendant informed the Court that Mr Cheng has left the employment of the 1^st defendant.

15.  Fourthly, even more strangely, it is the plaintiff’s pleaded case that she did not and does not know who the 2^nd defendant is and yet by the Standard Form of Transfer witnessed by Mr Cheng of the 1^st defendant, the 2^nd defendant transferred the 250 Million Shares of the Company to the plaintiff at nil consideration.  I find this very difficult to fathom.

16.  Then on 1 May 2017, the plaintiff opened a securities trading account with the 1^stdefendant (“the Account”) and Mr Cheng was assigned by the 1^st defendant to be the account executive of the Account.

17.  On 18 May 2017, the plaintiff deposited 250 million shares by way of physical scrip with certificate number ADC00008273 into the Account.  Mr Ho, the managing director of the 1^st defendant, in paragraph 7 of his 3^rd Affirmation, deposed that:

“ 7. The physical scrip with certificate number ADC00008273 deposited by the Plaintiff appears to be issued immediately after the physical scrips with certificate numbers ADC00008270 for 100 million shares, ADC00008271 for 100 million shares and ADC00008272 for 50 million shares, namely the 250M Shares (with‘ADC00008273’ being the certificate issued after ‘ADC00008272’). Therefore, it would appear that the 250 million shares deposited by the Plaintiff to the Account are in fact the 250M she received from the 1^st Third Party.” (emphasis added)

THE PLAINTIFF’S CASE

18.  The plaintiff pleads that on or about 18 August 2017, she discovered that on or about 16 August 2017, the 1^st defendant transferred 117 million shares of the Company (“the 117 Million Shares”) from the Account to the 2^nddefendant’s account (“the Yuanta Account”) maintainedwith Yuanta Securities (Hong Kong) Company Limited (“Yuanta”) without her instructions or authority.

19.  The plaintiff also pleads that she did not and does not know who the 2^nddefendant is (§6 of the plaintiff’s Amended Statement of Claim).  This is very weird because if the plaintiff did not know the 2^nd defendant, it is difficult to explain why the 2^nd defendant would transfer the 250 Million Share to the plaintiff in the first place on 5 May 2017 at nilconsideration.  The said transfer is said to have been witnessed by Mr Cheng of the 1^st defendant.

20.  The plaintiff further pleads that upon enquiry with Mr Cheng of the 1^st defendant, she found that:

(1)   At around 7:38 pm on 15 August 2017, someone impersonatingthe plaintiff (“the Impersonator”) initiated a chat with Mr Cheng using a WeChat account in the plaintiff’s name (“the WeChat Account”).  Mr Cheng accepted the Impersonator’s chat request.

(2)   At around 7:43 pm on 15 August 2017, the Impersonator sent another greeting message to Mr Cheng by the WeChat Account.

(3)   On 16 August 2017, the 1^st defendant received a “bought and sold note” and a “securities settlement instruction” (“the Purported Transfer Documents”) purported to have been signedby the plaintiff, whereby the plaintiff would sell the 117 Million Shares to the 2^nd defendant for a price of HK$0.51 per share with a total consideration of HK$59,670,000.  The “securities settlement instruction” purportedly instructed the 1^stdefendant to transfer the 117 Million Shares to an account maintained with Yuanta, ie the Yuanta Account.

(4)   On the same day, at around 1:14 pm, Mr Cheng informed the Impersonator, through the WeChat Account, that the 1^st defendant had received certain shares transfer documents and asked the Impersonator whether the shares should be transferred to the Yuanta Account.  The Impersonator confirmed the instruction to transfer.

(5)   At around 1:20 pm, without asking any further questions or making any enquiries, Mr Cheng messaged the Impersonator by the WeChat Account that he would handle the request and reminded the Impersonator that there would be a fee of 0.15% of the market value of the shares to be transferred.

(6)   On the same day, the 1^st defendant completed the transfer of the 117 Million Shares to the Yuanta Account through CCASS.

21.  The plaintiff alleges that:

(1)   The WeChat Account did not belong to her.  She had no knowledge of the identity of the Impersonator.  She had never communicated with Mr Cheng or any staff of the 1^st defendant by way of WeChat;

(2)   She had never signed the Purported Transfer Documents.  The signatures appearing on the Purported Transfer Documents were not hers and were forged;

(3)   She and/or her assistant, one Ms Wang had never received any telephone calls, electronic messages or any other form of communications from Mr Cheng or anyone from the 1^st defendant for confirmation of instructions before the 1^st defendant transferred the 117 Million Shares out of her account with the 1^st defendant.

22.  Accordingly, the plaintiff claims against the 1^st defendant for breach of fiduciary duty, contractual duty of care and negligence.

23.  The plaintiff subsequently joined the 2^nd defendant and Dan Kazuyoshi (“the 3^rd defendant”) as parties to this action.  Her claims against the 2^nd and 3^rd defendants are as follows:

“ 22A. By reason of the matter pleaded in paragraphs 8 to 12 above:-

(a) The Subject Shares were (and still are) stolen from the Plaintiff by fraud perpetrated by the Imposter and passed on to the 2^nd and 3^rd Defendants;

(b) The Plaintiff was (and continues to be) the beneficial owner of the Subject Shares and retained full rights and proprietary interest over them including any traceable proceeds thereof; and

(c)   The 2^nd and 3^rd Defendants held (and continue to hold) theremaining of the Subject Shares and the traceable proceeds on constructive trust in favour of the Plaintiff.”

(emphasis added)

24.  The plaintiff also claims against the 2^nd and 3^rd defendant as knowing recipients and for unjust enrichment of the 117 Million Shares. 

THE 2^ND DEFENDANT’S CASE

25.  The genesis of the 2^nd defendant’s case is that she entered into a legitimate commercial transaction to acquire the 250 Million Shares of the Company as an investment.  Since the subscription price was substantially lower than the market trading price, this was an attractive investment opportunity, as she could “flip” the shares and earn a profit.  She deposed that this was her first foray into share subscription, and hence, she was not familiar with the intricacies and logistics of such subscription.  The contemporaneous documents do show that she, indeed, entered into the Share Subscription Agreement and the 250 Million Shares were issued and registered in her own name.

26.  She said that in or around late March 2017, she was informed that a Mr Eddy Wong of Yuanta, which was a friendly firm of the Company, would contact her to make some further arrangements in relation to the subscription.  When Mr Eddy Wong contacted her, he requested her to opena securities trading account at Yuanta, the Yuanta Account was hence opened.

27.  By late March 2017, the 2^nd defendant said that she had completed the necessary formalities and was awaiting an official purchase and allotment of the 250 Million Shares to her.  There was no reason for her to doubt, she said, that it would simply be a case of awaiting the formal allotment since the relevant documents having been completed.

28.  The 2^nd defendant also set out, with reference to contemporaneous evidence, that she was not kept updated with the progress of the share subscription but she had reached out to Mr Eddy Wong to find out what happened.  It was submitted that from the WeChat messages between Mr Eddy Wong and the 2^nd defendant, it could be seen that the 2^nd defendant sent various “chaser” messages and questions to Mr Eddy Wong so as to learn more about the situation, conduct which is consistent with the 2^nd defendant being a bona fide investor.

29.  It subsequently transpired that the 250 Million Shares had been mishandled and/or misappropriated without the 2^nd defendant’s knowledge or consent:

(1)   On or around 15 August 2017, Mr Eddy Wong suddenly called and told the 2^nd defendant that the 250 Million Shares had already been transferred to another person, and that he was trying to recover part of the 250 Million Shares for her.  The 2^nd defendant was astonished, since she had never authorised the Company, Yuanta, Mr Eddy Wong nor any other person to transfer the 250 Million Shares or any part thereof to any third party.

(2)   Out of an abundance of caution, the 2^nd defendant sent a WeChat message to Mr Eddy Wong on 16 August 2017 at 10:41 am, putting on record that she had never signed any legal documents to authorise any transfer of the 250 Million Shares.

30.  After the above WeChat messages, the 2^nd defendant received a further phone call from Mr Eddy Wong asking her if she still wanted part of the 250 Million Shares that belonged to her.  Mr Eddy Wong did not tell her the identity of the person who received the 2^nd defendant’s shares and how many shares out of the 250 Million Shares were going to be transferredback to her.  Mr Eddy Wong simply said that part of the 250 Million Shares could be transferred to her Yuanta Account.  Naturally, the 2^nd defendant agreed and following Mr Eddy Wong’s request, sent a message consenting to have the shares transferred into the Yuanta Account.  In the said message,the 2^nd defendant did not specify the volume of shares to be transferred, because she did not have such information at the material time.

31.  Afterwards, Mr Eddy Wong told the 2^nd defendant that some 117 million shares of the Company were received.  The 2^nd defendant then chased Mr Eddy Wong for the account number and password of the YuantaAccount.  It was in these circumstances that the 2^nd defendant became aware of the details of the Yuanta Account, and discovered that only 117 million shares were transferred into the Yuanta Account.

32.  As regards the remaining part of the 250 Million Shares, the 2^nd defendant also chased Mr Eddy Wong for their return.  However, Mr Eddy Wong indicated to her over the phone that those other shares were in some other place(s) and he would try to recover them for her.

33.  Ms Lam SC for the 2^nd defendant submitted that the 2^nd defendant’s conduct subsequent to the transfer of the 117 Million Shares into her Yuanta Account continues to bear out her case that she was not involved and was unaware of any alleged fraud.  This is evidenced by,inter alia, the odd request from Mr Eddy Wong to sign backdated documents, which the 2^nd defendant refused.  There are also contemporaneous exchanges between her and the Yuanta representative, Mr Eddy Wong, which would again suggest that the 2^nd defendant was unaware of any alleged fraud or other odd dealings.

34.  In relation to the Purported Transfer Documents, Ms Lam SC submitted that:

(1)   As demonstrated by the 2^nd defendant’s travel records, the 2^nddefendant was not physically present in Hong Kong to signthe Purported Transfer Documents on or around 16 August 2017.

(2)   It was equally not possible for the 2^nd defendant to have sent scanned copies of signed version of the Purported Transfer Documents to Mr Eddy Wong:

(i)   The WeChat message from the 2^nd defendant to Mr Eddy Wong was sent at 12:36 pm on 16 August 2017.

(ii)   Thereafter, as shown in the WeChat conversation record, Mr Eddy Wong did not send the 2^nd defendant any documents for execution, and the 2^nd defendant did not send any scanned copy of any document to Mr Eddy Wong on that day.

(3)   Further, it was physically impossible for someone acting for Mr Eddy Wong to have travelled to Shenzhen with the unsigned version of the Purported Transfer Documents, had the same signed by the 2^nd defendant, and thereafter travelled all the way back to Hong Kong with all formalities completed, so as to enable the transfer of the 117 Million Shares to be effected before 2:09 pm on 16 August 2017, ie, the time when Mr Eddy Wong sent the 2^nd defendant the message that the 117 Million Shares have been received.

THE 1^ST DEFENDANT’S CASE AND ITS THIRD PARTY NOTICE

35.  In its Amended Defence, the 1^st defendant pleads alternative cases that:

(1)   It had not breached any duties owed to the plaintiff as it had been duly authorised by the plaintiff to make the transfer; or if this defence fails,

(2)   The transfer had been induced by fraudulent misrepresentations made by the 2^nd defendant to the 1^st defendant and/or the 2^nddefendant is a knowing recipient of the 117 Million Shares.  

36.  The 1^st defendant also relied on the fact that on 31 August 2017, the 1^stdefendant further transferred 70 million shares to the 3^rd defendant’s account with Yuanta.  The 2^nd defendant alleges that she agreed to sell the shares to a Mr Weng Lin Lei (“Mr Weng”), with the 3^rd defendant as the nominee.

37.  She further alleges that she had again been duped because Mr Weng never paid for those 70 million shares and she is in the course of taking a separate legal action against Mr Weng.

38.  Ms Cheung for the 1^st defendant submitted that according to the 1^st defendant’s preliminary research, all the three transfers appear to be part of a wider business deal, concerning an acquisition of Shenzhen Eastone Date Technology Company Limited by the Company’s wholly-owned subsidiary, Addchance International Limited, for which nothing was disclosed to this Court.

39.  Ms Cheung further submitted that as this matter is currently being investigated by the Hong Kong Police as well as the Securities and Futures Commission, Yuanta has temporarily suspended both the 2^nd and 3^rd defendant’s Yuanta accounts on a voluntarily basis.  However, Yuanta can lift such voluntary suspension at any time without notice to the 1^st defendant, it is just and fair that this Court should grant an interim injunction to freeze the 2^nd and 3^rd defendants’ Yuanta accounts. The 1^st defendant has yet to serve a writ on the 3^rd defendant out of the jurisdiction.

APPLICATION FOR FREEZING INJUNCTION

40.  On 21 June 2018, the 1^st defendant’s solicitors wrote to the plaintiff’s solicitors and stated:

“ 1. In light of recent discovery made by Yuanta Securities (Hong Kong) Company Limited (‘Yuanta’), Plaintiff is fully aware and knows that the Plaintiff’s alleged 117 million shares of Addchance Holdings Ltd of stock code 3344 (‘117M Shares’) or most part thereof have been temporarily restrained in the accounts of Madam Li Shuanghui (‘Ms Li’) and Mr. Dan Kazuyoshi (‘Dan K’) respectively held with Yuanta, because police issued notices to Yuanta, giving warning that the 117M Shares were suspected to be stolen items since in early September 2017. However, there is an obvious risk that Yuanta might not continue to voluntarily restrain the 117M Shares (and/or its sale proceeds or any part thereof, if any) whenever Yuanta deems fit, and Yuanta has no obligation to serve upon the Plaintiff or the Defendant any notice of this matter.

2. The Defendant hereby demands the Plaintiff to immediatelytake the following steps:

(a) to institute legal claims against Ms Li and Dan K and join them as 2^nd and 3^rd Defendants in this action; and

(b) to apply for injunction orders against Ms. Li and Dan K (and/or even Yuanta), which are to restrain Ms. Li and Dan K from further dealing with and/or disposing of the 117M Shares (or any part thereof and/or sale proceeds thereof) and/or their other assets in Hong Kong, PRC and/or elsewhere, in order to cover the full amount of the Plaintiff’s claims in this action.

3. Should the Plaintiff fail to take the aforesaid steps (in 2 above)immediately, the Plaintiff can no longer blame the Defendant for the loss of her assets, on the ground that the Plaintiff herself fails to discharge her own legal duty to protect her own alleged assets and/or minimize and/or mitigate her own loss and/or damage in respect of the 117M Shares, when and after she knows the existing whereabouts of the 117M Shares (or a substantive part thereof), her alleged assets as well as the identity and the contact address of the 2 ultimate recipients of the 117M Shares, as alleged to be fraudsters or such persons who had no legal entitlement to receive the 117M Shares (which is not admitted).

4. We are of our humble opinion that the Plaintiff has a much higher chance in obtaining the said injunction order against Ms Li and Dan K, as the Plaintiff is in a much better position to prove a good arguable case that they (or either of them) received the 117M Shares (or any part thereof) without her authority. To the contrary, the Defendant has a serious difficulty to prove a good arguable case against Ms Li and/or Dan K, as the Defendant can only base upon the Plaintiff’s allegation that Ms Li and/or Dan K received the 117M Shares without Plaintiff’s authority (which is not admitted).” (emphasis added)

41.  Strangely, the plaintiff was not keen to pursue claims against the 2^nd and 3^rd defendants and to apply for injunctions against them.  One would have thought that the plaintiff should have gone after the 2^nd and 3^rd defendants as primary defendants.  In her solicitors’ reply letter dated 25 June 2018, the plaintiff’s position was that:

“ We consider that your client, in its own capacity as the Defendant in the Action, is in a position to pursue against Li Shuanghui (‘Li’) and Dan Kazuyoshi (‘Kazuyoshi’), for instance by way of third party proceedings, if it sees fit upon your advice ….

In principle, the Plaintiff contemplates taking legal action against Li and Kazuyoshi subject to discovery in the Action ….”

42.  On 11 July 2018, the 1^st defendant’s solicitors wrote to the plaintiff’s solicitors again and stated, inter alia, that:

“ 2. We reiterate that there is an obvious risk that Yuanta might not continue to voluntarily restrain the 117M Shares (and/or its sale proceeds or any part thereof, if any) whenever Yuanta deemsfit, and Yuanta has no obligation to serve upon the Plaintiff or the Defendant any notice of this matter.”

43.  Nonetheless, the plaintiff, the alleged owner of the 117 Million Shares, was not concerned at all.  On 17 July 2018, the plaintiff’s solicitors replied and stated, inter alia, that:

“ As you stated, the accounts of Li Shuanghui and Dan Kazuyoshi have been frozen as a result of the police’s letter in September 2017. We do not observe a change of such status quo and we understand that the police is still investigating the matter.”

44.  On 14 August 2018, the 1^st defendant took out an inter partes summons against the 2^nddefendant (as the 1^st third party) under Order 29 ofthe Rules of the High Court, Cap 4A (“the Summons”), to seek an injunction in the following terms:

“ 1. The 1^st Third Party must not—

(1) remove from Hong Kong any of her assets which are within Hong Kong, whether in her own name or not, and whether solely or jointly owned, up to the value of HK$59,759,755, or

(2) in any way dispose of or deal with or diminish the value of any of her assets, which are within Hong Kong, whether in her own name or not, and whether solely or jointly owned up to the value of HK$59,759,755. This prohibition includes the following assets in particular:

(a) all stocks, assets, funds and monies in the account numbered 140443-M-000 at Yuanta Securities (Hong Kong) Company Limited; and

(b) all stocks, assets, funds and monies in the account number 6212998604125746 with China Merchant Bank.

2.   If the total unencumbered value of the 1^st Third Party’s asset in Hong Kong exceeds HK$59,759,755, the 1^st Third Party may remove any of those assets from Hong Kong or may dispose of or deal with them so long as the total unencumbered value of his asset still in Hong Kong remains above HK$59,759,755.”

45.  The Summons was first heard by Deputy High Court Judge M K Liu on 11 April 2019, who made an interim injunction order against the 2^nd defendant on the terms as set out in paragraph 44 above pending this substantive hearing.  The parties have since filed further affirmation evidence for substantive determination of the Summons before this Court.

FUNDAMENTAL ISSUES

46.  Both parties, namely, the 1^st defendant and the 2^nd defendant have filed very detailed and helpful submissions to assist this Court.  However, no assistance is rendered to this Court by the plaintiff. Despite repeated invitations from the 1^st defendant, the plaintiff persistently refused to apply for any injunctive relief against any of the defendants.  This conspicuous absence of the plaintiff makes the present freezing injunction application a very special application.  It is an application by one defendant against another defendant based on a third party notice.  This gives this Court a chance to address some interesting points of law, the analysis of which will be set out in detail below.

47.  However, I am of the view that the Court has to first determine whether the plaintiff has a good arguable case for injunctive relief against any of the defendants. This is the elephant in the room.  If the answer is in the negative, it is difficult to see how the 1^st defendant’s claims against the 2^nddefendant, which are contingent or parasitic on the plaintiff’s claims, can pass the test of a good arguable case for the purpose of obtaining a freezing injunction, one of the nuclear weapons in our court’s armoury.

48.  Ironically, in order for the 1^st defendant to establish a good arguable case on any of its claims against the 2^nd defendant, the 1^st defendant will need to show that the plaintiff has a good arguable case against itself and the 2^nddefendant.  This may seem odd as the 1^st defendant is required, in a way, to demonstrate to the Court that there is a real chance of the 1^st defendant failing in its primary defence i.e., losing at trial.  But that is in the nature of applications for Mareva/freezing injunctions on alternative bases, which is why, as will be explained below, it is generally more difficult for courts to be satisfied that there is a good arguable case in these circumstances.

49.  The plaintiff’s claims against the 1^st defendant and the 2^nddefendant are distinct but are nevertheless dependent on one central and critical claim, namely, the plaintiff is the rightful beneficial owner of the 250 Million Shares of the Company.  Establishing the beneficial ownership ofthe 250 Million Shares is crucial because it forms the basis of the plaintiff’s claims against both the 1^st defendant and the 2^nd defendant.

50.  Upon analysis, I am of the view that the plaintiff does not have any good arguable case to seek any injunctive relief against any of the defendants for the simple reason that there is no evidence to establish that the plaintiff is the beneficial owner of the 117 Million Shares or the 250 Million Shares.  This might well be the reason why the plaintiff is not prepared to apply for any injunctive relief against the 2^nd and 3^rd defendants.  Indeed,paragraph 3(b) of the 1^st defendant’s Amended Defence reads:

“ Since Madam Li [the 2^nd defendant] transferred the 250M Sharesto the Plaintiff at no consideration, a legal presumption of resultingtrust arises, such that the Plaintiff was at all material times holding the 250M Shares on trust for Madam Li [the 2^nd defendant].”

51.  It is a complete mystery to this Court as to how the plaintiff could have acquired any title, legal or otherwise, to the 250 Million Shares. First, the plaintiff had not paid for the 250 Million Shares.  I agree with Ms Lam SC that a resulting trust will arise in favour of the 2^nd defendant. In fact, the 1^st defendant has also pleaded in its Amended Defence that the plaintiff was holding the 250 Million Shares on resulting trust for the 2^nd defendant. On the present facts, it appears to this Court that such plea is correct.

52.  Secondly, the 2^nd defendant has adduced indisputable travel records both from the Hong Kong Immigration Department and Shenzhen Public Security Bureau Futian Branch that she was not in Hong Kong on 5 May 2017 to sign the Standard Form of Transfer.

53.  Thirdly, Mr Cheng of the 1^st defendant who witnessed the execution of the Standard Form of Transfer did not file any affirmation to enlighten the Court as to what had actually happened.  Ms Lam SC submitted that the Summons was issued on 14 August 2018.  At that time, Mr Cheng was still an employee of the 1^st defendant.  Indeed, in the 3^rdAffirmation ofHo Tzu Chuan, Mr Ho exhibited the WeChat conversation records betweenMr Cheng and the Impersonator.  This shows that the 1^st defendant was able to get evidence from Mr Cheng then.  Hence, I agree that the conspicuous absence of explanation or evidence from Mr Cheng is difficult to understand.  This is particularly so given that Ms Cheung for the 1^stdefendant submitted that the 1^st defendant has to date incurred significant resources and manpower in investigating the plaintiff’s claim and in seeking discovery against the 2^nd and 3^rd defendants and in carrying out investigations about the true nature of the parties’ relations and the underlying transactions, including but not limited to reporting and liaising with the Police and the Securities and Futures Commission, as well as obtaining discovery orders against Yuanta and Computershare.

54.  On the limited evidence before this Court, it is by no means clear that the plaintiff is the beneficial owner of the 250 Million Shares. On the contrary, there is a strong case that there is a resulting trust in favour of the 2^nd defendant, in which case the plaintiff’s claims against the 1^st and 2^nd defendants would fail.  I am of the view that the fact that no consideration was paid for the transfer of the 250 Million Shares casts serious doubts on the plaintiff’s case.

55.  Given that the plaintiff would have serious difficulties in persuading this Court that she has proprietary interest, legal or equitable,in the 250 Million Shares or the 117 Million Shares, I am of the view that she could not have satisfied this Court that she has a good arguable case vis-à-vis the 1^stdefendant and/or the 2^nd defendant.  I agree with Ms Lam SC’s submission that, as a matter of law, the plaintiff cannot have a better title to the 117 Million Shares than the 2^nd defendant as she derived her title from the 2^nd defendant but at nil consideration.

56.  I am of the view that as a matter of logic and common sense, unless the plaintiff has a good arguable case against both the 1^st defendant and the 2^nddefendant, the 1^st defendant would not have a good arguable case against the 2^nd defendant. (See Papamichael v National Westminster Bank plc [2002] 2 All ER (Comm) 60 at §47 per Judge Chambers QC).

57.  For the reasons stated above, I am of the view that the plaintiff does not have a good arguable case against the 1^st defendant or the 2^nd defendant on her pleaded claims.  This would have disposed of the Summons.  However, in case I am wrong on the plaintiff’s proprietary claims, I will further address the 1^st defendant’s claims as set out in its Third Party Notice in detail below.

58.  Ms Cheung for the 1^st defendant submitted that although the plaintiff has no good arguable case against any of the defendants for injunctive relief, there is still a possibility that after trial, the 1^st defendant could be found liable to the plaintiff.  Hence, there is a need to preserve the 2^nd and 3^rd defendants’ assets pending trial.  Indeed, it does appeal to one’s innate sense of justice that given that the 2^nd defendant also has not paid for the 250 Million Shares, a fair interim solution is to freeze all the disputed shares pending trial.

59.  However, upon reflection, I am of the view that the Court should adopt a principled approach to the granting of a freezing injunction. In other words, the Court cannot proceed on the basis that on balance, there is lesser harm in granting a freezing injunction, so a defendant’s assets should be frozen, albeit an applicant cannot establish a good arguable case.  In my view, that is wrong.

60.  As a matter of principle, it is also wrong that if the plaintiff hasno good arguable case for injunctive relief, but there is a possibility that the 1^st defendant would be liable to the plaintiff after trial, then an injunction should nevertheless be granted to freeze the assets of the 2^nd defendant to safeguard against that possibility.  To push this to its logical extreme, it will mean that in a case where a plaintiff does not have a good arguable case, aninjunction could still be granted simply because there is a risk or possibilitythat one of the defendants who has issued a third party notice could be found liable after trial.  This cannot be right. 

61.  There is another difficulty with the Summons. The 1^st defendant seeks a freezing injunction with a ceiling of HK$59,759,755.  This sum corresponds to the figure as stated in the Purported Transfer Documents, in particular, the Bought and Sold Notes plus HK$89,755 (being expenses arising from the transaction).  However, the plaintiff specifically pleaded that she did not sign the Purported Transfer Documents.  It is difficult to see how the plaintiff can on the one hand claim that the Purported Transfer Documents are forged documents and have no legal effects and on the other hand claim for the full consideration as stated in the Purported Transfer Documents.

62.  Insofar as it is pleaded by the plaintiff that the closing price of the Company on the Stock Exchange of Hong Kong on 16 August 2017 was HK$0.51 per share, the plaintiff has not adduced evidence to show that all of the 117 Million Shares of the Company could be sold in open market on 16 August 2017 at HK$0.51.  The Court has not been informed about the trading volume and liquidity of the shares of the Company at the material time.  Indeed, it is the plaintiff’s pleaded case that some shares were sold by the 2^nd defendant below HK$0.51.

63.  The plaintiff might well have a good basis, legal and evidential, to claim for the full sum of HK$59,759,755 as her loss.  However, she has not put forward any proof.  The 1^st defendant is left in an unenviable positionof having to advance the plaintiff’s claim for the full sum of HK$59,759,755.

64.  Given that this is an application for a Mareva/freezing injunction, the Court has to be cautious and an applicant carries the burden of making good its case that the amount to be frozen is the correct amount.

THE THIRD PARTY NOTICE

65.  In the 1^st defendant’s Third Party Notice, it is pleaded that:

“ The Defendant disputes the claim of the Plaintiff on grounds appearing in its Defence (a copy whereof has been served herewith),but in the event of the Defendant being held liable to the Plaintiff, the Defendant claims against the 1^st Third Party for damages, and against the 1^st Third Party and the 2^nd Third Party, severally and jointly, for contribution to the full extent of the Plaintiff’s claim; and/or such other relief or remedy stated hereunder, on the grounds as follows:” (emphasis added)

66.  The 1^st defendant only relies on two grounds, namely, fraudulent misrepresentation by reason of the Purported Transfer Documents and knowing receipt.

67.  It appears to this Court that the claim of fraudulent misrepresentation is an independent claim, in the sense that the 1^stdefendantalleges that it was misled by the 2^nddefendant in transferring the 117 Million Shares to her.  However, the claim of knowing receipt is contingent on the plaintiff’s proprietary claim.  Paragraph 17 of the Third Party Notice reads:

“ It may be the case that the Court finds that the Plaintiff’s property (or the Subject Shares) has been obtained by the alleged fraud. In this scenario, the Defendant alternatively claims against the 1^st and 2^nd Third Parties on the ground of knowing receipt.”

   (emphasis added)

68.  Hence, it is immediately apparent to this Court that the 1^st defendant’s knowing receipt claim is contingent on the plaintiff’s proprietary claim.  If this Court finds that the plaintiff does not have a good arguable case on its proprietary claim, then it follows that the 1^st defendant cannot have a good arguable case on knowing receipt.  Ms Cheung for the 1^st defendant also fairly agreed that the 1^st defendant does not assert any independent proprietary claims against the 2^nd defendant.

69.  However, before this Court proceeds to analyse whether the 1^st defendant has a good arguable case against the 2^nd defendant on the claims as set out in its Third Party Notice, there is a very interesting legal proposition raised by Ms Lam SC, namely, whether the court has jurisdiction to entertain an application for freezing injunction based on an alternative case.  Apparently, there is no Hong Kong case on this point.  So this Court needs to deal with this jurisdictional challenge first.

JURISDICTION TO GRANT MAREVA/FREEZING INJUNCTION ON ALTERNATIVE CASE

General legal principles for Mareva/freezing injunction

70.  It is first necessary to say a few words about Mareva/freezing injunctions, even though the governing principles are well-rehearsed.  The plaintiff must show that (1) he has a good arguable case on a substantive claim over which the court has jurisdiction, (2) there are assets within the jurisdiction, (3) the balance of convenience is in favour of the grant, (4) thereis a real risk of dissipation of assets or removal of assets from the jurisdictionand (5) he has complied with a strict duty of full and frank disclosure: Hong Kong Civil Procedure 2019 Vol 1, §29/1/65.

71.  A ‘good arguable case’ is explained to be one that is more than barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50% chance of success; the applicant need not go so far as to persuade the judge that he is likely to win: Grupo Pacifica Incorporada v Worldwide Marine Product Ltd & Others CACV 217/2015 (unreported, 28 January 2016) at §5.1 per Cheung JA.

72.  However, it should also be noted that the existence of a good arguable defence does not necessarily negate a good arguable case as it is entirely possible to have, at the interlocutory stage, both the claim and the defence being more than barely capable of serious argument and not necessarily having a better than 50% chance of success.  There is no requirement that the plaintiff has to show that he has a ‘much better’ case or argument than the defendant: Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd & OthersHCA 3023/2016 (unreported, 2 May 2017) at §42 per DHCJ Douglas Lam SC.

73.  Finally, it must be remembered that Mareva injunctions are not an end in themselves but are rather a supplementary remedy granted to protect the efficacy of court proceedings, domestic or foreign: Fourie v Le Roux [2007] 1 WLR 320 at §2 per Lord Bingham.  The underlying purpose of the jurisdiction is not to provide a claimant with security for its claim butto restrain a defendant from evading justice by disposing of assets otherwise than in the ordinary course of business so as to make itself judgment proof, with the result that any judgment or award in favour of the claimant goes unsatisfied: TTMI Ltd of England v ASM Shipping Ltd of India [2006] 1 Lloyd’s Rep 401, 406 at §25 per Christopher Clarke J.

Mareva/freezing injunctions based on alternative case

74.  Before considering whether the 1^st defendant has a good arguable case against the 2^nddefendant, there is a prior question of whether the 1^st defendant has locus standi to apply, and therefore whether the court has jurisdiction to entertain an application for Mareva/freezing injunction based on an alternative case.  The main hurdle is that the alternative case is dependent on a particular outcome at trial between the Plaintiff and the 1^st and 2^nd defendants, which means the 1^st defendant has no accrued cause of action against the 2^nd defendant unless and until the 1^st defendant and the 2^nd defendant are held liable to the plaintiff.

75.  Ms Cheung for the 1^st defendant cited the English Court of Appeal decision of Kazakhstan Kagazy plc v Zhunus [2017] 1 WLR 1360 as authority that it is entitled to apply for a Mareva/freezing injunction against the 2^nd defendant on the basis of its alternative case.  Ms Lam SC for the 2^nd defendant, on the other hand, submitted that the decision is of no assistance because (a) the principle discussed in Zhunus has questionable legal basis and should not be applied in Hong Kong and/or (b) the present facts are more complex and thus distinguishable.

(a)   Can courts grant Mareva/freezing injunctions in support of an alternative case?  

76.  On the issue of principle, Longmore LJ in Zhunus, giving the judgment of the Court of Appeal, distinguished between the need to establish a ‘cause of action’ and a ‘right to institute proceedings’.  Having considereda number of authorities mentioned at §25, which purportedly require there to be an accrued cause of action before a freezing injunction could be granted,his Lordship was of the view that those authorities were not considering cases in which it was appropriate for proceedings to be issued despite the absence of a cause of action in the strict sense: at §26.

77.  Rather, the whole thrust of the authorities is that there must be a right to institute proceedings before relief in the form of a freezing injunction could be granted: at §26.  In holding that what matters is whether there is a ‘right to institute proceedings’ and not a ‘cause of action’ in the strict sense,he gave two (possibly three) reasons:

(1)   First, as a matter of logic, there may be cases in which an injunction can be granted even if a cause of action (in its strict sense) does not yet exist but it is nevertheless possible to issue proceedings as it is with contribution notices;

(2)   The same point could also be put in another way — if a co-defendant is entitled to issue and serve a contribution notice, hehas a cause of action for so doing.  But it may also be regarded as an extension of the meaning of ‘cause of action’ for the purposes of freezing injunctions granted in support of a claim for contribution: see Injunctions (13^th ed, 2018), at §7-09.

(3)   Secondly, as a matter of policy, it obviously makes good sense that in a proper case, a freezing injunction can be granted in support of a valid contribution notice and obviously inconvenient if it cannot be so granted .

78.  In response, Ms Lam SC for the 2^nd defendant submitted that the purported legal basis for Mareva has been doubted by the same court in the earlier case of Papamichael v National Westminster Bank plc (supra)  .  There, it was held that the co-defendant applicant who issued the contribution notice has no accrued cause of action if relying on the contribution notice alone: at §§49, 52.  This, in my view, does not assist the 2^nd defendant’s case as the point of Zhunus was that an ‘accrued cause of action’ in the strict sense is not necessary — what matters is whether there exists a right to institute proceedings.  In any event, as rightly pointed out in Ms Cheung’s reply submissions, this case had been cited to the court in Zhunus and was rejected insofar as it concerns the need to first establish a cause of action.

79.  The second objection has more substance to it.  Ms Lam SC for the 2^nd defendant drew the Court’s attention to the fact that although the first instance judge in Zhunus Leggatt J postulated a potential legal basis for Mareva relief as the court’s jurisdiction to grant quia timet injunctions prior to the suffering of actual loss where there is clear evidence that the defendant threatens or intends to injure a clear right of the claimant, he then went on to express reservations: [2016] 4 WLR 86 at §81.  Specifically,he doubted whether it would often be possible to justify quia timet relief in the context of a claim for contribution because the relevant threat would be a refusal or failure by the third party defendant to pay a judgment for contribution in favour of the original defendant.  

80.  Thus, it may well be doubly difficult for the 1^st defendant to demonstrate a sufficiently clear threat since it is, on these facts, contingent on (a) the 1^st defendant being held liable to the plaintiff; (b) the 2^nd defendant being held liable to the plaintiff; and (c) the 2^nd defendant refusing or failingto satisfy a judgment for contribution (if a contribution claim was brought) and/orthe claims brought by the plaintiff.  The ‘contingency’ or ‘conditionality’ therefore goes to the question of whether there is a sufficiently pressing threat to the 1^st defendant so as to trigger the court’s jurisdiction to grant an injunction before a cause of action has accrued.

81.  I am of the firm view that, ultimately, the question of jurisdiction must depend on principles, having regard to the underlying rationales and purposes of Mareva/freezing injunctions in these circumstances.  As mentioned, a Mareva/freezing injunction is a supplementary remedy intended to prevent dissipation of assets to frustrate the efficacy of the court proceedings and any resulting judgment or award.  The difficulty with applications based on alternative claims is that a cause of action in the strict sense has not yet arisen.  The objection then is what, if anything, is the Mareva/freezing injunction protecting or supporting in such cases?

82.  However, I am of the view that this is to take an unduly narrow view of the supplementary nature of Mareva/freezing injunctions.  An applicant may well lose at trial, in which case the injunction could not be regarded as being granted to prevent the frustration of a judgment or award in favour of the applicant.  But the injunction nevertheless served a useful purpose in the meantime — it maintained the status quo such that the court proceedings could be carried out meaningfully.  It ensures that the determination of the rights and liabilities of the parties is in circumstances with a real prospect of enforcement, and not simply as an academic exercise.

83.  Additionally, the recognition that the court has jurisdiction to grant quia timet injunctions prior to the suffering of actual loss tends to support the principle in Zhunus.  By definition, if a quia timet injunction is applied for, no cause of action has yet accrued.  Of course, it will often be difficult to demonstrate that there is an imminent threat to the applicant’srights.  But it must follow that there is no principled objection to injunctions being granted in circumstances where a cause of action, in the strict sense,is yet to accrue.  If that were the case, the question is simply whether those circumstances should be extended to include claims brought under a contribution notice.

84.  On the one hand, as Longmore LJ had suggested, it would be inconvenient if freezing injunctions cannot be issued in support of a valid contribution notice because the applicant’s rights are just as entitled to protection as a claimant’s in an ordinary claim.  On the other hand, it willnormally be more difficult for the applicant to show a good arguable case onan alternative basis, because in addition to the normal obstacles in proving a sufficiently pressing threat, he must also show that there is a good arguable case in respect of the plaintiff’s claim against him.  But enhanced difficulty of proof does not justify a blanket prohibition on injunctions being granted in support of a contribution notice.

85.  For the above reasons, I am of the view that courts do have the jurisdiction to grant Mareva/freezing injunctions based on an alternative case.

(b)   Does that principle apply to the facts of the present case?

86.  If the principle in Zhunus is sound and should be adopted in Hong Kong, there comes the next question, which is whether the principle applies to the facts of the present case.  On this issue, there are three main areas of disagreement and the parties’ respective submissions may be summarised as follows:

(1)   Good arguable case requirement: Ms Lam SC for the 2^nd defendant submitted that the requirement is not satisfied because the prospect of the plaintiff succeeding against both the 1^st defendant and the 2^nd defendant is too contingent and remote. In Gerald Metals SA v Timis [2016] EWHC 2327 (Ch),Leggatt J at §34 said:

“ 34. Ultimately, it seems to me I must look not just at the individual conditions which would have to be met before Gerald Metals obtains a judgment for substantial damages against Mr. Timis, but at the cumulative effect of those conditions. Considered overall,I regard that prospect as too contingent and remote to satisfy the requirement of a good arguable case.” (emphasis added)

In reply, Ms Cheung for the 1^st defendant submitted that there are no such cumulative “conditions” in the present case which would make the 1^st defendant’s case on its Third Party Notice “contingent or remote”.

(2)   Types of claims: Ms Lam SC for the 2^nd defendant submitted that Zhunuswas more straightforward because the claimants’ claim was one of fraud/dishonesty against all defendants so that the facts and matters which need to be proved at trial wouldbe the materially the same.  So what the 1^st defendant is seekingis an extension rather than application of the principle in Zhunus. Ms Cheung for the 1^st defendant responded by saying that this objection does not apply to the knowing receipt claim.  

(3)   Parties’ positions: Ms Lam SC for the 2^nd defendant submitted that the claimants in Zhunus could not apply for Mareva/freezing injunctions against the first defendant, whereas the plaintiff here is entitled to but has elected not to apply for a Mareva/freezing injunction against the 2^nd defendant.  Moreover, the first defendant in Zhunus did not dispute liability but the 2^nd defendant here is strenuously denying the plaintiff’s allegations and will be defending the plaintiff’s claims against her.  Ms Cheung for the 1^st defendant, however, pointed out that Leggatt J at first instance accepted that had there been no settlement between the claimants and the 1^st defendant, the 2^nd defendant and the 3^rd defendant would be able to bring a contribution claim on an alternative basis.

87.  Subject to the 1^st defendant’s ability to prove a good arguable case on its pleaded claims under the Third Party Notice, I am of the view that the distinctions drawn by Ms Lam SC for the 2^nd defendant between the present case and Zhunusare insufficient to bring the case outside the ambit of Zhunus.  The issue is essentially jurisdictional.  Unless the distinctions go to the basis of the jurisdiction e.g., where the injunction is not sought in support of an alternative case, the grant or withholding of injunction is a matter for the court’s discretion, to be exercised in accordance with well-established principles of Mareva injunctions, including the need to establisha good arguable case.  The attempt to confine the principle to situations which are ‘on all fours’ with or materially indistinguishable from the fact pattern in Zhunus is too narrow a reading of the case:

(1)   Good arguable case: The different factual permutations speak only to ‘conditionality’, which may make it more difficult for the court to be satisfied that there is a good arguable case, but is not itself an a priori bar to the grant of injunctions in supportof alternative cases: see Zhunus, at §20 for observations to that effect.

(2)   Types of claims: Essentially the same point could be made.  The fact that the claimants brought largely the same claims against all defendants in Zhunus and not in the present case may have some bearing on the requirements of good arguable case and balance of convenience, but it cannot be a prerequisite for triggering the court’s jurisdiction to grant Mareva injunctions based on alternative cases.

(3)   Parties’ positions: It is difficult to see how the differences in the parties’ positions would affect the court’s jurisdiction to grant injunctions.  Again, it simply goes to the questions of good arguable case and balance of convenience.

88.  Having determined that courts in Hong Kong have jurisdiction to grant Mareva/freezing injunctions on an alternative cases, I now proceed to deal with the claims as pleaded in the 1^st defendant’s Third Party Notice and to determine whether there is a good arguable case for those claims in order for a Mareva/freezing injunction to be granted.

GOOD ARGUABLE CASE—FRAUDULENT MISREPRESENTATIONS /TORT OF DECEIT

89.  In relation to the fraudulent misrepresentation claim, there are two main issues to be considered:

(1)   As a matter of law, what is the causation test applicable to damages for fraud?   

(2)   On the facts, was the transfer induced by any fraudulent misrepresentations made by the 2^nddefendant to the 1^st defendant?  

Causation test for damages for fraudulent misrepresentation

90.  The elements of the tort of deceit and fraudulent misrepresentation are not in dispute and are set out in Haifa International Finance Co Ltd v Concord Strategic Investments Ltd [2009] 4 HKLRD 29 at §15 per Cheung JA, citing Winfield and Jolowicz on Tort (17^th ed, 2006), at §11-3:   

(1)   There must be a representation of fact made by words or conduct.

(2)   The representation must be made with knowledge that it is or may be false.  It must be wilfully false, or at least made in the absence of any genuine belief that it is true.

(3)   The representation must be made with the intention that it should be acted upon by the claimant, or by a class of persons which includes the claimant, in the manner which resulted in damage to him.

(4)   It must be proved that the claimant has acted upon the false statement.

(5)   It must be proved that the claimant suffered damage by so doing.

91.  Although there is no reference to causation in the above extract, points (4) and (5) taken together could be seen as laying down the need to establish reliance or causation and it is in any event trite that actionable misrepresentation requires reliance.

92.  The applicable causation test is therefore crucial to the question of good arguable case in respect of the fraudulent misrepresentation claim. The 1^st defendant’s case relies almost exclusively on the claim that the representations made in the form of the Purported Transfer Documents haveinduced the 1^stdefendant into making the transfer of the 117 Million Shares.  (See §11 of the Third Party Notice.)

93.  In Chitty on Contracts (33^rd ed, 2018) at §§7-038 and 7-039, the learned editors stated:

“ Need not be sole inducement. It is not necessary that the misrepresentation should be the sole cause which induced the representee to make the contract. It is sufficient if it can be shown to have been one of the inducing causes. Thus in Edgington v Fitzmaurice the plaintiff was induced to take debentures in a company partly because of a misrepresentation in the prospectus,but also because of a mistaken belief of his own that the debentures conferred a charge on the company’s property. He was held to be entitled to have the contract rescinded, and Cotton L.J. said, ‘[i]t is not necessary to show that the misstatement was the sole cause of his acting as he did’. The plaintiff appears to have agreed to take the debentures because of a combination of the misrepresentation and his own mistake. What is required is that the misrepresentee would not have entered the contract but for the misrepresentation.

‘But for’ causation normally required. It seems to be the normal rule that where a party has entered a contract after a misrepresentation has been made to him, he will not have a remedy unless he would not have entered the contract (or at least not on the same terms) but for the misrepresentation. Certainly this is thecase when the misrepresentee claims damages in tort for negligent misstatement; and it seems also to be required if damages are claimed for fraud. It seems likely that the same rule applies if he seeks to rescind on the ground of an innocent or negligent misrepresentation.” (emphasis added)

94.  Ms Cheung for the 1^st defendant did not dispute that but for test applies.  I am of the view that at the very least, the representation as relied upon has to have a material impact on the action or omission on the part of the misrepresentee. 

95.  On the facts, Ms Lam SC for the 2^nd defendant submitted that the 1^stdefendant never relied on the Purported Transfer Documents to effect the transfer of the 117 Million Shares.  The 1^st defendant, as a securities company, must have obtained instructions and positive confirmations from its clients before it would have executed any orders affecting their shares.  In the present case, it would be the verification provided by the Impersonator or the plaintiff, as the 1^st defendant’s client, which caused the transfer of the 117 Million Shares.  No matter what documents were presented to the 1^st defendant, without the confirmation and verification, no shares would be transferred out of the plaintiff’s account with the 1^st defendant.  In other words, it was the verification and/or confirmation by the plaintiff which was the causative event in the 1^st defendant’s act of transferring the 117 Million Shares to the 2^nd defendant’s Yuanta Account.

96.  It is important to note that on the plaintiff’s pleaded case, the fraud was perpetrated by an Imposter (not the 2^nd defendant nor the 3^rd defendant) and that the 117 Million Shares were then transferred to the 2^nd defendant and then to the 3^rd defendant as knowing recipients.

97.  It is the 1^st defendant’s case that the 1^st defendant received instructions to transfer the 117 Million Shares from the plaintiff’s account to the 2^nd defendant’s account (the Yuanta Account) in the form of the Purported Transfer Documents, and WeChat messages from the plaintiff’s purported account (the WeChat Account).

98.  On the contrary, it is the 2^nd defendant’s case that Mr Eddy Wong had procured her to send him WeChat instructions to receive the 117 Million Shares, and that the signatures on the Purported Transfer Documents were forged.  She also produced evidence that she was not in Hong Kong at the material time when the Purported Transfer Documents were signed.

99.  Ms Cheung for the 1^st defendant relied on the 2^nd defendant’s confirmation that she sent the WeChat messages instructing Mr Eddy Wongto receive the 117 Million Shares to say that there is at least a good arguable case that the 2^nd defendant made a false representation to the 1^st defendant,namely, that the plaintiff had received consideration for the 117 Million Shares, knowing that the transaction was not authorised (see §34 of the 1^st defendant’s Skeleton Submissions and §12 of the 1^st defendant’s Reply Submissions).  

100.  First, I am of the view that there is no evidence that it was the 2^nddefendant who made the representations as set out in paragraph 11 of the Third Party Notice.  The evidence tends to show that the 2^nd defendant did not sign the Purported Transfer Documents.  Ms Cheung for the 1^st defendant submitted that the 2^nd defendant could have signed the Purported Transfer Document on another date.  But that remains a mere speculation.

101.  Secondly, there is simply insufficient evidence to show that the2^nddefendant had made any representation to the 1^st defendant fraudulently, i.e., made with knowledge that it was false or at least in the absence of genuine belief that it is true: Haifa International Finance (supra) at §15 perCheung JA.  The allegation of fraudulent misrepresentation rests almost entirely on the Purported Transfer Documents and one WeChat message between the 2^nd defendant and Mr Eddy Wong.  While the court is not in a position to make any definitive findings of fact at an interlocutory stage,there are clearly genuine doubts as to whether the 2^nd defendant had in fact signed the Purported Transfer Documents and the context under which the WeChat message was sent.

102.  There is a material difference between raising suspicious circumstances and making an allegation of fraud.  Even though there is no need to persuade the Court that the 1^st defendant is likely to win, it would be a stretch to say that the evidence shows that the 2^nddefendant had instructed Mr Eddy Wong to receive the 117 Million Shares via WeChat, knowing that the transaction was not authorised or lacking a genuine belief that the transaction was authorised.  On the 2^nd defendant’s case, she had no knowledge of the mechanism by which the shares were transferred to her. This chain of inferences seeks to cross too many bridges.  As I said at the very beginning of this Decision, this Court has not been provided with sufficient relevant facts to know what had actually happened and it will be dangerous for this Court to form any views based on suspicions and speculations.  I also repeat that, in the absence of evidence from Mr Cheng of the 1^st defendant, this Court has reservation to draw the inferences advanced by the 1^st defendant at this interlocutory stage.  

103.  Further, the 1^st defendant’s own evidence shows that it took various steps to verify client’s instructions before executing the said transfer. This only goes to show that the effective cause for the transfer made by the 1^stdefendant was not the 2^nd defendant’s representation that the transfer was authorised by the plaintiff.  Rather, it was the purported confirmation from its own client, i.e., the plaintiff.  So the transfer was not made because of the Purported Transfer Documents, but because of the plaintiff’s instructions.  On the plaintiff’s pleaded case, it was not the 2^nd defendant who sent the false instructions to the 1^st defendant.  Without the requisite causal link, there is unlikely to be a good arguable case for fraudulent misrepresentation.  

104.  Finally, Ms Cheung for the 1^st defendant also submitted that although it appears that the 2^nddefendant has made reports to the Police, it is strange that, even now, the 2^nd defendant has not initiated any proceedings against Yuanta or the Company.  She has not applied for any injunction against the plaintiff.  She has not sought any discovery against Yuanta on the whereabouts of the rest of her shares.  Not a single letter before action was produced.  In my view, these submissions and observations are legitimate, in view of the present status of the evidence.  However, they are not strictly speaking relevant to the critical issue as to whether the 2^nd defendant has a good arguable case on the 1^st defendant’s pleaded case of fraudulent misrepresentation as analysed above.

GOOD ARGUABLE CASE — KNOWING RECEIPT

105.  As set out above, the 1^st defendant’s claim on knowing recipient is contingent on the plaintiff’s proprietary claim.  Ms Cheung for the 1^st defendant has rightly and fairly submitted that the 1^st defendant is not bringing a knowing receipt claim independently.

106.  The elements of a knowing (or unconscionable) receipt claim have been summarised by Hoffmann LJ (as he then was) in El Ajou v Dollar Holdings plc[1994] 2 All ER 685 at p 700g :

“ This is a claim to enforce a constructive trust on the basis of knowing receipt. For this purpose the plaintiff must show, first,a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.” (emphasis added)

107.  In the words of Snell’s Equity (33^rd ed, 2018), the basis of the defendant’s liability is that he received property in which the claimant had a subsisting equitable interest: at §30-071.

108.  As such, that should be the end of the 1^st defendant’s knowing receipt claim.

109.  Nevertheless, Ms Cheung for the 1^st defendant referred this Court to the case of Charter plc & Another v City Index Ltd & Others [2008]Ch 313.  It is submitted that:

“ the English Court of Appeal held that pursuant to ss.1(1) and 6(1)of the Civil Liability Contribution Act 1978 (identical to s.3(1) and 2(2) respectively of the Civil Liability (Contribution) Ordinance (Cap.377), a knowing recipient’s liability to make good the beneficiaries’ loss can properly be referred to as liability to compensate them. Hence, a knowing recipient could claim for contribution against the negligent director and auditors: see §§64, 67, 71, 73, 76 – 77, 79 per Arden LJ. The same principles and reasoning applies to the present case: SinoPac (if found to be liable to the Plaintiff) is entitled to claim for contribution against Madam Li (and Dan K) as knowing recipients of the Plaintiff’s property.” (§10 of the 1^st defendant’s Reply Submissions)

110.  In view of this Court’s determination of the plaintiff’s proprietary claim, it is not necessary for this Court to further determine the correctness and applicability of Charter plc v City Index Ltd.  However,given that the parties have made extensive submissions on this issue, this Court will express its views as follows: (a) Charter plc v City Index Ltd represents the current state of the law in England and Wales but (b) it was wrongly decided as a matter of principle.

111.  Charter plc v City Index Ltd establishes the following propositions:

(1)   Liability of knowing receipt depends on the defendant having sufficient knowledge of the circumstances of the payment to make it ‘unconscionable’ for him to retain the benefit or pay it away for his own purposes: at §8.

(2)   In other words, liability does not depend solely on the receipt, but on the retaining of the benefit or paying it away in circumstances where it was unconscionable to do so: at §32.

(3)   So while the directors’ legal responsibility arose at an earlier stage, it was only when City Index failed to return the money that Charter suffered any loss: ditto.

(4)   Adopting a wide interpretation of the Civil Liability (Contribution) Act 1978 (“the Act”), City Index’s liability to make good that loss can therefore properly be referred to as liability to ‘compensate’ them: ditto.

112.  This followed the earlier Court of Appeal decision in Friends’Provident Life Office v Hillier Parker May & Rowden [1997] QB 85  where Auld LJ gave sections 1(1) and 6(1) of the Act (corresponding to sections 3(1) and 2(3) of Civil Liability (Contribution) Ordinance (Cap 377) (“the Ordinance”) respectively) a wide interpretation and concluded that theAct enabled contribution to be claimed as between a tortfeasor and a person liable in restitution.  Notably, Auld LJ said at 102G-H:

“ The difference between asking for a particular sum of money backor for an equivalent sum of money for the damage suffered becauseof the withholding of it is immaterial in this statutory context, which is concerned with ‘compensation’ for ‘damage’.”

113.  The correctness of Charter plc v City Index Ltdas a matter of authority in English law depends mainly on whether it is able to stand against the House of Lords’ decision of Royal Brompton NHS Trust v Hammond [2002] 1 WLR 1397.  Lord Steyn agreed ‘in large measure’ that the Act ought to be given a broad interpretation, as it was in Friends’Provident (supra): at §26.  But he went on to cite Goff and Jones, The Law of Restitution’s criticism (5^th ed, 1998) of Auld LJ’s interpretation with approval, namely that it cannot be justified in principle to treat a restitutionary claim as one for ‘damage suffered’, nor would it be consistent with the natural meaning of the statutory language.  He then concluded that Auld LJ’s interpretation cannot, to this extent, be accepted as a correct statement of the law: at §33.

114.  In any event, subsequent cases have largely sought to treat Lord Steyn’s comments as obiter dicta and not necessary for the decision. For example, the Court of Appeal in Niru Battery Manufacturing Co v Milestone Trading Ltd (No 2) [2004] EWCA Civ 487 confirmed that Friends’Provident(supra) remains binding.  Both Clarke LJ (at §77) and Sedley LJ (at §87) were of the view that Auld LJ’s views in Friends’ Provident were part of the decision and not dicta, whereas the doubts cast by Lord Steyn in Royal Bromptonwere obiter dicta and not necessary for the decision. Goff and Jones (9^th ed, 2016) also shares the view that Friends’ Provident still represents the positive law in England and Wales: at §19-30.

115.  Similarly, Carnwath LJ in Charter plc v City Index Ltdexplicitly held that Friends’ Provident had not been overruled by Royal Brompton (at §20, §31).  In particular, he saw it difficult to maintain a categorical distinction between restitution and compensation when the restitutionary claim is for no more than the amount of loss suffered by the claimant: at §27. Arden LJ, concurring with Carnwath LJ on the conclusions, observed that the antithesis which Goff and Jones were drawing (cited by Lord Steyn) is between restitution for benefit gained on the one hand, and a claim for loss suffered on the other, that is, between a claim for an account of profits and aclaim for damages for loss: at §67.  This means that where the claim was for the amount that had been paid out, as it was in Charter plc v City Index Ltd,it is a claim to make good the claimant’s loss and therefore ‘compensation’:at §64.

116.  Closer scrutiny of the facts of Royal Brompton also supports the consensus that Lord Steyn’s comments were obiter.  The Royal Brompton case was not concerned with liabilities of a knowing recipient and a defaulting trustee.  Rather it was concerned with liabilities in tort and breach of contract.  It would appear, therefore, that Charter plc v City Index Ltd was right to follow Friends’ Provident as a matter of authority.  The liability of a knowing recipient and that of negligent directors are both regarded as ‘compensation’ for the same damage.

117.  Nevertheless, the Charter plc v City Index Ltddecision has itself been the subject of sustained academic criticism, albeit from various different angles.  Professor Virgo was of the view that the decision is incorrect on a ‘doctrinal level’, since the remedy for unconscionable receipt cannot be equated with that for the tort of negligence — the former isassessed with reference to the value of the property at the time of the receipt,which may be different to the loss suffered by the claimant at the time of transfer: The Principles of the Law of Restitution (3^rd ed, 2015), p 250.  Professor Burrows concurred that while the decision could be defended on policy grounds, it involves distorting the wording of the Act and may involve confusion as to the concepts in play.  Arden LJ’s attempt to treat the claim in question as concerning compensation for a wrong (at §64) is said to be inconsistent with the traditional view that knowing receipt is not an equitable wrong triggering compensation: The Law of Restitution (3^rd ed,2010), p 457.

118.  Goff and Jones do not go as far, but maintained their view that the Act does not cover claims between parties whose liabilities are not wrong-based but for unjust enrichment.  Friends’ Provident, which was followed in Charter plc v City Index Ltddespite having parts of it being declared incorrectly decided by Royal Brompton, was wrongly decided because the Law Commission’s 1977 Report and Hansard indicate the Parliament’s intention was solely to enact a scheme for contribution between wrongdoers: Goff & Jones, at §19-30.  But Friends’ Providentwas of course decided before the case of Bank of Credit and Commerce International (Overseas) Ltd & Another v Akindele [2001] Ch 437 had clarified the modern basis of liability for ‘knowing receipt’, which is now wrong-based/fault-based as it depends on the ‘unconscionable’ retention of property received.  So Charter plc & Anor v City Index Ltdis consistent with the view of Goff and Jones to the extent that the liabilities of both defendants are wrong-based/fault-based.

119.  Of course, none of the above decisions or academic observations is binding on the Hong Kong courts.  Charter plc v City Index Ltdhas been cited by Stone J in Akai HoldingsLimited (in liquidation) v Thanakharn Kasikorn Thai Chamkat (Mahachon) HCCL 59/2004 (unreported, 26 May 2008) at §§551 – 552 (the point was not taken further in the subsequent appeals).  But the learned judge declined to express views as to the nomenclature or the difference between the remedies: at §553.  I am of the view that, ultimately, the correct answer cannot be derived from a mere contest of authorities.  The correct approach is to adopt a position which this Court considers most principled and just.

120.  The key doctrinal or conceptual conundrum seems to be the nature of the liability of a knowing recipient, and particularly whether it is ‘compensation’ within the wording of the Ordinance.  A knowing recipient is liable to account as a constructive trustee: see Williams v Central Bank of Nigeria [2014] 2 WLR 355 at §9.  But as Lord Sumption has made clear,this constructive trust is ‘purely remedial’ — the recipients are required by equity to account as if they were trustees or fiduciaries, although they are not. No trust has been reposed in the knowing recipients and their sole obligation of any practical significance is to restore the assets immediately: at §31.

121.  In other words, the focus of this ‘remedy’ is on what the defendant has received, and not what the claimant has lost.  As Professor Virgo has pointed out, the date and subject of valuation may well be different.  Carnwath LJ criticised Lord Steyn’s statement that a claim for restitution ‘cannot be said’ to be a claim to recover ‘compensation’ as going too far, at least where the restitutionary claim is for no more than the amount of the loss suffered by the claimant: Charter plc v City Index Ltd at §27.  But this cannot be a normatively satisfactory response.  It would be an affront to legal certainty and conceptual clarity if the nature of remedies were to be determined based on the amount of the claim and the circumstances of the case.  The fact that the gain received by the defendant corresponded to the loss suffered by the claimant does not alter the nature of the knowing recipient’s liability to account as a constructive trustee — it is receipt-based.

122.  The same view should also be reached in respect of the plaintiff’s unjust enrichment claim against the 2^nd defendant.  The purpose of the law of unjust enrichment is to correct normatively defective transfers of value, usually by restoring the parties to their pre-transfer positions: Investment Trust Companies v Revenue & Customs Commissioners[2018] AC 275 at §42.  Although Lord Reed went on to say that the reversal of unjust enrichment is premised on the claimant’s also having suffered a loss through his provision of the benefit, he was at pains toemphasise that restitution is not a compensatory remedy and is not concerned with loss in the same sense as in the law of damages: at §43, §45.

123.  The better view, in light of the above discussions, seems to be that Charter plc v City Index Ltdwas wrongly decided insofar as it concerns the meaning of ‘compensation’ and should not be followed in Hong Kong.  The middle position, i.e., accepting Charter plc v City Index Ltdonly to the extent that the value of the claimant’s loss corresponds to the value of the defendant’s gain, is also not a satisfactory solution.  The root of the problem is a matter of doctrinal or conceptual clarity and statutory interpretation, which cannot be circumvented by an arbitrary rule based on the amount being claimed.

124.  In other words, liability for knowing receipt or in unjust enrichment should not be treated as ‘compensation’ and the Ordinance is not applicable insofar as it concerns the plaintiff’s knowing receipt claims.

125.  In view of the above analysis of Charter plc v City Index Ltd whether or not the 1^st defendant could seek contribution against the 2^nd defendant in the event that both the 1^st defendant and the 2^nd defendant are held liable to the plaintiff is entirely separate from whether the 1^st defendant has locus standi to bring a knowing receipt claim in its own right against the 2^nd defendant.  The first question depends on whether Charter plc v City Index Ltdis rightly decided and is only relevant when a contribution claim is brought whereas the second depends on whether there exists any exceptions to the rule in El Ajou, which is that a knowing receipt claim may only be brought by the beneficial owner of the assets. 

126.  It has been recognised that the trustee who has made a transfer in breach of trust has locus standi to bring a knowing receipt claim against a third party recipient, even though as between himself and his beneficiary he has committed a breach of trust and the commission of that breach of trust is a necessary ingredient in his cause of action against the recipient: Lewin on Trusts (19^th ed, 2018), at§42-033.

127.  However, the 1^st defendant has never claimed to be a trustee of the 117 Million Shares.  Indeed, the 1^st defendant denied that it owed any fiduciary duties to the plaintiff and referred to Clause 2.1 of the General Terms & Conditions which provides expressly that the 1^st defendant is not a trustee for the plaintiff.

128.  On the presently available evidence, it is unlikely that the 1^st defendant owed fiduciary duties to the plaintiff as it had not undertaken an obligation to act in her interests: Libertarian Investments Ltd v Hall(2013)16 HKCFAR 681 at §60 per Ribeiro PJ.  It was at all material times merely a securities trading firm acting as an intermediary.

129.  Even if the 1^st defendant did owe the plaintiff fiduciary duties,there is no indication in the 1^st defendant’s pleaded case or its skeleton submissions that it is bringing a knowing receipt claim in that capacity.  So this exception is not engaged on the facts.

130.  The question of whether Charter plc v City Index Ltd is rightly decided and should be applied only arises if the 1^st defendant brings a contribution claim under the Ordinance against the 2^nddefendant.  However, as mentioned, it does not appear to be part of the 1^st defendant’s case, either in its Amended Defence or in the Third Party Notice.

131.  If the 1^st defendant is bringing a separate claim of knowing receipt against the 2^nd defendant, the principles discussed in Charter plc & Another v City Index Ltdare not relevant for the application insofar as it relates to this separate knowing receipt claim.

132.  For all the above reasons, I am of the view that the 1^st defendant is therefore unlikely to have a good arguable case on its pleaded claim of knowing receipt.  

BALANCE OF CONVENIENCE

133.  Given that I have ruled that the 1^st defendant has no good arguable case against the 2^nddefendant, principally because the plaintiff hasno good arguable case that she has any beneficial interest in the 117 Million Shares, it is strictly speaking not necessary for me to deal with the issue of balance of convenience.

134.  But if I am wrong on my analysis of the 1^st defendant’s case against the 2^nddefendant, I am of the view that, the balance of convenience tips in favour of granting the freezing injunction.  First, although there is a voluntary freeze by Yuanta, there is uncertainty as to when such voluntary freeze will be lifted.

135.  Secondly, there is also the issue of the 70 Million Shares which had been sold by the 2^nd defendant and its proceeds which are not subjected to any voluntary freeze.

136.  Thirdly, I do not consider that any delay in making this application for Mareva/freezing injunction as fatal to the application. The Court fundamentally looks at the merits of the application.

DISPOSITION

137.  For all the reasons stated above, I make the following orders:

(1)   The Summons is dismissed;

(2)   A costs order nisi that the 1^st defendant is to pay the costs of and occasioned by the Summons to the 2^nddefendant forthwith, with a certificate for two counsel, to be taxed on a party to party basis, if not agreed.

(3)   The costs order nisi is to be made absolute if there are no applications to vary the same within 14 days from the date of this order.

138.  Finally, it remains for me to thank Ms Cheung and Ms Fan for the 1^st defendant and Ms Lam SC and Mr Cheung for the 2^nd defendant for their very able and helpful assistance to this Court.