WELLY GRACE LTD AND OTHERS v. KEUNG YEE MAN AND OTHERS

HCA 649/2023

[2023] HKCFI 3082

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 649 OF 2023

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D E C I S I O N

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1.  This is the plaintiffs’ application to (1) continue Mareva injunction orders against D1, D2, and D13 together with the ancillary disclosure orders, and (2) obtain proprietary injunction orders and ancillary disclosure orders against D1, D2, D4, D7, D8 and D13.

A.  THE RELEVANT BACKGROUND

2.  The following matters relating to the background are taken from the plaintiffs’ skeleton argument.

(1)  The plaintiffs are part of a group (“the Group”) engaging in education business in Hong Kong and Mainland China by operating pre-nurseries, kindergartens and interest classes under different school and brand names.

(2)  The Group was founded in 1979 by Mr Fung Lai-sing (“Mr Fung Sr”) and his wife, Mrs Fung Tam Shuk Yin, and is ultimately beneficially owned and controlled by Mr Fung Sr, Mrs Fung and their son, Mr Fung Chun Bong (“Mr Fung Jr”) (collectively the “Fung Family”).

(3)  The Group operates the business through corporate vehicles such that each undertaking is usually held or operated by a different Hong Kong company, which shares are usually in turn held by an offshore company.

(4)  The Group comprises around 50 BVI companies being holding companies and around 50 Hong Kong companies serving as operating subsidiaries.

(5)  D1 joined the Group in May 2013 and was the most senior accounting manager and the de facto chief financial officer of the Group.

(6)  D2 joined the Group in May 2013 upon D1’s recommendation and was D1’s immediate subordinate.

(7)  The Hong Kong companies within the Group share the same accounting department, which comprised 6 accounting staff (including D1, D2, D3, and Tong Siu Ping (“Stella”)) and around 15 accounting clerks. Other than D1, the accounting staff were each responsible for overseeing the finance and accounting activities of around 10 to 15 Hong Kong Group companies, including safekeeping their cheque books.  D2 was responsible for the finance and accounting activities of P1, P2, P5, P7, P8 and P10.  D3 was responsible for those of P3, P4, P6, P9 and P11.

(8)  The authorised signatories of the Hong Kong Group companies’ bank accounts are, with limited exceptions, either one of Mr Fung Jr or Mrs Fung.

(9)  The Fung Family reposed significant trust and confidence in D1 and her team.  In particular, the Fung Family concerned themselves with high-level decisions relating to the Group and did not have a habit of regularly reviewing the Group’s financial or bank statements, relying on D1 and her team’s periodic reports on the Group’s financial health.  The Fung Family also left it to D1 and her team to ensure that the companies’ receipts and expenditures were proper and justified.

(10)   In around September 2022, Stella informed Mr Fung Sr that D1, D2 and D3 regularly issued cash cheques drawn against the plaintiffs’ accounts for purposes other than in the plaintiffs’ ordinary course of business.  Stella suspected that they had misappropriated or misapplied company funds.

(11)   Separately, in around October 2022, Mr Fung Sr was concerned over the Group’s sluggish growth and asked D1 for the plaintiffs’ audited reports.  D1 was evasive and never provided Mr Fung Sr with the requested documents and information.

(12)   Mr Fung Sr then approached the plaintiffs’ banks to obtain their bank statements from 2020 to 2023 and copies of their issued cheques.  The requested documents were made available in a piecemeal fashion, with the first batch being provided in around January 2023.  The Fung Family immediately discovered suspicious entries.

(13)   In or around March 2023, further bank documents and cheque copies were made available.  The Fung Family discovered various irregularities, namely cheques were issued without supporting vouchers, substantial payments were made to settle D1’s and D2’s personal expenses, or paid to their relatives and other entities that are unrelated to the Group’s business, and the signatures on the cheques did not appear to belong to Mr Fung Jr.

(14)   On 22 March 2023, the Fung Family reported the matter to the police.  On 3 April 2023, D1 and D2 were summarily dismissed for suspected fraud.

3.  On 28 April 2023, P1 to P6 commenced the present action and obtained ex parte Mareva injunctive reliefs against D1, D2 and D3 (“the 1^st Ex Parte Order”).  The 1^st Ex Parte Order was subsequently varied on 2 May 2023 and 2 and 9 June 2023 to include additional plaintiffs and to increase the restraint values.

4.  On 2 May 2023, D7 was joined in this action.  On the same day, ex parte Mareva injunctive reliefs were obtained against D6, D10, D11 and D13 (“the 2^nd Ex Parte Order”).  The 2^nd Ex Parte Order was subsequently varied on 12 May 2023 and 2 June 2023 to increase the restraint values.

5.  On 9 June 2023, P8 to P11 and D14 were joined in this action.

6.  According to the plaintiffs, (1) their total loss to date amounts to HK$165,743,150, (2) the plaintiffs’ funds were apparently dissipated via forged cheques and unauthorised bank transfers, (3) the forged cheques would take different forms: (a) cheques issued to the defendants, (b) cash cheques to unknown recipients and (c) cheques issued to third parties.

7.  On 11 October 2023, default judgments were entered against D1 and D2 in respect of the plaintiffs’ claims for equitable compensation for breach of fiduciary duty.  According to the plaintiffs, they chose not to enter default judgment in respect of the sums personally received by D1 and D2 so as to preserve their right to elect between alternative remedies after trial.

8.  By a letter dated 10 November 2023, D13’s solicitors informed the court that D13 would have no objection to the orders sought by the plaintiffs and asked the court to excuse their client’s attendance at the substantive hearing.

9.  By a letter dated 15 November 2023, D4’s solicitors informed the court that D4 would adopt a neutral stance regarding the proprietary injunctive relief and the ancillary disclosure relief sought by the plaintiffs and asked that D4 be excused from attending the substantive hearing. 

10.  This Court subsequently excused the attendance of D4 and D13 at the substantive hearing.

11.  The plaintiffs have also obtained consent orders against (1) D6, D10 and D11 for the continuation of the Mareva injunction orders with ancillary disclosure orders and (2) D5, D6, D9, D10, D11, D12 and D14 for the proprietary injunction orders with ancillary disclosure orders.

12.  On the day of the substantive hearing on 20 November 2023, this Court also made a consent order against D3 for the continuation of the Mareva injunction orders with ancillary disclosure orders.

B.  CONTINUATION OF MAREVA INJUNCTIONS

13.  In view of the consent orders that have already been obtained, it is only necessary for the plaintiffs to seek the continuation of the Mareva injunction orders with ancillary disclosure orders against D1, D2 and D13.  D1 and D2 are absent whereas D13 has indicated that he has no objection to the orders sought by the plaintiffs.

14.  It is well-established that for the court to grant Mareva relief, a plaintiff has to show that (1) he has a good arguable case on the merits, (2) there are assets within the jurisdiction, (3) the balance of convenience is in favour of grant, (4) there is a real risk of dissipation or assets, or removal of assets from the jurisdiction, which would render the plaintiff’s judgment of no effect, and (5) he must comply with the strict duty of full and frank disclosure.

15.  As against D1 and D2, the plaintiffs submit the following.

(1)  There is a good arguable case for breach of fiduciary duty in that (a) each of them owed fiduciary duties to the plaintiffs in respect of the handling of the plaintiffs’ funds and cheque books; (b) each of them acted in breach of their fiduciary duties owed to the relevant plaintiffs by misappropriating and misapplying the plaintiffs’ funds.

(2)  There is a good arguable case for conspiracy in that (a) D1 and D2 are the principal perpetrators who oversaw the plaintiffs’ finance and accounting activities, had access to the plaintiffs’ cheque books, and caused the dissipation of the plaintiffs’ funds by forging cheques or procuring them to be forged by unauthorised bank transfers; (b) each of them intended to injure the plaintiffs, (c) the unlawful acts were carried out pursuant to the agreement or understanding, and with the requisite intention to injure the plaintiffs and (d) the plaintiffs suffered loss as a result.

(3)  D1 and D2 have assets within the jurisdiction.

(4)  D1 and D2 perpetrated a massive fraud which led directly to the dissipation of the plaintiffs’ funds.  There is clearly a risk of dissipation. 

(5)  Having regard to the risk of dissipation and the absence of evidence from D1 and D2 to explain their conduct and how the injunctions would cause them prejudice, the balance weighs in favour of the continuation of the Mareva injunctions.

16.  As against D13, the plaintiffs submit the following.

(1)  There is a good arguable case for knowing receipt in that (a) D13’s defence that he received HK$22,760,000 as consideration for cryptocurrency transactions with Mr Fung Jr is denied by the plaintiffs and D13 has produced no evidence of his alleged agreements with Mr Fung Jr for the sale and purchase of Tether; (b) there is a strong inference that D13 is associated with D1 and D2 because there would otherwise be no reason for the repeated and substantial transfers of money to D13 from November 2019 to September 2020; (c) D13 should have known that D1 and D2 worked as accountants in an education group and did not have the means to pay him HK$22,760,000 and this would put an honest and reasonable man on inquiry as regards the source of funds; (d) D13 made no such inquiry and continued to receive the funds so that it would make it unconscionable for him to retain the benefit of his receipts.

(2)  There is a good arguable case for unjust enrichment in that (a) D13 was enriched by HK$22,760,000 at the expense of the relevant plaintiffs; (b) the enrichment was unjust because the relevant plaintiffs did not consent to the payments and D1/D2 were not authorised to make the transfers; (c) D13 has not advanced any defence against the plaintiffs’ claim.

(3)  There is a good arguable case for conspiracy in that (a) D13 was a co-conspirator by supplying his bank account to D1, D2 and D3, receiving payments from the plaintiffs and concealing from the plaintiffs that he received such payments; (b) D13 intended to injure the plaintiffs; (c) D13 was sufficiently aware of the surrounding circumstances and shared the same object as D1, D2 and D3, (d) the unlawful acts were carried out pursuant to the agreement or understanding, and with the requisite intention to injure the plaintiffs; and (e) the plaintiffs suffered loss as a result.

(4)  D13 has assets within the jurisdiction.

(5)  D13 is a stranger to the Group who has no entitlement to the HK$22,760,000.  The explanations given for his receipt of the funds are not supported by any documentary evidence.  There is a strong inference that he is associated with D1 and/or D2 and participated in the conspiracy by providing his bank account details to them.  There is a real risk that he will dissipate his own assets to render himself judgment proof.

(6)  Having regard to the risk of dissipation and the absence of explanation from D13 on how the injunction would cause him prejudice, the balance weighs in favour of the continuation of the Mareva relief.

17.  On the basis of (1) the above submissions of the plaintiffs, (2) the absence of appearance from D1 and D2 and (3) the non-opposition from D13 of the orders sought by the plaintiffs, I am satisfied that there should be a continuation of the Mareva injunction orders as against D1, D2 and D13 until further order of the court or until the final determination of this action, together with the relevant ancillary disclosure orders.

C.  PROPRIETARY INJUNCTIONS

18.  In the light of the consent orders that have already been obtained, it is only necessary for the plaintiffs to seek proprietary injunction orders and ancillary disclosure orders against D1, D2, D4, D7, D8 and D13.  Their respective positions are as follows.  As mentioned earlier, D1 and D2 are absent.  The attendance of D4 and D13 at the hearing has been excused: D4 has indicated to the court that he adopts a neutral position whereas D13 has indicated that he has no objection to the orders sought by the plaintiffs.  D7 and D8 oppose the applications. 

C1.  The Relevant Legal Principles

19.  In Zhang Yan v Asa Bullion Ltd et al [2019] HKCFI 179, this Court at §11 stated:

“(1) Where a plaintiff asserts title to property or seeks to trace property which belongs to him, the Court has jurisdiction to grant a proprietary injunction restraining the disposal of that property: see A v C [1981] 1 QB 956 at 958D - 959D (Robert Goff J).

(2) For the grant of a proprietary injunction, there are three elements which the plaintiff has to demonstrate, following the American Cyanamid approach: (a) that there is a serious issue to be tried on the merits; (b) that the balance of convenience is in favour of granting an injunction and (c) that it is just and convenient to grant the injunction. It is not necessary to show any risk of dissipation of assets. See eg Madoff Securities International Ltd v Raven [2012] 2 All ER (Comm) 634 at §§127 - 128 (Flaux J).

(3) A proprietary injunction must relate to a specific asset held by or under the control of the defendant, or its traceable proceeds, in respect of which a proprietary claim is raised by the plaintiff: see任俊國v Chin Choi Ming (unreported, HCA 2017/2017, 6 November 2017) §20 (Chow J).

(4)  In order to justify the grant of a proprietary injunction, the plaintiff should ordinarily adduce some reasonable evidence of the existence of the specific asset (or its traceable proceeds) and that the same is being held by or under the control of the defendant.  Where the asset forming the subject matter of the proprietary claim has been dissipated and can no longer be traced, a proprietary injunction cannot ordinarily be granted.  See 任俊國v Chin Choi Ming (above) §§21 - 22 (Chow J).”

20.  The plaintiffs accept the principles as set out in §11(2) of Zhang Yan, namely that for the grant of a proprietary injunction, they must demonstrate that (1) there is a serious issue to be tried on the merits; (2) the balance of convenience is in favour of granting an injunction and (3) it is just and convenient to grant the injunction.

21.  At the hearing, Mr Douglas Lam SC (with Mr David Chen) on behalf of the plaintiffs indicated that he would put down a marker on the correctness of the propositions in §§11(3) and 11(4) of Zhang Yan (above).  It has therefore become necessary for me to re-examine such propositions.

22.  The propositions in §§11(3) and 11(4) of Zhang Yan were taken from 任俊國v Chin Choi Ming (unreported, HCA 2017/2017, 6 November 2017), where Chow J (as he then was) said at §§20-22:

“20. A proprietary injunction, by definition, is an injunction which relates to a specific asset held by or under the control of the defendant, or its traceable proceeds, in respect of which a proprietary claim is raised by the plaintiff. In order to justify the grant of a proprietary injunction, the plaintiff ought, ordinarily, to adduce some reasonable evidence of the existence of the specific asset or its traceable proceeds and that the same are still being held by or under the control of the defendant….

21. Where the asset forming the subject matter of the proprietary claim has been dissipated such that it could no longer be traced, no proprietary claim can be made and, it follows, no proprietary injunction can be granted….

22.   I would not rule out the possibility of some special or exceptional cases in which it would be justifiable for the court to grant a proprietary injunction or make an ancillary disclosure order even where the plaintiff is unable to point to an identifiable asset in the hands of the defendant which could form the subject matter of a proprietary claim.  However, this is far from such a case….”

23.  Mr Lam took issue with the accuracy of Chow J’s remarks by submitting that his Lordship did not cite any authorities to support his views and that it was an ex parte application in 任俊國.  With respect, Mr Lam’s criticisms are misplaced. 

24.  A proprietary claim in equity may be described as a claim brought by a plaintiff to recover an asset to which he has a continuing proprietary interest, or the asset’s traceable substitute.  The plaintiff must prove that the property to which he lays claim is still in the ownership of the defendant if he is to obtain a proprietary remedy.  The claim is brought to vindicate the plaintiff’s proprietary right in the asset and is not dependent on any discretion vested in the court.  See Boscawen v Bajwa [1996] Ch 328 at 334E, 334H (Millett LJ); Foskett v McKeown [2001] 1 AC 102 at 115G (Lord Hoffmann); 129D-E, 132A-B, 142D (Lord Millett); 108F-G, 109B-D (Lord Browne-Wilkinson).

25.  In relation to an equitable proprietary claim for property transferred in breach of trust, Briggs LJ in Clegg v The Estate and Personal Representatives of Pache (deceased) [2017] EWCA Civ 256 at §87 said as follows:

“Where a trustee pays trust property in breach of trust to a person who is in fact a stranger to the trust (rather than a beneficiary) and who receives it as a pure volunteer, then the recipient is bound by the beneficiaries’ interest in the property paid, so that the beneficiary may make a proprietary claim for its return, or a tracing claim for its proceeds, or a claim into a fund within which the recipient has mixed the property with his or her own property.”

26.  As Robert Goff J said in A v C [1981] QB 956 at 959D, in an action in which the plaintiff seeks to trace property which in equity belongs to him, the court may grant a proprietary injunction to restrain the disposal of that property.    Similarly, Scott LJ in Polly Peck International plc v Nadir (No 2) [1992] 4 All ER 769 at 776e-f said:

“Equitable tracing leads to a claim of a proprietary character. A fund is identified that, in equity, is regarded as a fund belonging to the claimant. … if identifiable assets are being claimed, the interlocutory relief sought will not be a Mareva injunction but relief for the purpose of preserving intact the assets in question until their true ownership can be determined.”

27.  The function of a proprietary injunction is therefore to preserve the property in the defendant’s hands which is said to belong to the plaintiff.  Where a plaintiff can no longer identify the property in question or its traceable substitute, it follows that there is nothing for the proprietary injunction to preserve.  As was explained in P McGrath QC Commercial Fraud in Civil Practice (2^nd ed, 2014) §21.03, “[without] an underlying substantive claim asserting such an interest in specified or identifiable assets [footnote 3], the premise for seeking a proprietary injunction simply falls away”.  The learned author also stated in footnote 3 that “[given] that a proprietary claim involves an assertion of proprietary interest or ownership over particular property, it forms an integral aspect of such a claim that the property is readily identifiable”.

28.  In my view, the above authorities fully support Chow J’s observations (stated in §§20 and 21 of 任俊國) that (1) a proprietary injunction must relate to a specific asset held by or under the control of the defendant, or its traceable proceeds, in respect of which a proprietary claim is raised by the plaintiff and (2) where the asset forming the subject matter of the proprietary claim has been dissipated such that it can no longer be traced, no proprietary claim can be made and no proprietary injunction can be granted.

29.  Similarly, Chow J’s observation (stated in §20 of 任俊國) that “the plaintiff ought, ordinarily, to adduce some reasonable evidence of the existence of the specific asset or its traceable proceeds and that the same are still being held by or under the control of the defendant” is also unremarkable and entirely accords with conventional principles.

(1)  In order to make a proprietary claim, the burden is on the plaintiff to “prove that the property to which he lays claim is still in the ownership of the defendant”: Boscawen v Bajwa (above) 334H (Millett LJ).

(2)  To show that the property in the defendant’s hands is property in which the plaintiff has a proprietary interest, the plaintiff has to carry out following and/or tracing exercises.  In Foskett v McKeown (above), Lord Millett explained these two exercises as follows.

“The process of ascertaining what happened to the plaintiffs' money involves both tracing and following. These are both exercises in locating assets which are or may be taken to represent an asset belonging to the plaintiffs and to which they assert ownership. The processes of following and tracing are, however, distinct. Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old. Where one asset is exchanged for another, a claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the hands of the same owner. In practice his choice is often dictated by the circumstances. [p 127B-C]

…

Tracing is thus neither a claim nor a remedy.  It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property.  Tracing is also distinct from claiming.  It identifies the traceable proceeds of the claimant's property.  It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim.  But it does not affect or establish his claim.  That will depend on a number of factors including the nature of his interest in the original asset. [p 128C-E]”

(3)  The plaintiff needs to follow and/or trace his property to support a proprietary claim because “his claim is based on the retention by him of a beneficial interest in the property which the defendant handled or received” (Boscawen v Bajwa (above) 334E (Millett LJ)).

(4)  The following/tracing exercises are simply processes of identifying assets and ought to be supported by evidence.  As Lord Steyn described it in Foskett v McKeown (above) at p 113B-C, “tracing is a process of identifying assets: it belongs to the realm of evidence”. 

30.  In the context of obtaining a proprietary injunction, the plaintiff needs to demonstrate a serious issue to be tried in relation to his proprietary claim, which would involve not only a consideration of the merits of the claim being brought by the plaintiff, but also an examination of the tracing exercise pursuant to which the asset in question has been identified.  As far as the tracing exercise is concerned, the plaintiff should adduce reasonable evidence to show a serious issue to be tried that the asset or its traceable substitute is being held by or under the control of the defendant.  As to what would constitute reasonable evidence to show “the existence of the specific asset or its traceable proceeds and that the same are still being held by or under the control of the defendant”, that must naturally depend on the facts and circumstances of each case, including but not limited to the stage of the proceedings, the information available to the plaintiff at the time when the proprietary injunction is sought, and any materials with sufficient cogency from the defendant.   

31.  At the hearing, Mr Lam submitted where a defendant seeks to rely on the defence of bona fide purchase for value without notice to defeat a plaintiff’s proprietary claim, the burden is on the defendant to make out such a defence.  This submission is based on clear authorities: e.g. Chan Chun Chung v PBM (Hong Kong) Ltd (2004) 7 HKCFAR 178 at §14 (Litton PJ).  However, I do not believe that the plaintiff’s burden to prove that the property to which he lays claim is still in the ownership of the defendant can be altered or displaced by the defendant’s reliance on a bona fide purchase defence.  It is fair to point out that Mr Lam did not go so far to make such a suggestion.

32.  Mr Lam, however, submitted at the hearing that once a plaintiff has shown receipt of the original property by a defendant, the court may draw adverse inferences as to whether the defendant still retains the original property or its traceable proceeds when the defendant has adduced no or insufficient evidence.  It is well-established that there must be a reasonable basis for some hypothesis in the evidence or the inherent probabilities before a court can draw useful inferences from a party’s failure to rebut it: Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd et al (unreported, CACV 90-96/2012, 17.9.2013) §§106-107 (Kwan JA).  I do not believe that the court can draw an adverse inference against the defendant when the plaintiff has not shown a prima facie case that the specific asset or its traceable substitute is still being held by the defendant.

33.  Two days after the conclusion of the hearing, the plaintiffs’ solicitors wrote to the Court attaching the case of Tsai Lee Ting v Best Leader Previous Metals Ltd [2023] HKCFI 2124 (referring to §§86 to 89).  It was further stated in the letter that (1) D7 and D8 would also wish to refer the Court to §§20-22 of 任俊國 (above), (2) “[both] sides refer to the respective authorities without making further submissions” and (3) the parties would seek leave to refer to such authorities “[insofar] as leave from court is required”.  The parties are reminded that it is only in “rare and exceptional circumstances” where the court’s attention may be drawn to additional matters after the conclusion of proceedings: Keen Lloyd Holdings Ltd v Commissioner of Customs & Excise [2016] 2 HKLRD 1372 at §33 (Lam VP, Kwan JA and Harris J).  I am unable to see any rare or exceptional circumstances to justify why the court should consider the two additional authorities when there is no explanation as to why they were not relied upon by the parties at the hearing.  I also do not find it helpful for the parties to ask the court to consider certain paragraphs of additional authorities but assert at the same time that they are not making any further submissions.

34.  In any event, it does not appear that §§86-89 of Tsai Lee Ting have laid down any general principles on proprietary injunction or contain anything which are inconsistent with the above.  Cheng J considered on the evidence before the court that there was a serious issue to be tried that the various defendants were holding the plaintiff’s assets or their traceable proceeds on trust for them.

35.  For the purpose of the present application, I will continue to apply the principles as set out by Chow J in §§20-22 of 任俊國 (and repeated in §§11(3) and 11(4) of Zhang Yan), bearing in mind the threshold of the application and that the plaintiff needs to demonstrate is only to show a serious issue to be tried. 

C2.  D1 and D2

36.  The plaintiffs have, according to them, shown that D1 and D2 have received a total of HK$3,173,856.40 and HK$35,578,381.20 respectively from the plaintiffs.  D1 and D2 have been absent throughout these proceedings and default judgments for certain part of the plaintiffs’ claim have already been entered into against them.  There is therefore nothing before the court to suggest that D1 and D2 have dissipated any part of the money that they received.  In these circumstances, I consider that the plaintiffs have adduced sufficient evidence to demonstrate that the plaintiffs’ money are still being held by D1 and D2.  

37.  The plaintiffs contend that there is a serious issue to be tried that they can seek proprietary relief against D1 and D2 for (1) knowing receipt and (2) on the basis of the Westdeutsche case.

38.  Knowing receipt does not generally give rise to proprietary relief.[1] A knowing recipient used to be described as a “constructive trustee” but such an expression has been held to be misleading and unfortunate.  When a defendant is held liable for knowing receipt, the remedy is a personal liability to account for the value of the property received.  As Millett LJ said in Paragon Finance plc v DB Thakerar and Co [1999] 1 All ER 400 at 409:

“Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be ‘liable to account as constructive trustee’. Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff. In such a case the expressions ‘constructive trust’ and ‘constructive trustee’ are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are ‘nothing more than a formula for equitable relief ’.” [emphasis added]

39.  In Arthur v Attorney-General of the Turks and Caicos Islands [2012] UKPC 30, Sir Terence Etherton said at §34:

“When considering relief for the consequences of knowing receipt it is necessary to distinguish between proprietary and personal remedies. The beneficiaries or innocent trustees will pursue a proprietary claim by following the trust property wrongly transferred or tracing its inherent value into something substituted for it: Foskett v McKeown [2001] 1 AC 103, 127-129 (Lord Millett). The claim for personal liability is for the recipient to account as a constructive trustee and will usually only be necessary where following or tracing is not possible because, for example, the property has been acquired by a bona fide purchaser for value without notice or has been dissipated and is otherwise no longer identifiable. As Sir Robert Megarry V-C said in Re Montagu’s Settlement Trusts [1987] 1 Ch 264, 285:

‘The equitable doctrine of tracing and the imposition of a constructive trust by reason of the knowing receipt of trust property are governed by different rules and must be kept distinct. Tracing is primarily a means of determining the rights of property, whereas the imposition of a constructive trust creates personal obligations that go beyond mere property rights.’ ”

40.  At the hearing, Mr Lam accepted that it was unnecessary for the plaintiffs to rely on knowing receipt to support their application for proprietary injunction. 

41.  I now turn to the other cause of action relied upon by the plaintiffs to support their proprietary claims.  In Westdeutsche Bank v Islington LBC [1996] AC 669, in the context of describing a thief stealing a bag of coins or moneys, Lord Browne-Wilkinson at 716C-D said obiter that stolen moneys are traceable in equity, and that equity imposes a constructive trust on the fraudulent recipient when property is obtained by fraud.  It appears that his Lordship considered that the thief’s unconscionable conduct in committing theft and his retention of the stolen property would be sufficient to give rise to a constructive trust.  The plaintiffs rely on this dictum to contend that D1 and D2, as fraudulent recipients, should hold the funds on constructive trust for the plaintiffs.  Constructive trusts provide proprietary relief.  Assuming (but without deciding) that Lord Browne-Wilkinson’s dictum applies, I am satisfied that the plaintiffs have shown a serious issue to be tried on their proprietary claims against D1 and D2.

42.  In the absence of any evidence from D1 and D2, I consider that the balance weighs in favour of granting the proprietary injunction and that it is just and convenient to do so.

43.  Accordingly, I grant the proprietary injunction against D1 and D2 as sought by the plaintiffs and the ancillary disclosure orders.

C3.  D4

44.  The plaintiffs have shown that D4 received a total of HK$1,057,000 from P1.

45.  In her affirmation dated 8 June 2023, D4, inter alia, mentioned that she is being investigated by the police in relation to the dealings in her bank account with HSBC and expressed concern that any further disclosure to the plaintiffs would affect her right to silence and her privilege against self-incrimination that she exercised in the criminal investigation.  She also stated that the court had already made disclosure orders against HSBC in relation to her account on 19 May 2023 and that the information disclosed by HSBC would be sufficient for the plaintiffs’ purposes.

46.  In a reply affirmation dated 7 July 2023 filed on behalf of the plaintiffs, Ms Cheng Yee Ling (“Ms Cheng”) disagreed with D4 that the disclosure orders made against HSBC on 19 May 2023 in relation to D4’s bank account would be sufficient for the plaintiffs’ purposes.  Specifically, Ms Cheng said (at §9) that “[it] is also clear from the bank statements of the Account obtained under the Disclosure Order that there was a mixing of the Plaintiffs’ funds and other funds within the Account”.  However, Ms Cheng has not exhibited D4’s bank statements that the plaintiffs have obtained from HSBC to her affirmation.  The Court is therefore left in a position not knowing the extent of the “mixing” of the plaintiffs’ funds and other funds in D4’s bank account. 

47.  In her Defence dated 20 October 2023, D4 stated that the Defence was filed without prejudice to her right to silence, except for the information and materials contained in her police statement dated 3 August 2023.  She further stated that she was hired by York International Kindergarten as an administration officer on 8 September 2021.  She pleaded that D1 had informed her that deposits would be paid into her (D4’s) bank account by cheques as advance payments for D4 to pay D1’s personal expenses, and that she (D4) was unaware of the source of the funds.  She further pleaded that on 1 December 2022, she returned a sum of HK$17,371.71 to D1, which represented “the total remaining balance of the money previously deposited by [D1]”.  D4 signed a Statement of Truth to confirm that all the facts stated in her Defence are true.

48.  In view of (1) the plaintiffs’ acknowledgment that there has been a mixing of their funds and the money in D4’s bank account, (2) an absence of any attempt to assist the court in examining the extent of the mixing of funds in D4’s bank account (to be contrasted with the exercise the plaintiffs chose to undertake in relation to D8’s bank account (see below)), and (3) D4’s pleaded position (and supported by her Statement of Truth) that she had returned to D1 the total remaining balance of money previously deposited by D1, I am not satisfied that the plaintiffs have demonstrated a serious issue to be tried that the total sum of HK$1,057,000 D4 received from the plaintiffs from September 2021 and September 2022 is still in the hands of D4.  I have not lost sight of the fact that D4 has expressed a neutral stance in this application.  Nonetheless, the burden of showing a serious issue to be tried in a proprietary injunction application rests on P1.

49.  Accordingly, I decline to grant the proprietary injunction and the ancillary disclosure orders against D4.

C4.  D13

50.  The plaintiffs have shown that D13 received a total of HK$22,760,000 from P1.  It is the plaintiffs’ case that D13 is a stranger to the Group.

51.  In his Defence dated 10 August 2023, D13 admitted that he was never employed by or worked for any of the Group companies, including the plaintiffs, and that he had received various sums of money in his bank account.  He pleaded, inter alia, that (1) he met Mr Fung Jr on Telegram before November 2019, (2) between November 2019 and March 2021, D13 entered into various agreements with Mr Fung Jr via Telegram whereby Mr Fung Jr agreed to purchase a cryptocurrency called Tether from D13, (3) D13 believed that the money received in his account was purchase money for the cryptocurrency from Mr Fung Jr.

52.  In the Reply to D13’s Defence dated 27 September 2023, the plaintiffs pleaded that Mr Fung Jr (1) has never come across D13, whether physically or virtually, (2) has never purchased Tether or any other kind cryptocurrency, (3) never received any bank account details of D13.

53.  D13 did not file any affirmation to oppose the plaintiffs’ application.  Specifically, I note there is nothing before the court to suggest that D13 has parted with the money that was received from the plaintiffs.  Moreover, I note that D13 has indicated through his solicitors that he has no objection to the plaintiffs’ summons, which would include the plaintiffs’ applications for proprietary injunction and the ancillary disclosure orders.

54.  In these circumstances, I am satisfied that that the plaintiffs have demonstrated a serious issue to be tried that they have a proprietary claim for HK$22,760,000 against D13 and that the amount is still being held by D13. 

55.  In the absence of any evidence from D13, I consider that the balance weighs in favour of granting the proprietary injunction and that it is just and convenient to do so.

56.  Accordingly, I grant the proprietary injunction against D13 as sought by the plaintiffs and the ancillary disclosure orders.

C4.  D7 and D8

57.  There is no dispute that D7 is D1’s sister and that D8 is D7’s husband.

58.  According to his Defence dated 13 September 2023 (jointly filed with D7):

(1)  D8 is a qualified architect and provides design services to client in his personal name.  He is also the principal and founder of Daydreamers Design Ltd (“Daydreamers”). 

(2)  In late December 2020, or early 2021, D7 informed D8 that D1 (a) wanted to renovate her (D1’s) residential property, (b) already engaged a designer to design and renovate but was dissatisfied with their services (c) told D7 to ask D8 to take up the project.

(3)  D1 and D8 then discussed a budget for the project and agreed, inter alia, that (a) the budget should be as close to HK$2 million as possible, (b) D8 would prepare the layout design, procure Daydreamers to engage contractors and material suppliers to carry out the renovation work, and pay them for services incurred, (c) D1 and/or her husband (D5) would pay D8 for the work.

(4)  D8 then procured Daydreamers to appoint Pui Kee Decoration & Engineering (“Pui Kee”) as main contractor to carry out the renovation work at D1’s property.

(5)  After renovation work was carried out, D1 deposited a total of HK$1,660,000 into D8’s bank account at HSBC (“D8’s Account”) from May 2021 to June 2022 for the work.  D1 represented that the funds were paid by her and/or her husband.  The payments were then paid to Daydreamers, which in turn paid Pui Kee and other suppliers in the total sum of HK$2,208,407.

(6)  There was a shortfall in the payment by D1 to D8 in the sum of HK$548,407 and D8 has suffered loss and damage in the same from the project.

(7)  D8 was a bona fide purchaser for value without notice, in that he provided consideration under the agreement with D1 and did not know and could not have known that the payments were not from D1 and/or her husband.

(8)  D8 relies on the defence of change of position, in that in reliance and but for the representation from D1 that she and/or her husband would settle any sum due under their agreement with D8, D8 would not have procured Daydreamers to enter into the agreement with Pui Kee and pay any money to Pui Kee and other material suppliers.

C4a.  Serious issue to be tried

59.  In the plaintiffs’ skeleton, Mr Lam submitted that the plaintiffs have a serious issue to be tried against D7 and D8 for knowing receipt.  Upon Mr Lam’s indication at the hearing that it is unnecessary for the plaintiffs to rely on knowing receipt to support their application for proprietary injunction (see paragraphs 38-40 above), I will proceed to consider whether the plaintiffs have demonstrated a serious issue to be tried for a proprietary claim against each of D7 and D8. 

60.  As far as D7 is concerned:

(1)  The plaintiffs have shown that D7 has received HK$8,000 from P1 and HK$181,631 from P6. 

(2)  Although D7 has filed a joint Defence with D8, the pleading does not deal with D7’s receipt of the plaintiffs’ money.  Further, D7 has not filed any affirmation to oppose the plaintiffs’ applications and D8’s affirmation does not say anything about the two sums of money D7 received from the plaintiffs.  In other words, there is nothing before the court to suggest that the money that D7 received from the plaintiffs has already been dissipated. 

(3)  In these circumstances, I am satisfied that the plaintiffs have shown a serious issue to be tried on their proprietary claim against D7. 

61.  As far as D8 is concerned:

(1)  D8 admits the receipt of HK$1,660,000 (purportedly) from D1.  As pointed out by the plaintiffs, the dates and various amounts match the outward remittances from P1.

(2)  The plaintiffs have exhibited in Ms Cheng’s 12^th Affirmation a copy of the account history report of D8’s Account (showing withdrawals from and deposits into the account from 1 May 2021 to 19 May 2023) (which was obtained from HSBC pursuant to the disclosure order dated 19 May 2023).  It can be seen from the report that (a) by 15 May 2023, the closing balance of D8’s Account was slightly over HK$3.5 million, (b) at no point in time between 1 May 2021 and 19 May 2023 did the account balance drop below the total amount of the sums advanced from P1, (c) by 18 May 2021, P1 had transferred to D8 HK$860,000 by 3 transfers and the balance of the account never fell below $860,000 after 18 May 2021, (d) by 10 June 2022, P1 had transferred to D8 HK$1,660,000 and the balance of the account never fell below that figure after 10 June 2022.

(3)  In this connection, the relevant equitable tracing rules are as follows:

(a)  If the fund is made up of a mixture of the plaintiff’s money and that of the alleged wrongdoer, the initial withdrawals are presumed to be made with the wrongdoer’s own funds: Re Hallett (1880) 13 Ch D 696.  But if the alleged wrongdoer has used the money from the mixed fund to purchase an asset and dissipated the remaining balance, the presumption is that the alleged wrongdoer intended to purchase the asset using the plaintiff’s money: Re Oatway [1903] 2 Ch 356.

(b)  If the plaintiff’s money is mixed with other money in a bank account and the balance of the account is subsequently reduced to less than the amount of the deposit of the plaintiff’s money, the plaintiff’s recovery is only limited to the maximum amount that can be treated as his money.  This is what is known as the “lowest intermediate balance” rule.  See Roscoe v Winder [1915] 1 Ch 62.

(4)  Mr Keith Cheung on behalf of D7 and D8 submitted that the total sum of HK$1,660,000 had already been paid out to third parties and that P1’s money has already been dissipated and can no longer be traced. Such submissions were made without any attempt to deal with the tracing exercise carried out by the plaintiffs as set out in sub-paragraph (2) above.   Further, the extensive submissions made on the lack of particulars of fraud and dishonesty in the plaintiffs’ pleading against D8 are irrelevant in the context of the plaintiffs’ proprietary claim.

(5)  Having regard to the above tracing rules, it seems to me that there is a serious issue to be tried on the question of whether the total sum of HK$1,660,000 is still in the hands of D8 and whether P1 has a proprietary claim against the amount. 

(6)  As far as the defences of bona fide purchase and change of position which D8 relies upon are concerned, I do not consider that they are sufficient to negate that P1 has a serious issue to be tried on its proprietary claim as against D8.

62.  For these reasons, I conclude that there is a serious issue to be tried on the plaintiffs’ proprietary claim against D7 and D8.

C4b. Balance of convenience and whether just and convenient

63.  As far as balance of convenience is concerned, Mr Cheung submitted that unless the plaintiffs can show that D7 and D8 are not good for the money, damages is obviously an adequate remedy and a proprietary injunction should not be granted.  Mr Cheung relied on Wason Holdings Ltd v BHP International Markets Ltd [2018] HKCA 113 at §§36-39 to support his submission.  I do not read Wason as authority for such a proposition.

64.  In Wason, the Court of Appeal considered the question of whether the balance of convenience was in favour of granting a proprietary injunction to prevent the defendant from disposing of some shares in a publicly listed company in Hong Kong or their proceeds of sale when such shares had already been sold.  Barma JA at §38 said that “in the circumstances of this case, the balance of convenience was against the granting of the injunction sought”.  His Lordship explained at §38 as follows:

“Given that the shares had been sold, the effect of the injunction could be to secure a sum of money … to satisfy any judgment the plaintiffs might ultimately obtain. However, given the nature of the business operated by the 1^st defendant, requiring it to set aside a sum of money, which it would be prevented from deploying in its business, would be likely to have a significant adverse impact. On the other hand, from the plaintiffs’ point of view, whatever judgment they may obtain at the end of the day is likely to involve the payment of money to them. Where that money comes from is ultimately of little consequence to the plaintiffs. Although their claim may be characterised as proprietary, in the particular circumstances of this case, it is nonetheless a claim to money. Unless there is reason to think that the 1^st defendant will be unable to meet such a claim, there is no particularly pressing need for money to be kept aside to meet it.”

65.  All Barma JA did at §38 was to balance the convenience of the respective parties in the particular circumstances of that case.  His Lordship considered the balance of convenience weighed against the granting of the injunction because of the nature of the 1^st defendant’s business (namely to make loans to borrowers against the security of relatively illiquid shares (§5)) and the significant adverse impact if it was required to set aside a large sum of money.  I do not read §§36-39 of Wason as laying down a rule that unless a plaintiff can show that the defendant is not good for the money, the balance of convenience is against the granting of a proprietary injunction for money.

66.  In the absence of any evidence from D7, I consider that the balance weighs in favour of granting the proprietary injunction against D7 and that it is just and convenient to do so. 

67.  As far as D8 is concerned, he says in his affirmation (at paragraph 28) that if he is required to set aside the sum of HK$1,660,000, he would be “prevented from deploying it in [his] business operations which would be likely to have a significant adverse impact”.  He further explains, inter alia, that (1) he provides services to clients as well as operating a business in the name of Daydreamers, (2) it is the norm in the industry for the architect to design and make up front payments to contractors, (3) two other shareholders and directors of Daydreamers have already phased out from its operation and Daydreamers in fact is wholly owned by and operated by D8.  Even assuming all of these matters to be true, there is in my view insufficient evidence to demonstrate that there would be “a significant adverse impact” on the businesses of D8 and Daydreamers would have if a proprietary injunction is granted over HK$1,660,000. 

68.  The court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other: National Commercial Bank Jamaica Ltd v Olint Corp Ltd [2009] 1 WLR 1405 at §17 (Lord Hoffmann).  There is a possibility that P1 will suffer irremediable prejudice if it succeeds in its claim against D8.  Having taken into account the circumstances of P1 and D8, it seems to me that the balance of convenience weighs in favour of granting the proprietary injunction against D8. 

69.  Once the court has decided that the balance of convenience favours the granting of the proprietary injunction, although the question whether it is just and convenient to do so is a separate question, it is extremely unlikely that the court would say it was not just and convenient, having decided the balance of convenience in favour of the plaintiff:  Madoff Securities International Ltd v Raven et al [2012] 2 All ER (Comm) 634 at §141 (Flaux J).  I am not satisfied that there was any delay on the part of the plaintiffs to make the proprietary injunction application against D8, as Mr Cheung suggested, given that the bulk of the bank statements were not made available until mid-March 2023.  In this case, I find it just and convenient for a proprietary injunction to be granted against D8.

C4c.  Conclusion

70.  For the above reasons, I grant the proprietary injunctions and the ancillary disclosure orders against D7 and D8 as sought by the plaintiffs.

71.  As to the ancillary disclosure orders, Mr Cheung argued that they serve no practical utility given that the plaintiffs have already obtained disclosure orders under section 21 of the Evidence Ordinance (Cap 8).  With respect, I disagree.  The ancillary disclosure orders currently sought by the plaintiffs go far beyond the ambit of the previous disclosure orders made.  Moreover, the previous disclosure orders were made against various financial institutions on 19 May 2023 and only ordered the disclosure of bank records up to the date of the court order.  I consider that the ancillary disclosure orders sought by the plaintiffs do serve real purposes and are designed to further ascertain the whereabouts of the property subject to the proprietary injunction.  I am satisfied that the court should order the ancillary disclosure orders against D7 and D8 as sought.

D.   DISPOSITION

72.  To conclude, the court:

(1)  continues the Mareva injunction orders as against D1, D2 and D13 until further order of the court or until the final determination of this action, together with the relevant ancillary disclosure orders;

(2)  grants the proprietary injunctions and the ancillary disclosure orders against D1, D2, D7, D8 and D13; and

(3)  dismisses the applications for proprietary injunction and ancillary disclosure orders against D4.

73.  Further, I make a costs order nisi that (1) the costs of and occasioned by the applications to continue the Mareva injunction orders against D1, D2 and D13 be in the cause with a certificate for two counsel to be taxed if not agreed, (2) the costs of and occasioned by the applications for proprietary injunction and ancillary disclosure orders against D1, D2, D7, D8 and D13 be in the cause with a certificate for two counsel to be taxed if not agreed, and (3) the costs of and occasioned by the applications for proprietary injunction and ancillary disclosure orders against D4 be borne by the plaintiffs to be taxed if not agreed.

74.  I direct the parties to agree on the draft form of order to be drawn up and to be submitted for the court’s approval within 7 days.