KOT SEE FOR v. LAM MAN CHEUNG AND OTHERS

HCA 743/2019

[2021] HKCFI 1029

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 743 OF 2019

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D E C I S I O N

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A. INTRODUCTION

1.  This is the appeal by the 3^rd defendant against the decision of Master Winnie Tsui (as she then was) of 11 May 2020, whereby the Master dismissed the 3^rd defendant’s application to strike out the claim brought by the plaintiff in this action against him for HK$34.6 million (together with benefits and profits derived therefrom).

2.  On 23 September 2020, I directed this appeal to be disposed of on paper.  This is my decision.

B.   THE PLAINTIFF’S PLEADED CASE

3.  The plaintiff’s case, according to his Amended Statement of Claim, is as follows.

4.  The plaintiff is an antique collector.  He claims to be the victim of a fraudulent scheme carried out pursuant to a conspiracy between the 1^st and the 2^nd defendants.  The pleaded acts of each of the 1^st and the 2^nd defendants are said to be in furtherance of the conspiracy and on behalf of each other.  It is, however, not alleged that the 3^rd defendant was a party to the conspiracy, and I shall describe how it is pleaded that he was involved below.

5.  The plaintiff was induced to invest in financial products related to gold.  He opened an account with Wayshine Corporation Limited (“Wayshine Corporation”) at the recommendation of the 1^st defendant, who was introduced to him by a Mr Kung Ho Yin, who “cold-called” the plaintiff sometime in May 2016.  Between June 2016 and May 2017, at the representations of the 1^st defendant, the plaintiff paid over a total of HK$73 million to Wayshine Corporation or the 1^st defendant for various purposes purportedly in connection with the account.

6.  The 1^st defendant was a 20% shareholder of Wayshine Corporation and the 100% owner of a company called Wayshine Global Group Limited (“Wayshine Global”), which the plaintiff claims were used by the 1^st and the 2^nd defendants to perpetrate the fraud on him.

7.  In about June 2017, the plaintiff told the 1^st defendant that he wished to exit his investments.  Under the pretext of arranging a buyer from London to purchase the plaintiff’s account[1], the 1^st defendant represented to the plaintiff at various times that various payments had to be made by the plaintiff, which the 1^st defendant said would eventually be returned to the plaintiff.  In particular, when the plaintiff was unable to raise the money required, he borrowed money from the 2^nd defendant (who was initially introduced to the plaintiff by the 1^st defendant) with his antiques pledged as security.  A total of four loans (totalling HK$130 million) were made, secured by four pledge agreements, as between the plaintiff and the 2^nd defendant, with the proceeds of the loans provided by the 2^nd defendant being paid by the plaintiff over to the 1^st defendant or Wayshine Global, and with some of the proceeds finding their way back to the 2^nd defendant.  The four pledge agreements covered a total of ten items of antique (with some original items being substituted by others subsequently as security).

8.  From June 2017 to May 2018, the plaintiff paid over a total of HK$283.65 million to the 1^st defendant or Wayshine Global.  The aforesaid does not include the HK$34.6 million which the plaintiff says he paid to the 3^rd defendant at the direction of the 2^nd defendant (see [12] below). 

9.  In the course of this, in July 2017, the 1^st defendant told the plaintiff that a London company was willing to purchase the plaintiff’s account at HK$220 million. Apart from “security monies” which the 1^st defendant said the plaintiff had to pay from time to time (and which would be refunded to him upon the successful conclusion of the sale), the 1^st defendant represented to the plaintiff sometime in October 2017 that the London buyer needed to set up a “working platform” which required an “activation capital” of HK$260 million as security, and the plaintiff had to provide HK$160 million therefor before any further proceeds[2] from the London buyer could be remitted to him (“the Activation Capital Representation”).  Upon the successful establishment of the working platform, the purchase price would be remitted to the plaintiff within 70 days, and the activation capital would also be refunded to him.

10.  The various representations of the 1^st defendant are said to be made fraudulently, and on behalf of himself and the 2^nd defendant pursuant to the conspiracy between them.

11.  In so far as the 3^rd defendant is concerned, it is said after the 1^st defendant had made the Activation Capital Representation,　the 1^st defendant arranged the 2^nd defendant to make a loan of HK$40 million to the plaintiff, which is the third of the four loans made by the 2^nd defendant to him (“the Third Loan”), and as security for which the plaintiff entered into the “Third Pledge Agreement” with two items of antique being pledged as security.　As a result, the 2^nd defendant gave the plaintiff two cashier orders totalling HK$40 million.  Subsequently, the plaintiff drew three cheques in favour of Wayshine Global for a total of HK$50 million as part payment of the sum the 1^st defendant said was required from the plaintiff as activation capital.

12.  On around 3 April 2018, at the instructions of the 2^nd defendant, the plaintiff caused two cashier orders in the total sum of HK$46.2 million to be issued, with one cashier order in favour of the 3^rd defendant for HK$34.6 million, and the other in favour of the 2^nd defendant for HK$11.6 million, which the 2^nd defendant accepted as full and final discharge of the plaintiff’s “purported liabilities” for the principal and interest under the Third Loan.[3] The antiques pledged under the Third Pledge Agreement were returned to the plaintiff.

13.  The plaintiff did not receive any moneys from the purported sale of his account save for HK$2,999,992.50, and so he was unable to repay the 2^nd defendant for the other three loans and continued to incur substantial interest therefor. Sometime in 2018, the 1^st defendant proposed to the plaintiff that, in order to stop the interest accruing under those three loans, the plaintiff could assign the pledged antiques to the 2^nd defendant so as to discharge the loans.  The consideration for the assignments would be the then outstanding principal and interest under each loan.  The plaintiff could repurchase the antiques at the stated considerations later when he had funds. It was also suggested that for a further sum of HK$40 million the plaintiff could assign another antique to the 2^nd defendant, and the plaintiff could repurchase the same at that price later.

14.  The plaintiff agreed and three assignments were made by him on 2 May 2018 in favour of the 2^nd defendant of the following antiques (“the Subject Antiques”):

(1)  The five antiques pledged to secure the fourth loan were assigned for HK$34.2 million, in full and final discharge of the plaintiff’s liabilities for that loan;

(2)  Three antiques (rather than one as first suggested) were assigned for HK$40 million;

(3)  The three antiques pledged to secure the first and the second loans were assigned for HK$79.2 million, in full and final discharge of the plaintiff’s liabilities for those loans.

15.  It is the plaintiff’s case that each of the said three assignments were made at a gross undervalue having regard to the true value of the relevant antiques.

16.  Regarding the 3^rd defendant, it is pleaded that on various occasions between June 2017 and July 2018, he met with the Chairman of Sotheby’s Asia, the auction house, sometimes joined by the 2^nd defendant and/or the chief executive officer of Sotheby’s Asia, during which the 3^rddefendant enquired about the value of items among the Subject Antiques, showed Sotheby’s Asia some of the actual Subject Antiques as well as photographs of the pledge agreements and assignments, and informed the Chairman that, in agreement with the 2^nd defendant, he would handle the logistics of and arrangements for the Subject Antiques including contacting Sotheby’s Asia in relation to their possible sale, while the 2^nd defendant was to liaise with the plaintiff.

17.  The plaintiff’s claim against the 3^rd defendant was for the HK$34.6 million the latter received, together with benefits and profits derived therefrom.  The following is the pleaded case against the 3^rd defendant as per the Amended Statement of Claim, with the amendments made on 2 September 2019 shown by underlines or deletions:

“77. As pleaded in paragraph 47.2 above, on in or around April 2018, [the plaintiff] (on the instructions of the 2^nd defendant) made payment by cheque cashier order in the sum of HK$34.6 million to [the 3^rd defendant] in partial discharge of the amounts purportedly outstanding under the 3^rd Pledge Agreement.

78. [The 3^rd defendant] received the aforesaid sum of HK$34.6 million knowing or ought having known that [the plaintiff] was induced to make such payment by reason of the fraudulent representations on the part of [the 2^nd/1^st defendants] (as pleaded in paragraph 70 above), or otherwise by reason of the Fraudulent Scheme, or alternatively, he turned a blind eye to, or was recklessly indifferent as to such matters.

Particulars of actual and/or constructive knowledge

78.1 [The 3^rd defendant] and [the 2^nd defendant] had agreed to the arrangement as pleaded in paragraph 59B.4 above, including that [the 2^nd defendant’s] role was to liaise directly with [the plaintiff] in relation to the Pledge Agreements and Assignments, while [the 3^rd defendant’s] role was to deal with the Subject Antiques obtained from [the plaintiff] pursuant thereto.

78.2 On at least two occasions pleaded in paragraph 59B.2 above, [the 3^rd defendant] had possession of some of the Subject Antiques, including [those pledged under the First Pledge Agreement].

78.3 [The 3^rd defendant] was in possession of copies of the Pledge Agreements and Assignments as pleaded in paragraph 59B.3 above, notwithstanding that he was not a party thereto, and which he could only have obtained from [the 2^nd and/or the 1^st defendants].

78.4 Upon [the 2^nd defendant’s] execution of the Pledge Agreements and Assignments, [the 3^rd defendant] enquired with the Sotheby’s Chairman about the valuation of items among the Subject Antiques and was informed of their approximate market value as pleaded in paragraph 59B.1 above.

78.5 By reason of the matters pleaded in paragraphs 78.3 and 78.4 above, [the 3^rd defendant] had knowledge of (i) the terms of the Pledge Agreements and the Assignments, in particular terms relating to interest as pleaded in paragraphs 18.3 to 18.4, 21.3 to 21.4, 32.3 to 32.4 and 41.3 above; and (ii) the fact that the loan amounts were far below the valuation of the Subject Antiques pledged as security under the Pledge Agreements; and (iii) the fact that Subject Antiques were purportedly assigned to [the 2^nd defendant] by [the plaintiff] at a gross undervalue pursuant to the Assignments.

78.6 In respect of the funds [the plaintiff] obtained from the 2^nd Assignment, which he was induced to transfer to Wayshine Global (as pleaded in sections C9 and C10 above), part thereof was thereafter remitted to [the 3^rd defendant]:

(1) As pleaded in paragraph 57.1 above, and by reason of the conspiracy between [the 1^st and the 2^nd defendants] (as pleaded in section D1 above) and the misrepresentations by them (as pleaded in section D2 above), [the plaintiff] was induced to enter the 2^nd Assignment and to remit the proceeds therefrom to Wayshine Global … (… the ‘Wayshine Account’) by two cheques in the sums of HK$19.4 million … and HK$19.6 million … respectively on 3 May 2018.

(2) Of the traceable proceeds of the HK$39 million in the Wayshine Account, HK$10 million … was remitted to E & C International Limited on 4 May 2018 (… the ‘E & C Account’).

(3) On 26 June 2018, E & C International Limited issued a cheque from the E & C Account … in favour of [the 3^rd defendant] in the sum of HK$4.6 million …, of which HK$3,009,250.55 represented traceable proceeds of [the plaintiff’s] funds obtained from the 2^nd Assignment and which were transferred pursuant to the Fraudulent Scheme.

78.7 From the matters pleaded at paragraphs 59A, 59B ad 78.1 to 78.6 above (and such further particulars as [the plaintiff] may provide after discovery and/or interrogatories herein), [the plaintiff] will be asking the Court to infer at trial that [the 3^rd defendant] either knew or ought to have known of the Fraudulent Scheme, including that [the plaintiff] was fraudulently induced by [the 2^nd and/or the 1^st defendants] to pledge and thereafter assign the Subject Antiques in circumstances pleaded in paragraphs 10 to 22, 24 to 33, 37 to 42, and 49 to 55 above.

78A. In the circumstances, [the 3^rd defendant] was at all material times and still is a constructive trustee of the sum of HK$34.6 million received by him from [the plaintiff] in or around April 2018 as pleaded in paragraph 47.2 above.

78B. Further, by reason of the matters pleaded above, [the plaintiff] is entitled to trace into and claim equitable title to the sum of HK$34.6 million or any part thereof which had come into the hands of [the 3^rd defendant] and any profits, income, assets or interests derived by [the 3^rd defendant] from the aforesaid sum or any part thereof.

79. [The 3^rd defendant] provided no consideration in return for the sum of HK$34.6 million.

80. It is further averred that upon the respective execution of the 1^st Pledge Agreement, 2^nd Pledge Agreement, 3^rd Pledge Agreement and 4^th Pledge Agreement, [the 3^rd defendant] (on his own or together with [the 2^nd defendant]) took the antiques pledged therein to Sotheby’s to inquire about the valuation of the antiques, representing himself to be [the 2^nd defendant’s] business partner.

81. In the premises:

81.1 it would be unconscionable for [the 3^rd defendant] to retain the sum of HK$34.6 million and he is liable to account to [the plaintiff] as a constructive trustee for the said sum (and all benefits and profits derived therefrom).

81.2 further or alternatively, [the 3^rd defendant] is liable to [the plaintiff] for restitution of the sum of HK$34.6 million (and all benefits and profits derived therefrom) on the basis of money had and received.

81A. Further or alternatively, [the plaintiff] paid the sum of HK$34.6 million to [the 3^rd defendant] under the mistaken belief as to the legality and validity of the Pledge Agreements and without knowledge of the conspiracy between [the 1^st and the 2^nd defendants] (as pleaded in section D1 above), the misrepresentations made by them (as pleaded in section D2 above) and their non-compliance with the Money Lenders Ordinance (as pleaded in section D3 above), as a result of which [the 3^rd defendant] benefited at [the plaintiff’s] expense.  In the premises, [the 3^rd defendant] is liable to [the plaintiff] for restitution of the sum of HK$34.6 million (for which [the 3^rd defendant] provided no consideration) on the basis of unjust enrichment or alternatively on the grounds of monies had and received.”

As the Amended Statement of Claim stands, the plaintiff is not making any claim for the HK$3,009,250.55 referred to in §78.6(3) against the 3^rd defendant.  The claim against the 3^rd defendant is only for the HK$34.6 million (and all benefits and profits derived therefrom) in trust and restitution.

C.   THE APPLICATION TO STRIKE OUT

18.  By Summons dated 18 July 2019, the 3^rd defendant applied to strike out §§77 to 81 of the Statement of Claim (that is, in the pre-amended version) and to dismiss the action against him on the grounds that they disclose no reasonable cause of action or alternatively they are frivolous or vexatious or they may prejudice, embarrass or delay the fair trial of the action or they are otherwise an abuse of the process of the Court.

19.  On 11 May 2020, the Master dismissed the Summons.  The Statement of Claim having been amended on 2 September 2019, I presume that the striking out application proceeded against §§77 to 81A of the Amended Statement of Claim.  Indeed, this is the order now being sought from me by the 3^rd defendant under his Notice of Appeal dated 20 May 2020 from the Master’s order.  I shall proceed accordingly.

20.  Pursuant to various orders granting him extensions of time, the 3^rd defendant has not filed any Defence yet.

D.   THE EVIDENCE

21.  In support of his application to strike out[4], the 3^rd defendant filed his first affirmation on 19 July 2019.  In it the 3^rd defendant points to what he calls absurdities in the plaintiff’s case on the fraud allegedly perpetuated on him as set out in the latter’s first affirmation dated 29 April 2019, made in support of his application for preservation and disclosure orders in relation to the Subject Antiques against the 2^nd defendant, in which the only reference to the 3^rd defendant was that the latter was paid HK$34.6 million as directed by the 2^nd defendant when discharging the Third Loan, and his visits to Sotheby’s Asia.

22.  The 3^rd defendant therefore says that the plaintiff’s claim that he had been defrauded is a fiction.  However, I note that nowhere in his first affirmation has the 3^rd defendant explained or dealt with his relationship (if any) with the 1^st and the 2^nd defendants, or whether he did receive HK$34.6 million and if so why, or whether he visited Sotheby’s Asia with some of the Subject Antiques.

23.  In answer, the plaintiff filed his second affirmation dated 6 September 2019, essentially setting out what he pleads in the Amended Statement of Claim against the 3^rd defendant, and seeking to refute the latter’s suggestion that the plaintiff’s case is a lie.

24.  In reply by way of his second affirmation dated 2 December 2019, the 3^rd defendant makes further criticisms of the plaintiff’s case by reference to the latter’s pleadings, affirmations and exhibits.  Regarding the alleged meetings with Sotheby’s Asia, the 3^rd defendant queries why they were not pleaded in the original Statement of Claim.  He also asks a series of questions about those alleged meetings but I note that he neither admits nor denies that he did meet with Sotheby’s Asia at all in relation to the Subject Antiques.  Further, he still does not deal with his relationship (if any) with the 1^st and the 2^nd defendants and whether he did receive HK$34.6 million and if so why.

E.   DISCUSSION

25.  The case of the 3^rd defendant on this appeal is as follows:

“The crux of [the 3^rd defendant’s] contention is that [the plaintiff’s] case against him has no solid basis and is incontrovertibly contradicted by contemporaneous documentary evidence; it presents a tissue of improbabilities which ought not be sent to proof. In any event, there is no basis for any constructive trust or unjust enrichment claim because, on [the plaintiff’s] own pleaded case, he paid inter alia $34.6m to [the 2^nd defendant] in exchange for (i) the discharge of the 3^rd Pledge Agreement and (ii) [the 2^nd defendant’s] return of pledged antiques.”

E1.  The factual case

26.  It is trite that in an application to strike out a statement of claim or parts thereof, the facts are generally assumed in favour of the plaintiff.  Mr K K Lau, counsel for the 3^rd defendant, does not dispute this as a general proposition.  However, he submits, citing Beijing Tong Gang Da Sheng Trade Co Ltd v Allen & Overy[5], that where it has been shown to be plain and obvious that the disputed assertion is made without evidence or any solid basis, a spurious action may be struck out.

27.  Mr Lau further cites the decision of G Lam J in Lam Kit Sing v Chungshan Commercial Association, Hong Kong[6], where it was said:

“[Counsel for the plaintiff] argued that on a strike-out application, the factual allegations in the pleading in question must all be taken as true. While that may be the proper approach in most applications, [her] proposition is in my view too widely stated. There are authorities that show that the court’s power to strike out a pleading can be exercised where it is plain and obvious that the plaintiff’s case has no factual basis: Oh Jae-Hoon, Eugene v Richdale [2004] 4 HKC 315, at paragraph 15, or has no ‘solid basis capable of proof’ and is a ‘myth’ with ‘no substantial foundation’, per Lord Herschell in Lawrence v Lord Norreys (1890) 15 App Cas 210, 220, or presents ‘a tissue of improbabilities which ought not to be sent to proof’, per Lord Watson at page 222; see also Overseas Trust Bank v Coopers & Lybrand [1990] 1 HKLR 568 at 583. Thus if a plaintiff pleads as a fact something which can clearly be shown to be incontrovertibly false, then on an application to strike out on that basis the court is not bound to accept the allegation as true and to proceed on a fictional basis.”

Ms Sara Tong and Ms Esther Mak, counsel for the plaintiff, do not dispute this as a matter of proposition.

28.  Pointing to the first affirmation of the plaintiff, Mr Lau submits that, according to the plaintiff, he had only invested HK$3 million.  The rest of his payments before June 2017 were paid as “security monies” because the 1^st defendant told him that that was required for the 1^st defendant to sell his investments for him.  Most of the payments were made to the 1^st defendant instead of Wayshine Corporation because the 1^st defendant told him to do so to avoid fees charged by the company (and this forms the basis of an illegality argument by the 3^rd defendant, which I shall deal with below).

29.  The payments made in and after June 2017 to the 1^st defendant and Wayshine Global are in the total sum of HK$283.65 million, while, according to the plaintiff’s evidence, other payments totalling at least HK$271.8 million[7] were made by him in connection with the purported sale of his investments. 

30.  The 3^rd defendant’s argument is that the plaintiff, according to his own case, in order to recoup an investment of HK$3 million, he had paid out a total of HK$434.5 million as security monies or “activation capital” or “operational capital”.  This, and seen in the light of the fact that the plaintiff is a wealthy investor with substantial business and investment experience, it is argued, is manifestly absurd.  And why, asks the 3^rd defendant, would the plaintiff believe that someone was willing to purchase his account for HK$220 million when he only injected HK$3 million?

31.  Further, the 3^rd defendant argues that, on the plaintiff’s case, it was the Activation Capital Representation which led to the making of the Third Loan, secured by the Third Pledge Agreement, in repayment of which HK$34.6 million was paid to the 3^rd defendant for which he is now being sued, as well as the Fourth Loan and the subsequent three assignments of antiques, the “heart” of the fraud perpetuated on the plaintiff was the Activation Capital Representation.  However, by early December 2017, as the plaintiff had paid less than half of the activation capital purportedly required from him, he could not have expected to be paid anything by the London buyer in late December 2017 or early January 2018 as the buyer had 70 days to remit after establishing the working platform after payment. Yet, from WhatsApp messages between the plaintiff and the 1^st defendant disclosed by the former, he expected to be paid HK$260 million on 4 January 2018.  This, it is said, is an “unbridgeable evidential gulf” which makes the plaintiff’s case, based on the Activation Capital Representation, “incontrovertibly false”.  It is submitted that his case on fraud and the claim for HK$34.6 million against the 3^rd defendant based thereon are unsustainable and must be struck out.

32.  As stated by DHCJ Maurellet SC in Chu Yue Bun v Lai Shiu Woon[8], and cited by the 3^rd defendant, I must not proceed on a blinkered approach and should look at the totality of the evidence, in particular, evidence which is either undisputed or undisputable.  With this approach, in my judgment, this case is not so plain and obvious that the plaintiff’s case should be struck out because of a lack of factual basis or incontrovertibly false, or to use any other similar expressions as were used in, for example, Lam Kit Sing by G Lam J, for the following reasons:

(1)  The 3^rd defendant does not (nor is he in a position to) challenge the existence of the various pleaded transactions between the plaintiff and the 1^st and the 2^nd defendants, for example, the various payments made to or by the plaintiff and the circumstances and purposes thereof, the loans made by the 2^nd defendant, or the pledging and assignment of the antiques.  These are evidenced by documents such as cheque copies, bank statements, signed agreements, and WhatsApp messages, the authenticity of which is not challenged.  It is therefore clear that there were indeed many transactions amongst those parties, with hundreds of millions being paid by the plaintiff.

(2)  The allegation that the plaintiff’s case that the transactions between him and the 1^st and the 2^nd defendants were entered into because of fraud perpetrated against him, on which the claim for HK$34.6 million against the 3^rd defendant is based, is a lie and fabrication but without challenging the existence of those transactions, seems to me to involve saying that the plaintiff is now concocting a case of fraud out of the many genuine commercial transactions which did exist and which were entered into for reasons and in circumstances other than those pleaded, in the course of over two years involving hundreds of millions of dollars.  I am not prepared to say that it is plain and obvious that this is the case on affirmation evidence alone at this stage.

(3)  I also note that the 3^rd defendant has chosen not to say anything about, and not even to deny, the allegations that he did receive HK$34.6 million as directed by the 2^nd defendant, and that he did visit Sotheby’s Asia to deal with the Subject Antiques.  It is his own choice of what evidence to adduce but in so far as he is making submissions on the credibility of the plaintiff’s factual case supported by affirmation evidence, under the totality of evidence approach which he himself advocates, I am entitled to, and do, take into account this “evidential gap” from the 3^rd defendant himself, leaving the question of receipt by him of the HK$34.6 million and his visits to Sotheby’s Asia undisputed, at least now before me.  In my judgment the nature of the 3^rd defendant’s involvement and knowledge, and circumstances surrounding his receipt of the HK$34.6 million (if he did), are matters which ought to be examined at trial. 

(4)  The 3^rd defendant also argues that on the plaintiff’s own case, he had a secret deal with the 1^st defendant for payments of monies to him rather than Wayshine Corporation to avoid charges and thus there is a question of illegality, as the 1^st defendant was acting in breach of his duties owed to Wayshine Corporation.  But that begs the question of whether this was part and parcel of the alleged fraud and whether those behind Wayshine Corporation were aware of this, which in my view must be a matter for trial.

(5)  I have not overlooked the many features in this case which the 3^rd defendant says are absurd or tissues of lies, including the WhatsApp messages about the working platform.  Mr Lau has analysed in some detail as to what he says to be inconsistencies or absurdities in the plaintiff’s case.  He may or may not have a point in some or all of those matters.  However, I do think that, in the light of the matters I refer to in the sub-paragraphs above, the plaintiff is entitled to have those matters fully considered in a trial and have the credibility of his explanations (if any) tested, and not for me to strike out his action against the 3^rd defendant on affirmation evidence alone with the level of detailed analysis undertaken. 

(6)  For reasons above, I am not prepared to say that, having regard to his affirmations which set out his factual case, and the documentary evidence he produces, it is plain and obvious that the plaintiff’s case is incontrovertibly false. 

(7)  Having come to this view, I do not think that I should analyse the 3^rd defendant’s arguments on this issue any further and seek to resolve or express any views on them on affirmation evidence.  

33.  I shall therefore proceed on the basis that the facts pleaded in the Amended Statement of Claim are all true.  The question is, on those facts, does the Amended Statement of Claim disclose a reasonable cause of action in restitution and/or constructive trust against the 3^rd defendant for the HK$34.6 million and its traceable benefits and profits?  Further, is any of the other grounds of striking out relied upon by the 3^rd defendant established?

E2.  Restitution

34.  I shall deal with restitution first.

35.  As far as I understand the plaintiff’s case, he says he handed over the cashier order made out to the 3^rd defendant in the sum of HK$34.6 million because he thought (mistakenly, he says now) that he was under a liability to pay the 2^nd defendant the sum of HK$46.2 million under a valid and enforceable loan, when the same is in fact tainted by fraudulent misrepresentation and breach of the Money Lenders Ordinance[9].  I shall assume that the Third Loan is not legally valid or enforceable by the 2^nd defendant, at least because of the alleged fraud, because at the time of the payment the plaintiff did not know that he could have avoided the same, and that the plaintiff did hand over the cashier order for HK$34.6 million under the said mistake. 

36.  As Ribeiro PJ said in Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd[10], in a restitution claim, the defendant must have been enriched at the plaintiff’s expense by reason of some unjust factor.   The question is, is it arguable that the 3^rd defendant was enriched at the expense of the plaintiff?

37.  In Takahashi v Cheng Zhen Shu[11], there was a series of back-to-back contracts.  The plaintiffs there contracted with the 2^nd defendant, which contracted with the 4^th defendant, which contracted with the 3^rd defendant.  Payments were to be made by the plaintiffs under their contract with the 2^nd defendant.  For a particular payment of HK$50 million, the plaintiffs procured three cashier orders totalling that sum payable to the 3^rd defendant, and delivered them to the 1^st defendant (the owner of the 2^nd defendant), who gave them to the 4^th defendant, which gave them to the 3^rd defendant.  The plaintiff’s claim for restitution against the 3^rd defendant for the HK$50 million for total failure for consideration, as they did not get what they bargained for under the contract with the 2^nd defendant, was rejected by the Court of Final Appeal. 

38.  It was held that even though the payee on the cashier orders was the 3^rd defendant in that case, it does not follow that the plaintiffs were making a direct payment to the 3^rd defendant.  The entity that was enriched at the plaintiffs’ expense was the 2^nd defendant, which used the HK$50 million to discharge its own obligations to the 4^th defendant.[12]

39.  Lord Hoffmann NPJ further explained in Takahashi[13]:

“In principle, if A agrees to discharge his obligation to make payment to B by providing B with the means of discharging B’s debt to C (or by discharging it directly), that is, for the purposes of the law of restitution, a payment from A to B. If I buy goods from you and give you a draft in favour of the bank where you have an overdrawn account, I will have enabled you to discharge part of your debt to the bank. If you do not deliver the goods, there is a failure of consideration.”

40.  In this case it is not known why the 2^nd defendant directed the payment of HK$34.2 million to the 3^rd defendant instead of pocketing the entire sum of HK$46.2 million himself (and to pay the 3^rd defendant out of that sum himself if necessary).  The plaintiff would not know and the 3^rd defendant has not offered any explanation. That is, it is not known if the 2^nd defendant asked the plaintiff to cause the sum of HK$34.2 million to be payable to the 3^rd defendant[14] because he owed the 3^rd defendant at least that sum of money, so that the payment to the 3^rd defendant was to discharge such a liability owed by the 2^nd defendant to the 3^rd defendant and therefore, as per Takahashi, it was the 2^nd defendant who was enriched to that extent (by having his obligations owed to the 3^rd defendant discharged) and not the 3^rd defendant.   

41.  However, if the relationship between the 2^nd and the 3^rd defendants, and the reason for the former directing payment to the latter, was different from that in Takahashi, then the question of who was enriched at the expense of the plaintiff might or might not be answered differently.  For example, what if the money was a gift from the 2^nd defendant to the 3^rd defendant?  What is the correct analysis on a restitution claim, for which I have received no assistance?  This is a matter which in my judgment ought to be considered and answered at the trial in the light of the evidence and facts found. 

42.  Mr Lau also argues that the restitution claim cannot succeed because counter-restitution is not possible, as the plaintiff has already obtained the benefit of the payment of the HK$34.6 million, namely the return of the pledged security. The antiques not having been destroyed[15], I fail to see how restitution is not possible only because that may involve something to be done about the antiques or making monetary adjustments in relation thereto. This is similar to the “no rescission” argument which I consider and reject in the next section. The question of restitution must be a matter for trial.

43.  It is also argued that the plaintiff would need to make counter-restitution by repaying HK$40 million to the 2^nd defendant.  I make no decision on whether this is correct in law but even if so that would be a possible counter-claim by the 2^nd defendant, and not a possible defence for the 3^rd defendant.  There is no reason why any necessary monetary adjustments between the parties as a result of the restitution claim cannot take place at the trial.

44.  I am not prepared to strike out the claim in restitution.

E3.  Constructive trust

45.  As for constructive trust, the plaintiff’s case is simply that he handed over HK$34.6 million to the 3^rd defendant pursuant to the fraudulent scheme of the 1^st and the 2^nd defendants, in purported discharge of the Third Loan and in the mistaken belief as to its legality and validity.  Although the 3^rd defendant is not said to be a party to the fraudulent scheme, his state of knowledge (as set out at §§78.1-78.7 of the Amended Statement of Claim) was such that it would be unconscionable for him, as the plaintiff argues, to retain the money which the plaintiff transferred pursuant to the fraud.

46.  The 3^rd defendant argues that a contract induced by a fraudulent misrepresentation is voidable, not void, and unless the representee takes steps to avoid the contract, the representator is not a constructive trustee of the property properly transferred pursuant to the contract, citing Millett J (as he then was) in Lonrho plc v Fayed (No 2)[16] and Potter LJ (as he then was) in Twinsectra Ltd v Yardley[17].  However, it is submitted, rescission is barred in this case because the transaction could not be unravelled following the return of the pledged antiques.  This is how the argument is put in the submissions on behalf of the 3^rd defendant:

“There is no basis to claim rescission of the 3^rd Pledge Agreement because the 2 subject antiques were duly returned to [the plaintiff]. The purpose of rescission is to restore the status quo ante prior to the alleged fraudulent misrepresentation, and it is plain and obvious that rescission, being a discretionary remedy, is a complete non-starter in the present context (and unlike the 1^st, 2^nd and 4^th Pledge Agreements) because [the plaintiff] has already recovered the antiques from [the 2^nd defendant]. The status quo ante has already been restored as a matter of practical justice”.

47.  It is then submitted that where there is no right to rescind the original transaction, the right to recover from the remote recipient is also barred.^[18]

48.  I am not sure if I understand the “no rescission” argument.  There are of course cases where rescission of a contract is barred because restitutio in integram is not possible even though there is otherwise in law such a ground, for example, where the subject matter no longer exists[19]. But I do not see how that applies in this case.

49.  The transaction said to be induced by fraudulent misrepresentation is the making of the loan of HK$40 million by the 2^nd defendant to the plaintiff, with the latter pledging two items of antique as security.  On a rescission of the loan and pledge, the position to which the parties ought to be restored would be that the plaintiff would have the pledged items back, together with any monetary adjustments between the parties.  I do not see how and why restoration to the status quo ante is said to be impossible, so as to bar rescission, simply because that very same position, as far as the pledged items are concerned, has already been attained.  If anything, that shows that restitutio in integram is possible in this case.

50.  The 3^rd defendant also argues that since the plaintiff had repaid the Third Loan with interest and the pledged items returned to him, the Third Loan and the Third Pledge Agreement had ceased to exist and can no longer be rescinded.  With respect, a contract that had been fully performed does not cease to exist: just that it is performed and fully executed.  However, no authority is cited for the proposition that a fully performed or executed contract cannot be rescinded.  Rather, performance of a contract is no bar to a claim for rescission for misrepresentation, even for innocent misrepresentation^[20], and this is always the case for fraudulent misrepresentation.^[21]

51.  It is also argued that the plaintiff paid the HK$34.6 million so as to get back the pledged items and so he could no longer claim any “property” in the sum as it had been substituted by the antiques that were returned to him.  But it seems to me that this argument is premised upon the legal validity of the Third Loan and the Third Pledge Agreement, and the legal effect and effectiveness of acts done purportedly in pursuant thereto, which is a core question between the plaintiff and the 3^rd defendant which can only be resolved at trial.  (A similar argument is made in relation to the restitution claim that the plaintiff paid the HK$34.6 million to discharge the Third Loan and the Third Pledge Agreement. The argument appears to be that good consideration has been provided, namely the discharge of the Third Loan and the Third Pledge Agreement, but in my view the same answer can be given thereto.)

52.  In my judgment, on the pleaded facts, the plaintiff does have a reasonable cause of action in constructive trust for the HK$34.6 million and any benefits and profits therefrom against the 3^rd defendant.  For the same reason, I do not think that any of the other grounds of striking out is established.

53.  It is unnecessary for me to discuss the other arguments raised by the plaintiff in support of this cause of action, and I shall not do so in the light of the fact that this matter will proceed to trial (subject of course to any appeal from this decision).

F.   DISPOSITION

54.  The appeal is dismissed with a costs order nisi against the 3^rd defendant.

55.  If any party wishes to apply to vary the costs order nisi, he is to do so by way of summons within 14 days of the date of this Decision.  If neither party so applies, then I direct that the plaintiff is to file a Statement of his costs for the appeal within 7 days of the expiry of the period for the making of the application to vary.[22] The 3^rd defendant is to file his submissions on the Statement within 7 days thereafter if he so wishes, and if he does so the plaintiff is to file his reply within 7 days thereafter if he so wishes.

56.  I thank counsel for their assistance.