LEE SAI NAM v. LI SHU CHUNG AND ANOTHER

HCA 1711/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1711 OF 2009

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BETWEEN

(By Counterclaim)

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D E C I S I O N

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1.  These are applications by the 3^rd and 4^th defendants (“Seline Li” and “Yuen Hing”) to strike out the counterclaim brought against them by the plaintiff (by counterclaim) Li Shu Chung (“Ken Li”).

2.  Ken Li is Seline Li’s elder brother.  Ken Li, by original action, is being sued by his father.  It thus becomes immediately apparent that this is a family dispute about a family business.

3.  To date the pleadings run to over 170 pages.  They cover approximately 25 years of the running of the family business and the roles played by different family members during that period.  The corporate structure which has emerged over those years is also quite complex.

4.  The factual background which is relevant to this striking out summons, however, can be stated briefly.

Background

5.  In about 2009 the family embarked on a scheme which was designed to reduce their legitimate tax liabilities in Hong Kong.  It was called the “re-invoicing operations”.  It involved the incorporation of “Yuen Hing” in Macau. Seline Li became the sole director of Yuen Hing and is its sole signatory on the bank account.  Yuen Hing is a corporate vehicle whose sole purpose is to hold the profits of the family business.

6.  Over recent years the factual dispute between the family members has centred on the apportionment of the family business’s profits among each other. 

7.  In Yuen Hing’s bank account there was an identifiable sum of $53,602,977 which represented those profits.  Of that sum $28,000,000 has already been paid to Ken Li.  Ken Li claims to be entitled to the balance.  It is Ken Li’s case that the most recent agreement (2009) on the profit sharing was that the sum of $53,602,977 represented his 100% share.

8.  By counterclaim, Ken Li’s causes of action against Seline Li and Yuen Hing are, primarily (but not exclusively) “money had and received” and breach of constructive trust.

Legal principles in striking out applications

9.  Mr Gary C.C. Lam, counsel for Seline Li and Yuen Hing, concedes that the threshold test is a high one.  The onus is on the applicant to demonstrate that the claim is obviously unsustainable.  The court should proceed on the basis that the facts are those advanced by the party being struck out.  The court should refrain from deciding difficult or moot points of law and a strike out should only be ordered in plain and obvious cases.

10.  These principles are well settled and concisely set out in Ha Francesca v Tsai Kut Kan (No.1) [1982] 1 HKC 382:

“ (1) An application to strike out an action should only be granted in plain and obvious cases. There should be no trial upon affidavit. Disputed facts were to be taken in favour of the party sought to be struck out.

(2) The court must be careful not to drive a plaintiff from the judgment seat. Nor should the court decide difficult points of law in striking out proceedings. The claim must be obviously unsustainable, the pleadings unarguably bad and that it was impossible, not just improbable, for the case to succeed, before a court would strike it out. If the court did not think the matter to be clear beyond doubt or if it failed to be satisfied that there was no reasonable cause of action or that the proceedings were frivolous or vexatious, then, there should be no striking out.

(3) A judge in striking out proceedings, which were interlocutory in nature, had a discretion which must be exercised judicially.”

Seline Li and Yuen Hing’s submissions

11.  The relevant facts are not in dispute. Ken Li is entitled to a share of the profits.  Those profits are in the Yuen Hing bank account.  Yuen Hing is controlled by Seline Li who has paid out $28 million but has refused or declined to pay out (to Ken Li) the balance of $25,602,977.

12.  Mr Lam submits that these facts cannot support the pleaded claim which is at paragraphs 43 and 44 of the counterclaim as follows:

“ 43. In the circumstances, Seline Li and Yuen Hing have wrongfully retained the sum of HK$25,602,977.76 and the cumulative profits of the Group from 01/12/08 to date, as money had and received on behalf of Ken Li and Ken Li has therefore suffered loss and damages.

44.  Further or alternatively, as Seline Li and Yuen Hing well knew, the said sums belong to Ken Li and as such, they hold such sums as a constructive trustee for Ken Li.”

13.  As far as the plea of money had and received is concerned Mr Lam’s main complaint is that there is no money received by Seline Li or Yuen Hing from Ken Li.  The money is the company’s profits.  Seline Li’s failure to hand it over is, at most, a failure to realize an expectation, not an unlawful retention of the plaintiff’s money.

14.  Moreover, it is submitted that the case against Seline Li has an additional flaw, namely, that she has never been in possession of any money.  It has always been held by Yuen Hing, a separate legal entity.  Seline Li cannot be brought into this action, it is said, simply because she has control of the money.  There is no plea that the corporate veil be lifted.

15.  Turning to the cause of action based on breach of constructive trust, the law is undoubtedly more complex, but the point being made is essentially the same.  A pre-requisite for a trust is the acquisition of property which party A holds and in which party B has a beneficial interest.  Mr Lam submits that these matters are plainly absent in this case.  There is no pleaded agreement to acquire the money in the account and it is consequently impossible for Ken Li to prove a receipt of money which is traceable to a breach of trust.

16.  In short, it is submitted that:

(i)   The existence of any trust is not specifically pleaded.

(ii)  There is no specific plea that any trust property has been knowingly received.

(iii)  There is no specific plea as to what constitutes the trust property.

Ken Li’s submission

17.  My decision in this matter is that I accept the submissions made on behalf of Ken Li by his counsel Mr Jean‑Paul Wou. In my judgment the high threshold of the claim being “obviously unsustainable”, “impossible to succeed” has not been reached.  A summary of the arguments supporting that proposition now follow:

(1)   It is not essential that a claim for money had and received must be based on the fact that the money originated from the plaintiff.  The claim is sustainable even where the money came from a third party.  The key element is that it is property belonging to the plaintiff.  The claim is that it was money received by the defendants for the use of the plaintiff.  The plaintiff’s claim is a claim in restitution.  Mr Wou relies, inter alia, on extracts from Atkins, Court Forms 1995 Vol. 27 including:

“A person who should have received money which has in fact been received and retained fraudulently or without legal right by another person may recover it as money had and received …

…, either principal or agent may be sued for money wrongfully obtained by the agent and applied by him for the principal’s benefit …

An action for money had and received is maintainable wherever the money of one man has, without consideration, gone into the pocket of another.”

(2)   Whilst the normal case of money had and received is for the recovery of money which the plaintiff had paid to the defendant, as the above extracts demonstrate, it is not the sole category of such cases.  The Hong Kong “White Book” at 18/12/26 simply states:

“The statement of claim must set out the facts which are alleged to make the defendant’s receipt of the money a receipt a receipt to the use of the plaintiff.”

(3)   The plaintiff’s claim of a constructive trust is sustainable and arguably good on the basis of the defendant’s “knowing receipt” of the money.  The money is identifiable and traceable and knowingly received by the 3^rd defendant.

(4)   The complaint that there is no specific plea of breach of constructive trust is not fatal.  As set out in Bullen & Lake (Vol.2 53-02) the pleadings requirements are:

“Elements of an action for knowing receipt. The claimant must plead and prove:

(a) that there has been a disposal of his assets in breach of trust or fiduciary duty;

(b) the defendant has beneficially received assets which are traceable as representing the claimant’s own assets;

(c) the defendant has knowledge that the assets he received are traceable to a breach of fiduciary duty or breach of trust.”

These requirements have been met. There is no requirement to prove or plead dishonesty.

(5)   Mr Wou further submits that the extract cited below from Snells Equity (32^nd edition) 895 succinctly describes his pleaded case:

“ Where the defendant receives the property beneficially he may be liable to give restitution of its value in an action for knowing receipt. The basis of the defendant’s liability is that he received property in which the claimant had a subsisting equitable interest, so the claim could not arise if he received it as a bona fide purchaser for value. The claimant may need to prove by the formal rules of following or tracing that the money received by the defendant was specifically attributable to him. It would not be enough for him to prove in a more general way that the sum received by the defendant was the same as the sum misapplied from the trust.”

(6)   Seline Li and Yuen Hing are indeed separate legal entities.  However, the factual matrix which is clearly pleaded shows Seline Li to be the 4^th defendant’s sole director and sole signatory of the bank account.  She was, and is, the 4^th defendant’s directing mind and alter ego.  The pleaded case in this regard is based on the 3^rd defendant, as the sole director, knowing of all the circumstances whereby the money came into the 4^th defendant’s account.  It is not a quantum leap to argue that, thereby, in the context of a constructive trust, she becomes accountable to the plaintiff.

(7)   The final matter, to which some weight may be attached in a strike out application, is the question of delay.  Such an application should be made promptly.  Seline Li’s defence was filed on 3 November 2010.  This summons is dated 8 November 2011.  The passage of over a year is unexplained and, in the circumstances, may be weighed in balance when deciding to refuse the application.

18.  Thus, I find that the plaintiff’s pleaded case is not obviously unsustainable.  The issues which are pertinent to the summons have little or no bearing on the factual merits of the plaintiff’s case.  At trial the factual issues will centre on the validity and accuracy of the alleged profit sharing “agreements” relied on by Ken Li which conclude with a claimed agreement that he is entitled to 100% of the profits.  But that is for another day.

19.  I decline to make the orders sought by the 3^rd and 4^th defendants by summonses dated 8 November 2011 with costs to the plaintiff, Li Shu Chung.