PECONIC INDUSTRIAL DEVELOPMENT LTD v. LAU KWOK FAI AND OTHERS

FACV No. 17 of 2008

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 17 OF 2008 (CIVIL)

(ON APPEAL FROM CACV NO. 248 OF 2006)

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J U D G M E N T

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Mr Justice Bokhary PJ :

1.  I agree with the judgment of Lord Hoffmann NPJ.

Mr Justice Chan PJ :

2.  I agree with the judgment of Lord Hoffmann NPJ.

Mr Justice Ribeiro PJ :

3.  I agree with the judgment of Lord Hoffmann NPJ.

Mr Justice Litton NPJ :

4.  On 1 June 2006, after trial, the judge ordered Danny Lau to pay to Peconic the sum of HK$350,534,416, leaving the question of interest and cost for later determination.  He also gave judgment against the firms Albert K.K. Luk & Co. (“AKKL”) and K.F. Lau & Co. (“KFL”), but left the amount of the award to be agreed between the parties, with liberty to apply to him for directions and determination if necessary.  In August 2006 final liability was determined in these terms :

“1.  final judgment in favour of the Plaintiff against the 2^nd and 3^rd Defendants be entered on the figures of HK$328,056,559 and HK$18,671,481.92 respectively;

2.  the 1^st, 2^nd and 3^rd Defendants do pay interest for the respective sums of HK$422,372,611.37, HK$396,712,372.34 and HK$21,222,568.86 on the respective Judgment sums of HK$350,534,416, HK$328,056,559 and HK$18,671,481.92 calculated at the rate of 1% above prime rate from the respective dates of payment by the Plaintiff until 31 May 2006 together with interest at Judgment rate thereafter; ....”

5.  Take the case of the 2^nd defendant, AKKL, where the award was HK$328,056,559.  Paragraph 2 of the judge’s order required the firm to pay interest of “HK$396,712,372.34 ... on the ... Judgment sum of ... HK$328,056,559 ... calculated at the rate of 1% above prime rate from the respective dates of payment by the Plaintiff until 31 May 2006 ...”.  This made, on the face of the order, a total liability of HK$724,768,931.34 which then carried interest at the judgment rate prescribed under the High Court Ordinance, Cap. 4, until payment.

6.  Where the order referred to “the respective dates of payment by the Plaintiff” it meant presumably the various dates in 1991 when Peconic paid out to Asiagreat Ltd the total sum of about HK$515 million for the purchase of the Mai Po land.  On the face of the order, the interest which AKKL was required to pay, covering a period of nearly 15 years, exceeded by a considerable amount the principle sum awarded.

7.  This has some bearing on a proper appreciation of the policy which lies behind the Limitation Ordinance, Cap. 347.  If one asked the general question: Why limit the time within which parties are required to institute proceedings?  The short answer must be: Public interest leans against delay.  The consequence of delay in the institution of proceedings might be the extravagant result which we see in the judge’s order in this case.

8.  As regards the proper application of s.26(1) of the Limitation Ordinance, the crucial question, as I see it, is whether Peconic could, with reasonable diligence, have discovered Danny Lau’s participation in Chio’s fraud, prior to August 1996.  Danny Lau was, seemingly, a solicitor of good standing, rendering legal service to Asiagreat.  But once the possibility of Chio having an interest in Asiagreat arose, then the shadow of suspicion must inevitably fall on Danny Lau whose firm was receiving the purchase money for Asiagreat: For here you have Chio, a director of Peconic, causing the company to pay out vast sums to buy the land, and Chio, under the mask of Asiagreat receiving the money.  The suggestion that Danny Lau had no curiosity with regard to the beneficial interest behind Asiagreat, the company that he had caused to be formed shortly before the purchases began, is too far fetched.  Once Mr Huang came to be appointed as managing director of Peconic in November 1992 and began his inquiries, the first question he ought to have asked is: Who is Asiagreat?  Assuming that a search at the companies registry got him nowhere – the persons named as company secretary and the two directors seemingly acting as mere nominees – Mr Huang’s curiosity (or that of the objective inquirer in Mr Huang’s shoes) would not have ended there.  And when the receipts issued by Danny Lau to JSM came to light – showing that the purchase money for the vendors, distributed by Danny Lau, was recorded in his firm’s books as coming from “Elsie Chan” – further questions would (and should) have been asked.  If “Elsie Chan” was indeed the “celebrity” called “陳奕詩 Elsie” (Chan Yik Sze Elsie) then the link to Chio would have been all too apparent.  Elsie Chan was at that time in her early twenties.  The notion that she was entering into this transaction in her own right was improbable.  Her link to Chio, at that time a legislator in Macau and a person of some renown, would have been well-known.

9.  By 1999 Peconic had sufficient material in hand to institute the first action: against Chio, Elsie Chan and the persons registered as nominee directors and company secretary of Asiagreat.  Why Danny Lau was not joined as a party in the first action has not been satisfactorily explained, particularly, as the judge found (para. 696 of his judgment), that the results of the ICAC investigations were made known to Peconic the year before, in December 1998.

10.  In the defence of Danny Lau (1^st defendant), para. 8A, lodged in the second action, he said :

“a.  Chio did not at any time give any business or name card to the 1^st Defendant;

b.  the 1^st Defendant only became aware that the full name of Elsie Chan’s boyfriend was 陳繼杰 (transliterated as ‘Chan Kai Kit’) in mid or late 1992 when the 1^st Defendant was requested to sponsor a congratulatory advertisement in a Chinese newspaper relating to Chan Kai Kit’s appointment as Consul of a certain county; and

c.  The 1^st Defendant was at all material times not concerned with, nor did not he pay any attention to, the names 陳繼杰 (transliterated as ‘Chan Kai Kit’) or ‘Chio Ho Cheong’ in all his dealings with Elsie Chan.”

Here is a clear admission that, by “late 1992” Danny Lau was aware of the close connection between Elsie Chan and Chio.

11.  Moreover, in Leung Kwan Pui’s witness statement (Leung was the Deputy General Manager of Star Glory Investment Ltd, the 2^nd plaintiff in the first action) he said that he was introduced to Chan Kai Kit and “his girl-friend Chan Yik Sze.  They appeared to be well acquainted”.  This introduction took place when Star Glory, a “window company” of the Foshan sub-branch of the Agricultural Bank, was considering the land investment in Mai Po, in early 1991.

12.  Factually, the evidence seems overwhelming that, at an early stage, Danny Lau was aware of the close connection between Elsie Chan and Chio.  The notion that Peconic was unaware of this fact, and could not with the exercise of reasonable diligence have found out, is untenable.

13.  I have had the advantage of reading in draft Lord Hoffmann’s judgment and agree with it.  I too would dismiss the appeals.

Lord Hoffmann NPJ :

14.  In 1991 the Agricultural Bank of China (“the bank”) was the victim of a fraud.  A Macau businessman named Chio Ho Cheong (“Chio”) dishonestly induced it to invest in a Hong Kong land speculation by false representations about the prospect of making a large profit.  The bank funded the purchase of the land through a joint venture company called Peconic Industrial Development Ltd (“Peconic”), (of which Chio became a director and 25% shareholder), at a price of about HK$515 million.  The immediate vendor was Asiagreat Ltd (“Asiagreat”), a recently formed company which had just contracted to buy the land from a number of individual owners for about HK$151 million.  Chio represented to the bank that Asiagreat was controlled by a third party but he was in fact its beneficial owner and he personally made a secret profit of some HK$350 million from the transaction.  The bank made a very considerable loss.

15.  In 1999 the bank commenced proceedings against Chio and various other individuals who had participated in the fraud.  In 2002 it commenced separate proceedings against a solicitor named Lau Kwok Fai, known in English as Danny Lau, the firm of Albert K.K. Luk & Co. (“AKKL”), in which he had been a partner and K.F. Lau & Co. (“KFL”) a firm which he later formed.  The claim was that he had dishonestly assisted Chio in the fraudulent breach of his fiduciary duties to Peconic and that AKKL and KFL were vicariously liable.  The defendants denied liability and pleaded that the claim was statute-barred.  Andrew Cheung J tried both actions together and after a hearing which lasted 40 days, found Danny Lau, AKKL and KFL liable.  He decided, as a matter of law, that someone who dishonestly assists in a breach of trust is not entitled to any limitation defence.   He also held that even if Danny Lau had in principle been entitled to the statutory six-year limitation period, the commencement of that period would have been postponed until a date less than six years before the issue of the writ by s.26 of the Limitation Ordinance, Cap. 347:

“    ...[W]here in the case of any action for which a period of limitation is prescribed by this Ordinance, ...

        (a)  the action is based upon the fraud of the defendant;

        ...

the period of limitation shall not begin to run until the plaintiff has discovered the fraud ... or could with reasonable diligence have discovered it.”

16.  There has been no challenge to the judge’s findings on liability, but Danny Lau, AKKL and KFL appealed on the ground that the judge was wrong on both of the reasons for which he denied them a limitation defence.  The Court of Appeal (Rogers VP, Le Pichon JA and Stone J) allowed the appeal, unanimously as to the availability in principle of a limitation defence and by a majority (Stone J dissenting) on the ground that Peconic could with reasonable diligence have discovered the fraud more than six years before the issue of the writ.  Peconic appeals to this Court.

17.  Although the law on the first point has a somewhat chequered history and counsel developed interesting arguments by reference to authorities going back two centuries and numerous text-book and academic writings, I think that the position is now clear and can be stated fairly shortly.  The question turns upon the construction of s.20 of the Limitation Ordinance, Cap. 347:

“(1)   No period of limitation prescribed by this Ordinance shall apply to an action by a beneficiary under a trust, being an action―

(a)  in respect of any fraud or fraudulent breach of trust to which the trustee was a party or a privy; or

(b)  to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.”

18.  The terms “trust” and “trustee” are defined to extend to constructive trusts: s.2(1) and s.2 of the Trustee Ordinance, Cap. 29.  It is accepted that, within this extended definition, a director of a company is a trustee in relation to its assets.  So the action against Chio was an action by a beneficiary in respect of his fraudulent breach of trust and no limitation period applied.  But was Danny Lau a constructive trustee within the meaning of the Ordinance?  If not, could the action against him come within the section on the ground that it was “in respect of” a fraud to which “the trustee”, i.e. Chio, was a party?  These are the two questions of construction which arise.

19.  The language of s.20, like most of the Ordinance, is taken word for word from the UK Limitation Act 1939.  It was obviously intended to have the same meaning.  One therefore has to ask whether Danny Lau would have been a constructive trustee within the meaning of the corresponding section of the 1939 Act (s.19).  On a literal reading he would, because a stranger to a trust who dishonestly assists in its breach is traditionally described as a constructive trustee.  For the purposes of limitation, however, there are two kinds of constructive trustees.  The distinction between them has been explained by judges on numerous occasions, from Sir William Grant in Beckford v. Wade (1805) 17 Ves Jun 87, 95-96 to Mr Richard Sheldon QC (sitting as a deputy High Court judge) in Cattley v. Pollard [2007] Ch 353, 360-376.  First, there are persons who, without any express trust, have assumed fiduciary obligations in relation to the trust property; for example as purchaser on behalf of another, trustee de son tort, company director or agent holding the property for a trustee.  I shall call them fiduciaries.  They are treated in the same way as express trustees and no limitation period applies to their fraudulent breaches of trust.  Then there are strangers to the trust who have not assumed any prior fiduciary liability but make themselves liable by dishonest acts of interference.  I shall call them non-fiduciaries.  They are also called constructive trustees but this, as Ungoed-Thomas J said in Selangor United Rubber Estates Ltd v. Cradock (No. 3) [1968] 1 WLR 1555, 1582 is a fiction: “nothing more than a formula for equitable relief”.  They are not constructive trustees within the meaning of the law of limitation.

20.  This distinction was drawn at a time when there was no statutory basis for the limitation of equitable remedies.  Common law periods were, in appropriate cases, applied by analogy and trustees were unable to raise a limitation defence even for an innocent breach of trust.  This last rule was felt to be too harsh and the law was changed by s.8 of the Trustee Act 1888, which was subsequently replaced by s.19 of the 1939 Act.  This confined the rule to fraudulent breaches of trust and cases in which the trustee held the trust property or its proceeds or had converted them to his use.

21.  In Taylor v. Davies [1920] AC 636 it was argued that an Ontario statute in terms identical to s.8 of the 1888 Act had not only given express trustees and fiduciaries the right to rely on limitation in all but the excepted cases but had taken away the previous right of non-fiduciaries to rely upon limitation even in the cases in which fiduciaries could not.  This was said to follow from the definition of trustees to include constructive trustees.  The argument was rejected by the Privy Council.  Lord Cave said:

“If this contention be correct, then the section, which was presumably passed for the relief of trustees, has seriously altered for the worse the position of a constructive trustee...  It does not appear to their Lordships that the section has this effect.  The expressions ‘trust property’ and ‘retained by the trustee’ properly apply, not to a case where a person having taken possession of property on his own behalf, is liable to be declared a trustee by the Court; but rather to a case where he originally took possession upon trust for or on behalf of others.  In other words, they refer to cases where a trust arose before the occurrence of the transaction impeached and not to cases where it arises only by reason of that transaction.”

22.  This was an authoritative statement on the construction of the 1888 Act and although the 1939 Act amended as well as consolidated the previous law, it is hard to believe that the slight changes of language in s.19 were intended to introduce a fundamental change.  In Paragon Finance plc v. DB Thakerar & Co. [1999] 1 All ER 400, 412-414 Millett LJ offered what he called “formidable arguments” against such a construction which I find entirely convincing.

23.  In my opinion, therefore, non-fiduciaries do not come within the definition of trustees in s.19 of the 1939 Act or s.20 of the Ordinance.  It is necessary however to deal with a different submission, which is that by some process of attraction, one category of non-fiduciaries, namely, persons who dishonestly assist a trustee in a fraudulent breach of trust, should be treated in the same way as the trustee and not allowed a limitation defence.

24.  This argument has the high authority of some dicta of Lord Esher MR and Bowen and Kay LJJ in Soar v. Ashwell [1893] 2 QB 390.  These remarks have been subjected to minute analysis in the cases and academic writings but I am willing to accept that they support the proposition that dishonest assisters cannot rely on a limitation defence.  Nevertheless, I think that they are wrong in principle and unsupported by authority.  The principle is not that the limitation defence is denied to people who were dishonest.  It plainly applies to claims based on ordinary common law fraud.  The principle is that the limitation period is denied to fiduciaries.  But dishonest assisters are not fiduciaries.  It might be surprising, as Millett LJ said in the Paragon Finance case (at p.414), if a person primarily liable was entitled to plead the Limitation Act when someone who assisted him could not.  But there seems no reason in fairness or logic why the reverse should not be true.  And in any case, Royal Brunei Airlines Sdn Bhd v. Tan [1995] 2 AC 378 shows that the liability of a dishonest assister is independent of the dishonesty of the trustee or other fiduciary.  Mr Scott placed some reliance upon Millett LJ’s observation that “a principled system of limitation would also treat a claim against an accessory as barred when the claim against the principal was barred and not before”: see Paragon Finance, ibid.  That showed, he said, that if the fraudulent trustee is never entitled to plead limitation, the dishonest assister should not be entitled to do so.  But I do not think Millett LJ could have meant this, which would be contrary to most of his reasoning and to his subsequent clear statement in Dubai Aluminium Co Ltd v. Salaam [2003] 2 AC 366, 404 that a dishonest assister is not a fiduciary and can plead the Limitation Act.

25.  It remains to consider the alternative argument that, as a matter of construction, a claim against a dishonest assister may be within s.20 because it is “in respect of”, in the sense of being accessory to, the actual trustee’s fraudulent breach of trust.  It is true that in certain contexts the words “in respect of” may have a very wide meaning and the possibility of such a meaning being given to the words in s.20 was tentatively considered by Danckwerts J in G L Baker Ltd v. Medway Building and Supplies Ltd [1958] 1 WLR 1216, 1222.  But I think that in the context of s.20 of the Ordinance it simply means that the beneficiary must be claiming against the trustee on the ground that he has committed a fraudulent breach of trust.  If it had been intended to include claims against dishonest assisters or other non-fiduciaries on the ground that they were accessories to the breach of trust, the language would have been a good deal clearer.

26.  In principle, therefore, Danny Lau and his firm were entitled to plead the Limitation Ordinance and on this point I would uphold the unanimous opinion of the Court of Appeal.  The next question is whether the commencement of the limitation period was postponed until less than six years before the commencement of proceedings by s.26 of the Ordinance.  There is no suggestion that Peconic had actually discovered the fraud until after the six-year period before action had begun.  The question is whether they could with reasonable diligence have done so.

27.  This is a point on which the judges below were equally divided. Andrew Cheung J did not have to decide the point because he had held that Danny Lau could not rely upon limitation anyway.  He therefore dealt with it relatively briefly, but expressed the view that Peconic could not with reasonable diligence have discovered Danny Lau’s fraud.  In the Court of Appeal Stone J was of the same opinion but the majority disagreed.

28.  This point will involve a fairly detailed examination of the facts, but before I come to them, I must say something about the general approach to s.26.  Stone J said in paras 184-185 of his dissent:

“184.    It strikes me as inherently unattractive for a ‘dishonest assister’ such as Danny Lau, a professional lawyer of apparently good reputation embedded within a firm of solicitors of equally unblemished reputation, and a man who clearly had taken every precaution against discovery of his professional defalcations, now to maintain to the court that by reason of the limitation provisions he is able to avoid the consequences of his nefarious actions because Peconic/Mr Huang of the bank should have done more to uncover precisely the dishonest and fraudulent modus operandi that he had spent a good deal of time and effort both in devising and in seeking to obscure from view.

185. Accordingly, I do not think that this court should be too astute to accord to him the statutory protection he now seeks...”

29.  It is commendable for Stone J openly to have admitted to a state of mind which some judges might have concealed, but I think it was the wrong approach.  No doubt a gentleman who knows he is liable does not plead the Limitation Ordinance any more than the Gaming Act, but if he does so, it must be applied according to its terms.  The purpose of the Act is not, after all, to allow people to escape liability for fraud.  It may incidentally have that result, but that is not the policy which underlies it.  Its purpose is to avoid the investigation of whether the defendant was fraudulent after a lapse of time which could prejudice his ability to rebut the charge.  The fact that this sometimes allows people who were undoubtedly fraudulent to escape liability is the price which the legislature was willing to pay for having a general and clear-cut rule.  But it begs the question to approach the construction of s.26 on the assumption that the defendant has committed the fraud.  The question of what the plaintiff could with reasonable diligence have discovered must be answered dispassionately and without regard to what may be perceived as the merits.  In any case, I am not at all clear where the merits in this case lie.  The bank was on any view extremely foolish to invest a large sum of money without any independent expert advice about the planning situation and the consequence of a judgment for the bank may be the ruin of Danny Lau’s innocent partner.

30.  What does “the plaintiff ... could with reasonable diligence have discovered [the fraud]” mean?  The word “reasonable” denotes an objective standard.  But that is not the end of the matter.  It is the plaintiff who is supposed to have shown reasonable diligence.  This leaves open to argument the extent to which the personal characteristics of the plaintiff are to be taken into account in deciding what diligence he could reasonably have been expected to have shown.  It does not follow that because an objective standard is applied, he must be assumed to have been someone else.  The extent to which the characteristics of the actual plaintiff are ignored depends upon the reason for invoking an objective standard.  (Some of these questions are discussed in the context of the postponement of the running of the limitation period in personal injury cases in Adams v. Bracknell Forest Borough Council [2005] 1 AC 76 and A v. Hoare [2008] 1 AC 844).

31.  There can be no doubt, I think, that for the purposes of the inquiry into what the plaintiff could have done, he must be assumed to have suffered the loss which he actually suffered.  In this case, one assumes the plaintiff to be a bank which has lost some HK$400 million.  When it discovered (or could reasonably have discovered) that it had suffered the loss, it must be assumed to have displayed some curiosity about why this should have happened.  The question is then what steps it could reasonably have taken to try to obtain a remedy.  In some cases it may be necessary to decide whether the plaintiff must be assumed to have had only the resources and other opportunities for investigation which he actually had or whether this too must be determined according to some objective standard.  In Paragon Finance plc v. DB Thakerar & Co. [1999] 1 All ER 400, 418, Millett LJ said (apparently at the suggestion of May LJ) that the test was —

“How a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency.”

32.  For my part, I would prefer to leave this question open, because in the present case it does not arise.  There is no dispute that the bank had access to adequate resources and expertise to make any investigations which reasonable diligence would have suggested.  The bank must be assumed not merely to have employed its own expertise, but to have engaged whatever specialist services reasonable diligence would have suggested, in the same way that a victim of personal injury is expected to seek medical advice.  And in the same way that the plaintiff in a personal injury case is assumed to have told the adviser his symptoms, so the bank instructing advisers is expected to have told them what it knew about the facts of the case.

33.  What is important is that the burden was upon the bank to show that it could not with reasonable diligence have discovered the fraud: see Millett LJ in Paragon at p.418.  For example, if the bank’s case is that it took whatever steps could reasonably have been taken but that they proved fruitless, it is for the bank to satisfy the court that it actually did so.

34.  It is now necessary to look in some detail at the facts, which I take for the most part from the careful and detailed judgment of Andrew Cheung J.  Chio had business interests in Macau, including a nightclub and various property developments.  In 1990, in connection with one of these developments, he met Chen Jun-Yi (“Chen”), the manager of the bank’s Foshan sub-branch.  There was some evidence that the bank made a profit out of this transaction and that it cemented a business relationship with Chen.

35.  In September 1991 Chio suggested to Chen a joint venture by which he and the bank would buy some land at Mai Po.  It is uncertain how much Chen knew about the true facts, but in mid-September he proposed the scheme to Foo Shi Fang (“Foo”), the manager of the Guangdong branch which supervised the Foshan sub-branch.  Next day Foo went to inspect the site with Chen, Chio and Chio’s girl-friend Chan Yik-Sze, who was a Hong Kong film and television celebrity.  I shall call her by her English name Elsie Chan.  Chio told Foo that after acquisition the land could be sold to Taiwanese businessmen at a profit of HK$200 million or developed even more profitably as a golf course.  Ten days later Chen pressed for a decision, saying that if the bank did not snap up the opportunity, someone else would.  There was a meeting of the management of the Guangdong branch on 26 September 1991 which decided to invest an initial US$20 million in the project.  In February of the following year it subscribed another US$20 million for the purchase of more land.

36.  The judge found that Chio had repeated the representations that the property could be quickly resold for a HK$200 million profit or developed as a golf course at a number of subsequent meetings with officials of the bank.  By January 1992, when Chio was asking for the second tranche of US$20 million, he seems to have said less about a quick resale but represented that the site could be used for low-rise residential development, pointing out that there were other such developments nearby.  In the circumstances, he said there would be no problem in obtaining the necessary consent.

37.  Peconic, the joint venture company which had been formed for the purposes of buying the land, instructed JSM to carry out the conveyancing.  Paul Yu acted on behalf of the firm.  The vendor, as I have said, was Asiagreat, represented by AKKL in the person of Danny Lau.  Asiagreat was a shelf company incorporated in July 1991 about which the bank knew nothing, but Chio told Paul Yu that Asiagreat was beneficially owned by one Poon Kam (“Poon”), a man of influence in Mai Po who had been able to contract to acquire the properties on favourable terms.  The conveyances would be executed by the original owners and Asiagreat would convey as confirmor.  When JSM was unwilling to release the deposit to Asiagreat without a guarantee of its repayment if the sale should go off, it was Poon who gave the guarantee.

38.  It speedily became clear to the bank that the representations about a quick profit or residential development, to say nothing of the golf course, had been reckless or worse.  Nothing was ever heard of the seriously interested Taiwanese businessmen.  The land was immediately next to the Mai Po Nature Reserve, a Site of Special Scientific Interest and important bird sanctuary.  While it was true that development control in the area had in previous years been erratic, by 1990 the Government had adopted a clear policy of not allowing residential or commercial development in a buffer zone around the Reserve which included the land in question.  At the time of the purchase Paul Yu alerted his client to the planning restrictions but Chen and Chio told him that they had obtained a favourable expert opinion about the prospect of obtaining permission.

39.  In June 1992 Peconic applied for planning permission.  It was refused and an application for review in 1993 was also unsuccessful.  For the first time Peconic (and the bank) sought independent expert advice on the prospects of obtaining permission.  In May 1993 planning consultants called Urbis sent Peconic a bleak report which said that the government was strongly opposed to residential development in the area and there were no indications that it was likely to change its policy.  Peconic made a modified application in 1994, which was also rejected and then gave up.

40.  In November 1992 Chen retired and the Guangdong branch appointed Huang Zhiyong (“Huang”) to be managing director of Peconic.  It was clear to him that Chio had seriously misrepresented the planning position and the prospects of a profitable resale.  At the trial he said in response to questions from his counsel Mr Scott:

Q.  Did you or any of your colleagues in Peconic at this stage believe that [Chio] had made any misrepresentations to Peconic leading up to the purchase of the land?

A.  Yes.

Q.  Well, what did you think had been misrepresented?

A.  He boasted about the prospect of the piece of land.  And he made a calculation and said there would be a high, a very high return. He often said that there were a lot of people who were interested in acquiring the land.  And he said that a lot of experts thought that the user could be changed.

41.  Huang also found that Chio had not paid for his 25% shareholding in Peconic but had subscribed “only a few million Hong Kong dollars”.  Pressed for payment, Chio was unforthcoming.  On 6 July 1994 there was a meeting of the board of directors of Peconic, with Chio present, at which it was resolved that unless he paid for his 25% interest within 3 months, his shareholding should be reduced to 0.84%, representing the contribution he had actually made.  He did not pay.  Instead, he seems to have gone to ground.  There was a meeting of the board in Macau on 12 June 1995 at which, Huang said in evidence, he had wanted to discuss the planning debacle and other matters with Chio.  But he did not appear:

Q.  But you were in Macau.  Did you make any attempt to contact him?

A.  Yes.  We issued a lot of notices to him.

Q.  All right.  What happened?

A.  No response.  And he did not appear.

Q.  What was your reaction to that?

A.  Of course we thought he was not fair to us. 

42.  But Huang’s biggest surprise had come in July 1993, when JSM sent him the documents of title.  It was at this point he discovered that Asiagreat had been a confirmor, having bought for HK$151 million the land which, more or less contemporaneously, it had sold to the bank for HK$515 million.  He said that he was worried and alarmed by this discovery.  He asked Chio and Chen for an explanation and they said it had been necessary because of “the complication in the land title and sale and purchase arrangements”, an answer which, not surprisingly, does not seem to have satisfied him.  He reported the matter to the Guangdong branch but failed to stir them into any action.  He was merely instructed to progress the planning application “in order to minimise the loss”.

43.  Still worried, Huang asked JSM to pass the documents to Poon & Cheung, another firm of lawyers.  He asked them to read them.  But they reported nothing suspicious.  So nothing happened.  He eventually learned of the fraud only as a result of an investigation by ICAC in December 1998.   This revealed that the beneficial owners of Asiagreat had been Chio and his girl-friend Elsie Chan.  They had hidden themselves behind Poon, to whom Chio and Elsie Chan gave an indemnity for any personal liability he might incur.  Danny Lau had introduced them to Poon (who was a relative of his) and helped to conceal their involvement.

44.  For the most part, Danny Lau’s concealment was effective.  But he had carelessly left a clue for anyone who cared to read the conveyancing file.  On six receipts which he sent to JSM for money paid to Asiagreat, he filled in the name of his client as “Elsie Chan”.  Anyone who thought that Poon was the beneficial owner of Asiagreat might have wondered why someone else was named as the client and anyone who knew of Chio’s involvement with Peconic and his relationship with Elsie Chan would have been astonished.

45.  The question, then, is whether with reasonable diligence Peconic (or someone instructed to investigate the matter on its behalf) could have discovered that clue.  Peconic say it was unreasonable to expect it to have done so.  JSM had seen the receipts when they originally came in and noticed nothing untoward.  Poon & Cheung had read the files and found nothing suspicious.  What more could Peconic have done?

46.  The difficulty about this argument is that we know nothing about what Poon & Cheung were instructed to do.  It is understandable that JSM would not have been particularly interested in whom Danny Lau regarded as his client.  They were concerned to obtain a good title for Peconic and to make sure that it would have some means of recovering its deposit (which was not to be held by Danny Lau as stakeholder, but released to the vendor) if the sale went off.  In 1994, however, the situation had changed.  What instructions should have been given to Poon & Cheung or anyone else asked to investigate the matter which worried Huang, namely the huge quick profit which Asiagreat had made on the transaction?

47.  By the time he instructed Poon & Cheung, Huang knew four important facts.  The first was that his bank had lost a great deal of money.  It had invested over HK$500 million in land which appeared unlikely ever to have more than its agricultural value, estimated at the trial to be about HK$70 million.  The second was that Chio had induced the bank to enter into the transaction by representations which were at best reckless and quite possibly downright lies.  The third was that Chio, having originally put himself forward as a co-adventurer, had in fact put in very little money.  And the fourth was that Asiagreat had made a mouth-watering profit.

48.  In these circumstances, one would expect even the most unsophisticated banker to ask himself whether there was any explanation for Chio’s conduct.  What was in it for him?  Why did he make false statements to induce the bank to make such a disastrous investment?  What did he stand to gain?  The only person who appeared to have made a profit out of the transaction was Asiagreat.  Would not a reasonable banker show some curiosity as to whether there might be a link between Chio and Asiagreat?  The only information they had about Asiagreat, that it belonged to Poon, came from Chio, either directly or via Chen.

49.  One would therefore expect Poon & Cheung, or anyone else investigating the transaction, to be told the significant facts known to Peconic and the bank and asked to read the papers with a view to seeing whether they contained any information about the beneficial ownership of Asiagreat.   Even if the bank was too naïve to consider that Chio might have had an interest in the company, any Hong Kong firm of solicitors who was told the whole story known to the bank at the time would have advised such an inquiry.   They would have read the file for a purpose, namely, to look for exactly the kind of clue which the receipts provided.

50.  We have no evidence of what instructions were given to Poon & Cheung.  It seems that they looked at the title deeds and documents but not JSM’s full conveyancing files, which does not suggest that they were asked to find what information they could about the beneficial ownership of Asiagreat.  In fact, after reading Huang’s evidence, I am quite unclear about what they were told or asked to do.  It is at this point that the burden of proof is important.   It is for Peconic to satisfy the court that they could not with reasonable diligence have done more than they did.  If the evidence of what they actually did is lacking, they are not entitled to ask the court to assume that they gave the instructions which reasonable diligence would have required.

51.  Peconic says that even if the receipts had been read, they would not have provided Peconic with any useful information.  Elsie Chan is a common name in Hong Kong.  Why should Danny Lau’s client be assumed to be the Elsie Chan who was Chio’s girl-friend­?  That seems to me quite unreal.  It all depends upon what one is looking for.  Peconic knew that Chio’s girl-friend was Elsie Chan, the 23-year-old television celebrity.  If they or someone on their behalf had been reading the file with a view to seeing whether Chio had any fingers in the Asiagreat pie, they would instantly have associated the two of them.

52.  Even the documents disclosed by a company search could have been mined for information about Asiagreat, although this might have required rather more effort than simply reading the files in the possession of Peconic’s solicitors.  The directors were Leung Hiu Ling and Wong Shiu-Wai, who were respectively Chio’s brother’s common law wife and Elsie Chan’s mother.  Their names and addresses were on the register.  Anyone who did not know the whole background would probably have assumed that they were simply nominees, probably clerks in the employment of AKKL.  But someone looking for a link between Asiagreat and Chio would have tried to find out who they were.

53.  There is some irony in the fact that in 2001 Peconic commenced proceedings against Paul Yu and JSM for dishonestly assisting in the fraud or negligence.  It pleaded that AKKL had sent JSM the six receipts showing Elsie Chan as their client and said that, as she was known to be Chio’s girl-friend, they disclosed an improper connection between Chio and Asiagreat.  That and the other facts known to JSM at the time of the original purchase “would have alerted an honest solicitor to the likelihood that the transaction involved a fraud”.  If that was expected of JSM in 1991-92, it is hard to see why it should not have been expected of Peconic in 1994 or 1995.

54.  Mr Scott rightly said that it was not enough that Peconic could with reasonable diligence have discovered the fraud of Chio.  This was an action against Danny Lau, and it was therefore necessary to find that they could with reasonable diligence have discovered that he had participated in the fraud.  To all outward appearances, he was, as Stone J put it, “the apparently respectable lawyer working quietly in the background”.  The receipts would have indicated that he regarded Elsie Chan as his client instead of, or in addition to, Poon.  But that would not show that he knew of the link between Elsie Chan and Chio.  It was only when ICAC’s seizure of AKKL’s files revealed that he had drafted an indemnity to be given to Poon by both Elsie Chan and Chio that his participation in the fraud was firmly established.

55.  It seems to me, however, that as soon as Peconic discovered that Elsie Chan had an interest in Asiagreat, it was entitled to assume that Danny Lau knew that Chio was a director of Peconic and that Elsie Chan was Chio’s girl-friend and constant companion.  He would have known the former from the documents he was receiving from JSM and he would have known the latter because all Hong Kong knew it.  Chio and Elsie Chan do not appear to have made any attempt to conceal their relationship.  Mr Scott suggested that Chio was not likely to have told Danny Lau of his link to Elsie Chan because that would have revealed the impropriety.  But that is a double-edged argument.  Elsie Chan was a celebrity.  It seems to me that even if Danny Lau knew nothing about her relationship with Chio, it is inconceivable that Chio would have attempted to conceal something which could at any moment have been revealed to Danny Lau by a photograph on the social page of a newspaper.  It was absolutely necessary for him to take Danny Lau into his confidence and secure his participation in the fraud.

56.  In any case, it is not necessary that Peconic should have known facts which put Danny Lau’s participation in the fraud beyond all reasonable doubt.  The purpose of the inquiry into whether Peconic could with reasonable diligence have discovered his fraud is to establish when they could reasonably have been expected to commence proceedings.  For that purpose, they needed only to know facts which amounted to a prima facie case.  In my view, Danny Lau’s representation that Poon was the beneficial owner of Asiagreat and his concealment of Elsie Chan’s role was enough to make out a case which called for an answer. 

57.  I would therefore dismiss the appeals.

Mr Justice Bokhary PJ :

58.  The Court unanimously dismisses the appeals and does so with costs (it having been accepted by Peconic at the hearing that it would have to bear the costs if its appeals were to fail).